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** **

 

 

**UnitedStates**

**Securitiesand Exchange Commission**

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

###### ** **

**Form 10-K**

** **

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

 

**For thefiscal year ended December 31, 2008**

 

**Commission file number 1-16791**

 

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

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

**(302)674-4600**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Large accelerated filer o  Acceleratedfiler x  Non-accelerated filer o  Smallerreporting company o

 

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

 

The aggregate market value of common stock held bynon-affiliates of the registrant was $84,869,017 as of June 30, 2008 (thelast day of our most recently completed second quarter).

 

As of February 27, 2009, the number of shares ofeach class of the registrant’s common stock outstanding is as follows:

 

| Common Stock -              |   | 15,464,610 shares |
|-----------------------------|--------|-------------------|
| Class A Common Stock - |   | 16,603,173 shares |

 

**Documents Incorporated by Reference**

 

Portions of the registrant’s Proxy Statement inconnection with the Annual Meeting of Stockholders to be held April 29,2009 are incorporated by reference into Part III, Items 10 through 14 ofthis report.

 

 

 

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**Part I**

 

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

 

**Item 1.            Business**

 

We are a diversified gaming and entertainment company whose operationsconsist of Dover Downs Casino – a 165,000 square-foot video lottery casinocomplex featuring the latest in slot machine offerings, including multi-playerelectronic table games with virtual dealers; the Dover Downs Hotel andConference Center – a 500 room AAA Four Diamond hotel with conference, banquet,fine dining, ballroom, concert hall and spa facilities; and Dover Downs Raceway– a harness racing track with pari-mutuel wagering on live and simulcast horseraces. Our entertainment complex is located in Dover, the capital of the Stateof Delaware.

 

On July 10, 2008, our Phase VI casino expansion, The Colonnade,was partially opened to the public with approximately 500 additional slotmachines, Doc Magrogan’s Oyster House, Sweet Perks Too and the Dover Downs’Fire & Ice Lounge debuting. Four retail outlets opened and space for two additional outlets wascompleted in late September 2008. The expansion, which is now complete, added approximately 68,000square-feet of space bringing our video lottery casino complex to 165,000square-feet housing approximately 3,110 slot machines.

 

We entered into a letter of intent on October 14, 2008 with UGEntertainment LLC (“UGE “) to provide management services for the operation ofa video lottery facility at Underground Atlanta.  UGE has made presentations to the GeorgiaLottery relative to the possibility of commencing video lottery operations atUnderground Atlanta.  Such video lotteryoperations are not presently authorized and would require regulatory action bythe Georgia Lottery and possibly legislative approval by the State ofGeorgia.  The letter of intent between usand UGE provides for a five year management agreement and affords us tworenewal options for two years each subject to the attainment of certainfinancial criteria by the new facility. The letter of intent contemplates thatthe parties will negotiate and enter into an acceptable management agreementwith terms and conditions comparable to management agreements of a similarnature.  Our compensation would consistof a management fee based on gross revenues and an incentive fee based on netearnings before taxes.  We have agreed tomake a $500,000 non-interest bearing loan to UGE subject to certain conditionsset forth in the letter of intent.  Theletter of intent also contemplates that we will have the right to purchase upto 10% of the equity of UGE.

 

Dover Downs Gaming & Entertainment, Inc. is a publicholding company that has two wholly owned subsidiaries: Dover Downs, Inc.and Dover Downs Management Corp.  DoverDowns, Inc. was incorporated in 1967 and began motorsports and harnessracing operations in 1969.  In June of1994, legislation authorizing video lottery operations in the State of Delaware(the “State”) was adopted. Our video lottery (slots) casino operations began onDecember 29, 1995.  As a result ofseveral restructurings, Dover Downs, Inc. became a wholly owned subsidiaryof Dover Motorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.)(“DVD”), and became the operating entity for all of DVD’s gaming operations.

 

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

 

Dover Downs, Inc. is authorized to conduct video lotteryoperations as one of three “Licensed Agents” under the Delaware State LotteryCode. Pursuant to Delaware’s Horse Racing Redevelopment Act, enacted in 1994,the Delaware State Lottery Office administers and controls the operation of thevideo lottery.

 

Our 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

 

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basis. In order tomaintain our license to conduct video lottery operations, we are required tomaintain our harness horse racing license. We have received an annual license from the Commission for the past 40consecutive years and management believes that our relationship with theCommission remains good.

 

Due to the nature of our business activities, we are subject to variousfederal, state and local regulations.

 

**DoverDowns Casino**

 

Ourvideo lottery (slot) machine casino opened in December 1995 withapproximately 500 video lottery (slot) machines.  Due to its popularity, the video lottery(slot) machine casino has expanded six times since its opening and the numberof machines has increased steadily to approximately 3,110  at December 31, 2008.  The mostrecent expansion, which was completed in September of 2008, addedapproximately 68,000 square-feet of space bringing our video lottery casinocomplex to 165,000 square-feet.  We are now open for business 24 hours perday, seven days per week.

 

Our video lottery (slot) machines range from our popular penny machinesto $100 machines in the Premium Slots area and include most popular games foundin the country’s major gaming jurisdictions. We have added multi-player electronic table games, such as Blackjack,Roulette and Poker, which accommodate up to five players in an interactivesetting that features a virtual dealer. Our facilities are open every day of the year, except Christmas andEaster, and we estimated that the facility was visited by****3.2million patrons in 2008.

 

The Delaware State Lottery Office administers and controls our videolottery (slot) machine operations. We are a LicensedAgent authorized to conduct video lottery operations under the DelawareState Lottery Code and one of only three locations permitted to do so in theState of Delaware. We are permitted by law to set the payout to customersbetween 87% and 95%.

 

We use sophisticated database marketing to enable us to developlong-term relationships with our patrons and to target promotions to specificcustomer segments. Our Capital Club®, a slots players club and trackingsystem, allows us to identify customers and to reward their level of playthrough various marketing programs. Membership in this club currently stands atapproximately 150,000 active patrons.

 

We have implemented extensive procedures for financial and accountingcontrols, safekeeping and accounting of monies, and security provisions.Security over the gaming operations involves the integration of surveillancecameras, observation and oversight by employees, security and gaming staff, andvarious security features built into the video lottery (slot) machines. Theabove, when combined with proper internal control procedures and dailymonitoring of each video lottery (slot) machine by the Delaware State LotteryOffice, are intended to maintain the security, integrity and accountability ofthe video lottery operations.

 

Legislation has been introducedin Delaware to consider the resumption of sports betting.  Three Delaware state agencies (the Office ofManagement and Budget, the Department of Finance, and the Controller General’soffice) participated in a report issued January 10, 2008which concludes as follows: “[W]hile all the options for theimplementation of sports betting in the State of Delaware are feasible, themost reasonable option for phased-in legalization is a racino based operation.”  By Federal law, Delaware is the only stateeast of Montana, and one of only four states in the United States, where sportsbetting is legally permitted.  Wecontinue to pursue this with the legislature.

 

**DoverDowns Hotel**

 

Our luxury hotel facility, the Dover Downs Hotel, connects to ourcasino.  The facility includes 500 rooms,including eleven luxury spa suites, a multi-purpose ballroom/concert hall, afine dining restaurant, swimming pool and a luxurious 6,000 square-footfull-service spa.  When we built theoriginal hotel we also built a 425-seat buffet restaurant and renovated our enclosedharness racing grandstand with state-of-the-art simulcasting facilities.  By offering a wide range of entertainmentoptions to our patrons, including concerts featuring prominent entertainers,live boxing, gourmet dining, spa facilities, trade shows and conferences, webelieve we are able to attract new patrons and lengthen the stay of currentpatrons.  Since opening the Dover DownsHotel in 2002, we have managed 

 

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its operationsourselves.  In 2008, hotel occupancyaveraged 82% and the hotel was awarded the AAA Four Diamond Award for the sixthconsecutive year.

 

**DoverDowns Raceway**

 

Dover Downs Raceway has presented pari-mutuel harness racing events for40 consecutive years. Live harness races are conducted at Dover Downs Racewayfrom late October until April and are simulcast to more than 400tracks and other off-track betting locations across North America on each ofour more than 130 live race dates.  Theharness horse racing track is a 5/8-mile track and is lighted for nighttimeoperations.  The track is adjacent to ourcasino and hotel on land owned by DVD on the inside of DVD’s auto racingsuperspeedway.  Use of the track ispursuant to an easement granted by DVD which does not require the payment ofany rent.

 

Within our main grandstand is the simulcast parlor where our patronscan wager on harness and thoroughbred races received by satellite into DoverDowns Raceway year round from numerous tracks across North America.  Television monitors throughout the parlorarea provide views of all races simultaneously and the parlor’s betting windowsare connected to a central computer allowing bets to be received on all racesfrom all tracks.  Additional amenitiesinclude the Winners Circle® Restaurantoverlooking the horse racing track.

 

Harness racing in the State of Delaware is governed by the DelawareHarness Racing Commission. We hold a license from the Commission authorizing usto hold harness race meetings on our premises and to offer pari-mutuel wageringon live and simulcast horse races.

 

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

 

The legislation authorizing video lottery operations in the State ofDelaware was adopted 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 theform of increased 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.

 

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

 

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

 

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**Licensingand Regulation by Gaming and Other Authorities**

 

## *General*

##  

We are subject to extensive federal, state and local regulationsrelated to our operations, particularly our video lottery (slot) operations,live harness racing and pari-mutuel wagering. These operations are contingentupon continued government approval of such operations as forms of legalizedgaming and could be subjected at any time to additional or more restrictiveregulations.  The following is a briefoutline of some of the more significant regulations affecting our gaming operationsand not intended as a recitation of all regulations applicable to our business.

 

Delaware law regulates the percentage of commission we are entitled toreceive from our gaming activities, which comprises a significant portion ofour overall revenues.  Our licenses toconduct video lottery (slot) machine operations, harness horse races andpari-mutuel wagering could be modified or repealed at any time and we could berequired to terminate our gaming operations.

 

## *Video Lottery (Slot) Operations*

##  

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

 

A “video lottery (slot) machine” is defined by law as any machine inwhich bills, coins or tokens are deposited in order to play in a game of chancein which the results, including options available to the player, are randomlyand immediately determined by the machine. A machine may use spinning reels or video displays or both, and may ormay not dispense coins or tokens directly 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.

 

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

 

*Licensing Requirements*.  We were granted a license on December 13,1995.  Delaware gaming licenses do nothave an expiration date.

 

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

 

There are similar licensure requirements for providers of the videolottery (slot) machines and certain companies that seek to provide services toa Licensed Agent.

 

*Revocation, Suspension or Modification of License*.  The Lottery Director may revoke or suspendthe 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

 

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by the rules andregulations, the material violation of any rules and regulationspromulgated by the Lottery Director or any conduct by the licensee whichundermines the public confidence in the video lottery system or serves theinterest of organized gambling or crime and criminals in any manner.  A license may be revoked for an unintentionalviolation of any federal, state or local law, rule or regulation providedthat the violation is not cured within a reasonable time as determined by theLottery Director.  A hearing officer’sdecision revoking or suspending the license shall be appealable to the DelawareSuperior Court under the provisions of the Administrative Procedures Act.  All existing or new officers, directors, keyemployees and owners of a Licensed Agent are subject to backgroundinvestigation.  Failure to satisfy thebackground investigation may constitute cause for suspension or revocation ofthe License.

 

*Ownership Changes*.  Under Delaware law, a change of ownership ofa Licensed 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 occur if any newindividual or entity acquires, directly or indirectly, 10% or more of theLicensed Agent or if more than 20% of the legal or beneficial interest in theLicensed Agent is transferred, whether by direct or indirect means.  The Commission may require extensivebackground investigations of any new owner acquiring a 10% or greater interestin a Licensed Agent, including criminal background checks.  Accordingly, we have a restrictive legend onour shares of common stock which require that (a) any holders of commonstock found to be disqualified or unsuitable or not possessing thequalifications required by any appropriate gaming authority could be requiredto dispose of such stock and (b) any holder of common stock intending toacquire 10% or more of our outstanding common stock must first obtain priorwritten approval from the Delaware State Lottery Office.

 

*Harness Racing Events*.  In order to maintain our 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.

 

*Control Over Equipment and Technology*.  We do not own or lease the video lottery(slot) machines or computer systems used by the State in connection with ourvideo lottery gaming operations.  TheLottery Director enters into contracts directly with the providers of the videolottery (slot) machines and computer systems (the “Technology Providers”).  Equipment is provided to the State by sale orlease and all Technology Providers must be licensed by the LotteryDirector.  Our operations could bedisrupted in the event that a licensed Technology Provider in any way breachesits agreement with the State or ceases to be properly licensed for anyreason.  Such an event would be outsideof our control.

 

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

### ** **

*Licensing Requirements. *Harness racing in the Stateof Delaware is governed by the Delaware Harness Racing Commission.  We hold a license from the Commission bywhich we are authorized to hold harness race meetings on our premises and tomake, conduct and sell pools by the use of pari-mutuel machines ortotalizators.  The license must be renewedon an annual basis.  The Commission mayreject an application for a license for any cause which it deems sufficient andthe action of the Commission is final. The Commission may also suspend or revoke a license which it has issuedand its action in that respect is final, subject to review, upon questions oflaw only, by the Superior Court of the County within which the license wasgranted.  The action of the Commissionstands unless and until reversed by the Court. We have received an annual license from the Commission for the past 40consecutive years and management believes that our relationship with theCommission remains good.  However, therecan be no assurances that we will continue to be licensed by the Commission inthe future.

 

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

 

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

 

*USTA. *Anylicense granted by the Commission is also subject to such reasonable rules andregulations as may be prescribed from time to time by the United StatesTrotting Association (“USTA”).  The USTAsets various rules relating to the conduct of harness racing.  According to its Articles of Incorporation,the purposes of the USTA shall include the improvement of the breed of trottingand pacing horses, 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 frommembership, or privileges or for any other misconduct detrimental to the sport.

 

## *Gaming Taxes and Fees*

##  

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

 

Effective July 1, 2008, theState enacted legislation that (1) increases the existingsurcharge on the portion of slot win that we retain, (2) requires thatwe pay the costs of all franchise games which were previously shared with theState, and (3) requires that we pay an additional annualamount to a certain horse racing industry organizationpreviously funded by the State. That legislation also allows us to operate all day on Sundays andeliminates the prior legislatively imposed limit on our use of free promotionalslot play.

 

# ***Compliance with Other Laws***

# ** **

We are subject to various federal, state and local laws and regulationsin addition to gaming regulations. These laws and regulations include, but arenot limited to, restrictions and conditions concerning alcoholic beverages,environmental matters, employees, currency transactions, taxation, zoning andbuilding codes, and marketing and advertising.

 

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

 

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

 

Laws and regulations are always subject to change, can be interpreteddifferently in the future, and new laws and regulations may be enacted whichcould adversely affect the tax, regulatory, operational or other aspects of the

 

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gaming industryand our company. Furthermore, noncompliance with one or more of these laws andregulation could result in the imposition of substantial penalties against us.

 

**Competition**

 

The gaming industry in the United States is intensely competitive andfeatures many participants, including riverboat casinos, dockside casinos,land-based casinos, video lottery (slot) and poker machines, whether or notlocated in casinos, native American gaming, pari-mutuel wagering on live andsimulcast horse racing, off-track betting, state run lotteries, internetgambling and other forms of gambling. Gaming competition is particularlyintense in each of these sectors.

 

We compete in local and regional markets withhorse tracks, off-track betting parlors, state run lotteries, casinos and othergaming facilities.  We cannot be certainthat we will maintain our market share or compete more effectively with ourcompetitors.  The introduction orexpansion of gaming in neighboring jurisdictions, particularly Maryland,Virginia, West Virginia, Washington, D.C., Pennsylvania or New Jersey, or thelegalization of additional gaming venues in Delaware, could have a materialadverse effect on our cash flows and results of operations.  From timeto time legislation is proposed for adoption in these jurisdictions which ifenacted, 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.  The Maryland Legislature passedlegislation in 2008 that will permit up to 15,000 slot machines infive different specific locations throughout Maryland. The legislationrequired a Constitutional amendment which passed on a referendum vote in November 2008. The establishment of any gaming locations in the State remains subject to localzoning prohibitions and may face further opposition.  As the number ofmachines and the specific locations of the gaming establishments are set by theState’s Constitution, any changes to the number of machines or the locationswould require further amendment to theState Constitution.   It is difficult for us to predictwhat types of gaming establishments may ultimately be built in Maryland orwhen they are likely to become operational.  Management has estimated thatapproximately 43% of our total slot win comes from Maryland patrons. ** **Approximately 69% ofour Capital Club® member slot win comes from out of statepatrons.  In July 2004, Pennsylvania adopted legislation which authorizes upto 61,000 slot machines at various existing and proposed venues throughout thestate.  It is difficult for us to predictthe effect that such legislation will ultimately have on us, but severalfacilities in Pennsylvania began operations by the end of 2006.  Management has estimated that slot win fromPennsylvania patrons currently represents approximately 3% of our total slotwin which is the same as the prior year.

 

All states in our geographic region have state-run lotteries. AtlanticCity, New Jersey is located approximately 100 miles from our entertainmentfacility and offers a full range of gaming products.  Virginia and Washington, D.C. do notcurrently permit video lottery (slot) machine operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

**GrowthStrategies**

 

We offer a unique gaming and entertainment experience and makeavailable to our patrons a number of different options: slot machine gaming,live harness horse racing, fine dining, national recording and entertainmentacts, night club, retail shopping, live boxing and simulcasting of thoroughbredand harness horse races from across North America. Our mission is simple: toprovide all of our customers a premier gaming and entertainment experience witha focus on unparalleled customer service. Our growth strategy is to foster customer loyalty by following thismission, focus on our most valuable customers, expand and improve the qualityof our slot gaming positions, enhance our gaming products with additionalentertainment offerings and create an exciting gaming environment whilefocusing on areas that we believe will increase our revenue and profitability.Our efforts in this regard include the following:

 

*IncreaseThe Utilization Of Our Casino*

 

We use a sophisticated database marketing program to enable us todevelop long-term relationships with our patrons and to target promotions tospecific customer segments.  Our CapitalClub, a slots players club and tracking system, allows us to identify customersand to reward their level of play through various marketing programs.Membership in this club currently stands at approximately 150,000 activepatrons.  We attempt to increaseattendance at both our casino and hotel through effective promotional use ofour database and by making improvements to our facilities and gaming offeringsbased on what we learn from our Capital Club members. For example, we continueto add the most popular machines with differing denominations. Additionally, wehave added multi-player electronic table games, such as Blackjack, Roulette andPoker, which seat up to five players in an interactive setting that features avirtual dealer.

 

         On July 10, 2008, our Phase VIcasino expansion, The Colonnade, was partially opened to the public withapproximately 500 additional slot machines, Doc Magrogan’s Oyster House, SweetPerks Too and the Dover Downs’ Fire & Ice Lounge debuting.  Four retail outlets opened and space for twoadditional outlets was completed in late September 2008.  The expansion, which is now complete, addedapproximately 68,000 square-feet of space bringing our video lottery casinocomplex to 165,000 square-feet housing approximately 3,110 slot machines.

 

Legislation was introduced in2008 in Delaware to consider the resumption of sports betting.  Recently, three Delaware state agencies (theOffice of Management and Budget, the Department of Finance, and the ControllerGeneral’s office) participated in a report issued January 10, 2008which concludes as follows: “[W]hile all the options for theimplementation of sports betting in the State of Delaware are feasible, the mostreasonable option for phased-in legalization is a racino based operation.”  By Federal law, Delaware is the only stateeast of Montana, and one of only four states in the United States, where sportsbetting is legally permitted.  Wecontinue to pursue this with the legislature.

 

*CapitalizeOn Our Luxury Hotel*

 

Our luxury hotel facility, the Dover Downs Hotel, connects to ourcasino.  It is the only hotel in theDover area, and one of only three hotels in the State, to receive the AAA FourDiamond Award.  The facility includes 500

 

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rooms, includingeleven luxury spa suites, a multi-purpose ballroom/concert hall, a fine diningrestaurant, swimming pool and a luxurious 6,000 square-foot spa.  When we built the original hotel we alsobuilt a 425-seat buffet restaurant and renovated our enclosed harness racinggrandstand with state-of-the-art simulcasting facilities.  By offering a wide range of entertainmentoptions to our patrons, including concerts featuring prominent entertainers,live boxing, gourmet dining, trade shows and conferences, we believe we areable to attract new patrons and lengthen the stay of current patrons.

 

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

 

With a percentage of video lottery (slot) machine revenuessupplementing the purses for the horsemen, we have experienced dramaticincreases in the amount of our purses. By the end of our 2007-2008 season, our average daily purse distributionincreased to approximately $220,000 from $8,000 in 1995.  The result is that we continue to attract higherquality horses.  We have prestigiousevents such as our annual “Progress Pace” with an estimated $400,000 purse, anevent which attracts the country’s top three-year-old horses.  Bettors are attracted to races with largerpurses and typically wager more on the higher quality and more predictablehorses. We have also completed various upgrades to enhance the harness horseracing facilities, including renovations to the track and grounds, receivingbarn and paddock areas and, more recently, our simulcast parlor which hasstate-of-the-art facilities that allow year round wagering. We continue tofocus on improvements that we believe allow us to increase attendance andwagering, including wagering on our events from other tracks and off-trackwagering facilities that receive our racing signal.

 

*PursueManagement Agreements*

 

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

 

**Seasonality**

 

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

 

**Employees**

 

As of December 31, 2008, we had 789 full-time employees and 109part-time employees. We engage temporary personnel to assist during our liveharness racing season. None of our employees are party to a collectivebargaining agreement and we believe that our relationship with our employees isgood.

 

#### **Available Information**

#### ** **

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

 

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#### **Internet Address**

#### ** **

We maintain a website where additional information concerning ourbusiness and various upcoming events can be found.  The address of our Internet website is http://www.doverdowns.com.We provide a link on our website, under Investor Relations, to our filings withthe SEC, including our annual report on Form 10-K, proxy statement, Section 16reports, quarterly reports on Form 10-Q, current reports on Form 8-Kand all amendments to those reports.

 

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

 

Disclosure regarding the most significant factors that may adverselyaffect our business, operations, industry or financial position or our futurefinancial performance is set forth under the section entitled, “Factors That May AffectOperating Results; Forward-Looking Statements,” beginning on page 21.

 

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

 

We have not received any written comments that were issued more than180 days before December 31, 2008, the end of the fiscal year covered bythis report, from the SEC staff regarding our periodic or current reports underthe Securities Exchange Act of 1934 that remain unresolved.

 

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

 

We own our principal executive office located in Dover, Delaware; DoverDowns Casino – our 165,000 square-foot casino featuring the latest in slotmachine offerings such as multi-player electronic table games with virtualdealers; the Dover Downs Hotel and Conference Center – a 500 room AAA FourDiamond hotel with conference, banquet, fine dining, ballroom, concert hall andspa 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.

 

Our use of DVD’s 5/8-mile harness racing track is pursuant to aneasement granted to us by DVD which does not require the payment of any rent.Under the terms of the easement, we have exclusive use of the harness trackduring 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.  Theharness track is located on property owned by DVD and is on the inside of DVD’smotorsports superspeedway.  Our indoorgrandstands are used by DVD at no charge in connection with its majormotorsports events. DVD also leases its principal office space from us.  Various easements and agreements relative toaccess, utilities and parking have also been entered into between DVD and usrelative to our respective Dover, Delaware facilities.

 

**IntellectualProperty**

 

We have various registered and common law trademark rights, including,but not limited to, “Dover Downs Gaming & Entertainment,” “DoverDowns,” “Capital Club,” “Capital Gold,” “Capital Platinum,” “Dover Downs Hotel &Casino,” “Dover Downs is Cooking,” “Sweet Perks,” “Gazebo Bar,” “WinnersCircle,” “Michele’s at Dover Downs,” “Rollins Center,” “$1 Million JackpotSlot,” “Come Play!.”  We alsohave limited rights to use the names and logos of other businesses inconnection with promoting our facilities and special events at thosefacilities.  Due to the value of our intellectual property rights forpromotional purposes, it is our intention to vigorously protect theserights, through litigation, if necessary.

 

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

 

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

 

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**Item 4.**            **Submission Of Matters To AVote Of Security Holders**

 

No matters were submitted during the fourth quarter of the fiscal yearcovered by this report to a vote of security holders.

 

**Executive Officers Of The Registrant**

 

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

 

**Part II**

 

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

 

Ourcommon stock is listed on the New York Stock Exchange under the ticker symbol “DDE.”  Our Class A common stock is not publiclytraded but is freely convertible on a one-for-one basis into common stock atany time at the option of the holder thereof. As of February 27, 2009, there were 15,464,610 shares of common stockand 16,603,173 shares of Class A common stock outstanding.  There were 1,034 holders of record for commonstock and 20 holders of record for Class A common stock.

 

The high and low sales prices for our common stock onthe New York Stock Exchange and the dividends declared per share for the yearsended December 31, 2008 and 2007 are detailed in the following table.

 

| **Quarter Ended:**      | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends  Declared** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|-------------------------|------------|
| December 31, 2008  |       | $        | 8.09       |    | $          | 2.27                    |       | $ | 0.050 |   |
| September 30, 2008 |       | $        | 9.49       |    | $          | 6.03                    |       | $ | 0.050 |   |
| June 30, 2008      |       | $        | 9.32       |    | $          | 6.38                    |       | $ | 0.050 |   |
| March 31, 2008     |       | $        | 11.34      |    | $          | 8.00                    |       | $ | 0.050 |   |
|                    |       |     |       |    |       |                    |       |
| December 31, 2007  |       | $        | 12.56      |    | $          | 9.89                    |       | $ | 0.050 |   |
| September 30, 2007 |       | $        | 15.23      |    | $          | 9.77                    |       | $ | 0.050 |   |
| June 30, 2007      |       | $        | 15.32      |    | $          | 12.06                   |       | $ | 0.045 |   |
| March 31, 2007     |       | $        | 15.71      |    | $          | 11.76                   |       | $ | 0.045 |   |

 

On October 23, 2002, our Board of Directorsauthorized the repurchase of up to 3,000,000 shares of our outstanding commonstock.  The purchases may be made in theopen market or in privately negotiated transactions as conditions warrant.  The repurchase authorization does not obligateus to acquire any specific number of shares and may be suspended at anytime.  No repurchases were made in thefourth quarter of 2008 and we had remaining purchase authority of 1,653,333shares.

 

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**CommonStock Performance**

 

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

 

·      our Common Stock;

 

·      the Russell 2000 Index; and

 

·      an index of peer companies.

 

The peer index we selected consists of the following companies engagedin the gaming business:  Dover DownsGaming & Entertainment, Inc., MTR Gaming Group, Inc.,Ameristar Casinos, Inc., Penn National Gaming, Inc., Churchill Downs, Inc.,Pinnacle Entertainment, Inc., and Magna Entertainment Corp.  The graph assumes that the value of theinvestment in our Common Stock and each index was 100 at December 31, 2003and all dividends were reinvested.  Thecomparisons in this table are required by the Securities and ExchangeCommission and, therefore, are not intended to forecast or be necessarilyindicative of any future return on our Common Stock.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

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

**AND APEER GROUP**

 

 

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*       $100 invested on December 31, 2003 in stock orindex—including reinvestment of dividends. Fiscal year ending December 31.

 

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

 

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

 

**Five YearSelected Financial Data**

 
| ** **                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                          | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Consolidated Statement of Earnings Data (in  thousands, except per share data):** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                           |       |                              |       |   |   |   |   |   |   |   |   |
| Gaming                                                                              |       | $                                 | 219,878    |   | $ | 224,760 |   | $ | 220,412 |   | $ | 202,372 |   | $ | 193,922 |   |
| Other operating                                                                     |       | 19,254                            |       | 17,606 |   | 16,039 |   | 14,480 |   | 13,822 |   |
|                                                                                |       | 239,132                           |       | 242,366 |   | 236,451 |   | 216,852 |   | 207,744 |   |
| Less - non-recurring gaming charge (a)                                              |       | —                            |       | — |   | — |   | — |   | 448 |   |
|                                                                                |       | 239,132                           |       | 242,366 |   | 236,451 |   | 216,852 |   | 207,296 |   |
| Expenses:                                                                           |       |                              |       |   |   |   |   |   |   |   |   |
| Gaming                                                                              |       | 169,360                           |       | 166,040 |   | 163,288 |   | 151,973 |   | 152,725 |   |
| Non-recurring gaming charge (a)                                                     |       | —                            |       | — |   | — |   | — |   | 1,802 |   |
| Other operating                                                                     |       | 16,101                            |       | 15,268 |   | 14,202 |   | 13,167 |   | 13,013 |   |
| General and administrative                                                          |       | 6,317                             |       | 6,319 |   | 5,905 |   | 4,765 |   | 4,603 |   |
| Depreciation                                                                        |       | 10,849                            |       | 7,843 |   | 7,146 |   | 6,998 |   | 6,791 |   |
|                                                                                |       | 202,627                           |       | 195,470 |   | 190,541 |   | 176,903 |   | 178,934 |   |
|                                                                                |       |                              |       |   |   |   |   |   |   |   |   |
| Gain on sale of shopping center (b)                                                 |       | —                            |       | — |   | — |   | 5,837 |   | — |   |
| Operating earnings                                                                  |       | 36,505                            |       | 46,896 |   | 45,910 |   | 45,786 |   | 28,362 |   |
| Interest expense                                                                    |       | 3,484                             |       | 2,741 |   | 2,943 |   | 1,875 |   | 762 |   |
| Earnings before income taxes                                                        |       | 33,021                            |       | 44,155 |   | 42,967 |   | 43,911 |   | 27,600 |   |
| Income taxes                                                                        |       | 13,510                            |       | 18,070 |   | 17,639 |   | 17,871 |   | 11,219 |   |
| Net earnings                                                                        |       | $                                 | 19,511     |   | $ | 26,085 |   | $ | 25,328 |   | $ | 26,040 |   | $ | 16,381 |   |
| ** **                                                                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings per common share (c) :                                            |       |                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                               |       | $                                 | 0.62       |   | $ | 0.81 |   | $ | 0.78 |   | $ | 0.73 |   | $ | 0.41 |   |
| Diluted                                                                             |       | $                                 | 0.62       |   | $ | 0.80 |   | $ | 0.77 |   | $ | 0.72 |   | $ | 0.41 |   |
|                                                                                |       |                              |       |   |   |   |   |   |   |   |   |
| Dividends declared per common share                                                 |       | $                                 | 0.20       |   | $ | 0.19 |   | $ | 0.175 |   | $ | 0.16 |   | $ | 0.15 |   |
| ** **                                                                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected Consolidated Operating Data  (unaudited):**                              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average number of slot machines                                                     |       | 2,888                             |       | 2,719 |   | 2,599 |   | 2,500 |   | 2,432 |   |
| Casino square-footage                                                               |       | 165,000                           |       | 97,000 |   | 97,000 |   | 91,000 |   | 91,000 |   |
|                                                                                |       |                              |       |   |   |   |   |   |   |   |   |
| ** **                                                                          | ** ** | **December 31,**             | ** ** |
| ** **                                                                          | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Consolidated Balance Sheet Data (in thousands):**                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Working capital                                                                     |       | $                                 | 14,456     |   | $ | 7,065 |   | $ | 11,979 |   | $ | 9,216 |   | $ | 8,505 |   |
| Total assets                                                                        |       | 241,332                           |       | 225,180 |   | 173,027 |   | 153,461 |   | 160,300 |   |
| Long-term debt (b)                                                                  |       | 108,325                           |       | 92,425 |   | 59,425 |   | 24,075 |   | 51,950 |   |
| Total stockholders’ equity (c)                                                 |       | 101,085                           |       | 89,599 |   | 77,259 |   | 93,270 |   | 72,770 |   |

 

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(a)    Effective December 2004,we changed our policy relating to our point loyalty program to allow pointsearned by customers to be redeemed for cash under certain circumstances.  As a result, we recorded a non-recurringcharge of $2,250,000 ($1,338,000 after income tax benefit) in the fourthquarter of 2004 to record the net impact of the program change.  The estimated amount of points redeemable forcash was recorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise was recorded as gaming expense.

 

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(b)    On December 28, 2005, we closed on the sale of a shopping center weowned in Dover, Delaware.  The salesprice was $12,450,000 and we recognized a gain on the sale of $5,837,000($3,461,000 after income taxes).  Theproceeds from the sale were used to pay down outstanding amounts on our creditfacility.

 

(c)    On November 10, 2004, wecommenced a tender offer to purchase up to 1,560,632 shares of our common stockand up to 2,411,259 shares of our Class A common stock at a fixed price of$8.00 per share.  The offer expired on December 10,2004.  We purchased 1,560,632 shares ofour common stock and 2,400,000 shares of our Class A common stock for$32,045,000, including expenses, in connection with the tender offer.

 

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

 

On October 23, 2002, our Board of Directorsauthorized the repurchase of up to 3,000,000 shares of our outstanding commonstock. The purchases may be made in the open market or in privately negotiatedtransactions as conditions warrant.  Therepurchase authorization has no expiration date, does not obligate us toacquire any specific number of shares and may be suspended at any time.  During the year ended December 31, 2008,we purchased and retired 98,500 shares of our outstanding common stock pursuantto this plan at an average purchase price of $9.09 per share, not includingnominal brokerage commissions.  Duringthe year ended December 31, 2007, we purchased and retired 916,900 sharesof our outstanding common stock pursuant to this plan at an average purchaseprice of $10.72 per share, not including nominal brokerage commissions.  No purchases of our equity securities weremade pursuant to this authorization during the years ended December 31,2006 and 2005.  During the year ended December 31,2004, we purchased and retired 76,350 shares of our outstanding common stockpursuant to this plan at an average purchase price of $6.63 per share, notincluding nominal brokerage commissions.

 

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

### ** **

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

 

Dover Downs Gaming & Entertainment, Inc. is a diversifiedgaming and entertainment company whose operations consist of Dover Downs Casino– a 165,000 square-foot video lottery casino complex featuring the latest inslot machine offerings, including multi-player electronic table games withvirtual dealers; the Dover Downs Hotel and Conference Center – a 500 room AAAFour Diamond hotel with conference, banquet, fine dining, ballroom, concerthall and spa facilities; and Dover Downs Raceway – a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

On July 10, 2008, our Phase VI casino expansion, The Colonnade,was partially opened to the public with approximately 500 additional slotmachines, Doc Magrogan’s Oyster House, Sweet Perks Too and the Dover Downs’Fire & Ice Lounge debuting. Four retail outlets opened and space for two additional outlets wascompleted in late September 2008. The expansion, which is now complete, added approximately 68,000square-feet of space bringing our video lottery casino complex to 165,000square-feet housing approximately****3,110 slot machines.

 

Approximately 90% of our revenue is derived from video lottery (slot)machine win.  Several factors contributeto the video lottery (slot) machine win for any gaming company, including, butnot limited to:

 

·      Proximity to majorpopulation bases,

·      Competition in the market,

·      The quantity and types ofslot machines available,

·      The quality of the physicalproperty,

·      Other amenities offered onsite,

·      Customer service levels,

 

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·      Marketingprograms, and

·      Generaleconomic conditions.

 

Webelieve that we hold a strong position in each of these areas.  Our entertainment complex is located inDover, the capital of the State of Delaware. We draw patrons from several majormetropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all withina two hour drive. According to the 2000 United States Census, approximately32.8 million people live within 150 miles of our complex.  There are significant barriers to entryrelated to the gaming business in Delaware. By law, only three existing horse racing facilities in the State are allowedto have a gaming license.  Our propertyis similar to properties found in the country’s largest gaming markets.  Our recently expanded luxury hotel is theonly casino-hotel in Delaware, providing a strong marketing tool, especially tohigher-end players.  We also utilize ourslot marketing system to allow for the most efficient marketing programs andthe highest levels of customer service.

 

Because all of our operations are located at one facility, we face therisk of increased competition from the legalization of new or additional gamingvenues.  We have therefore focused on creatingthe region’s premier gaming destination and building and rewarding customerloyalty through innovative marketing efforts, unparalleled customer service anda variety of amenities.

 

**Resultsof Operations**

 

Gaming revenues represent (i) the net win from video lottery(slot) machine wins and losses and (ii) commissions from pari-mutuelwagering.  Other operating revenuesconsist of hotel rooms revenue, food and beverage sales and other miscellaneousincome.  Revenues do not include theretail amount of hotel rooms, food and beverage and other miscellaneous goodsand services provided without charge to customers as promotional items. Theestimated direct cost of providing these items has been charged to the casinothrough interdepartmental allocations and is included in gaming expenses in theconsolidated statement of earnings.

 

For the video lottery operations, the difference between the amountwagered by bettors and the amount paid out to bettors is referred to as thewin. The win is included in the amount recorded in our consolidated financialstatements as gaming revenue. The Delaware State Lottery Office sweeps the winfrom the video lottery operations, collects the State’s share of the win andthe amount due to the vendors under contract with the State who provide thevideo lottery (slot) machines and associated computer systems, collects theamount allocable to purses for harness horse racing and remits the remainder tous as our commission for acting as a Licensed Agent. Gaming expenses include theamounts collected by the State (i) for the State’s share of the win, (ii) forremittance to the providers of the video lottery (slot) machines and associatedcomputer systems, and (iii) for harness horse racing purses. We recognizerevenues from pari-mutuel commissions earned from live harness horse racing andimporting of simulcast signals from other race tracks when the race occurs.Revenues from hotel rooms, food and beverage sales and other miscellaneousincome are recognized at the time the service is provided.

 

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

 

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

 

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

 

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

 

Other operating expenses increased by $833,000, or 5.5%, reflecting thehigher revenues.  Expenses related to ourfood and beverage operations were $12,873,000 in 2008 and $12,552,000 in 2007.  These increased expenses included initialcosts of operations related to our new Dover Downs’ Fire & Ice Loungeand Sweet Perks Too coffee shop which opened in the third quarter of 2008.  Expenses related to our rooms operationsincreased $312,000 in 2008 primarily due to the hotel expansion.  We also incurred approximately $500,000 inexpenses during the fourth quarter of 2008 related to the termination of tworestaurant leases on our property.

 

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

 

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

 

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

 

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

 

*YearEnded December 31, 2007 vs. Year Ended December 31, 2006*

 

Gaming revenues increased by $4,348,000, or 2.0%, to$224,760,000 in 2007, entirely the result of increased play in our casino.  This increase in video lottery (slot) machinewin was partially offset by lower horse racing commissions.  We believe that the increase in casino playcan be attributed to the opening of our hotel expansion during the later partof 2007, the conversion of 4,000square-feet of space within our existing complex to gaming space which allowedus to add more than 200 new machines in July of 2006, targetedmarketing efforts using our player database, and our efforts to provide ourcustomers with enhanced casino products and other amenities.  Our average number of machines increased from2,599 in 2006 to 2,719 in 2007.

 

Other operating revenues were $17,606,000 in 2007 ascompared to $16,039,000 in 2006.  Netfood and beverage revenues increased $1,177,000 to $12,123,000 from $10,946,000in 2006 primarily due to an increase in banquet sales and sales at our FestivalBuffet restaurant.  Additionally, cashrooms revenue increased $585,000 in 2007 mainly due to the hotelexpansion.  Partially offsetting theseincreases was a decrease in concert ticket sales as a result of promoting fewershows during 2007.  Other operatingrevenues do not include the retail amount of promotional allowances which areprovided to customers on a complimentary basis of $15,770,000 and $15,152,000in 2007 and 2006, respectively.

 

Gaming expenses increased by $2,752,000, or 1.7%,reflecting the higher gaming revenues. 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$1,025,000 and $1,115,000, respectively. Additionally, amounts allocated from the video lottery operation forharness horse racing purses increased from $25,333,000 in 2006 to $25,887,000in 2007.

 

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Other operating expenses increased by $1,066,000, or 7.5%.  Expenses related to our food and beverageoperations were $12,552,000 in 2007 and $11,815,000 in 2006.  Expenses related to our rooms operationsincreased $262,000 in 2007 primarily due to the hotel expansion.  All other operating expenses increased$67,000 in 2007 as compared to 2006.

 

General and administrative expenses increased by$414,000 to $6,319,000 from $5,905,000 in 2006, primarily the result of higherstock based compensation expenses, higher benefits costs and losses on thedisposal of property and equipment. Partially offsetting these increases was a decrease in legal expenses.

 

Depreciation expense was $7,843,000 in 2007 ascompared to $7,146,000 in 2006.  Theincrease resulted primarily from the opening of our hotel expansion during2007.

 

Interest expense decreased by $202,000 due to theamount of interest we capitalized during 2007 as compared to 2006, despitehigher average outstanding borrowings and an increase in our average interestrate on our credit facility.  During2006, the majority of our credit facility borrowings were used to fund our$34,986,000 self-tender in January 2006. During 2007, the majority of our credit facility borrowings were usedfor our hotel expansion project and to a lesser extent our casino expansionproject.  The interest expense associatedwith the borrowings for our hotel and casino expansions is being capitalized aspart of the project cost.

 

Our effective income tax rate was 40.9% and 41.1% forthe years ended December 31, 2007 and 2006, respectively.

 

**Liquidityand Capital Resources**

 

Net cash provided by operating activities was $26,808,000 for the yearended December 31, 2008 compared to $36,420,000 for the year ended December 31,2007.  The decrease was primarily due tothe decrease in net earnings and other working capital changes.

 

Net cash used in investing activities was $40,266,000 for the yearended December 31, 2008 compared to $52,134,000 for the year ended December 31,2007 and was primarily related to capital improvements.  Capital expenditures for 2008 relatedprimarily to the Phase VI casino expansion. Capital expenditures for 2007 related primarily to the Dover Downs Hotelexpansion and to a lesser extent, our Phase VI casino expansion.

 

Net cash provided by financing activities was $8,891,000 for the yearended December 31, 2008 compared to $18,150,000 for the year ended December 31,2007.  During 2008, we borrowed anadditional $15,900,000 under our credit facility compared to $33,000,000 during2007.  We repurchased and retired$1,040,000 of our outstanding common stock during 2008 compared to $9,990,000during 2007.  We paid $6,360,000 and$6,036,000 in cash dividends during 2008 and 2007, respectively.

 

On January 28, 2009, our Board of Directorsdeclared a quarterly cash dividend on both classes of common stock of $0.05 pershare.  The dividend is payable on March 10,2009 to shareholders of record at the close of business on February 10,2009.

 

On October 23, 2002, our Board of Directors authorized therepurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization has noexpiration date, does not obligate us to acquire any specific number of sharesand may be suspended at any time.  Duringthe year ended December 31, 2008, we purchased and retired 98,500 sharesof our outstanding common stock pursuant to this plan at an average purchaseprice of $9.09 per share, not including nominal brokerage commissions.  During the year ended December 31, 2007,we purchased and retired 916,900 shares of our outstanding common stockpursuant to this plan at an average purchase price of $10.72 per share, notincluding nominal brokerage commissions. At December 31, 2008, we had remaining repurchase authority of1,653,333 shares.

 

During 2007, we increased the number of hotel rooms inthe Dover Downs Hotel from 232 to 500, including eleven luxury spa suites, andadded a luxurious 6,000 square-foot spa. Construction began in the second quarter of 2006 and was completed in October 2007.  The cost of the hotel expansion wasapproximately $47,500,000.  On July 10,2008, our Phase VI casino expansion, the Colonnade, was partially opened to thepublic with approximately 500 additional slot machines, Doc Magrogan’s OysterHouse, Sweet Perks Too and the Dover Downs’ Fire & Ice

 

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Lounge debuting. Four retail outlets opened and space for twoadditional outlets was completed in late September 2008.  The expansion, which is now complete, addedapproximately 68,000 square-feet of space bringing our video lottery casinocomplex to 165,000 square-feet housing approximately 3,110 slot machines.  The cost of the Phase VI casino expansion wasapproximately $51,000,000, of which approximately $49,500,000 was paid as of December 31,2008. The remainder is expected to be paid during the first quarter of 2009.  Based oncurrent business conditions, we expect to make capital expenditures ofapproximately $2,000,000 during 2009, primarily for renovations to our existingcasino facility, casino equipment and improvements in our food and beveragedepartments. Additionally, we expect to contribute between $1,500,000and $3,000,000 to our pension plans in 2009 in order to satisfy minimumstatutory funding requirements.

 

We have a credit facility with Wilmington Trust Company that expires onApril 17, 2012.  At December 31,2008, the maximum borrowing limit under the facility was $125,000,000 whichreduces to $100,000,000 on January 1, 2010, to $85,000,000 on January 1,2011 and to $75,000,000 on January 1, 2012.  Interest is based, at our option, upon LIBORplus a margin that varies between 75 and 125 basis points (125 basis points at December 31,2008) depending on the ratio of funded debt to earnings before interest, taxes,depreciation and amortization (the “leverage ratio”) or the base rate (thegreater of the prime rate or the federal funds rate plus 0.5%) less a marginthat varies between 50 and 100 basis points (50 basis points at December 31,2008) depending on the leverage ratio. The credit facility has minimum net worth, interest coverage and maximumleverage requirements.  Material adversechanges in our results of operations could impact our ability to satisfy theserequirements.  In addition, the creditagreement also includes a material adverse change clause.  The facility is for seasonal funding needs,capital improvements and other general corporate purposes.  At December 31, 2008, we were incompliance with all terms of the facility and there was $108,325,000outstanding at a weighted average interest rate of 2.37%.  At December 31, 2008, $16,675,000 wasavailable pursuant to the facility.

 

Effective January 15, 2009, we entered into aninterest rate swap agreement that effectively converts $35,000,000 of ourvariable-rate debt to a fixed-rate basis, thereby hedging against the impact ofpotential interest rate changes.  Theagreement terminates on April 17, 2012. Pursuant to this agreement, we will pay a fixed interest rate of 1.74%,plus a margin that varies between 75 and 125 basis points depending on ourleverage ratio (125 basis points at December 31, 2008).  In return, the issuing lender will refund tous the variable-rate interest paid to the bank group under our revolving creditagreement on the same notional principal amount, excluding the margin.

 

Effective July 1, 2008, the State enacted legislation that (1) increases the existingsurcharge on the portion of slot win that we retain, (2) requires thatwe pay the costs of all franchise games which were previously shared with theState, and (3) requires that we pay an additional annualamount to a certain horse racing industry organizationpreviously funded by the State. That legislation also allows us to operate all day on Sundays andeliminates the prior legislatively imposed limit on our use of free promotionalslot play.  These increased surcharge and fees were approximately $1,500,000for the year ended December 31, 2008.

 

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

 

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

 

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#### **Contractual Obligations**

#### ** **

At December 31, 2008, we had the following contractualobligations:

 
| ** **                                                  | ** ** | ** ** | ** **  | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------|------------|------------|-------------|-------------------------------------------|------------|
| ** **                                                  | ** ** | **Total**  | ** **  | **2009**                                  | ** ** | **2010 – 2011** | ** ** | **2012 – 2013** | ** ** | **Thereafter** | ** ** |
| Revolving line of credit                                    |       | $          | 108,325,000 |                                      | $          | — |   | $ | 23,325,000 |   | $ | 85,000,000 |   | $ | — |   |
| Estimated interest payments on revolving line of  credit(a) |       | 8,187,000  |        | 2,785,000                                 |       | 4,820,000 |   | 582,000 |   | — |   |
| Pension contributions(b)                                    |       | 2,250,000  |        | 2,250,000                                 |       | — |   | — |   | — |   |
| Purchase obligations(c)                                     |       | 1,500,000  |        | 1,500,000                                 |       | — |   | — |   | — |   |
|                                                        |       | $          | 120,262,000 |                                      | $          | 6,535,000 |   | $ | 28,145,000 |   | $ | 85,582,000 |   | $ | — |   |

 

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(a) The future interest payments on our revolving credit agreementwere estimated using the current outstanding principal or the maximum borrowinglimit as of December 31, 2008.  For$35,000,000 of our outstanding borrowings, we used the fixed interest rate perthe interest rate swap agreement we entered into effective January 15,2009.  For the remaining $73,325,000 ofour outstanding borrowings, we used our interest rates as of December 31,2008.

 

(b) We expect to contribute between $1,500,000 and $3,000,000 toour pension plans for 2009 in order to satisfy minimum statutory fundingrequirements.  For years subsequent to2009, we are unable to estimate what our pension contributions will be.

 

(c) The purchase obligations in the above table represent theestimated remaining payments to be made onour Phase VI casino expansion.

 

#### **Related Party Transactions**

#### ** **

See NOTE 10 — Related Party Transactions to our consolidated financialstatements included elsewhere in this document for a full description ofrelated party transactions.

 

#### **Critical Accounting Policies**

#### ** **

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

 

*Propertyand Equipment*

 

Property and equipment are recorded at cost. Depreciation is providedfor financial reporting purposes using the straight-line method over estimateduseful lives ranging from 5 to 10 years for furniture, fixtures and equipmentand up to 40 years for facilities.  Theseestimates require assumptions that are believed to be reasonable.  We perform reviews for impairment oflong-lived assets whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable.  No such events or changes in circumstanceshave occurred to date.  An impairmentloss would be measured as the amount by which the carrying amount of the assetexceeds its fair value.  Generally, fairvalue will be determined using valuation techniques such as the present valueof future cash flows.

 

*AccruedPension Cost*

 

The benefits provided by our defined-benefit pension plans are based onyears of service and employee’s remuneration over their employment withus.  Accrued pension costs are developedusing actuarial principles and assumptions which consider a number of factors,including estimates for the discount rate, assumed rate of compensation increase,and expected long-term rate of return on 

 

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assets.  Changes in these estimates would impact theamounts that we record in our consolidated financial statements and our fundingcontributions to the plans.

 

**RecentAccounting Pronouncements**

 

See NOTE 2—Summary of Significant Accounting Policies****to our consolidated financial statements included elsewherein this document for a description of recent accounting pronouncementsincluding the expected dates of adoption and effects on results of operations,financial condition and cash flows.

 

### **FactorsThat May Affect Operating Results; Forward-Looking Statements**

### ** **

In addition 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 financialcondition, profitability, liquidity, resources, business outlook, proposed acquisitions,market forces, corporate strategies, consumer preferences, contractualcommitments, legal matters, capital requirements and other matters.  Documents incorporated by reference into thisAnnual Report may also contain forward-looking statements. The PrivateSecurities Litigation Reform Act of 1995 provides a safe harbor forforward-looking statements. To comply with the terms of the safe harbor, wenote that a variety of factors could cause our actual results and experience todiffer substantially from the anticipated results or other expectationsexpressed in our forward-looking statements. When words and expressions suchas: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,”“goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,”“might,” “likely,” “enable” or similar words or expressions are used in thisdocument, as well as statements containing phrases such as “in our view,” “therecan be no assurance,” “although no assurance can be given” or “there is no wayto anticipate with certainty,” forward-looking statements are being made.

 

Various risks and uncertainties may affect theoperation, performance, development and results of our business and could causefuture outcomes to differ materially from those set forth in ourforward-looking statements, including the following factors:

 

·     general market and economic conditions,including consumer and corporate spending sentiment;

 

·     success of any expansion to or renovationof our existing facilities or changes in our growth strategies;

 

·     expansion of gaming in neighboringjurisdictions;

 

·                  trends and uncertainties in thegaming industry;

 

·     patron demographics;

 

·     our ability to finance future businessrequirements;

 

·     our ability to effectively compete in themarketplace;

 

·     the availability of adequate levels ofinsurance;

 

·     our development and potential acquisitionof new facilities;

 

·     our ability to successfully integrateacquired companies and businesses;

 

·     management retention and development;

 

·     changes in Federal, state, and local lawsand regulations, including environmental, gaming license and tax legislation;

 

·     the effect of weather conditions or travelon attendance at our facilities;

 

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·     military or other government actions; and

 

·     national or local catastrophic events.

 

The above risks and uncertainties and the cautionarystatements below should be considered in connection with any futureforward-looking statements we make. We undertake no obligation to publiclyupdate or revise any forward-looking statements as a result of futuredevelopments, events or conditions.  Newrisk factors emerge from time to time and it is not possible for us to predictall such risk factors, nor can we assess the impact of all such risk factors onour business or the extent to which any factor, or combination of factors, maycause actual 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.

 

*Our GamingActivities Compete Directly With Other Gaming Facilities And OtherEntertainment Businesses*

 

We compete in local and regional markets withhorse tracks, off-track betting parlors, state run lotteries, casinos and othergaming facilities.  We cannot be certainthat we will maintain our market share or compete more effectively with ourcompetitors.  The introduction orexpansion of gaming in neighboring jurisdictions, particularly Maryland,Virginia, West Virginia, Washington, D.C., Pennsylvania or New Jersey, or thelegalization of additional gaming venues in Delaware, could have a materialadverse effect on our cash flows and results of operations.  From timeto time legislation is proposed for adoption in these jurisdictions which ifenacted, 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.  The Maryland Legislature passedlegislation in 2008 that will permit up to 15,000 slot machines infive different specific locations throughout Maryland. The legislationrequires a Constitutional amendment which passed on a referendum vote in November 2008. The establishment of any gaming locations in the State remains subject to localzoning prohibitions and may face further opposition.  As the number ofmachines and the specific locations of the gaming establishments are set by theState’s Constitution, any changes to the number of machines or the locationswould require further amendment to theState Constitution.   It is difficult for us to predictwhat types of gaming establishments may ultimately be built in Maryland orwhen they are likely to become operational.  Management has estimated thatapproximately 43% of our total slot win comes from Maryland patrons. ** **Approximately 69% ofour Capital Club® member slot win comes from out of statepatrons.  In July 2004, Pennsylvania adopted legislation which authorizes upto 61,000 slot machines at various existing and proposed venues throughout thestate.  It is difficult for us to predictthe effect that such legislation will ultimately have on us, but several facilitiesin Pennsylvania began operations by the end of 2006.  Management has estimated that slot win fromPennsylvania patrons currently represents approximately****3%of our total slot win which is the same as the prior year.

 

*All OfOur Facilities Are In One Location*

 

Our facilities are located adjacent to one another at a single locationin Dover, Delaware. Any prolonged disruption of operations at these facilitiesdue to damage or destruction or other reasons could adversely affect ourfinancial condition and results of operations. We maintain property andbusiness interruption insurance to protect against such types of disruption,but there can be no assurance that the proceeds of such insurance would beadequate to repair or rebuild our facilities or to compensate us for lostprofits.

 

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

 

The Delaware State Lottery Office and the Delaware Harness RacingCommission regulate our gaming operations. Our license from the Commission mustbe renewed on an annual basis. To keep our license for video lottery (slot)machine gaming, we must remain licensed for harness horse racing by theCommission and conduct at least 80 live race days each racing season, subjectto the availability of harness race horses. The Commission has broad discretionto reject any application for a license or suspend or revoke a license once itis issued. The Director of the Delaware State Lottery Office (the “LotteryDirector”) has broad discretion to revoke, suspend or modify the terms of avideo lottery license. Any modification or termination of existing licensingregulations or any revocation, 

 

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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*

 

Video lottery (slot) machine gaming, harness horse racing andpari-mutuel wagering are subject to extensive government regulation. Delawarelaw regulates the win we are entitled to retain and the percentage ofcommission we are entitled to receive from our gaming revenues, which comprisesa significant portion of our overall revenues. The State granted us a licenseto conduct video lottery (slot) machine operations and a license to conductharness horse races and pari-mutuel wagering. The laws under which theselicenses are granted could be modified or repealed at any time and we could berequired to terminate our gaming operations. If we are required to terminateour gaming operations or if the amount of the commission we receive from theState for conducting our gaming operations is decreased, our businessoperations and overall profitability would be significantly impaired.

 

We believe that the prospect of significant additional tax revenue isone of the primary reasons why jurisdictions have legalized gaming. As aresult, gaming operators are typically subject to significant taxes and fees inaddition to normal federal and state corporate income taxes. These taxes andfees are subject to increase at any time. We pay substantial taxes and feeswith respect to our operations and would likely incur similar burdens in anyother jurisdiction in which we may conduct gaming operations in the future. Anymaterial increase in taxes or fees, or the adoption of additional taxes orfees, may have a material adverse effect on our future financial results.

 

Effective July 1, 2008, the State enacted legislation that (1) increasesthe existing surcharge on the portion of slot win that we retain, (2) requires thatwe pay the costs of all franchise games which were previously shared with theState, and (3) requires that we pay an additional annualamount to a certain horse racing industry organizationpreviously funded by the State. That legislation also allows us to operate all day on Sundays andeliminates the prior legislatively imposed limit on our use of free promotionalslot play.  These increased surcharge and fees were approximately$1,500,000 for the year ended December 31, 2008.

 

We are subject to various federal, state and local laws and regulationsin addition to gaming regulations. These laws and regulations include, but arenot limited to, restrictions and conditions concerning alcoholic beverages,environmental matters, employees, currency transactions, taxation, zoning andbuilding codes, and marketing and advertising. Such laws and regulations arealways subject to change, can be interpreted differently in the future, and newlaws and regulations may be enacted which could adversely affect the tax,regulatory, operational or other aspects of our gaming operations. Furthermore,noncompliance with one or more of these laws and regulations could result inthe imposition of substantial penalties against us.

 

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

 

We do not own or lease the video lottery (slot) machines or computersystems used by the State in connection with our video lottery gamingoperations.  The Lottery Director entersinto contracts directly with the providers of the video lottery (slot) machinesand computer systems. The State purchases or leases all equipment and theLottery Director licenses all technology providers. Our operations could bedisrupted if a licensed technology provider violates its agreement with theState or ceases to be licensed for any reason. Such an event would be outsideof our control and could adversely affect our gaming revenues.

 

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

 

We have elected to be treated as a “controlled corporation” as definedby New York Stock Exchange Rule 303A.  We are a controlledcorporation because a single person, Henry B. Tippie, the Chairman of our Boardof Directors, controls in excess of fifty percent of our voting power. Thismeans that he has the ability to determine the outcome of the election ofdirectors at our annual meetings and to determine the outcome of manysignificant corporate transactions, many of which only require the approval ofa majority of our voting power. Such a concentration of voting power could alsohave the effect of delaying or preventing a third party from acquiring us at apremium.  In addition, as a controlled corporation, we are notrequired to comply with certain New York Stock Exchange rules.

 

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**Item 7A.         Quantitative And Qualitative Disclosure About Market Risk**

 

We are exposed to financial market risk resulting from changes ininterest rates.  At December 31,2008 and for the year then ended, we did not engage in speculative or leveragedtransactions, hold any derivative financial instruments, nor hold or issuefinancial instruments for trading purposes.

 

At December 31, 2008, we have marketablesecurities of $103,000.  Thesesecurities, which consist of mutual funds, are classified as available-for-saleand reported at fair-value in our consolidated balance sheet.  Fair-value is determined based on the currentmarket values.

 

At December 31, 2008, there was $108,325,000outstanding under our revolving credit facility.  Effective January 15, 2009, we entered intoan interest rate swap agreement that effectively converts $35,000,000 of ourvariable-rate debt to a fixed-rate basis, thereby hedging against the impact ofpotential interest rate changes. Taking into account the impact of the interestrate swap, a change in interest rates of one percent on the balance outstandingat December 31, 2008 would cause a change in total annual interest costsof $733,000.  The carrying values ofthese borrowings approximate their fair values at December 31, 2008.

 

#### **Item8.            FinancialStatements And Supplementary Data**

#### ** **

Our consolidated financial statements and the Reportof Independent Registered Public Accounting Firm included in this report areshown on the Index to Consolidated Financial Statements on page 32.

 

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

 

None.

 

**Item 9A.         Controls and Procedures**

 

*(a) Evaluationof Disclosure Controls and Procedures*

 

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

 

Based on their evaluation as of December 31, 2008, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective toensure that the information we are required to disclose in the reports that wefile or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

There have been no changes in our internal control over financialreporting during the fiscal quarter ended December 31, 2008 that havematerially affected, or that are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting. We conducted an evaluation of the effectiveness of our internal controlover financial reporting based on the framework in *InternalControl — Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation, managementconcluded that our internal control over financial reporting was effective asof December 31, 2008.  KPMG LLPindependently assessed the effectiveness of our internal control over financialreporting as of December 31, 2008. KPMG LLP has issued their report which is included herein.

 

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# ***(d) Report of IndependentRegistered Public Accounting Firm***

# ** **

The Board ofDirectors and Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

We have audited Dover Downs Gaming & Entertainment, Inc.’s(the Company’s) internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying *Management’s Report on InternalControl Over Financial Reporting (Item 9A(c))*. Our responsibility isto express an opinion on the effectiveness of the Company’s internal controlover financial reporting based on our audit.

 

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

 

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

 

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

 

In our opinion, Dover Downs Gaming & Entertainment, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2008, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Dover Downs Gaming & Entertainment, Inc. andsubsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of earnings and comprehensive earnings and cash flowsfor each of the years in the three-year period ended December 31, 2008,and our report dated March 6, 2009 expressed an unqualified opinion onthose consolidated financial statements.

 
|                       | KPMG LLP |
|----------------------------|----------|
|                       |     |
| Philadelphia, Pennsylvania |     |
| March 6, 2009         |     |

 

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**Item 9B.         Other Information**

 

None.

 

**Part III**

** **

**Item 10.         Directors, Executive Officers And Corporate Governance**

 

Except as presented below, biographical information relating to ourdirectors and executive officers, information regarding our audit committeefinancial experts and information on Section 16(a) BeneficialOwnership Reporting Compliance called for by this Item 10 are incorporated byreference to our Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 29, 2009.

 

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

 

Executive Officersof the Registrant.  Asof December 31, 2008, our executive officers were:

 
| **Name**            | ** ** | **Position**                                                       | ** ** | **Age** | ** ** | **Term of Office** |
|---------------------|------------|--------------------------------------------------------------------|------------|---------|------------|--------------------|
|                |       |                                                               |       |    |       |               |
| Denis McGlynn       |       | President and Chief  Executive Officer                             |       | 62      |       | 11/79 to date      |
|                |       |                                                               |       |    |       |               |
| Edward J. Sutor     |       | Executive Vice  President and Chief Operating Officer              |       | 59      |       | 3/99 to date       |
|                |       |                                                               |       |    |       |               |
| Timothy R. Horne    |       | Sr. Vice  President-Finance, Treasurer and Chief Financial Officer |       | 42      |       | 11/96 to date      |
|                |       |                                                               |       |    |       |               |
| Klaus M. Belohoubek |       | Sr. Vice  President-General Counsel and Secretary                  |       | 49      |       | 7/99 to date       |

 

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

 

Denis McGlynn has served as our President and Chief Executive Officerfor 29 years.  Mr. McGlynn alsoserves as President and Chief Executive Officer to DVD.

 

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

 

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

 

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

 

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**Item 11.         Executive Compensation**

 

The information called for by this Item 11 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 29,2009.

 

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

 

The information called for by this Item 12 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 29,2009.

 

###### **EquityCompensation Plan Information**

###### ** **

We have a stock incentive planwhich provides for the grant of up to 2,250,000 shares of common stock to ourofficers and key employees through stock options and/or awards valued in wholeor in part by reference to our common stock, such as restricted stockawards.  Refer to NOTE8-Stockholders’ Equity to our consolidated financial statements includedelsewhere in this document for further discussion.  Securities authorized for issuance under equitycompensation plans at December 31, 2008 are as follows:

 
| ** **                                                  | ** ** | **Number of **       | ** ** | ** **                       | ** ** | **Number of securities**    | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **securities to be** | ** ** | ** **                       | ** ** | **remaining available for** | ** ** |
| ** **                                                  | ** ** | **issued upon**           | ** ** | **Weighted-average**             | ** ** | **future issuance under**   | ** ** |
| ** **                                                  | ** ** | ** exercise of **    | ** ** | **exercise price of ** | ** ** | **equity compensation**          | ** ** |
| ** **                                                  | ** ** | **outstanding**                | ** ** | **outstanding**                  | ** ** | **plans (excluding**             | ** ** |
| ** **                                                  | ** ** | **options, warrants**     | ** ** | **options, warrants**       | ** ** | **securities reflected in** | ** ** |
| **Plan Category**                                      | ** ** | **and rights**            | ** ** | **and rights**              | ** ** | **column (a))**                  | ** ** |
| ** **                                                  | ** ** | **(a)**                        | ** ** | **(b)**                          | ** ** | **(c)**                               | ** ** |
| Equity compensation plans approved by security  holders     |       | 666,630                        |       | $                                | 6.97       |                                  | 822,070    |   |
|                                                        |       |                           |       |                             |       |                                  |       |
| Equity compensation plans not approved by security  holders |       | —                         |       | —                           |       | —                                |       |
| Total                                                       |       | 666,630                        |       | $                                | 6.97       |                                  | 822,070    |   |

 

**Item 13.         Certain Relationships And Related Transactions, AndDirector Independence**

 

The information called for by this Item 13 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 29,2009.

 

**Item 14.         Principal Accounting Fees And Services**

 

The information called for by this Item 14 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 29,2009.

 

**Part IV**

** **

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

 
| (a)    | (1)    | Financial Statements — See  accompanying Index to Consolidated Financial Statements on page 32. |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
|   | (2)    | Financial Statement Schedules —  None.                                                               |

 

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|   | (3)    | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 2.1    | Amended and Restated Agreement Regarding  Distribution and Plan of Reorganization, dated as of February 15, 2002,  by and between Dover Motorsports, Inc. (formerly known as Dover Downs  Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to  Exhibit 2.1 to the Form 10 filed on February 26, 2002, which  was declared effective on March 7, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 3.1    | Certificate of Incorporation of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 3.1 to the Form 10 filed on November 21, 2001,  which was declared effective on March 7, 2002).                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 3.2    | Amended and Restated By-laws of Dover Downs  Gaming & Entertainment, Inc. dated March 1, 2002 (incorporated  herein by reference to Exhibit 3.2 to the Form 10 filed on  March 7, 2002).                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.1    | Form of Common Stock Certificate of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 4.1 to the Form 10 filed on November 21, 2001,  which was declared effective on March 7, 2002).                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.2    | Rights Agreement dated as of January 2, 2002  between Dover Downs Gaming & Entertainment, Inc. and Mellon  Investor Services, as Rights Agent (incorporated herein by reference to  Exhibit 4.2 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.1   | Employee Benefits Agreement, dated as of  January 15, 2002, by and between Dover Motorsports, Inc. (formerly  known as Dover Downs Entertainment, Inc.) and Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 10.2 to the Form 10 filed on January 16, 2002,  which was declared effective on March 7, 2002).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.2   | Transition Support Services Agreement, dated as of  January 15, 2002, by and between Dover Motorsports, Inc. (formerly  known as Dover Downs Entertainment, Inc.) and Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 10.3 to the Form 10 filed on January 16, 2002,  which was declared effective on March 7, 2002).                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.3   | Tax Sharing Agreement, dated as of January 15,  2002, by and between Dover Motorsports, Inc. (formerly known as Dover  Downs Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to  Exhibit 10.4 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.4   | Real Property Agreement dated as of January 15,  2002, by and between Dover Motorsports, Inc. (formerly known as Dover  Downs Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to  Exhibit 10.5 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.5   | Agreement between Dover Downs, Inc. and  Delaware Standardbred Owners Association, Inc. dated May 1, 2007  (incorporated herein by reference to Exhibit 10.5 to the Form 10-K  filed on March 7, 2008).                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.6   | Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, 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).                                                                                                                                                                           |

 

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|   | 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  | Fifth Amendment to Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington  Trust Company, as agent, dated as of April 18, 2006 (incorporated herein  by reference to Exhibit 10.1 to the Form 8-K filed on  April 21, 2006).        |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.14  | Sixth Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming & Entertainment, Inc.  and Wilmington Trust Company, as agent, dated as of March 30, 2007 (incorporated  herein by reference to Exhibit 10.2 to the Form 8-K filed on  March 30, 2007).        |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.15  | Seventh Amendment to Amended  and Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  January 15, 2009.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.16  | Eighth Amendment to Amended  and Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  February 27, 2009.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.17  | Amended and Restated Employment and Non-Compete  Agreement between Dover Downs Gaming & Entertainment, Inc. and  Denis McGlynn dated February 13, 2006 (incorporated herein by reference  to Exhibit 10.1 to the Form 8-K filed on February 17, 2006).                            |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.18  | 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).                         |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.19  | 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).                        |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.20  | 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).                     |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.21  | Amendment to certain agreements between Dover Downs  Gaming & Entertainment, Inc. and selected executives and  directors (incorporated herein by reference to Exhibit 10.1 to the  Form 10-Q filed on November 3, 2008).                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.22  | 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).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                |
|   | 10.23  | Dover Downs Gaming &  Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated  (incorporated herein by reference to Exhibit A to our Proxy Statement  filed on March 29, 2004).                                                                                              |

 

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|   | 10.24  | 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). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
|   | 10.25  | Form of Restricted Stock Grant Agreement Used  with Dover Downs Gaming & Entertainment, Inc. 2002 Stock  Incentive Plan, as Amended and Restated (incorporated herein by reference to  Exhibit 10.2 to the Form 10-Q filed on November 3, 2004). |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 10.26  | Description of Annual Salary and Certain  Discretionary Incentives to Executive Officers (incorporated herein by  reference to the Current Report on Form 8-K dated January 2, 2009).                                                                                    |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 10.27  | Construction Management Agreement dated March 30, 2007 between Dover Downs, Inc. and  T.N. Ward Company (incorporated herein by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed on  March 30, 2007).                                   |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 10.28  | Letter of Intent dated October 14, 2008 between Dover  Downs Gaming Management Corp. and UG  Entertainment, LLC  (incorporated  herein by reference to Exhibit 10.1 to the Current Report on  Form 8-K filed on January 14, 2009).                             |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 21.1   | List of Subsidiaries of Dover Downs  Gaming & Entertainment, Inc.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 24.1   | Powers of Attorney for Directors                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 31.1   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 31.2   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 32.1   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 32.2   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 99.1   | Information Statement dated as of March 7, 2002  (incorporated herein by reference to Exhibit 99.1 to the Form 10  filed on March 7, 2002).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                               |
|   | 99.2   | Audit Committee Charter of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit B to our Proxy Statement filed on March 29, 2004).                                                                                      |

 

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**Signatures**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
| DATED: | March 6, 2009 |                                                  | Dover Downs Gaming &  Entertainment, Inc. |
|--------|--------------------|-------------------------------------------------------|---------------------------------------------------------|
|   | Registrant         |
|   |               |
|   |               |
|   | BY:                | /s/ Denis McGlynn                                     |
|   |               | Denis McGlynn                                         |
|   |               | *President and Chief Executive Officer and  Director* |

 

 

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

 

 
| /s/ Timothy R. Horne | * * | *Sr. Vice President-Finance,*           | March 6, 2009 |
|----------------------|----------|-----------------------------------------|--------------------|
| Timothy R. Horne     | * * | *Treasurer and Chief Financial Officer* |               |

 

 

The Directors ofthe registrant (listed below) executed a power of attorney appointing DenisMcGlynn and Timothy R. Horne their attorneys-in-fact, empowering either of themto sign this report, or any amendments, on their behalf.

 

 

Henry B. Tippie, *Chairman of the Board*

 

Kenneth K.Chalmers, *Director andChairman of the Audit Committee*

 

R. RandallRollins, *Director*

 

Patrick J. Bagley,*Director*

 

John W. Rollins, Jr.,*Director*

 

Jeffrey W.Rollins,*Director*

 

 
| /s/ Denis McGlynn | * * | *As Attorney-in-Fact and Director* | March 6, 2009 |
|-------------------|----------|------------------------------------|--------------------|
| Denis McGlynn     | * * |                               |               |

 

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

** **
| ** **                                                                                                                 | **Page** |
|----------------------------------------------------------------------------------------------------------------------------|----------|
| Statement  of Management Responsibility                                                                                    | 33       |
|                                                                                                                       |     |
| Report  of Independent Registered Public Accounting Firm                                                                   | 34       |
|                                                                                                                       |     |
| Consolidated  Statements of Earnings and Comprehensive Earnings for the years ended  December 31, 2008, 2007 and 2006 | 35       |
|                                                                                                                       |     |
| Consolidated  Balance Sheets at December 31, 2008 and 2007                                                            | 36       |
|                                                                                                                       |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and  2006                          | 37       |
|                                                                                                                       |     |
| Notes to the  Consolidated Financial Statements                                                                            | 38       |

 

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**STATEMENT OF MANAGEMENT RESPONSIBILITY**

** **

Dover Downs Gaming & Entertainment, Inc. and subsidiaries’(the “Company”) management is responsible for the preparation, integrity andobjectivity of the consolidated financial statements and other financialinformation included in the Company’s 2008 Annual Report on Form 10-K. Theconsolidated financial statements have been prepared in conformity with U.S.generally accepted accounting principles and reflect the effects of certainestimates and judgments made by management.

 

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

 

The Company conducted an evaluation of the effectiveness of itsinternal control over financial reporting based on the framework in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Based on the Company’s evaluation, managementof the Company concluded that the Company’s internal control over financialreporting was effective as of December 31, 2008.

 

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

 

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

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board ofDirectors and Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

We have audited the accompanying consolidated balance sheets of DoverDowns Gaming & Entertainment, Inc. and**subsidiaries(the Company) as of December 31, 2008 and 2007, and the relatedconsolidated statements of earnings and comprehensive earnings and cash flowsfor each of the years in the three-year period ended December 31, 2008.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Dover DownsGaming & Entertainment, Inc. and subsidiaries as of December 31,2008 and 2007, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2008, inconformity with U.S. generally accepted accounting principles.

 

As discussed in Note 8 to the consolidated financial statements, theCompany adopted the provisions of Statement of Financial Accounting Standards No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans,” on December 31, 2006; and Securities and Exchange Commission StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements,” effective January 1, 2006.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), Dover Downs Gaming &Entertainment, Inc.’s internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 6,2009 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 
|                       | KPMG LLP |
|----------------------------|----------|
|                       |     |
| Philadelphia, Pennsylvania |     |
| March 6, 2009         |     |

 

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

### **CONSOLIDATEDSTATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS**

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

** **
| ** **                                                                                                                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                                                                                             |       |                                        |       |   |   |   |   |
| Gaming                                                                                                                                |       | $                                           | 219,878    |   | $ | 224,760 |   | $ | 220,412 |   |
| Other operating                                                                                                                       |       | 19,254                                      |       | 17,606 |   | 16,039 |   |
|                                                                                                                                  |       | 239,132                                     |       | 242,366 |   | 236,451 |   |
| Expenses:                                                                                                                             |       |                                        |       |   |   |   |   |
| Gaming                                                                                                                                |       | 169,360                                     |       | 166,040 |   | 163,288 |   |
| Other operating                                                                                                                       |       | 16,101                                      |       | 15,268 |   | 14,202 |   |
| General and administrative                                                                                                            |       | 6,317                                       |       | 6,319 |   | 5,905 |   |
| Depreciation                                                                                                                          |       | 10,849                                      |       | 7,843 |   | 7,146 |   |
|                                                                                                                                  |       | 202,627                                     |       | 195,470 |   | 190,541 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Operating earnings                                                                                                                    |       | 36,505                                      |       | 46,896 |   | 45,910 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Interest expense                                                                                                                      |       | 3,484                                       |       | 2,741 |   | 2,943 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Earnings before income taxes                                                                                                          |       | 33,021                                      |       | 44,155 |   | 42,967 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Income taxes                                                                                                                          |       | 13,510                                      |       | 18,070 |   | 17,639 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Net earnings                                                                                                                          |       | 19,511                                      |       | 26,085 |   | 25,328 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Unrealized loss on available-for-sale securities,  net of income tax benefit of $12                                                   |       | (19                                         | )          | — |   | — |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Change in pension net actuarial loss and prior  service cost, net of income tax benefit (expense) of $1,367 and ($143),  respectively |       | (1,995                                      | )          | 210 |   | — |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Comprehensive earnings                                                                                                                |       | $                                           | 17,497     |   | $ | 26,295 |   | $ | 25,328 |   |
|                                                                                                                                  |       |                                        |       |   |   |   |   |
| Net earnings per common share (Note 2):                                                                                               |       |                                        |       |   |   |   |   |
| Basic                                                                                                                                 |       | $                                           | 0.62       |   | $ | 0.81 |   | $ | 0.78 |   |
| Diluted                                                                                                                               |       | $                                           | 0.62       |   | $ | 0.80 |   | $ | 0.77 |   |

 

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

 

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**DOVER DOWNSGAMING & ENTERTAINMENT, INC.**

** **

**CONSOLIDATED BALANCE SHEETS**

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

** **
| ** **                                                                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                   |       |                  |       |   |   |
| Cash                                                                                                                                              |       | $                     | 17,889     |   | $ | 22,456 |   |
| Accounts receivable                                                                                                                               |       | 2,661                 |       | 4,560 |   |
| Due from State of Delaware                                                                                                                        |       | 10,870                |       | 10,530 |   |
| Inventories                                                                                                                                       |       | 2,025                 |       | 1,858 |   |
| Prepaid expenses and other                                                                                                                        |       | 2,029                 |       | 1,902 |   |
| Deferred income taxes                                                                                                                             |       | 1,317                 |       | 1,227 |   |
| Total current assets                                                                                                                              |       | 36,791                |       | 42,533 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Property and equipment, net                                                                                                                       |       | 203,522               |       | 182,298 |   |
| Other assets                                                                                                                                      |       | 1,019                 |       | 349 |   |
| Total assets                                                                                                                                      |       | $                     | 241,332    |   | $ | 225,180 |   |
|                                                                                                                                              |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                              |       |                  |       |   |   |
| Accounts payable                                                                                                                                  |       | $                     | 4,679      |   | $ | 13,382 |   |
| Purses due horsemen                                                                                                                               |       | 9,395                 |       | 9,689 |   |
| Accrued liabilities                                                                                                                               |       | 7,419                 |       | 11,940 |   |
| Payable to Dover Motorsports, Inc.                                                                                                           |       | 11                    |       | 18 |   |
| Income taxes payable                                                                                                                              |       | 619                   |       | 341 |   |
| Deferred revenue                                                                                                                                  |       | 212                   |       | 98 |   |
| Total current liabilities                                                                                                                         |       | 22,335                |       | 35,468 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Revolving line of credit                                                                                                                          |       | 108,325               |       | 92,425 |   |
| Liability for pension benefits                                                                                                                    |       | 6,099                 |       | 2,510 |   |
| Deferred income taxes                                                                                                                             |       | 3,488                 |       | 5,178 |   |
| Total liabilities                                                                                                                                 |       | 140,247               |       | 135,581 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Commitments and contingencies (see Notes to the  Consolidated Financial Statements)                                                               |       |                  |       |   |   |
|                                                                                                                                              |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                        |       |                  |       |   |   |
| Preferred stock, $.10 par value; 1,000,000 shares  authorized; shares issued and outstanding: none                                                |       | —                |       | — |   |
| Common stock, $.10 par value; 74,000,000 shares  authorized; shares issued and outstanding: 15,209,544 and 14,737,821,  respectively              |       | 1,521                 |       | 1,474 |   |
| Class A common stock, $.10 par value;  50,000,000 shares authorized; shares issued and outstanding: 16,603,173 and  17,003,173, respectively |       | 1,660                 |       | 1,700 |   |
| Additional paid-in capital                                                                                                                        |       | 933                   |       | 63 |   |
| Retained earnings                                                                                                                                 |       | 99,263                |       | 86,640 |   |
| Accumulated other comprehensive loss                                                                                                              |       | (2,292                | )          | (278 | ) |
| Total stockholders’ equity                                                                                                                   |       | 101,085               |       | 89,599 |   |
| Total liabilities and stockholders’ equity                                                                                                   |       | $                     | 241,332    |   | $ | 225,180 |   |

 

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

 

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

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

** **
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating activities:                                                                |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 19,511     |   | $ | 26,085 |   | $ | 25,328 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                         |       | 10,849                                      |       | 7,843 |   | 7,146 |   |
| Amortization of credit facility origination fees                                     |       | 40                                          |       | 40 |   | 44 |   |
| Stock-based compensation                                                             |       | 998                                         |       | 895 |   | 732 |   |
| Deferred income taxes                                                                |       | (316                                        | )          | (333 | ) | (218 | ) |
| Cumulative effect of accounting change                                               |       | —                                      |       | — |   | (1,541 | ) |
| Changes in assets and liabilities:                                                   |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                  |       | 1,899                                       |       | (235 | ) | (520 | ) |
| Due from State of Delaware                                                           |       | (340                                        | )          | 442 |   | (1,872 | ) |
| Inventories                                                                          |       | (167                                        | )          | (93 | ) | 190 |   |
| Prepaid expenses and other                                                           |       | (768                                        | )          | (453 | ) | 118 |   |
| Accounts payable                                                                     |       | (610                                        | )          | (65 | ) | 79 |   |
| Purses due horsemen                                                                  |       | (294                                        | )          | 790 |   | 567 |   |
| Accrued liabilities                                                                  |       | (4,521                                      | )          | 742 |   | 269 |   |
| Payable to/receivable from Dover  Motorsports, Inc.                             |       | (7                                          | )          | 9 |   | 24 |   |
| Income taxes payable/prepaid income taxes                                            |       | 193                                         |       | 469 |   | (3,480 | ) |
| Deferred revenue                                                                     |       | 114                                         |       | 61 |   | (75 | ) |
| Other liabilities                                                                    |       | 227                                         |       | 223 |   | — |   |
| Net cash provided by operating activities                                            |       | 26,808                                      |       | 36,420 |   | 26,791 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| Investing activities:                                                                |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                 |       | (40,166                                     | )          | (52,134 | ) | (22,065 | ) |
| Purchase of available-for-sale securities                                            |       | (100                                        | )          | — |   | — |   |
| Net cash used in investing activities                                                |       | (40,266                                     | )          | (52,134 | ) | (22,065 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| Financing activities:                                                                |       |                                        |       |   |   |   |   |
| Borrowings from revolving line of credit                                             |       | 186,725                                     |       | 177,255 |   | 196,010 |   |
| Repayments of revolving line of credit                                               |       | (170,825                                    | )          | (144,255 | ) | (160,660 | ) |
| Dividends paid                                                                       |       | (6,360                                      | )          | (6,036 | ) | (5,510 | ) |
| Repurchase of common stock                                                           |       | (1,040                                      | )          | (9,990 | ) | (35,052 | ) |
| Proceeds from stock options exercised                                                |       | 366                                         |       | 1,114 |   | 470 |   |
| Excess tax benefit on stock awards                                                   |       | 25                                          |       | 62 |   | 50 |   |
| Net cash provided by (used in) financing activities                                  |       | 8,891                                       |       | 18,150 |   | (4,692 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| Net (decrease) increase in cash                                                      |       | (4,567                                      | )          | 2,436 |   | 34 |   |
| Cash, beginning of year                                                              |       | 22,456                                      |       | 20,020 |   | 19,986 |   |
| Cash, end of year                                                                    |       | $                                           | 17,889     |   | $ | 22,456 |   | $ | 20,020 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| Supplemental information:                                                            |       |                                        |       |   |   |   |   |
| Interest paid                                                                        |       | $                                           | 3,204      |   | $ | 2,564 |   | $ | 2,720 |   |
| Income taxes paid                                                                    |       | $                                           | 13,606     |   | $ | 17,870 |   | $ | 20,235 |   |
| Change in accounts payable for capital expenditures                                  |       | $                                           | (8,093     | ) | $ | 5,275 |   | $ | 3,280 |   |

 

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

 

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1—Business Operations**

 

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

 

We are a diversified gaming and entertainment company whose operationsconsist of Dover Downs Casino — a 165,000 square-foot video lottery casino complexfeaturing the latest in slot machine offerings, including multi-playerelectronic table games with virtual dealers; the Dover Downs Hotel andConference Center — a 500 room AAA Four Diamond hotel with conference, banquet,fine dining, ballroom, concert hall and spa facilities; and Dover Downs Raceway— a harness racing track with pari-mutuel wagering on live and simulcast horseraces. Our entertainment complex is located in Dover, the capital of the Stateof Delaware.

 

On July 10, 2008, our Phase VI casino expansion, The Colonnade,was partially opened to the public with approximately 500 additional slotmachines, Doc Magrogan’s Oyster House, Sweet Perks Too and the Dover Downs’Fire & Ice Lounge debuting. Four retail outlets opened and space for 2 additional outlets wascompleted in late September 2008. The expansion, which is now complete, added approximately 68,000square-feet of space bringing our video lottery casino complex to 165,000square-feet housing approximately 3,110 slot machines.

 

We entered into a letter of intent on October 14, 2008 with UGEntertainment LLC (“UGE “) to provide management services for the operation ofa video lottery facility at Underground Atlanta.  UGE has made presentations to the GeorgiaLottery relative to the possibility of commencing video lottery operations atUnderground Atlanta.  Such video lotteryoperations are not presently authorized and would require regulatory action bythe Georgia Lottery and possibly legislative approval by the State ofGeorgia.  The letter of intent between usand UGE provides for a five year management agreement and affords us tworenewal options for two years each subject to the attainment of certainfinancial criteria by the new facility. The letter of intent contemplates thatthe parties will negotiate and enter into an acceptable management agreementwith terms and conditions comparable to management agreements of a similarnature.  Our compensation would consistof a management fee based on gross revenues and an incentive fee based on netearnings before taxes.  We have agreed tomake a $500,000 non-interest bearing loan to UGE subject to certain conditionsset forth in the letter of intent.  Theletter of intent also contemplates that we will have the right to purchase upto 10% of the equity of UGE.

 

Dover Downs Gaming & Entertainment, Inc. is a publicholding company that has two wholly owned subsidiaries: Dover Downs, Inc.and Dover Downs Management Corp.  DoverDowns, Inc. was incorporated in 1967 and began motorsports and harnessracing operations in 1969.  In June of1994, legislation authorizing video lottery operations in the State of Delaware(the “State”) was adopted. Our video lottery (slots) casino operations began onDecember 29, 1995.  As a result ofseveral restructurings, Dover Downs, Inc. became a wholly owned subsidiaryof Dover Motorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.)(“DVD”), and became the operating entity for all of DVD’s gaming operations.

 

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

 

Dover Downs, Inc. is authorized to conduct video lotteryoperations as one of three “Licensed Agents” under the Delaware State LotteryCode. Pursuant to Delaware’s Horse Racing Redevelopment Act, enacted in 1994,the Delaware State Lottery Office administers and controls the operation of thevideo lottery.

 

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Our 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 our license to conduct video lottery operations, we are required tomaintain our harness horse racing license. We have received an annual license from the Commission for the past 40consecutive years and management believes that our relationship with theCommission remains good.

 

Due to the nature of our business activities, we are subject to variousfederal, state and local regulations.

 

**NOTE2—Summary of Significant Accounting Policies**

 

*Basis of consolidation—*Theconsolidated financial statements include the accounts of Dover Downs Gaming &Entertainment, Inc. and its wholly owned subsidiaries. Intercompanytransactions and balances have been eliminated.

 

***Investments—***Investments, which consist of mutual funds, areclassified as available-for-sale and reported at fair-value in other assets inour consolidated balance sheets.  Changesin fair value are reported in other comprehensive income (loss).  See NOTE 8 — Stockholders’ Equity and NOTE 9 —Financial Instruments for further discussion.

** **

*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.

 

*Property and equipment—*Propertyand 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  |

 

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

 

*Interest capitalization—*Interestis capitalized in connection with the construction of major facilities. Thecapitalized interest is amortized over the estimated useful life of the assetto which it relates.  During the yearsended December 31, 2008, 2007 and 2006, respectively, we incurred$4,051,000, $4,280,000 and $3,255,000 of interest cost, of which $567,000,$1,539,000 and $312,000 was capitalized.

 

*Income taxes—*Deferred incometaxes are provided on all differences between the tax bases of assets andliabilities and their reported amounts in the consolidated financial statementsbased upon enacted statutory tax rates in effect at the balance sheet date.  Tax years after 2004 remain open toexamination by the major taxing jurisdictions to which we are subject.

 

*Point loyalty program—*Wecurrently have a point loyalty program for our video lottery customers whichallows them to earn points based on the volume of their video lotteryactivity.  All reward points earned bycustomers are expensed in the period they are earned.  The estimated amount of points redeemable forcash is recorded as a reduction of gaming revenue and the estimated amount ofpoints redeemable for services and merchandise is recorded as gaming expense.In determining the amount of the liability, which was $1,838,000 and$1,932,000, respectively, at December 31, 2008 and 2007, we estimate aredemption rate, a cost of rewards to be offered and the mix of cash, goods andservices for which reward points will be redeemed.  We use historical data to estimate thoseamounts.

 

*Revenue and expense recognition—*Gamingrevenues represent (i) the net win from video lottery (slot) machine winsand losses and (ii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotelrooms revenue, food and beverage sales and other miscellaneous income.  Revenues do not include the retail amount of 

 

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hotel rooms, foodand beverage and other miscellaneous goods and services provided without chargeto customers as promotional items of $17,758,000, $15,770,000 and $15,152,000for the years ended December 31, 2008, 2007 and 2006, respectively.  The estimated direct cost of providing theseitems has been charged to the casino through interdepartmental allocations andis included in gaming expenses in the consolidated statements of earnings.

 

For the video lottery operations, which account for approximately 90%of revenues for all periods presented, the difference between the amountwagered by bettors and the amount paid out to bettors is referred to as thewin. The win is included in the amount recorded in our consolidated financialstatements as gaming revenue. The Delaware State Lottery Office sweeps the winfrom the video lottery operations, collects the State’s share of the win andthe amount due to the vendors under contract with the State who provide thevideo lottery (slot) machines and associated computer systems, collects theamount allocable to purses for harness horse racing and remits the remainder tous as our commission for acting as a Licensed Agent. Gaming expenses includethe amounts collected by the State (i) for the State’s share of the win, (ii) forremittance to the providers of the video lottery (slot) machines and associatedcomputer systems, and (iii) for harness horse racing purses. We recognizerevenues from pari-mutuel commissions earned from live harness horse racing andimporting of simulcast signals from other race tracks when the race occurs.Revenues from hotel rooms, food and beverage sales and other miscellaneousincome are recognized at the time the service is provided.

 

*Advertising costs—*The cost ofgeneral advertising is charged to operations as incurred.

 

*Net earnings per common share—*Weightedaverage shares used in computing basic and diluted net earnings per commonshare (“EPS”) are as follows:

 
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Basic EPS                     |       | 31,436,000                                  |       | 32,239,000 |   | 32,353,000 |   |
| Effect of dilutive securities |       | 134,000                                     |       | 372,000 |   | 568,000 |   |
| Diluted EPS                   |       | 31,570,000                                  |       | 32,611,000 |   | 32,921,000 |   |

 

Dilutive securities include stock options and nonvested stock awards.

 

For the year ended December 31, 2008, options to purchase 666,630shares of common stock were outstanding but not included in the computation ofdiluted EPS because they would have been anti-dilutive.  There were no anti-dilutive securitiesexcluded from the calculation of diluted EPS for the years ended December 31,2007 and 2006.

 

*Accounting for stock-based compensation—*Werecorded total stock-based compensation expense for our nonvested restrictedstock awards and stock options of $998,000, $895,000 and $732,000 as generaland administrative expenses for the years ended December 31, 2008, 2007and 2006, respectively.  We recordedincome tax benefits of $319,000, $231,000 and $147,000 for the years ended December 31,2008, 2007 and 2006, respectively, related to our nonvested restricted stockawards.

 

*Use of estimates—*The preparationof financial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

*Fair value of financial instruments—*Thecarrying amounts of financial instruments reported in the balance sheet forcurrent assets and current liabilities approximates their fair values becauseof the short maturity of these instruments. The carrying value of our revolving line of credit at December 31,2008 and 2007 approximates its fair value based on the interest rates availableon similar borrowings.

 

*Segment information*—We accountfor our operating segment in accordance with FASB Statement No. 131, *Disclosures About Segments of an Enterprise and Related Information*.  Statement No. 131 establishes guidelinesfor public companies in determining operating segments based on those used forinternal reporting to management.  Basedon these guidelines, we report information under a single gaming andentertainment segment.

 

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*Recent accounting pronouncements—*InSeptember 2006, the FASB issued Statement No. 157, *Fair Value Measurements*, which establishes a framework formeasuring fair value and expands disclosures about fair value measurements.Statement No. 157 applies under other accounting pronouncements thatrequire or permit fair value measurements and, accordingly, Statement No. 157does not require any new fair value measurements. Statement No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years, for financial assets andliabilities that are measured at fair value on a recurring basis.  In February 2008, the FASB issued FASBStaff Position (“FSP”) 157-2, *Effective Date of FASBStatement No. 157*, which delays the effective date of StatementNo. 157’s fair value measurement requirements for non-financial assets andliabilities that are not required or permitted to be measured at fair value ona recurring basis to fiscal years beginning after November 15, 2008.  Non-recurring non-financial assets andliabilities for which we have not applied the provisions of Statement No. 157include our long-lived assets measured at fair value under the provisions ofFASB Statement No. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*. The impact of adoption of Statement No. 157 for financial assetsand liabilities is discussed in NOTE 9 — Financial Instruments.  We do not expect the adoption of Statement No. 157for non-recurring non-financial assets and liabilities to have a significantimpact on our consolidated financial statements.

 

**NOTE3—Property and Equipment**

 

Propertyand equipment consists of the following as of December 31:

 
| ** **                        | ** ** | **2008**    | ** **  | **2007**    | ** ** |
|-----------------------------------|------------|-------------|-------------|-------------|------------|
| Land                              |       | $           | 785,000     |        | $          | 785,000 |   |
| Casino facility                   |       | 75,643,000  |        | 32,881,000  |       |
| Hotel facility                    |       | 112,875,000 |        | 109,402,000 |       |
| Harness racing facilities         |       | 10,005,000  |        | 9,975,000   |       |
| General facilities                |       | 15,552,000  |        | 15,277,000  |       |
| Furniture, fixtures and equipment |       | 50,871,000  |        | 43,692,000  |       |
| Construction in progress          |       | 2,323,000   |        | 24,477,000  |       |
|                              |       | 268,054,000 |        | 236,489,000 |       |
| Less accumulated depreciation     |       | (64,532,000 | )           | (54,191,000 | )          |
|                              |       | $           | 203,522,000 |        | $          | 182,298,000 |   |

 

**NOTE4—Accrued Liabilities**

 

Accrued liabilities consist of the following as of December 31:

 
| ** **                               | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty program                    |       | $         | 1,838,000  |      | $          | 1,932,000 |   |
| Payroll and related items                |       | 2,004,000 |       | 2,524,000 |       |
| Win due to Delaware State Lottery Office |       | 2,367,000 |       | 6,273,000 |       |
| Other                                    |       | 1,210,000 |       | 1,211,000 |       |
|                                     |       | $         | 7,419,000  |      | $          | 11,940,000 |   |

#### ** **

#### **NOTE 5—Credit Facility**

#### ** **

We have a credit facility with Wilmington Trust Company that expires onApril 17, 2012.  At December 31,2008, the maximum borrowing limit under the facility was $125,000,000 whichreduces to $100,000,000 on January 1, 2010, to $85,000,000 on January 1,2011 and to $75,000,000 on January 1, 2012.  Interest is based, at our option, upon LIBORplus a margin that varies between 75 and 125 basis points (125 basis points at December 31,2008) depending on the ratio of funded debt to earnings before interest, taxes,depreciation and amortization (the “leverage ratio”) or the base rate (thegreater of the prime rate or the federal funds rate plus 0.5%) less a marginthat varies between 50 and 100 basis points (50 basis points at December 31,2008) depending on the leverage ratio. The credit facility has minimum net worth, interest coverage and maximumleverage requirements.  Material adversechanges in our results of operations could impact our ability to satisfy theserequirements.  In addition, the creditagreement also includes a material adverse change clause.  The facility is for seasonal funding needs,capital improvements and other general corporate purposes.  At December 31, 2008, we were incompliance with all terms of the facility and 

 

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there was$108,325,000 outstanding at a weighted average interest rate of 2.37%.  At December 31, 2008, $16,675,000 was availablepursuant to the facility.

 

Effective January 15, 2009, we entered into aninterest rate swap agreement that effectively converts $35,000,000 of ourvariable-rate debt to a fixed-rate basis, thereby hedging against the impact ofpotential interest rate changes.  Theagreement terminates on April 17, 2012. Pursuant to this agreement, we will pay a fixed interest rate of 1.74%,plus a margin that varies between 75 and 125 basis points depending on ourleverage ratio (125 basis points at December 31, 2008).  In return, the issuing lender will refund tous the variable-rate interest paid to the bank group under our revolving creditagreement on the same notional principal amount, excluding the margin.

 

**NOTE 6—Income Taxes**

** **

The current and deferred income tax provisions are as follows:

 
| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:           |       |                                        |       |   |   |   |   |
| Federal            |       | $                                           | 10,845,000 |   | $ | 14,556,000 |   | $ | 14,112,000 |   |
| State              |       | 2,981,000                                   |       | 3,938,000 |   | 3,745,000 |   |
|               |       | 13,826,000                                  |       | 18,494,000 |   | 17,857,000 |   |
| Deferred:          |       |                                        |       |   |   |   |   |
| Federal            |       | (227,000                                    | )          | (364,000 | ) | (247,000 | ) |
| State              |       | (89,000                                     | )          | (60,000 | ) | 29,000 |   |
|               |       | (316,000                                    | )          | (424,000 | ) | (218,000 | ) |
| Total income taxes |       | $                                           | 13,510,000 |   | $ | 18,070,000 |   | $ | 17,639,000 |   |

 

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

 
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Federal tax at statutory rate       |       | 35.0                                        | %          | 35.0 | % | 35.0 | % |
| State taxes, net of federal benefit |       | 5.7                                         | %          | 5.7 | % | 5.7 | % |
| Other                               |       | 0.2                                         | %          | 0.2 | % | 0.4 | % |
| Effective income tax rate           |       | 40.9                                        | %          | 40.9 | % | 41.1 | % |

 

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

 
| ** **                                             | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income tax assets:                            |       |       |       |       |       |
| Point loyalty program                                  |       | $          | 747,000    |       | $          | 785,000 |   |
| Accrued expenses                                       |       | 2,626,000  |       | 1,015,000  |       |
| Other                                                  |       | 521,000    |       | 374,000    |       |
| Total deferred income tax assets                       |       | 3,894,000  |       | 2,174,000  |       |
|                                                   |       |       |       |       |       |
| Deferred income tax liabilities:                       |       |       |       |       |       |
| Depreciation — property and equipment             |       | (6,065,000 | )          | (6,125,000 | )          |
| Total deferred income tax liabilities                  |       | (6,065,000 | )          | (6,125,000 | )          |
| Net deferred income tax liabilities                    |       | $          | (2,171,000 | )          | $          | (3,951,000 | ) |
|                                                   |       |       |       |       |       |
| Amounts recognized in the consolidated balance  sheet: |       |       |       |       |       |
| Current deferred income tax assets                     |       | $          | 1,317,000  |       | $          | 1,227,000 |   |
| Noncurrent deferred income tax liabilities             |       | (3,488,000 | )          | (5,178,000 | )          |
|                                                   |       | $          | (2,171,000 | )          | $          | (3,951,000 | ) |

 

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**NOTE7—Pension Plans**

 

We maintain a non-contributory, tax qualified defined benefit pensionplan. All of our full time employees are eligible to participate in thisqualified pension plan.  Benefitsprovided by our qualified pension plan are based on years of service andemployees’ remuneration over their term of employment.  We also maintain a non-qualified,non-contributory defined benefit pension plan for certain employees.  This excess plan provides benefits that wouldotherwise be provided under the qualified pension plan but for maximum benefitand compensation limits applicable under federal tax law.  The cost associated with the excess plan isdetermined using the same actuarial methods and assumptions as those used forour qualified pension plan.

 

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

 
| ** **                                     | ** ** | **2008**   | ** ** | **2007**  | ** ** |
|------------------------------------------------|------------|------------|------------|-----------|------------|
| Change in benefit obligation:                  |       |       |       |      |       |
| Benefit obligation at beginning of year        |       | $          | 9,052,000  |      | $          | 8,047,000 |   |
| Service cost                                   |       | 1,277,000  |       | 1,218,000 |       |
| Interest cost                                  |       | 583,000    |       | 497,000   |       |
| Actuarial loss (gain)                          |       | 732,000    |       | (500,000  | )          |
| Benefits paid                                  |       | (138,000   | )          | (199,000  | )          |
| Other                                          |       | —     |       | (11,000   | )          |
| Benefit obligation at end of year              |       | 11,506,000 |       | 9,052,000 |       |
|                                           |       |       |       |      |       |
| Change in plan assets:                         |       |       |       |      |       |
| Fair value of plan assets at beginning of year |       | 6,542,000  |       | 5,407,000 |       |
| Actual (loss) gain on plan assets              |       | (2,047,000 | )          | 334,000   |       |
| Employer contribution                          |       | 1,050,000  |       | 1,000,000 |       |
| Benefits paid                                  |       | (138,000   | )          | (199,000  | )          |
| Fair value of plan assets at end of year       |       | 5,407,000  |       | 6,542,000 |       |
|                                           |       |       |       |      |       |
| Unfunded status                                |       | $          | (6,099,000 | )         | $          | (2,510,000 | ) |

 

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

 
| ** **         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Net actuarial loss |       | $        | 3,797,000  |     | $          | 426,000 |   |
| Prior service cost |       | 33,000   |       | 42,000   |       |
|               |       | $        | 3,830,000  |     | $          | 468,000 |   |

 

Forthe year ending December 31, 2009, we expect to recognize the followingamounts as components of net periodic benefit cost which are included inaccumulated comprehensive loss as of December 31, 2008:

 
| Actuarial loss     |   | $     | 214,000 |   |
|--------------------|--------|-------|---------|--------|
| Prior service cost |   | 9,000 |    |
|               |   | $     | 223,000 |   |

 

Weexpect to contribute between $1,500,000 and $3,000,000 to our pension plans in2009 in order to satisfy minimum statutory funding requirements.

 

Theaccumulated benefit obligation was $9,146,000 and $7,122,000, respectively, asof December 31, 2008 and 2007.

 

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

 

| 2009      |   | $ | 168,000   |   |
|-----------|--------|---|-----------|--------|
| 2010      |   | $ | 206,000   |   |
| 2011      |   | $ | 291,000   |   |
| 2012      |   | $ | 395,000   |   |
| 2013      |   | $ | 468,000   |   |
| 2014-2018 |   | $ | 3,561,000 |   |

 

The components of net periodic pension cost for theyears ended December 31, 2008, 2007 and 2006 are as follows:

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Service cost                   |       | $        | 1,277,000  |     | $          | 1,218,000 |       | $ | 1,233,000 |   |
| Interest cost                  |       | 583,000  |       | 497,000  |       | 415,000   |       |
| Expected return on plan assets |       | (601,000 | )          | (502,000 | )          | (391,000  | )          |
| Recognized net actuarial loss  |       | 9,000    |       | 11,000   |       | 72,000    |       |
| Recognized prior service cost  |       | 9,000    |       | 9,000    |       | 9,000     |       |
|                           |       | $        | 1,277,000  |     | $          | 1,233,000 |       | $ | 1,338,000 |   |

 

The principal assumptions used to determine the net periodic pensioncost for the years ended December 31, 2008, 2007 and 2006, and theactuarial value of the benefit obligation at December 31, 2008 and 2007(the measurement dates) for our pension plans are as follows:

 
| ** **                                       | ** ** | **Net Periodic Pension Cost** | ** ** | **Benefit Obligation** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2008**                                     | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted-average discount rate                   |       | 6.50                                         | %          | 6.15                        | %          | 5.85 | % | 6.10 | % | 6.50 | % |
| Weighted-average rate of compensation increase   |       | 5.00                                         | %          | 5.00                        | %          | 5.00 | % | 5.00 | % | 5.00 | % |
| Expected long-term rate of return on plan assets |       | 8.50                                         | %          | 8.50                        | %          | 9.00 | % | n/a |   | n/a |   |

 

For2008, we assumed a long-term rate of return on plan assets of 8.5%.  In developing the 8.5% expected long-termrate of return assumption, we reviewed asset class return expectations andlong-term inflation assumptions and considered our historical compoundedreturn, which was consistent with our long-term rate of return assumption.

 

Ourpension plan asset allocation at December 31, 2008 and 2007, and targetallocation for 2009 are as follows:

 
| ** **                | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** | **Target  Allocation** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                | ** ** | **2008**                                                                | ** ** | **2007**               | ** ** | **2009** | ** ** |
| **Asset Category**   |       |                                                                    |       |                   |       |   |   |
| Equity mutual funds       |       | 70                                                                      | %          | 68                     | %          | 50 | % |
| Fixed income mutual funds |       | 29                                                                      | %          | 30                     | %          | 40 | % |
| Other                     |       | 1                                                                       | %          | 2                      | %          | 10 | % |
| Total                     |       | 100                                                                     | %          | 100                    | %          | 100 | % |

 

Our investment goals are to maximize returns subject to specific riskmanagement policies.  Our risk managementpolicies permit investments in mutual funds, and prohibit direct investments indebt and equity securities and derivative financial instruments.  We address diversification by the use ofmutual fund investments whose underlying investments are in domestic andinternational equity and fixed income securities.  These mutual funds are readily marketable andcan be sold to fund benefit payment obligations as they become payable.

 

Wemaintain a defined contribution 401(k) plan which permits participation bysubstantially all employees. Our matching contributions to the 401(k) planwere $86,000, $80,000 and $64,000 for the years ended December 31, 2008,2007 and 2006, respectively.

 

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**NOTE8—Stockholders’ Equity**

 

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

 
| ** **                                                                                                     | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Deferred  Compensation** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| **Balance at December 31, 2005**                                                                          |       | $                 | 1,064      |                            | $          | 1,326                            |       | $                      | 36,461     |                                        | $          | 55,459                     |       | $ | — |   | $ | (1,040 | ) |
| Reclassification of deferred compensation upon  adoption of FASB Statement No. 123R                       |       | —            |       | —                          |       | (1,040                           | )          | —                 |       | —                                      |       | 1,040                      |       |
| Cumulative effect of accounting change for adoption  of SAB No. 108                                       |       | —            |       | —                          |       | —                           |       | (1,541                 | )          | —                                      |       | —                     |       |
| Net earnings                                                                                                   |       | —            |       | —                          |       | —                           |       | 25,328                 |       | —                                      |       | —                     |       |
| Dividends paid, $.17 per share                                                                                 |       | —            |       | —                          |       | —                           |       | (5,510                 | )          | —                                      |       | —                     |       |
| Repurchase and retirement of common stock                                                                      |       | (106              | )          | (133                            | )          | (34,813                          | )          | —                 |       | —                                      |       | —                     |       |
| Proceeds from stock options exercised                                                                          |       | 5                 |       | —                          |       | 465                              |       | —                 |       | —                                      |       | —                     |       |
| Issuance of nonvested stock awards, net of  forfeitures                                                        |       | 6                 |       | —                          |       | (6                               | )          | —                 |       | —                                      |       | —                     |       |
| Stock-based compensation                                                                                       |       | —            |       | —                          |       | 732                              |       | —                 |       | —                                      |       | —                     |       |
| Excess tax benefit on stock awards                                                                             |       | —            |       | —                          |       | 50                               |       | —                 |       | —                                      |       | —                     |       |
| Conversion of Class A common stock to common  stock                                                       |       | 77                |       | (77                             | )          | —                           |       | —                 |       | —                                      |       | —                     |       |
| Three-for-two stock split                                                                                      |       | 496               |       | 584                             |       | (1,080                           | )          | —                 |       | —                                      |       | —                     |       |
| Adoption of FASB Statement No.158, net of income tax  benefit of $333                                          |       | —            |       | —                          |       | —                           |       | —                 |       | (488                                        | )          | —                     |       |
| **Balance at December 31, 2006**                                                                          |       | 1,542             |       | 1,700                           |       | 769                              |       | 73,736                 |       | (488                                        | )          | —                     |       |
| Net earnings                                                                                                   |       | —            |       | —                          |       | —                           |       | 26,085                 |       | —                                      |       | —                     |       |
| Dividends paid, $.185 per share                                                                                |       | —            |       | —                          |       | —                           |       | (6,036                 | )          | —                                      |       | —                     |       |
| Repurchase and retirement of common stock                                                                      |       | (92               | )          | —                          |       | (2,753                           | )          | (7,145                 | )          | —                                      |       | —                     |       |
| Proceeds from stock options exercised                                                                          |       | 16                |       | —                          |       | 1,098                            |       | —                 |       | —                                      |       | —                     |       |
| Issuance of nonvested stock awards, net of  forfeitures                                                        |       | 8                 |       | —                          |       | (8                               | )          | —                 |       | —                                      |       | —                     |       |
| Stock-based compensation                                                                                       |       | —            |       | —                          |       | 895                              |       | —                 |       | —                                      |       | —                     |       |
| Excess tax benefit on stock awards                                                                             |       | —            |       | —                          |       | 62                               |       | —                 |       | —                                      |       | —                     |       |
| Amortization of prior service costs and unrealized  losses on pension plans, net of income tax expense of $143 |       | —            |       | —                          |       | —                           |       | —                 |       | 210                                         |       | —                     |       |
| **Balance at December 31, 2007**                                                                          |       | 1,474             |       | 1,700                           |       | 63                               |       | 86,640                 |       | (278                                        | )          | —                     |       |
| Net earnings                                                                                                   |       | —            |       | —                          |       | —                           |       | 19,511                 |       | —                                      |       | —                     |       |
| Dividends paid, $.20 per share                                                                                 |       | —            |       | —                          |       | —                           |       | (6,360                 | )          | —                                      |       | —                     |       |
| Proceeds from stock options exercised                                                                          |       | 6                 |       | —                          |       | 360                              |       | —                 |       | —                                      |       | —                     |       |
| Issuance of nonvested stock awards, net of  forfeitures                                                        |       | 12                |       | —                          |       | (12                              | )          | —                 |       | —                                      |       | —                     |       |
| Stock-based compensation                                                                                       |       | —            |       | —                          |       | 998                              |       | —                 |       | —                                      |       | —                     |       |
| Excess tax benefit on stock awards                                                                             |       | —            |       | —                          |       | 25                               |       | —                 |       | —                                      |       | —                     |       |
| Change in pension net actuarial loss and prior  service cost, net of income tax benefit of $1,367              |       | —            |       | —                          |       | —                           |       | —                 |       | (1,995                                      | )          | —                     |       |
| Unrealized loss on available-for-sale securities,  net of income tax benefit of $12                            |       | —            |       | —                          |       | —                           |       | —                 |       | (19                                         | )          | —                     |       |
|                                                                                                                |            |                   |            |                                 |            |                                  |            |                        |            |                                             |            |                            |            |  |  |  |  |  |  |

 

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| ** **                                               | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Deferred  Compensation** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| Repurchase and retirement of common stock                |       | (11               | )          | —                          |       | (501                             | )          | (528                   | )          | —                                      |       | —                     |       |
| Conversion of Class A common stock to common  stock |       | 40                |       | (40                             | )          | —                           |       | —                 |       | —                                      |       | —                     |       |
| **Balance at December 31, 2008**                    |       | $                 | 1,521      |                            | $          | 1,660                            |       | $                      | 933        |                                        | $          | 99,263                     |       | $ | (2,292 | ) | $ | — |   |
|                                                          |            |                   |            |                                 |            |                                  |            |                        |            |                                             |            |                            |            |  |  |  |  |  |  |

 

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

 

On April 26, 2006, our Board of Directors approved a three-for-twosplit of both classes of our common stock. The split was effected in the formof a stock dividend by issuing one additional share of stock for every twoshares of stock held. On June 15, 2006, 4,967,650 shares of common stockand 5,837,343 shares of Class A common stock were distributed toshareholders of record at the close of business on May 10, 2006.  No fractional shares were issued.  Shareholders were paid cash in lieu of anyfractional shares.  All share and pershare amounts have been restated to give effect to the stock split.  The statement of stockholders’ equityreflects the stock split by reclassifying from additional paid-in capital tocommon stock and Class A common stock an amount equal to the par value ofthe additional shares issued to effect the stock split.

 

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

 

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

 

We adopted a stockholder rights plan in 2002. The rights are attachedto and trade in tandem with our common stock and Class A common stock.Each right entitles the registered holder to purchase from us one share ofcommon stock at a purchase price of $200 per share. The rights, unless earlierredeemed by our Board of Directors, will detach and trade separately from ourcommon stock upon the occurrence of certain events such as the unsolicitedacquisition by a third party of beneficial ownership of 10% or more of ouroutstanding combined common stock and Class A common stock or the announcementby a third party of the intent to commence a tender or exchange offer for 10%or more of our outstanding combined common stock and Class A common stock.After the rights have detached, the holders of such rights would generally havethe ability to purchase such number of either shares of our common stock orstock of an acquirer of ours 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 us. The rights mayserve as a significant deterrent to unsolicited attempts to acquire control ofus, including transactions involving a premium to the market price of ourstock.  The rights expire on January 1,2012, unless earlier redeemed.

 

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We adopted SAB No. 108 during the quarter ended December 31,2006.  Prior to adopting SAB No. 108,our approach to quantifying misstatements only considered the amount of theerror originating in the current year statement of earnings.  Thus the effects of correcting the portion ofthe balance sheet misstatement that originated in prior years were not considered.  Upon adopting SAB No. 108, we changedour approach to quantifying the effects of misstatements to include an analysisof the impact on the current year statement of earnings for the cumulativebalance of any known errors, regardless of when they originated.  When we applied the new approach toquantifying the effects of misstatements to our 2006 consolidated financialstatements, we identified an error that was not material to our consolidatedstatement of earnings in any prior quarter or annual period; however, thecumulative error would have been material to correct in the currentperiod.  The error resulted from adifference in the amount of slot win we recorded from our meters as compared tothe amount of cash slot win that was taken out of the slot machines and hadaccumulated over several years.  Sincethe error was not material to any prior statement of earnings, we were notrequired to restate prior year financial statements.  The consolidated financial statements werecorrected with an adjustment of $1,541,000, net of income tax effect of$1,055,000, to the beginning balance of retained earnings at January 1,2006.

 

On January 28, 2009, our Board of Directorsdeclared a quarterly cash dividend on both classes of common stock of $.05 pershare.  The dividend is payable on March 10,2009 to stockholders of record at the close of business on February 10,2009.

 

On October 23, 2002, our Board of Directors authorized therepurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization has noexpiration date, does not obligate us to acquire any specific number of sharesand may be suspended at any time.  Duringthe year ended December 31, 2008, we purchased and retired 98,500 sharesof our outstanding common stock pursuant to this plan at an average purchaseprice of $9.09 per share, not including nominal brokerage commissions.  During the year ended December 31, 2007,we purchased and retired 916,900 shares of our outstanding common stockpursuant to this plan at an average purchase price of $10.72 per share, notincluding nominal brokerage commissions. No purchases of our equity securities were made pursuant to thisauthorization during the year ended December 31, 2006.  At December 31, 2008, we had remainingrepurchase authority of 1,653,333 shares.

 

During the years ended December 31, 2008, 2007 and 2006, wepurchased and retired 13,881, 8,288 and 3,431 shares of our outstanding commonstock for $139,000, $112,000 and $56,000, respectively.  These purchases were made from employees inconnection with the vesting of restricted stock awards under our stockincentive plan and were not pursuant to the aforementioned repurchaseauthorization. Since the vesting of a restricted stock award is a taxable eventto our employees for which income tax withholding is required, the plan allowsemployees to surrender to us some of the shares that would otherwise have vestedin satisfaction of their tax liability. The surrender of these shares is treated by us as a purchase of theshares.

 

On December 19, 2005, our Board of Directorsauthorized us to commence a tender offer to purchase up to 1,595,906 shares ofour common stock and up to 1,988,202 shares of our Class A common stock ata fixed price of $9.67 per share.  Theoffer expired on January 19, 2006. We purchased 1,595,906 shares of ourcommon stock and 1,987,500 shares of our Class A common stock for$34,996,000, including expenses, in connection with the tender offer.

 

We have a stock incentive plan which provides forthe grant of up to 2,250,000 shares of common stock to our officers and keyemployees through stock options and/or awards valued in whole or in part by referenceto our common stock, such as nonvested stock awards.  Under the plan, option grants must have anexercise price of not less than 100% of the fair market value of the underlyingshares of common stock at the date of the grant.  The stock options have eight-year terms andgenerally vest equally over a period of six years from the date of grant.  Once the options are exercised, our planrequires that the common stock be held for a minimum of one year.  The nonvested stock vests an aggregate oftwenty percent each year beginning on the second anniversary date of thegrant.  As of December 31, 2008,there were 822,070 shares available for granting options or stock awards.

 

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Stock option activity for the year ended December 31, 2008 was asfollows:

 
| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in yrs)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2007 |       | 746,107                    |       | $                                          | 6.87       |                                                                   |       |                            |       |   |
| Expired                               |       | (18,373                    | )          | $                                          | 5.98       |                                                                   |       |                            |       |   |
| Exercised                             |       | (61,104                    | )          | $                                          | 5.99       |                                                                   |       |                            |       |   |
| Outstanding at December 31, 2008 |       | 666,630                    |       | $                                          | 6.97       |                                                                   | 1.6        |                            | $          | — |   |
| Exercisable at December 31, 2008 |       | 590,377                    |       | $                                          | 7.06       |                                                                   | 1.5        |                            | $          | — |   |

 

No stock options were granted during the three year period ending December 31,2008.  The total intrinsic value of stockoptions exercised during the years ended December 31, 2008, 2007 and 2006was $165,000, $1,089,000 and $560,000, respectively, on the exercise date.

 

Nonvested stock option activity for the year ended December 31,2008 was as follows:

 

| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Nonvested at December 31, 2007 |       | 201,450                    |       | $                                                       | 2.92       |   |
| Vested                              |       | (125,197                   | )          | $                                                       | 3.08       |   |
| Nonvested at December 31, 2008 |       | 76,253                     |       | $                                                       | 2.67       |   |

 

The total fair value of stock options vested during the years ended December 31,2008, 2007 and 2006 was $385,000, $407,000 and $457,000, respectively.  We recorded, within general and administrativeexpenses, compensation expense of $214,000, $326,000 and $372,000 related tostock options for the years ended December 31, 2008, 2007 and 2006,respectively.  As of December 31,2008, there was $3,000 of total unrecognized compensation cost related tononvested stock options granted to employees under our stock incentiveplan.  That cost is expected to berecognized over a weighted-average period of 0.5 years.

 

Nonvestedrestricted stock activity for the year ended December 31, 2008 was asfollows:

 

| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Nonvested at December 31, 2007 |       | 298,300                    |       | $                                                       | 10.25      |   |
| Granted                             |       | 123,000                    |       | $                                                       | 10.51      |   |
| Vested                              |       | (51,300                    | )          | $                                                       | 8.79       |   |
| Nonvested at December 31, 2008 |       | 370,000                    |       | $                                                       | 10.54      |   |

 

The aggregate market value of the nonvestedrestricted stock at the date of issuance is being amortized on a straight-linebasis over the six-year service period.  Thetotal fair value of shares vested during the years ended December 31,2008, 2007 and 2006 was $451,000, $247,000 and $109,000, respectively.  The grant-date fair value of nonvestedrestricted stock awards granted during the years ended December 31, 2008,2007 and 2006 was $10.51, $13.54 and $9.58, respectively.  We recorded, within general andadministrative expenses, compensation expense of $784,000, $569,000 and$360,000 related to nonvested restricted stock awards for the years ended December 31,2008, 2007 and 2006, respectively.  As ofDecember 31, 2008, there was $2,711,000 of total deferred compensationcost related to nonvested restricted stock awards granted to employees underour stock incentive plan.  That cost isexpected to be recognized over a weighted-average period of 3.9****years.

 

On December 31, 2006, we adopted the provisions of Statement No. 158,*Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans*, which requires an employer to (a) recognizein its statement of financial position an asset for a plan’s overfunded statusor a liability for a plan’s underfunded status, (b) measure a plan’sassets and its obligations that determine its funded status as of the end ofthe employer’s fiscal year, and (c) 

 

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recognize changesin the funded status of a defined postretirement plan in the year in which thechanges occur (reported in comprehensive income).  As a result of adoptingStatement No. 158, we increased our pension liability and recordedaccumulated other comprehensive loss in the amount of $821,000 ($488,000 afterincome tax benefit) in our December 31, 2006 consolidated balancesheet.  Additionally, we reclassified ourpension liability from accrued liabilities (current) to liability for pensionbenefits (non-current).  The adoption ofStatement No. 158 did not have an impact on our 2006 consolidatedstatement of earnings or cash flows.

 

As of December 31, 2008 and 2007, accumulated other comprehensiveloss consists of the following:

 
| ** **                                                                                                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net actuarial loss and prior service cost not yet  recognized in net periodic benefit cost, net of income tax benefit of $1,557  and $190, respectively |       | $        | (2,273,000 | )        | $          | (278,000 | ) |
| Accumulated unrealized loss on available-for-sale  securities, net of income tax benefit of $12                                                         |       | (19,000  | )          | —   |       |
| Accumulated other comprehensive loss                                                                                                                    |       | $        | (2,292,000 | )        | $          | (278,000 | ) |

 

**NOTE9—Financial Instruments**

 

We adopted FASB Statement No. 157 effective January 1,2008 for financial assets and liabilities measured on a recurring basis.Statement No. 157 applies to all financial assets and financialliabilities that are being measured and reported on a fair value basis. Therewas no impact from the adoption of Statement No. 157 to the consolidatedfinancial statements. Statement No. 157 requires disclosure thatestablishes a framework for measuring fair value and expands disclosure aboutfair value measurements. The statement requires fair value measurement beclassified and disclosed in one of the following three categories:

 

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

 

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

 

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

 

Our short-term investments and financial instrumentsas of December 31, 2008 consist of marketable equity securities which arerecorded at fair value in our consolidated financial statements based on quotedmarket prices (Level 1 inputs).  As of December 31,2008, these investments had a cost basis and fair value of $134,000 and$103,000, respectively.

 

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

 

The carrying value of our revolving line of credit at December 31,2008 and 2007 approximates its fair value based on the interest rates availableon similar borrowings.

 

**NOTE10—Related Party Transactions**

 

During the years ended December 31, 2008, 2007 and 2006, weallocated costs of $2,104,000, $1,873,000 and $1,614,000, respectively, to DVD,a company related through common ownership, for certain administrative andoperating services.  Additionally, DVDallocated costs of $295,000, $229,000 and $121,000 to us for the years ended December 31,2008, 2007 and 2006, respectively.  Theallocations were based on an analysis of each company’s share of thecosts.  In connection with DVD’s 2008,2007 and 2006 NASCAR event weekends at Dover International Speedway, weprovided certain services for which DVD was invoiced $1,237,000, $1,207,000 and$965,000, respectively.  Additionally,DVD invoiced us $434,000, $429,000 and $149,000, respectively, for our rentalof a skybox suite, tickets and other services during DVD’s 2008, 2007 and 2006NASCAR event weekends at Dover 

 

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InternationalSpeedway.  As of December 31, 2008and 2007, our consolidated balance sheet includes an $11,000 and $18,000payable to DVD, respectively, for the aforementioned items.  We settled these payables in January of2009 and 2008, respectively.  The netcosts incurred by each company for these services are not necessarilyindicative of the costs that would have been incurred if the companies had beenunrelated entities and/or had otherwise independently managed these functions;however, management believes that these costs are reasonable.

 

Our use of DVD’s 5/8-mile harness racing track is pursuant to aneasement granted to us by DVD which does not require the payment of any rent.Under the terms of the easement, we have exclusive use of the harness trackduring 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.  Theharness track is located on property owned by DVD and is on the inside of DVD’smotorsports superspeedway.  Our indoorgrandstands are used by DVD at no charge in connection with its majormotorsports events. DVD also leases its principal office space from us.  Various easements and agreements relative toaccess, utilities and parking have also been entered into between DVD and usrelative to our respective Dover, Delaware facilities.

 

In conjunction with the spin-off from DVD, we and DVDentered into various agreements that addressed the allocation of assets and liabilitiesbetween the two companies and that define the companies’ relationship after theseparation.  Among these are the RealProperty Agreement and the Transition Support Services Agreement.

 

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

 

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

 

Henry B. Tippie, Chairman of our Board of Directors,controls in excess of fifty percent of our voting power.  Mr. Tippie’s voting control emanatesfrom his direct and indirect holdings of common stock and Class A commonstock, from his status as trustee of the RMT Trust, our largest stockholder,and from certain shares as to which he has voting rights pursuant to a votingagreement with R. Randall Rollins, one of our directors.  This means that Mr. Tippie has the abilityto determine the outcome of our election of directors and to determine theoutcome of many significant corporate transactions, many of which only requirethe approval of a majority of our voting power.

 

Patrick J. Bagley, Kenneth K. Chalmers, Denis McGlynn,Jeffrey W. Rollins, John W. Rollins, Jr., R. Randall Rollins and Henry B.Tippie are all Directors of ours and DVD. Denis McGlynn is the President andChief Executive Officer of both companies, Klaus M. Belohoubek is the SeniorVice President — General Counsel and Secretary of both companies and Timothy R.Horne is the Senior Vice President — Finance and Chief Financial Officer ofboth companies.  Mr. Tippie controlsin excess of fifty percent of the voting power of DVD.

 

**NOTE11—Commitments and Contingencies**

 

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

 

As of December 31, 2008, we have purchase obligations related tothe Phase VI expansion of our casino.  Construction began in the first quarter of2007 and was completed in October 2008. The estimated cost of the casino expansion is $51,000,000, of whichapproximately $49,500,000 was paid through December 31, 2008, andapproximately $1,500,000 is included in accounts payable in the consolidatedbalance sheet.

 

Effective July 1, 2008, the State enacted legislation that (1) increasesthe existing surcharge on the portion of slot win that we retain, (2) requires thatwe pay the costs of all franchise games which were previously shared with theState, and (3) requires that we pay an additional annualamount to a certain horse racing industry organization 

 

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previously funded by the State.  Weare unable to quantify the overall effect of this new legislation onour operations going forward.

 

We have employment, severance and noncompeteagreements with certain of our officers and directors under which certainchange of control, severance and noncompete payments and benefits might becomepayable in the event of a change in our control, defined to include a tenderoffer or the closing of a merger or similar corporate transactions.  In the event of such a change in our controland the subsequent termination of employment of all employees covered underthese agreements, we estimate that the maximum contingent liability would rangefrom $9,100,000 to $10,200,000 depending on the tax treatment of the payments.

 

To the extent that any of the potential payments orbenefits due under the agreements constitute an excess “parachute payment”under the Internal Revenue Code and result in the imposition of an excise tax,each agreement requires that we pay the amount of such excise tax plus anyadditional amounts necessary to place the officer or director in the sameafter-tax position as he would have been had no excise tax been imposed. Weestimate that the tax gross ups that could be paid under the agreements in theevent the agreements were triggered due to a change of control could be between$1,100,000 and $2,200,000 and these amounts have been included in the maximumcontingent liability disclosed above. This maximum tax gross up assumesthat none of the payments made after the hypothetical change in control wouldbe characterized as reasonable compensation for services rendered. Eachagreement with an executive officer provides that fifty percent of the monthlyamount paid during the term is paid in consideration of the executive officer’snon-compete covenants. The exclusion of these amounts would reduce thecalculated amount of excess parachute payments subject to tax. We are unable toconclude whether the Internal Revenue Service would characterize all or some ofthese non-compete payments as reasonable compensation for services rendered.

 

**NOTE12—Quarterly Results (unaudited)**

 
| ** **                            | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| **Year Ended December 31, 2008** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
| Revenues                              |       | $                 | 59,789,000 |             | $          | 59,971,000            |       | $                    | 63,929,000 |   | $ | 55,443,000 |   |
| Operating earnings                    |       | $                 | 9,934,000  |             | $          | 10,271,000            |       | $                    | 9,458,000  |   | $ | 6,842,000 |   |
| Net earnings                          |       | $                 | 5,321,000  |             | $          | 5,698,000             |       | $                    | 4,996,000  |   | $ | 3,496,000 |   |
| Net earnings per share-basic          |       | $                 | 0.17       |             | $          | 0.18                  |       | $                    | 0.16       |   | $ | 0.11 |   |
| Net earnings per share-diluted        |       | $                 | 0.17       |             | $          | 0.18                  |       | $                    | 0.16       |   | $ | 0.11 |   |
| ** **                            | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
| **Year Ended December 31, 2007** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
| Revenues                              |       | $                 | 60,631,000 |             | $          | 57,868,000            |       | $                    | 64,566,000 |   | $ | 59,301,000 |   |
| Operating earnings                    |       | $                 | 12,188,000 |             | $          | 11,306,000            |       | $                    | 13,308,000 |   | $ | 10,094,000 |   |
| Net earnings                          |       | $                 | 6,881,000  |             | $          | 6,404,000             |       | $                    | 7,435,000  |   | $ | 5,365,000 |   |
| Net earnings per share-basic          |       | $                 | 0.21       |             | $          | 0.20                  |       | $                    | 0.23       |   | $ | 0.17 |   |
| Net earnings per share-diluted        |       | $                 | 0.21       |             | $          | 0.20                  |       | $                    | 0.23       |   | $ | 0.17 |   |

 

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

 

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