**United States Securities and ExchangeCommission**

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

 

**Form 10-K**

 

**Annual ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the fiscal year ended December 31, 2003**

 

**Commission filenumber     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 Number) |

 

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

(Address of principal executive offices)

 

**(302) 674-4600**

(Registrant’s telephone 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 whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.Yes   ý    No   o  

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

The aggregate market value ofcommon stock held by non-affiliates of the registrant was $88,301,675 as ofJune 30, 2003 (the last day of our most recently completed second quarter).

 

As of February 29, 2004, thenumber of shares of each class of the registrant’s common stock outstanding isas follows:

 
|   | Common Stock -         |   | 10,333,112 shares |
|--------|------------------------|--------|-------------------|
|   | Class A Common Stock - |   | 16,145,059 shares |

 

**DocumentsIncorporated by Reference**

 

Portions of the registrant’s Proxy Statementin connection with the Annual Meeting of Stockholders to be held April 28, 2004are incorporated by reference into Part III, Items 10 through 14 of thisreport.

 

 

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**Part I**

 

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

 

**Item 1.    Business**

 

Dover Downs Gaming & Entertainment, Inc. is adiversified gaming and entertainment company whose operations consist of DoverDowns Slots – an 80,000 square foot video lottery (slots) casino complex (whichafter the latest construction will be 91,000 square feet); the Dover DownsHotel and Conference Center – featuring luxury accommodations with conference,banquet, fine dining, ballroom and concert hall facilities; and Dover DownsRaceway – a harness racing track with pari-mutuel wagering on live andsimulcast horse races.

 

Our entertainment complex is located in Dover, thecapital of the State of Delaware. We draw patrons from several majormetropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all withina 2 hour drive. According to the 2000 United States Census, approximately 32.8million people live within 150 miles of the complex.

 

Dover Downs Gaming & Entertainment, Inc. has twowholly owned subsidiaries; Dover Downs, Inc. and Dover Downs ManagementCorp.  Dover Downs, Inc. wasincorporated in 1967 and began motorsports and harness racing operations in1969.  In June of 1994, legislationauthorizing video lottery operations in the State of Delaware (the “State”) wasadopted.  The Company’s video lotterycasino operations began on December 29, 1995. As a result of several restructurings, Dover Downs, Inc. became a whollyowned subsidiary of Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment,Inc.) (“DVD”), and became the operating entity for all of DVD’s gamingoperations.

 

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 completed atax-free spin-off of its gaming operations by contributing 100% of the issuedand outstanding common stock of Dover Downs, Inc. to the Company, andsubsequently distributing 100% of the issued and outstanding common stock ofthe Company to DVD stockholders. Immediately following the spin-off, Dover Downs Gaming &Entertainment, Inc. became an independent public company.

 

**Dover Downs Slots**

 

Our video lottery (slot) machine casino opened inDecember 1995 with approximately 500 video lottery (slot) machines. Due to itspopularity, the video lottery (slot) machine casino has expanded three timessince its opening and the number of machines has increased steadily to 2,000 atDecember 31, 2003.

 

In an effort to increase therevenues from its three video lottery agents, the State passed legislation inJune 2003 which extended the operating hours for video lottery agents andpermitted the Director of the Delaware State Lottery Office (the “Lottery Director”) to authorize 500additional video lottery (slot) machines at each licensed facility.  This sets 2,500 as the maximum number ofmachines permitted per Licensed Agent. The Company has completed its architectural design work and has begunconstruction of 11,000 additional square feet of gaming space to accommodateinstallation of the 500 newly authorized machines within its existing casinocomplex.  Installation of all 500additional machines is expected to be complete by March 31, 2004.  The new legislation also authorizes the useof separate video lottery (slot) machines for promotional tournaments, providesfor the introduction of popular franchise games with the State assumingone-half of the incremental expenses and allows the Lottery Director to enterinto agreements with other state or international lotteries for linkedparticipation in progressive lottery games. The new law also revised the video lottery distribution formula toincrease the State’s share of the video lottery proceeds by assessing a 1.25%surcharge on commissions received by video lottery agents.  In addition, recent regulatory changes allowvideo lottery agents to extend credit to gaming customers and effectivelyremoved the $100 betting limit per machine.

 

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Our video lottery (slot) machines range from ourpopular nickel machines to $100 machines in the Premium Slots area and includemost popular franchise games found in the country’s major gaming jurisdictions.Additional amenities include the Garden Cafe, which becomes a lounge with liveentertainment most evenings, and the Winners Circle Restaurant.  The Las Vegas style “video lottery casino”housing the gaming equipment was designed and built using expertise fromCaesars World Gaming Development Corporation (“Caesars”), a leader in thegaming industry.  Our facilities areopen every day of the year, except Christmas and Easter.  Our casino was visited by almost 2,500,000patrons in 2003.

 

The Delaware State Lottery Office administers andcontrols our video lottery (slot) machine operations. We are a Licensed Agent authorized to conduct videolottery operations under the Delaware State Lottery Code and one of only three locationspermitted to do so in the State of Delaware. We are permitted by law to set thepayout to customers between 87% and 95%. Since the introduction of our videolottery (slot) machine operations, we have maintained an average payout ofapproximately 91.3%. We believe that this represents a competitive payoutpercentage.

 

We have a management agreement with Caesars, underwhich, Caesars is our agent to supervise, manage and operate our video lottery(slot) machine casino. Caesars has been properly licensed by the Delaware StateLottery Office to perform these functions. We pay to Caesars a management feebased on the financial performance of the video lottery operations.  We do not expect to renew the agreement whenit expires in December 2004 as we no longer rely on any Caesars’ employees orsystems.

 

We use sophisticated database marketing to developlong-term relationships with our patrons and to target promotions to specificcustomer segments. Our Capital Club, a slots players club and tracking system,allows us to identify customers and to reward their level of play throughawards programs. Membership in this club currently stands at approximately150,000 active patrons.  We are in theprocess of installing a state-of-the-art customer management and slot datasystem.  Our new system will allow us tomarket our property more effectively and allow for the ultimate conversion ofour casino floor to ticket-in, ticket-out (cashless) technology.

 

We have implemented extensive procedures for financialand accounting controls, safekeeping and accounting of monies, and securityprovisions. Security over the gaming operations involves the integration ofsurveillance cameras, observation and oversight by employees, security andgaming staff, and various security features built into the video lottery (slot)machines. The above, when combined with proper internal control procedures anddaily monitoring of each video lottery (slot) machine by the Delaware StateLottery Office, are intended to maintain the security, integrity andaccountability of the video lottery operations.

 

On May 30, 2003, a committeecreated by the Delaware House of Representatives (the “Committee”) issued afavorable assessment as to the merits of conducting sports wagering in theState through its video lottery agents. The Committee concluded that sports gaming is feasible in the State,outlined proposed structures for its implementation and provided variousfinancial projections.  The report hasbeen provided to the Delaware General Assembly for consideration.  By Federal law, Delaware is the only stateeast of Montana where sports betting is legally permitted, though enablinglegislation would need to be passed by the Delaware General Assembly.

 

**Dover Downs Hotel andConference Center**

 

Our luxury hotel facility, the Dover Downs Hotel andConference Center, is located adjacent to our casino.  Phase one of the facility waspartially opened in the first quarter of 2002 and was completed in April2002.  The hotel and conferencecenter includes 232 rooms, a multi-purpose ballroom/concert hall, a fine diningrestaurant, swimming pool and health spa. Additional construction that occurredincluded, among other things, building a 425-seat buffet restaurant, renovatingthe enclosed harness racing grandstand with state-of-the-art simulcastingfacilities and building an HVAC plant. With this facility, we are capitalizing on the need for luxury hotelaccommodations in the Dover area and offering a wider range of entertainmentoptions to our patrons, including concerts featuring prominent entertainers,live boxing, gourmet dining, trade shows and conferences.  The facility allows us to attract newpatrons and lengthen the stay of current patrons.  Since opening the Dover Downs Hotel and Conference Center, we havemanaged its operations ourselves.  In2003, hotel occupancy averaged almost 93% and the hotel was awarded the AAAFour Diamond Award for 2004.

 

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**Dover Downs Raceway**

 

Dover Downs Raceway has presented pari-mutuel harnessracing events for 35 consecutive years. Live harness races are conducted atDover Downs Raceway between November and April and are simulcast to tracks andother off-track betting locations across North America on each of the Company’smore than 130 live race dates. Our races currently are transmitted to more than400 tracks and off-track betting locations. The harness horse racing track is a5/8-mile track and is lighted for nighttime operations.  The track is adjacent to our casino and hoteland conference center on land owned by DVD on the inside of DVD’s auto racingsuperspeedway.  Use of the track isunder an easement granted by DVD.

 

Dover Downs Raceway has facilities for pari-mutuelwagering on both live harness horse racing and on simulcast thoroughbred andharness horse racing received from numerous tracks across North America. Withinour main grandstand is the recently renovated simulcast parlor where ourpatrons can wager on harness and thoroughbred races received by satellite intoDover Downs Raceway year round. Television monitors throughout the parlor areaprovide views of all races simultaneously and the parlor’s betting windows areconnected to a central computer allowing bets to be received on all races fromall tracks.

 

Harness racing in the State of Delaware is governed bythe Delaware Harness Racing Commission (the “Commission”). We hold a licensefrom the Commission authorizing us to hold harness race meetings on ourpremises and to offer pari-mutuel wagering on live and simulcast horse races.

 

Harness racing refers to any racing of horses in whichthe horses competing or participating are harnessed to a sulky, carriage orsimilar vehicle and are not mounted by a jockey. Pari-mutuel wagering refers topooled betting by which the wagering public, not the track, determines the oddsand the payoff. The track retains a commission, which is a percentage of thetotal amount wagered (“handle”). Simulcasting refers to the transmission oflive horse racing by television, cable or satellite signal from one race trackto another with pari-mutuel wagering being conducted at the sending andreceiving track and a portion of the handle being shared by the sending andreceiving tracks.

 

The legislation authorizing video lottery operationsin the State of Delaware was adopted in June 1994, and is referred to as the“Horse Racing Redevelopment Act.” The Delaware General Assembly’s statedpurpose in approving the legislation was to (i) provide non-state supportedassistance in the form of increased economic activity and vitality forDelaware’s harness and thoroughbred horse racing industries, which activity andvitality will enable the industry to improve its facilities and breeding stock,and cause increased employment; and (ii) restrict the location of such lotteryto locations where wagering is already permitted and controls exist. A portionof the proceeds from the wagering on the video lottery (slot) machines isallocated to increase the purses for harness horse races held at Dover Downs Racewayand is intended to provide increased vitality for Delaware’s horse racingindustry.

 

We have an agreement with DSOA, or DelawareStandardbred Owner’s Association, Inc., effective August 1, 2003 and continuingthrough July 31, 2007. DSOA’s membership consists of owners, trainers, anddrivers of harness horses participating in harness race meetings at ourfacilities and elsewhere in the United States and Canada. DSOA has beenorganized and exists for the purpose of promoting the sport of harness racing;improving the lot of owners, drivers, and trainers of harness racing horsesparticipating in race meetings; establishing health, welfare and insuranceprograms for owners, drivers, and trainers of harness racing horses;negotiating with harness racing tracks on behalf of owners, trainers, drivers,and 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, depending on the level of the averagedaily dollar handle.

 

We enjoy a good relationship with representatives ofDSOA and anticipate that this relationship will continue. We believe that theDSOA agreement is typical of similar agreements in the industry.

 

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**Licensing andRegulation by Gaming and Other Authorities**

 

*General*

 

We are subject to extensive federal, state and localregulations related to our operations, particularly our video lottery (slot)operations, live harness racing and pari-mutuel wagering.  These operations are contingent uponcontinued government approval of such operations as forms of legalized gamingand 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 gamingoperations and not intended as a recitation of all regulations applicable toour business.

 

Delaware law regulates the percentage of commission weare entitled to receive from our gaming activities, which comprises asignificant portion of our overall revenues. Our licenses to conduct video lottery (slot) machine operations, harnesshorse races and pari-mutuel wagering could be modified or repealed at any timeand we could be required to terminate our gaming operations.

 

*VideoLottery (Slot) Operations*

 

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

 

A “video lottery (slot) machine” is defined by law asany machine in which bills, coins or tokens are deposited in order to play in agame of chance in which the results, including options available to the player,are randomly and immediately determined by the machine.  A machine may use spinning reels or videodisplays or both, and may or may not dispense coins or tokens directly to winningplayers.  A machine shall be considereda video lottery (slot) machine notwithstanding the use of an electronic creditsystem making the deposit of bills, coins or tokens unnecessary.  Various video lottery (slot) machines are inuse at our casino.  All accept $1, $5,$10, $20, $50 and $100 bills.

 

The Lottery Director has discretion to adopt suchrules and regulations as the Lottery Director deems necessary or desirable forthe efficient and economical operation and administration of the system, including(i) type and number of games permitted, (ii) pricing of games, (iii) numbersand sizes of prizes, (iv) manner of payment, (v) value of bills, coins ortokens needed to play, (vi) requirements for licensing agents and serviceproviders, (vii) standards for advertising, marketing and promotional materialsused by Licensed Agents, (viii) procedures for accounting and reporting, (ix)registration, kind, type, number and location of video lottery (slot) machineson a Licensed Agent’s premises, (x) security arrangements for the video lotterysystem, and (xi) reporting and auditing of financial information of LicensedAgents.

 

*LicensingRequirements*.  We weregranted a license on December 13, 1995.

 

There are continuing licensure requirements for allofficers, directors, key employees and persons who own directly or indirectly10% or more of 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 providersof the video lottery (slot) machines and certain companies that seek to provideservices to a Licensed Agent.  Caesarshas been licensed to provide management services to the Company.

 

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*Revocation,Suspension or Modification of License*. The Lottery Directormay revoke or suspend the license of a Licensed Agent, such as ours, for“cause.”  “Cause” is broadly defined andcould potentially include falsifying any application for license or reportrequired by the rules and regulations, the failure to report any informationrequired by the rules and regulations, the material violation of any rules andregulations promulgated by the Lottery Director or any conduct by the licenseewhich undermines the public confidence in the video lottery system or servesthe interest of organized gambling or crime and criminals in any manner.  A license may be revoked for anunintentional violation of any federal, state or local law, rule or regulationprovided that the violation is not cured within a reasonable time as determinedby the Lottery Director.  A hearingofficer’s decision revoking or suspending the license shall be appealable tothe Delaware Superior Court under the provisions of the Administrative ProceduresAct.  All existing or new officers,directors, key employees and owners of a Licensed Agent are subject tobackground investigation.  Failure tosatisfy the background investigation may constitute cause for suspension orrevocation of the License.

 

*OwnershipChanges*.  UnderDelaware law, a change of ownership of a Licensed Agent will automaticallyterminate its license 90 days after the change of ownership occurs, unless theLottery Director determines after application to issue a new license to the newowners.  Change of ownership may occurif any new individual or entity acquires, directly or indirectly, 10% or moreof the Licensed Agent or if more than 20% of the legal or beneficial interestin the Licensed Agent is transferred, whether by direct or indirect means.  The Commission may require extensivebackground investigations of any new owner acquiring a 10% or greater interestin a Licensed Agent, including criminal background checks.  Accordingly, the Company has a restrictivelegend on its shares of common stock which require that (a) any holders ofcommon stock found to be disqualified or unsuitable or not possessing thequalifications required by any appropriate gaming authority could be requiredto dispose of such stock and (b) any holder of common stock intending toacquire 10% or more of the outstanding common stock of the Company must firstobtain prior written approval from the Delaware State Lottery Office.

 

*HarnessRacing Events*.  Inorder to maintain our license for video lottery (slot) machine gaming, we arerequired to maintain our license for harness horse racing with the Commissionand must conduct a minimum of 80 live race days each racing season, subject tothe availability of racing stock.

 

*ControlOver Equipment and Technology*.  The Company does not own or lease the video lottery (slot)machines or computer systems used by the State in connection with its videolottery gaming operations.  The LotteryDirector enters into contracts directly with the providers of the video lottery(slot) machines and computer systems (the “Technology Providers”).  Equipment is provided to the State by saleor lease and all Technology Providers must be licensed by the Lottery Director.  There are also limitations on the number ofvideo lottery (slot) machines that may be used at any one facility that aresupplied by the same Technology Provider. The operations of the Company could be disrupted in the event that alicensed Technology Provider in any way breaches its agreement with the Stateor ceases to be properly licensed for any reason.  Such an event would be outside of the control of the Company.

 

### ***Harness Racing and Pari-Mutuel Wagering***

 

*LicensingRequirements. *Harnessracing in the State of Delaware is governed by the Delaware Harness Racing Commission.  The Company holds a license from theCommission by which it is authorized to hold harness race meetings on itspremises and to make, conduct and sell pools by the use of pari-mutuel machinesor totalizators.  The license must berenewed on an annual basis.  TheCommission may reject an application for a license for any cause which it deemssufficient and the action of the Commission is final.  The Commission may also suspend or revoke a license which it hasissued and its action in that respect is final, subject to review, uponquestions of law only, by the Superior Court of the County within which thelicense was granted.  The action of theCommission stands unless and until reversed by the Court.  The Company has received an annual licensefrom the Commission for the past 35 consecutive years and management believesthat its relationship with the Commission remains good.  However, there can be no assurances that theCompany will continue to be licensed by the Commission in the future.

 

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Under the law, the Commission has broad powers ofsupervision and regulation.  TheCommission may prescribe rules, regulations and conditions under which allharness racing and betting pools shall be conducted; may regulate theperformance of any service or the sale of any article on the premises of alicensee; may compel the production of books and documents of a licensee andrequire that books and records be kept in such manner as the Commission mayprescribe; may visit, investigate and place accountants or other persons as itdeems necessary, at the expense of a licensee, in the office, track or place ofbusiness of a licensee; may summon witnesses and administer oaths; and mayrequire the removal of any employee or official employed by a licensee.  All proposed extensions, additions orimprovements to the property of a licensee are subject to the approval of theCommission.

 

The Commission is required to inspect a licensee’sracing plant not less than five days prior to a race meeting and may withdrawthe license for the meeting if the racing plant is found to be unsafe foranimals or persons or is not rendered safe prior to the opening of themeeting.  A licensee must deposit withthe Commission, ten days before a race meeting, a policy of insurance againstpersonal injury liability in an amount to be approved by the Commission.

 

*USTA. *Any license granted by theCommission is also subject to such reasonable rules and regulations as may beprescribed from time to time by the United States Trotting Association(“USTA”).  The USTA sets various rulesrelating to the conduct of harness racing. According to its Articles of Incorporation, the purposes of the USTAshall include the improvement of the breed of trotting and pacing horses, theestablishment of rules regulating standards and the registration of such horsesthereunder, the advancement and promotion of the interest of harness racing inthe United States, the investigation, ascertainment and registration of the pedigreesof such horses, the regulation and government of the conduct of the sport ofharness racing, the establishment of rules for the conduct thereof, notinconsistent with the laws of the various states, and the sanctioning of theholding of exhibitions of such horses and meetings for the racing thereof, theissuance of licenses to qualified persons to officiate at harness race meetingsand exhibitions, the issuance of licenses to the owners of horses permittingthe exhibition and racing of such horses and the qualification thereof, theissuance of licenses to drivers of horses participating in such races orexhibitions, and providing for the enforcement of the rules promulgated by theUSTA, and providing for the fixing of penalties, fines, and the suspension orexpulsion from membership, or privileges or for any other misconductdetrimental to the sport.

 

*GamingTaxes and Fees*

 

We believe that the prospect of significant additionaltax revenue is one of the primary reasons why jurisdictions have legalizedgaming.  As a result, gaming operatorsare typically subject to significant taxes and fees in addition to normalfederal and state corporate income taxes. These taxes and fees are subject to increase at any time.  We pay substantial taxes and fees with respectto our operations and would likely incur similar burdens in any otherjurisdiction in which we may conduct gaming operations in the future.

 

*Compliance with Other Laws*

 

Regulations adopted by the Financial Crime EnforcementNetwork of the U.S. Treasury Department require us to report currencytransactions in excess of $10,000 occurring within a gaming day, includingidentification of the patron by name and social security number.  Substantial penalties can be imposed againstus if we fail to comply with these regulations.

 

The State has enacted a ban onsmoking in all indoor public facilities with certain minor exceptions such asfire halls and fraternal organization premises where fundraising takesplace.  The ban became effective November27, 2002.  The law prohibits smokinginside the Company’s casino, hotel and conference center, restaurants, harnesstrack indoor grandstands and simulcasting facilities, provided that smoking ispermitted in up to 25% of the rooms in the hotel.  Efforts to seek legislative relief from the law have beenunsuccessful.

 

Our operations are also subject to a variety of otherrules and regulations, including, but not limited to, zoning, environmental,construction and land-use laws and regulations.

 

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**Competition**

 

The gaming industry in the United States is intenselycompetitive and features many participants, including riverboat casinos,dockside casinos, land-based casinos, video lottery (slot) and poker machines,whether or not located in casinos, native American gaming, pari-mutuel wageringon live and simulcast horse racing, off track betting, state run lotteries,internet gambling and other forms of gambling. Gaming competition isparticularly intense in each of these markets.

 

The legalization of new or additional casino or othergaming venues in jurisdictions close to Delaware, particularly Maryland,Virginia, Washington, D.C., Pennsylvania or New Jersey, could negatively impactour gaming business. From time to time legislation is proposed for adoption inthese jurisdictions, as it has been for several years in Maryland andPennsylvania, which if enacted, would further expand state gambling andwagering opportunities, including video lottery (slot) machines at racetracks.Enactment of such legislation could increase our competition and couldadversely affect our business, financial condition and overall profitability.

 

At present, video lottery (slot) machines are onlypermitted at two other locations in Delaware: Delaware Park and HarringtonRaceway. The neighboring states of Pennsylvania and Maryland do not presentlypermit video lottery (slot) machine operations. Pennsylvania, Maryland and NewJersey all have state-run lotteries. Atlantic City, New Jersey is located approximately100 miles from our entertainment facility and offers a full range of gamingproducts.

 

Competition in horse racing is varied since racetracksin the surrounding area differ in many respects. Some tracks only offerthoroughbred or harness horse racing; others have both. Tracks have live racingseasons that may or may not overlap with neighboring tracks. Depending on thepurse structure, tracks that are farther apart may compete with each other morefor quality horses than for patrons.

 

Live harness racing also competes with simulcasts ofthoroughbred and harness racing. All racetracks in the region are involved withsimulcasting. In addition, a number of off-track betting parlors compete withtrack simulcasting activities. With respect to the simulcasting of our liveharness races to tracks and other locations, our simulcast signals are indirect competition with live races at the receiving track and other races beingsimulcast to the receiving location.

 

Within the State of Delaware, we face little directlive competition from the State’s other two tracks. Harrington Raceway, a southcentral Delaware fairgrounds track, conducts harness horse racing periodicallybetween May and November. There is no overlap presently with our live raceseason. Delaware Park, a northern Delaware track, conducts thoroughbred horseracing from April through mid-November. Its race season only overlaps with oursfor approximately six weeks each year.

 

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

 

Competition for our hotel and conference center variesand consists of local and regional competition. With respect to hotelaccommodations only, we compete with a variety of nearby hotels in the Doverarea; however, few of these offer the luxury accommodations that we offer. Withrespect to trade shows, conferences, concerts and hotel room packages tied tothese events or tied to our casino and other gaming offerings, we compete at aregional level with the other gaming operations referred to above and withconvention centers and larger hotels in major cities such as Philadelphia,Washington, D.C., Baltimore and Wilmington.

 

In addition, our activities compete with otherleisure, entertainment and recreational activities.

 

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**Growth Strategies**

 

We offer a unique gaming and entertaining experienceand make available to our patrons a number of different options: slot machinegaming, live harness horse racing, fine dining, national recording andentertainment acts, live boxing and simulcasting of thoroughbred and harnesshorse races from across the United States. Our mission is simple: to provideall of our customers a premier gaming and entertainment experience with a focuson quality customer service. Our growth strategy is to foster customer loyaltyby following this mission, focus on our most valuable customers, expand andimprove the quality of our slot gaming positions, enhance our gaming productswith additional entertainment offerings and create an exciting gamingenvironment while focusing on areas that we believe will increase our revenue andprofitability. Our efforts in this regard include the following:

 

*Increase TheUtilization Of Our Casino*

 

At December 31, 2003, we had 2,000 video lottery(slot) machines at our Dover facility.  In an effort to increase the revenues from itsthree video lottery agents, the State passed legislation in June 2003 whichextended the operating hours for video lottery agents and permitted the LotteryDirector to authorize 500 additional video lottery (slot) machines at eachlicensed facility.  This sets 2,500 asthe maximum number of machines permitted per Licensed Agent.  The Company has completed its architecturaldesign work and has begun construction of 11,000 additional square feet ofgaming space to accommodate installation of the 500 newly authorized machineswithin its existing casino complex. Installation of all 500 additional machines is expected to be completeby March 31, 2004.  The new legislationalso authorizes the use of separate video lottery (slot) machines forpromotional tournaments, provides for the introduction of popular franchisegames with the State assuming one-half of the incremental expenses and allowsthe Lottery Director to enter into agreements with other state or internationallotteries for linked participation in progressive lottery games.

 

We use a sophisticated database marketing program to develop long-termrelationships with our patrons and to target promotions to specific customersegments. Our Capital Club, a slots players club and tracking system, allows usto identify customers and to reward their level of play through awardsprograms. Membership in this club currently stands at approximately 150,000active patrons.  We are in the processof installing a state-of-the-art customer management and slot data system.  Our new system will allow us to market ourproperty more effectively and allow for the ultimate conversion of our casinofloor to ticket-in, ticket-out (cashless) technology.  We expect to increase attendance at both our casino and hotel andconference center through effective promotional use of our database and bymaking improvements to our facilities and gaming offerings based on what welearn from our Capital Club members. For example, we continue to add machineswith differing denominations and progressive slot machines with large jackpotsizes because they offer patrons a more exciting gaming experience.

 

On May 30, 2003, the Committeeissued a favorable assessment as to the merits of conducting sports wagering inthe State through its video lottery agents. The Committee concluded that sports gaming is feasible in the State,outlined proposed structures for its implementation and provided variousfinancial projections.  The report hasbeen provided to the General Assembly for consideration.  By Federal law, Delaware is the only stateeast of Montana where sports betting is legally permitted, though enablinglegislation would need to be passed by the Delaware General Assembly.

 

*Capitalize On OurLuxury Hotel And Conference Center*

 

Our luxury hotel facility, the Dover Downs Hotel andConference Center, is located adjacent to our casino.  The facility was partiallyopened in the first quarter of 2002 and was completed in April 2002.  The first phase of the hotel andconference center includes 232 rooms, a multi-purpose ballroom/concert hall, afine dining restaurant, swimming pool and health spa. Additional constructionthat occurred in adjacent facilities during the first phase included, amongother things, building a new 425-seat buffet restaurant, renovating the enclosedharness racing grandstand with state-of-the-art simulcasting facilities andbuilding an HVAC plant. The second phase, if implemented, is expected toinclude an additional 268 rooms. With this facility, we are capitalizing on theneed for luxury hotel accommodations in the Dover area and offering a widerrange of entertainment options to our patrons, including concerts featuringprominent entertainers, live boxing, gourmet dining, trade shows andconferences.  The facility allows us toattract new patrons and lengthen the stay of current patrons.

 

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*Increase TheAttendance And Wagering On Live Harness Horse Racing Through Increased PurseLevels*

 

With a percentage of video lottery (slot) machinerevenues supplementing the purses for the horsemen, we have experienceddramatic increases in the amount of our purses.  As of the end of our 2002-2003 season, our average daily pursedistribution had increased to $171,000 from $8,000 in 1995. According toinformation published by the Harness Tracks of America, Inc., an association webelong to comprised of harness race tracks throughout the world, this levelwould have us ranked second among thirty-six United States harness tracks indaily purse distribution.  The result isthat we continue to attract higher quality horses.  We have such prestigious events as our annual “Progress Pace”with an estimated $400,000 purse, an event which attracts the country’s topthree-year-old horses.  Bettors areattracted to races with larger purses and typically wager more on the higherquality and more predictable horses. We have also completed various upgrades toenhance the harness horse racing facilities, including renovations to the trackand grounds, receiving barn and paddock areas and, more recently, our simulcastparlor which has state-of-the-art facilities that allow year round wagering. Wecontinue to focus on improvements that we believe allow us to increaseattendance and wagering, including wagering on our events from other tracks andoff track wagering facilities that receive our racing signal during our raceseason.

 

**Seasonality**

 

Gaming & Entertainment’s quarterly operatingresults are affected by weather and the general economic conditions in theUnited 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, 2003, Gaming & Entertainment hadapproximately 759 full-time employees and 137 part-time employees. We engagetemporary personnel to assist during our live harness racing season. None ofour employees are party to a collective bargaining agreement and we believethat our relationship with our employees is good.

#### ** **

#### **Available Information**

 

We file annual, quarterly and current reports,information statements and other information with the United States Securitiesand Exchange Commission (the “SEC”). The public may read and copy any materialswe file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street,N.W., Washington, D.C. 20549. The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.The SEC also maintains an Internet site that contains reports, proxy andinformation statements, and other information regarding issuers that fileelectronically with the SEC.  Theaddress of that site is http://www.sec.gov.

 

#### **Internet Address**

 

We maintain a website where additional informationconcerning our business and various upcoming events can be found.  The address of our Internet website ishttp://www.doverdowns.com. We provide a link on our website, under InvestorRelations, to our filings with the SEC, including our annual report on Form10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and allamendments to those reports.

 

10

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**Item2.    Properties**

 

We own our principal executive office located inDover, Delaware; Dover Downs Slots—our 80,000 square foot casino (which afterthe latest construction estimated to be completed by March 31, 2004 will be91,000 square feet); the Dover Downs Hotel and Conference Center—featuringluxury accommodations with conference, banquet, fine dining, ballroom andconcert hall facilities; and the Dover Downs Raceway—indoor grandstands,betting and simulcasting parlors, all of which are located at our entertainmentcomplex situated on approximately 78 acres of land owned by us.

 

The Company’s use of DVD’s5/8-mile harness racing track is under an easement granted to the Company byDVD which does not require the payment of any rent. Under the terms of theeasement the Company has exclusive use of the harness track during the periodbeginning November 1 of each year and ending April 30 of the following year,together with set up and tear down rights for the two weeks before and aftersuch period.  The harness track islocated on property owned by DVD and is on the inside of DVD’s motorsports superspeedway.  The Company’s indoor grandstands are used byDVD at no charge in connection with its motorsports events. DVD also leases itsprincipal executive office space from the Company.  Various easements and agreements relative to access, utilities andparking have also been entered into between DVD and the Company relative totheir respective Dover, Delaware facilities.

 

**Item3.    LegalProceedings**

 

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

 

**Item4.    SubmissionOf Matters To A Vote Of Security Holders**

 

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

 

11

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**Part II**

 

**Item5.    MarketFor Registrant’s Common Equity, Related Stockholder Matters And IssuerPurchases Of Equity Securities**

 

Gaming & Entertainment’s common stock is listed on the New YorkStock Exchange under the ticker symbol “DDE.” Gaming & Entertainment Class A common stock is not publicly tradedbut is freely convertible into Gaming & Entertainment common stock at anytime at the option of the holder thereof. As of February 29, 2004, there were 10,333,112 shares of common stockand 16,145,059 shares of Class A common stock outstanding.  There were 1,157 holders of record forcommon stock and 16 holders of record for Class A common stock.

 

The high and low sales prices for theCompany’s common stock on the New York Stock Exchange and the dividendsdeclared per share for the years ended December 31, 2003 and 2002, beginningafter the Company’s spin-off from DVD, are detailed in the followingtable.  The Company’s spin-off from DVDbecame effective on March 31, 2002, at which time Gaming & Entertainmentbecame an independent public company.

 
| **Quarter Ended:** |   | **High** |   | **Low** |   | **Dividends  Declared** |   |
|--------------------|--------|----------|--------|---------|--------|-------------------------|--------|
|               |   |     |   |    |   |                    |   |
| December 31, 2003  |   | $        | 10.00  |    | $      | 8.02                    |   | $ | 0.05 |   |
| September 30, 2003 |   | 10.35    |   | 7.97    |   | 0.05                    |   |
| June 30, 2003      |   | 10.04    |   | 8.80    |   | 0.05                    |   |
| March 31, 2003     |   | 10.15    |   | 8.45    |   | 0.05                    |   |
|               |   |     |   |    |   |                    |   |
| December 31, 2002  |   | 10.55    |   | 7.65    |   | 0.05                    |   |
| September 30, 2002 |   | 13.00    |   | 7.41    |   | 0.0375                  |   |
| June 30, 2002      |   | 14.90    |   | 11.60   |   | 0.0375                  |   |
|                    |        |          |        |         |        |                         |        |  |  |  |

###### ** **

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

 

Securities authorized for issuance under equity compensation plans atDecember 31, 2003 are as follows:

 
| **Plan Category**                                           |   | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** |   | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** |   | **Number of  securities  remaining available for  future issuance under   equity compensation  plans (excluding  securities reflected in  column (a))** |       |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |   | **(a)**                                                                                               |   | **(b)**                                                                             |   | **(c)**                                                                                                                                                 | ** ** |
| Equity compensation plans approved by  security holders     |   | 862,360                                                                                               |   | $10.02                                                                              |   | 626,859                                                                                                                                                 |       |
|                                                        |   |                                                                                                  |   |                                                                                |   |                                                                                                                                                    |       |
| Equity compensation plans not approved by  security holders |   | —                                                                                                |   | —                                                                              |   | —                                                                                                                                                  |       |
| Total                                                       |   | 862,360                                                                                               |   | $10.02                                                                              |   | 626,859                                                                                                                                                 |       |

 

On October 23, 2002, the Company’s Board of Directors authorized therepurchase of up to 2,000,000 shares of the Company’s outstanding commonstock.  The purchases may be made in theopen market or in privately negotiated transactions as conditions warrant.  The repurchase authorization does not obligatethe Company to acquire any specific number of shares and may be suspended atany time.  During 2003, the Companypurchased and retired 169,945 shares of its outstanding common stock at anaverage price of $8.96 per share. Gaming & Entertainment did not repurchase any outstanding shares ofits common stock during the fourth quarter of 2003.  At December 31, 2003, the Company had remaining repurchaseauthority of 1,830,055 shares.

 

12

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**Item6.    SelectedFinancial Data**

 

The following table summarizes certain selected consolidated financialdata of Gaming & Entertainment, which has been derived from theconsolidated financial statements of Gaming & Entertainment for the yearsended December 31, 2003, 2002 and 2001, the six months ended December 31, 2000and for each of the two years ended June 30, 2000. The historical informationmay not be indicative of Gaming & Entertainment’s future performance as anindependent public company. This information set forth below should be read inconjunction with “Management’s Discussion And Analysis of Financial ConditionAnd Results of Operations,” the “Consolidated Financial Statements” and thenotes thereto, included elsewhere in this document.

 

**Five Year Selected Financial Data**

** **
|                                                                                |   |                          |                      | **Six Months  Ended  Dec. 31,  2000** |       |       |       |
|-------------------------------------------------------------------------------------|--------|-------------------------------|---------------------------|---------------------------------------|------------|------------|------------|
|                                                                                |   | **Years  Ended December 31,** | **Years  Ended June 30,** |                                  |
| **2003**                                                                            |   | **2002**                      |                      | **2001**                              | **2000**   |       | **1999**   |
| **Consolidated Statement of Earnings Data (in  thousands, except per share data):** |   |                          | ** **                |                                  | ** ** |       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenues:                                                                           |   |                          |                      |                                  |       |       |       |   |   |   |   |   |   |
| Gaming                                                                              |   | $                             | 175,023                   |                                  | $          | 193,723    |       | $ | 175,065 |   | $ | 79,897 |   | $ | 158,398 |   | $ | 130,519 |   |
| Other operating                                                                     |   | 32,476                        |                      | 26,083                                |       | 12,550     |       | 5,796 |   | 10,567 |   | 9,093 |   |
| Gross revenues                                                                      |   | 207,499                       |                      | 219,806                               |       | 187,615    |       | 85,693 |   | 168,965 |   | 139,612 |   |
| Less - promotional allowances                                                       |   | 18,667                        |                      | 13,331                                |       | 6,322      |       | 2,941 |   | 4,450 |   | 3,651 |   |
|                                                                                |   | 188,832                       |                      | 206,475                               |       | 181,293    |       | 82,752 |   | 164,515 |   | 135,961 |   |
| Expenses:                                                                           |   |                          |                      |                                  |       |       |       |   |   |   |   |   |   |
| Gaming                                                                              |   | 138,423                       |                      | 148,817                               |       | 132,587    |       | 58,731 |   | 118,987 |   | 97,766 |   |
| Other operating                                                                     |   | 9,899                         |                      | 10,351                                |       | 5,205      |       | 2,360 |   | 4,821 |   | 4,306 |   |
| Depreciation                                                                        |   | 6,287                         |                      | 5,176                                 |       | 2,211      |       | 1,037 |   | 1,798 |   | 1,269 |   |
| General and administrative                                                          |   | 4,317                         |                      | 5,061                                 |       | 4,676      |       | 1,991 |   | 3,375 |   | 2,694 |   |
|                                                                                |   | 158,926                       |                      | 169,405                               |       | 144,679    |       | 64,119 |   | 128,981 |   | 106,035 |   |
| Operating earnings                                                                  |   | 29,906                        |                      | 37,070                                |       | 36,614     |       | 18,633 |   | 35,534 |   | 29,926 |   |
| Interest expense, net                                                               |   | 842                           |                      | 903                                   |       | 1,020      |       | — |   | 216 |   | 85 |   |
| Earnings before income taxes                                                        |   | 29,064                        |                      | 36,167                                |       | 35,594     |       | 18,633 |   | 35,318 |   | 29,841 |   |
| Income taxes                                                                        |   | 11,827                        |                      | 14,725                                |       | 14,499     |       | 7,577 |   | 14,366 |   | 12,145 |   |
| Net earnings                                                                        |   | $                             | 17,237                    |                                  | $          | 21,442     |       | $ | 21,095 |   | $ | 11,056 |   | $ | 20,952 |   | $ | 17,696 |   |
|                                                                                |   |                          |                      |                                  |       |       |       |   |   |   |   |   |   |
| Net earnings per common share (a):                                                  |   |                          |                      |                                  |       | (unaudited | )          | (unaudited | ) | (unaudited | ) |   |   |
| Basic                                                                               |   | $                             | 0.65                      |                                  | $          | 0.80       |       | $ | 0.79 |   | $ | 0.42 |   | $ | 0.82 |   |   |   |
| Diluted                                                                             |   | $                             | 0.65                      |                                  | $          | 0.80       |       | $ | 0.79 |   | $ | 0.42 |   | $ | 0.82 |   |   |   |
|                                                                                |   |                          |                      |                                  |       |       |       |   |   |   |   |   |   |
| Dividends declared per common share                                                 |   | $                             | 0.20                      |                                  | $          | 0.125      |       |   |   |   |   |   |   |   |   |
|                                                                                |   |                          |                      |                                  |       |       |       |   |   |   |   |   |   |
| **Selected Consolidated Operating Data  (unaudited):**                              |   |                          |                      |                                  |       |       |       |   |   |   |   |   |   |
| Total slots facility attendance (in  thousands)                                     |   | 2,476                         |                      | 2,615                                 |       | 2,512      |       | 1,212 |   | 2,343 |   | 1,933 |   |
| Avg. number of slot machines                                                        |   | 2,000                         |                      | 2,000                                 |       | 2,000      |       | 2,000 |   | 1,723 |   | 1,191 |   |
| Casino square footage                                                               |   | 80,000                        |                      | 80,000                                |       | 80,000     |       | 80,000 |   | 80,000 |   | 65,000 |   |

 
|                                                 |   | **December  31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------|--------|-------------------|------------|--------------|------------|
|                                                 |   | **2003**          |       | **2002**     | ** ** | **2001** | ** ** | **2000** | ** ** | **2000** | ** ** | **1999** | ** ** |
| **Consolidated Balance Sheet Data (in  thousands):** |   |              |       |         |       |   |   |   |   |   |   |   |   |
| Working capital (deficit)                            |   | $                 | 8,917      |         | $          | 7,117 |   | $ | (3,173 | ) | $ | 37,166 |   | $ | 31,486 |   | $ | 19,796 |   |
| Total assets                                         |   | 152,159           |       | 152,506      |       | 135,650 |   | 101,013 |   | 90,553 |   | 60,461 |   |
| Long-term debt                                       |   | 31,225            |       | 40,890       |       | — |   | — |   | — |   | — |   |
| Total stockholders’ equity (b)                  |   | 94,975            |       | 84,439       |       | 102,653 |   | 81,558 |   | 70,502 |   | 49,550 |   |
|                                                      |        |                   |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          Net earnings per commonshare information for periods prior to April1, 2002, the day after the effective date of the spin-off from DVD, wascalculated using the pro forma average outstanding common shares and Class Acommon shares for Gaming & Entertainment. The pro forma average outstandingcommon shares and Class A common shares were derived from DVD’s common sharesand Class A common shares outstanding for the periods presented using thedistribution ratio of 0.7 shares of Gaming & Entertainment common stock andClass A common stock for each share of DVD common stock and Class A common stock,respectively. Outstanding stock options of Gaming & Entertainment wascalculated assuming the stock options related to each individual who became aGaming & Entertainment employee or both a DVD and a Gaming &Entertainment employee subsequent to the spin-off were outstanding Gaming &Entertainment options during each period presented.

 

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(b)         On April 1, 2002 inconnection with our spin-off from DVD, Gaming & Entertainment paid down $45million of the amounts outstanding under DVD’s credit facility. This paymentwas recorded as a charge to stockholders’ equity.

### ** **

**Item 7.    Management’s Discussion And Analysis OfFinancial Condition And Results Of Operations**

 

The following discussion is based upon and should be read inconjunction with the consolidated financial statements and notes theretoincluded elsewhere in this Annual Report on Form 10-K.

 

Dover Downs Gaming & Entertainment, Inc. is a diversified gamingand entertainment company whose operations consist of Dover Downs Slots – whichwith its 2004 expansion estimated to be completed by March 31, 2004, will be a91,000 square foot video lottery (slots) casino complex; the Dover Downs Hoteland Conference Center – featuring luxury accommodations with conference,banquet, fine dining, ballroom and concert hall facilities; and Dover DownsRaceway – a harness racing track with pari-mutuel wagering on live andsimulcast horse races.

 

More than 80% of the Company’s gross revenue is derived from videolottery (slot) machine win (as defined below). Several factors contribute to the video lottery (slot) machine win forany gaming company, including, but not limited to:

 

**•**                  Proximityto major population bases,

•                  Competitionin the company’s market,

•                  Thequantity and types of machines available,

•                  Thequality of the physical property,

•                  Otheramenities offered on site,

•                  Customerservice levels, and

•                  Marketingprograms.

 

The Company believes that it is holds a strong position in each ofthese areas.  Our entertainment complexis located in Dover, the capital of the State of Delaware. We draw patrons fromseveral major metropolitan areas. Philadelphia, Baltimore and Washington, D.C.are all within a 2 hour drive. According to the 2000 United States Census,approximately 32.8 million people live within 150 miles of the complex.  There are significant barriers to entryrelated to the gaming business in Delaware, such as the statutory limitation ofgaming licenses to the three existing horse racing facilities.  The Company’s property, designed anddeveloped with the assistance of Caesars World Gaming Development Corporation(“Caesars”) is similar to properties found in the country’s largest gamingmarkets.  The Company offers the only luxuryhotel in the Delaware gaming market, providing a strong marketing tool,especially to higher end players.  TheCompany has, and is currently upgrading, its slot marketing system to allow forthe most efficient marketing programs and the highest levels of customerservice.

 

The biggest risks to the Company are increased competition insurrounding states from the legalization of new or additional casino or othergaming venues and the fact that all of our operations are located at onefacility.  The Company has thereforefocused on creating the region’s premier gaming destination and building andrewarding customer loyalty through innovative marketing efforts andunparalleled customer service.

 

14

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** **

**Results of Operations**

 

Gaming revenues represent the net win from video lottery (slot) machinewins and losses and commissions from pari-mutuel wagering.  Other operating revenues consist of hotelrooms revenue, food and beverage sales and other miscellaneous income.

 

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 the Company’s financialstatements as gaming revenue. The Delaware State Lottery Office sweeps the winfrom the video lottery operations, collects the State of Delaware’s (the“State’s”) share of the win and the amount due to the vendors under contractwith the State who provide the video lottery (slot) machines and associatedcomputer systems, collects the amount allocable to purses for harness horseracing and remits the remainder to the Company as its commission for acting asa Licensed Agent. Gaming expenses include the amounts collected by the State(i) for the State’s share of the win, (ii) for remittance to the providers ofthe video lottery (slot) machines and associated computer systems, and (iii)for harness horse racing purses. The Company recognizes revenues frompari-mutuel commissions earned from live harness horse racing and importing ofsimulcast signals from other race tracks when the race occurs. Revenues fromhotel rooms, food and beverage sales and other miscellaneous income arerecognized at the time the service is provided.

 

The retail value of hotel rooms, food, beverage and other items thatare provided to customers without charge has been included in gross revenuesand a corresponding amount has been deducted as promotional allowances. 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.

 

*Year Ended December31, 2003 vs. Year Ended December 31, 2002*

 

Gaming revenue decreased by $18,700,000, or9.7%, to $175,023,000, primarily the result of the enactment inNovember 2002 of the Delaware Clean Indoor Air Act (the “Act”) and to a lesserextent from severe weather in February 2003 and Hurricane Isabel in September2003.  From January 2002 throughNovember 2002, slot win grew each month at an average rate of 12.7%.  On November 27, 2002, the Delaware CleanIndoor Air Act became effective.  TheAct prohibits smoking inside the Company’scasino, hotel and conference center, restaurants, harness track indoorgrandstands and simulcasting facilities, provided that smoking is permitted inup to 25% of the rooms in the hotel. Prior to the effective date of the Act, we derived significant revenuesfrom designated smoking areas.  Duringthe first year of the smoking ban, the Company’s slot win declined approximately11.3% compared to the previous year.  InDecember 2003, slot win increased for the first time in 2003 versus the samemonth in 2002; by approximately 7%. Efforts to seek legislative relief from the law have beenunsuccessful.  If the smoking bancontinues in its current form, the Company’s revenues, earnings and cash flowscould continue to be negatively impacted compared with results prior to theAct.

 

In an effort to increase the revenues fromits three video lottery agents, the State passed legislation in June 2003 whichextended the operating hours for video lottery agents and permitted the LotteryDirector to authorize 500 additional video lottery (slot) machines at eachlicensed facility.  This sets 2,500 asthe maximum number of machines permitted per Licensed Agent.  The Company has completed its architecturaldesign work and has begun construction of 11,000 additional square feet ofgaming space to accommodate installation of the 500 newly authorized machineswithin its existing casino complex. Installation of all 500 additional machines is expected to be completeby March 31, 2004.

 

Other operating revenues increased by$6,393,000, or 24.5%, to $32,476,000, primarily due to higher occupancy levelsat the Dover Downs Hotel and Conference Center and the result of the hotelbeing open for all of 2003 compared with only a portion of 2002.  The hotel opened with approximately 100rooms on February 15, 2002 and added rooms during the next two months with theentire 232-room facility opened as of April 6, 2002.  Additionally, the Company received $1,300,000 in the fourthquarter of 2003 from its insurance carrier to settle a business interruptionclaim related to the opening of the Dover Downs Hotel and ConferenceCenter.  In the fourth quarter of 2002,the Company received a $250,000 payment related to this claim.

 

15

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Other operating revenues for 2003 and 2002included $18,667,000 and $13,331,000, respectively, related to promotionalitems provided to customers without charge. The increase in promotional allowances is primarily due to the Company’sexpanded marketing efforts to attract more casino customers to the hotel byproviding additional complimentary and discounted hotel rooms and the result ofthe Dover Downs Hotel and Conference Center being open for all of 2003 comparedwith only a portion of 2002.

 

Gaming expenses decreased by $10,394,000, or7.0%, reflecting the lower gaming revenues. Amounts retained bythe State of Delaware and the amount collected by the State of Delaware forpayment to the vendors under contract with the State who provide the videolottery (slot) machines and associated computer systems decreased by$7,291,000, or 10.9%, and $184,000, or 2.0%, respectively.  Amounts allocated from the video lotteryoperation for harness horse racing purses decreased from $22,307,000 in 2002 to$20,143,000 in 2003.  These decreaseswere offset by a $2,326,000 increase in the cost of advertising and promotionsin 2003. All other gaming expenses decreased $3,081,000 compared with 2002.

 

Other operating expenses decreased by$452,000, primarily the result of a larger interdepartmental allocation to thecasino operations for the estimated cost of providing the increased promotionalallowances.

 

Depreciation expense increased by $1,111,000primarily due to the Dover Downs Hotel and Conference Center being open for allof 2003 compared with only a portion of 2002 and information system upgrades inthe casino and administrative departments.

 

General and administrative expenses decreasedby $744,000 to $4,317,000 from $5,061,000 in 2002, primarily due to costcutting measures implemented to offset the effects of thedecrease in gaming revenues, including reducing headcount and other administrativecosts.

 

Interest expense was $842,000 in 2003, noneof which was capitalized.  The Companyincurred $1,254,000 of interest in 2002 of which $351,000 was capitalized.  The Company’s average interest ratedecreased from 2.95% during 2002 to 2.07% during 2003.

 

The Company’s effective income tax rate was40.7% for the years ended December 31, 2003 and 2002.

 

Net earnings were $17,237,000 in 2003compared to $21,442,000 in 2002. The decrease of $4,205,000, or 19.6%, was primarily due to lower gamingrevenues resulting from the enactment of the Delaware Clean Indoor Air Act andinclement weather and increased depreciation expense from the opening of theDover Downs Hotel and Conference Center in April 2002, offset by increases inother operating revenues and lower general and administrative expenses.

 

*Year Ended December31, 2002 vs. Year Ended December 31, 2001*

 

Gaming revenues increased by $18,658,000, or10.7%, to $193,723,000, primarily the result of increased play in thecasino.  The opening of the Dover DownsHotel and Conference Center and other expanded marketing and promotionalactivities were the major contributors to the increased slot machine play.  The new hotel facility allowsus to attract new patrons and lengthen the stay of current patrons.  From January 2002 through November 2002,slot win grew each month at an average rate of 12.7%.  On November 27, 2002, the Delaware Clean Indoor Air Act becameeffective and as a result gaming revenuesdeclined 13.1% in December 2002 compared to December 2001.

 

Other operating revenues increased by$13,533,000, or 107.8%, to $26,083,000, primarily the result of the opening ofthe Dover Downs Hotel and Conference Center in April 2002.

 

Other operating revenues for 2002 and 2001included $13,331,000 and $6,322,000, respectively, related to promotional itemsprovided to customers without charge. The increase in promotional allowances is primarily due to the openingof the Dover Downs Hotel and Conference Center in 2002.

 

 

 

16

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       Gaming expenses increased by $16,230,000, or 12.2%, reflectingthe higher gaming revenues. Amounts retained by the State of Delaware, and theamount collected by the State of Delaware for payment to the vendors undercontract with the State who provide the video lottery (slot) machines andassociated computer systems increased by $7,204,000 and $503,000,respectively.  Amounts allocated fromthe video lottery operation for harness horse racing purses were $22,307,000 in2002 compared with $20,232,000 in 2001. The other significant expense increaseswere wages and related employee benefits of $1,129,000 and the cost ofpromotional allowances of $4,521,000.

 

Other operating expenses increased by$5,146,000, primarily the result of operating expenses associated with theDover Downs Hotel and Conference Center.

 

Depreciation expense increased by $2,965,000primarily due to the opening of the Dover Downs Hotel and Conference Center in2002.

 

General and administrative expenses increasedby $385,000 to $5,061,000 from $4,676,000 in 2001, primarily due to increasedwage and benefit costs.

 

Net interest expense decreased by $117,000primarily as a result of the Company’s average interest rate decreasing from5.73% during 2001 to 2.95% during 2002. The Company capitalized $351,000 of interest related to the constructionof major facilities in 2002 compared with $1,580,000 in 2001.  Capitalization of interest on the DoverDowns Hotel and Conference Center ceased when the facility fully opened in April2002.

 

The Company’s effective income tax rate was40.7% for the years ended December 31, 2002 and 2001.

 

Net earnings were $21,442,000 in 2002 as compared to $21,095,000 in2001. The increase of $347,000, or 1.6%, was primarily due to increased play inthe casino and hotel revenues from the opening of the Dover Downs Hotel andConference Center, offset by related gaming and hotel costs and increaseddepreciation expense.

 

**Liquidity and CapitalResources**

 

Net cash provided by operating activities was $24,178,000 for the yearended December 31, 2003 compared to $23,832,000 for the year ended December 31,2002.  The increase in 2003 as comparedto 2002 was primarily due to the timing of cash receipts from the DelawareState Lottery Office related to our commission and the timing of income taxpayments and payments to vendors, partially offset by the decrease in earningsafter income taxes but before depreciation and amortization from $26,678,000 in2002 to $23,555,000 in 2003.  There wereno other material changes in items affecting operating cash flows.

 

Net cash used in investing activities was $6,383,000 for the year endedDecember 31, 2003 compared to $20,652,000 for the year ended December 31,2002.  The decrease in 2003 as comparedwith 2002 was primarily due to the completion of construction of the DoverDowns Hotel and Conference Center in April 2002.

 

Net cash used in financing activities was $16,493,000 for the yearended December 31, 2003 compared to $5,777,000 for the year ended December 31,2002.  The change was primarily due tothe repayment of outstanding borrowings under our credit facility and therepurchase of 169,945 shares of the Company’s outstanding common stock during2003.  Additionally, the Company paid$5,305,000 in regular quarterly cash dividends during 2003 compared with$3,333,000 during 2002.  Since thespin-off was effective March 31, 2002, the Company paid dividends for threequarters of 2002 as compared to four quarters of 2003 and the Company increasedits quarterly dividend payments from $0.0375 per share to $0.05 per sharebeginning in the fourth quarter of 2002.

 

On January 28, 2004, the Board of Directors of the Company declared aquarterly cash dividend on both classes of common stock of $.05 per share.  The dividend is payable on March 10, 2004 tostockholders of record at the close of business on February 10, 2004.

 

17

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On October 23, 2002, the Board of Directors authorized the repurchaseof up to 2,000,000 shares of the Company’s outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization does notobligate the Company to acquire any specific number of shares and may be suspendedat any time.  Through the date of filingthis Annual Report on Form 10-K, the Company purchased and retired 169,945shares of its outstanding common stock at an average price of $8.96 per share.

 

Based on current business conditions, theCompany expects to make capital expenditures of approximately $10,000,000during 2004.  These expendituresprimarily relate to construction and renovations to allow for the addition of500 slot machines at our video lottery casino, additional amenities at our luxuryhotel and site improvements, such as parking and signage, as well as thepurchase of a new customer management and slot data system.  Additionally, the Company expects tocontribute approximately $1,100,000 to its pension plans in 2004.

 

At December 31, 2003, we had a $45,000,000unsecured revolving line of credit.  Thecredit facility was amended on February 19, 2004 to reduce it to $40,000,000and extend its term to April 30, 2006. At December 31, 2003, $31,225,000 was outstanding under the facility.  Based on current business trends, we believethat our cash flows from operations and the funds available pursuant to ourrevolving credit facility, and extensions of such, will be sufficient to meetour short and long-term cash needs.  Anysignificant expansion of our gaming facility that we may decide to undertake,any significant acquisitions, or any material adverse change in our operationscould cause the need for additional financing. The Company expects that its net cash flows from operating activitiesand funds available from its credit facility will be sufficient to provide forits working capital needs and capital spending requirements at least through2004, as well as any cash dividends the Company’s Board of Directors maydeclare.  We expect cash flows fromoperating activities and funds available from our credit facility, and itsextensions, to also provide for long-term liquidity.

 

The introduction or expansion of gaming in nearby states would have amaterial adverse effect on our cash flows and results of operations.  However, the Company believes that even ifsome form of new or expanded gaming is approved by surrounding states, thelikelihood of any facility opening or significantly expanding in 2004 isremote.

 

#### **Recent Legislative andRegulatory Developments**

 

In an effort to increase the revenues fromits three video lottery agents, the State passed legislation in June 2003 whichextended the operating hours for video lottery agents and permitted the Directorof the Delaware State Lottery Office (the “LotteryDirector”) to authorize 500 additional video lottery (slot) machines at eachlicensed facility.  This sets 2,500 asthe maximum number of machines permitted per Licensed Agent.  The Company has completed its architecturaldesign work and has begun construction of 11,000 additional square feet ofgaming space to accommodate installation of the 500 newly authorized machineswithin its existing casino complex. Installation of all 500 additional machines is expected to be completeby March 31, 2004.  The new legislationalso authorizes the use of separate video lottery (slot) machines forpromotional tournaments, provides for the introduction of popular franchisegames with the State assuming one-half of the incremental expenses and allowsthe Lottery Director to enter into agreements with other state or internationallotteries for linked participation in progressive lottery games.  The new law also revised the video lotterydistribution formula to increase the State’s share of the video lotteryproceeds by assessing a 1.25% surcharge on commissions received by videolottery agents.  In addition, recentregulatory changes allow video lottery agents to extend credit to gamingcustomers and effectively removed the $100 betting limit per machine.

 

On May 30, 2003, a committee created by theDelaware House of Representatives (the “Committee”) issued a favorableassessment as to the merits of conducting sports wagering in the State throughits video lottery agents.  The Committeeconcluded that sports gaming is feasible in the State, outlined proposedstructures for its implementation and provided various financialprojections.  The report has beenprovided to the Delaware General Assembly for consideration.  By Federal law, Delaware is the only state eastof Montana where sports betting is legally permitted, though enablinglegislation would need to be passed by the Delaware General Assembly.

 

18

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#### **Contractual Obligations**

 

At December 31, 2003, the Company had the following contractualobligations (as adjusted to reflect the amendment of our credit facility inFebruary 2004):

 
|                   |   |      |       | **Payments  Due by Period** |   |
|------------------------|--------|-----------|------------|-----------------------------|--------|
|                   |   | **Total** |       | **2004**                    |   | **2005 –  2006** |   | **2007 –  2008** |   | **Thereafter** |   |
| Notes payable to banks |   | $         | 31,225,000 |                        | $      | — |   | $ | 31,225,000 |   | $ | — |   | $ | — |   |
| Purchase obligations   |   | 6,237,000 |       | 5,341,000                   |   | 896,000 |   | — |   | — |   |
|                   |   | $         | 37,462,000 |                        | $      | 5,341,000 |   | $ | 32,121,000 |   | $ | — |   | $ | — |   |

 

At December 31, 2003, we had a $45,000,000unsecured revolving line of credit.  Thecredit facility was amended on February 19, 2004 to reduce it to $40,000,000and extend its term to April 30, 2006. At December 31, 2003, $31,225,000 was outstanding under the facility.

 

Purchase obligations at December 31, 2003 include contracts related tothe installation of 500 additional videolottery (slot) machines and a state-of-the-art customer management andslot data system.  Both of theseprojects are expected to be complete byMarch 31, 2004, though payments related to the customer management and slotdata system extend into 2005.

 

In May 1995, Dover Downs, Inc., a subsidiary of the Company, enteredinto a long-term management agreement with Caesars.  Caesars acts as our agent to manage our video lottery casino andis paid a management fee based on the operating results of the casino. Caesarshas been properly licensed by the Delaware State Lottery Office to performthese functions. The Company does not expect to renew the agreement when itexpires in December 2004 as we no longer rely on any Caesars’ employees or systems.** **Amounts owed to Caesars under theagreement at December 31, 2003 for services provided through that date totaled$653,000 and are included in accrued liabilities.

 

#### **Related PartyTransactions**

 

During the years ended December 31, 2003,2002 and 2001, Gaming & Entertainment allocated corporate costs of$1,969,000, $495,000 and $2,307,000, respectively, to DVD for certainadministrative and operations services, including DVD’s use of officespace.  The allocation was based on bothan allocation to the business that directly incurred the costs and an analysisof each company’s share of the costs. In connection with DVD’s 2003 NASCAR event weekends, Gaming &Entertainment provided certain catering services for which DVD was invoiced$443,000.  DVD invoiced Gaming &Entertainment $206,000 for tickets purchased to the 2003 events and other eventrelated items. As of December 31, 2003 and 2002, Gaming & Entertainment’sconsolidated balance sheet includes a $96,000 payable to and a $793,000receivable from DVD, respectively, for the aforementioned costs and for otherpayments made by the Company on DVD’s behalf. The Company settled the $96,000 liability in the first quarter of2004.  The net costs incurred by eachcompany for these services are not necessarily indicative of the costs thatwould have been incurred if the companies had been separate, independententities and/or had otherwise independently managed these functions; however,management believes that these costs are reasonable.

 

For the year ended December 31, 2003, DVDreported a net operating loss for federal income tax purposes.  The loss was carried back to 2001, a periodprior to the spin-off, which generated an alternative minimum tax creditcarryforward, a portion of which is required to be paid to DVD under the TaxSharing Agreement (see below); therefore, during the fourth quarter of 2003Gaming & Entertainment recorded a $330,000 payable to DVD for the Company’sportion of the carryforward.  Gaming &Entertainment anticipates paying the amount in the first quarter of 2004.

 

During the third quarter of 2002, pursuant to the Tax SharingAgreement, the Company paid DVD $2.7 million for its portion of DVD’sconsolidated federal income tax liability for 2002.  Since the spin-off of the Company from DVD was effective on March31, 2002, DVD’s 2002 federal income tax return included the operations of theCompany for the first quarter of the year.

 

19

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The Company’s use of DVD’s5/8-mile harness racing track is under an easement granted to the Company byDVD which does not require the payment of any rent. Under the terms of theeasement the Company has exclusive use of the harness track during the periodbeginning November 1 of each year and ending April 30 of the following year,together with set up and tear down rights for the two weeks before and aftersuch period.  The harness track islocated on property owned by DVD and is on the inside of DVD’s motorsportssuperspeedway.  The Company’s indoorgrandstands are used by DVD at no charge in connection with its motorsportsevents. DVD also leases its principal executive office space from theCompany.  Various easements andagreements relative to access, utilities and parking have also been enteredinto between DVD and the Company relative to their respective Dover, Delawarefacilities.

 

In conjunction with the Company’s spin-offfrom DVD, the two companies entered into various agreements that addressed theallocation of assets and liabilities between the companies and that define thecompanies’ relationship after the separation. These are the Agreement Regarding Distribution and Plan ofReorganization, the Real Property Agreement, the Employee Benefits Agreement,the Transition Support Services Agreement and the Tax SharingAgreement.  The companies have severalcommon directors and officers.  Refer toNOTE 1—Dover Motorsports, Inc. Spin-off Of Its Gaming Business of theConsolidated Financial Statements included elsewhere in this Form 10-K forfurther discussion.

 

#### **Critical AccountingPolicies**

 

The accounting policies described below are those the Company considerscritical in preparing its consolidated financial statements and/or includesignificant estimates made by management using information available at thetime the estimates are made. However, as described below, these estimates couldchange materially if different information or assumptions were used. Thedescriptions below are summarized and have been simplified for clarity.

 

*Points Program*

 

The Company currently has a point loyalty program for its video lotterycustomers which allows them to earn points based on the volume of their videolottery activity.  The points are issuedon the basis that they expire after one year if the customer has no video lotteryplay during that time period.  TheCompany records the points as an expense when they are redeemed by thecustomers.  The points can be redeemedfor various services and merchandise throughout the gaming facility; however,they are not redeemable for cash or casino play.

 

*Accrued Pension Cost*

 

The benefits provided by the Company’s defined-benefit pension plansare based on years of service and employee’s remuneration over their employmentwith the Company.  The Companyestablishes accrued pension costs in accordance with the provisions ofFinancial Accounting Standards Board Statement No. 87, *Employers’ Accounting for Pensions.*Accrued pension costs are developed using actuarial principles and assumptionswhich consider a number of factors, including estimates for the discount rate,assumed rate of compensation increase, and expected long-term rate of return onassets.  Changes in these estimateswould impact the amounts that the Company records in its consolidated financialstatements.

 

*Property and 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. These estimates require assumptions that are believed to be reasonable.Long-lived assets are evaluated for impairment annually and when an eventoccurs that indicates an impairment may exist.

 

**Recent AccountingPronouncements**

 

See NOTE 3—Summary of Significant Accounting Policies****ofthe Consolidated Financial Statements included elsewhere in this Annual Reporton Form 10-K for a full description of recent accounting pronouncementsincluding the respective expected dates of adoption and effects on results ofoperations and financial condition.

 

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### **Factors That 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 of theSecurities Exchange Act of 1934, as amended, relating to our financialcondition, profitability, liquidity, resources, business outlook, proposedacquisitions, market forces, corporate strategies, consumer preferences,contractual commitments, legal matters, capital requirements and other matters.The Private Securities 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 orexpressions are used in this document, as well as statements containing phrasessuch as “in our view,” “there can be no assurance,” “although no assurance canbe given,” or “there is no way to anticipate with certainty,” forward-lookingstatements are being made.

 

Various risks and uncertainties may affect the operation, performance,development and results of our business and could cause future outcomes todiffer materially from those set forth in our forward-looking statements,including the following factors:

 

•                  successof or changes in our growth strategies;

 

•                  ourdevelopment and potential acquisition of new facilities;

 

•                  anticipatedtrends in the gaming industry;

 

•                  patrondemographics;

 

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

 

•                  ourability to finance future business requirements;

 

•                  ourability to effectively compete in the marketplace;

 

•                  theavailability of adequate levels of insurance;

 

•                  ourability to successfully integrate acquired companies and businesses;

 

•      management retention and development;

 

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

 

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

 

•                  militaryor other government actions; and

 

•      national or local catastrophic events.

 

We undertake no obligation topublicly update 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 any forward-lookingstatements. 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.

 

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*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 legalization of new or additional casino or other gamingvenues in jurisdictions close to Delaware, particularly Maryland, Virginia,Washington, D.C., Pennsylvania or New Jersey, could negatively impact ourgaming business. From time to time legislation is proposed for adoption inthese jurisdictions, as it has been for several years in Maryland andPennsylvania, which if enacted, would further expand state gambling andwagering opportunities, including video lottery (slot) machines at racetracks.Enactment of such legislation could increase our competition and couldadversely affect our business, financial condition and overall profitability.Approximately 70% of our customers come from Maryland, Pennsylvania, Virginiaand the District of Columbia.

 

*All Of OurFacilities Are In One Location*

 

Our facilities are located adjacent to oneanother at a single location in Dover, Delaware. Any prolonged disruption ofoperations at these facilities due to destruction of or material damage to thefacilities or other reasons could adversely affect our financial condition andresults of operations. We maintain property and business interruption insuranceto protect against such types of disruption, but there can be no assurance thatthe proceeds of such insurance would be adequate to repair or rebuild ourfacilities in such event or to compensate us for lost profit during the periodof any such disruption.

 

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

 

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

 

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

 

Video lottery (slot) machine gaming, harnesshorse racing and pari-mutuel wagering are subject to extensive governmentregulation. Delaware law regulates the win we are entitled to retain and thepercentage of commission we are entitled to receive from our gaming revenues,which comprises a significant portion of our overall revenues. The Stategranted us a license to conduct video lottery (slot) machine operations and alicense to conduct harness horse races and pari-mutuel wagering. The laws underwhich these licenses are granted could be modified or repealed at any time andwe could be required to terminate our gaming operations. If we are required toterminate our gaming operations or if the amount of the commission we receivefrom the State for conducting our gaming operations is decreased, our businessoperations and overall profitability would be significantly impaired.

 

We believe that the prospect of significantadditional tax revenue is one of the primary reasons why jurisdictions havelegalized gaming. As a result, gaming operators are typically subject tosignificant taxes and fees in addition to normal federal and state corporateincome taxes. These taxes and fees are subject to increase at any time. We paysubstantial taxes and fees with respect to our operations and will likely incursimilar burdens in any other jurisdiction in which we may conduct gamingoperations in the future. Any material increase in taxes or fees, or theadoption of additional taxes or fees, may have a material adverse effect on ourfuture financial results.

 

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*The State ofDelaware’s Public Smoking Ban Continues To Negatively Impact Our Revenues AndEarnings*

 

The State has enacted a ban onsmoking in all indoor public facilities with certain minor exceptions such asfire halls and fraternal organization premises where fundraising takesplace.  The ban became effectiveNovember 27, 2002.  The law prohibitssmoking inside the Company’s casino, hotel and conference center, restaurants,harness track indoor grandstands and simulcasting facilities, provided thatsmoking is permitted in up to 25% of the rooms in the hotel.  Efforts to seek legislative relief from thelaw have been unsuccessful.  If thesmoking ban continues in its current form, the Company’s revenues, earnings andcash flows could continue to be negatively impacted compared with results priorto the ban.

 

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

 

We do not own or lease the video lottery(slot) machines or central computer systems used in connection with our videolottery gaming operations. The Lottery Director enters into contracts directlywith the providers of the video lottery (slot) machines and computer systems.The State purchases or leases all equipment and the Lottery Director licensesall technology providers. Our operations could be disrupted if a licensedtechnology provider violates its agreement with the State or ceases to belicensed for any reason. Such an event would be outside of our control andcould adversely affect our gaming revenues.

 

**Item 7A.    Quantitative And Qualitative DisclosureAbout Market Risk**

 

The Company does not utilizefinancial instruments for trading purposes and holds no derivative financialinstruments which could expose it to market risk. Our exposure to market risksrelated to fluctuations in interest rates is limited to our variable rateborrowings of $31,225,000 at December 31, 2003 under our revolving creditfacility.  A change in interest rates ofone percent on the balance outstanding at December 31, 2003 would cause achange in total annual interest costs of $312,000. The carrying values of theseborrowings approximate their fair values at December 31, 2003.

 

**Item 8.    Financial Statements And SupplementaryData**

 

Gaming & Entertainment’s consolidatedfinancial statements and the Independent Auditors’ Report included in thisreport are shown on the Index to Consolidated Financial Statements on page 30.

 

**Item9.    ChangesIn And Disagreements With Accountants On Accounting And Financial Disclosure**

 

None.

 

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**Item 9A. Controls andProcedures**

 

(a)          Disclosure Controls andProcedures.

 

As required by Rule 13a-15 under theSecurities Exchange Act of 1934, as amended, (the “Exchange Act”), the Companycarried out an evaluation under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this report. Based upon their evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures are effective to ensure that material informationrelating to the Company required to be disclosed by us in reports we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms. In designing and evaluating the disclosure controls and procedures,the Company’s management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurances ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in designing and evaluating the controls andprocedures. The Company currently is in the process of further reviewing anddocumenting its disclosure controls and procedures, and its internal controlover financial reporting, and may from time to time make changes aimed atenhancing their effectiveness and to ensure that our systems evolve with ourbusiness.

 

(b)         Changes in InternalControl Over Financial Reporting.

 

There were no changes in our internal control over financial reportingduring the fourth quarter of fiscal year 2003 that have materially affected, orthat are reasonably likely to materially affect our internal controls overfinancial reporting.

 

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**Part III**

 

**Item10.         DirectorsAnd Executive Officers Of The Registrant**

 

Except as presented below, biographical information relating to theCompany’s directors and executive officers, information regarding the Company’saudit committee financial experts and information on Section 16(a) BeneficialOwnership Reporting Compliance called for by this Item 10 are incorporated byreference to the Gaming & Entertainment Proxy Statement to be filedpursuant to Regulation 14A for the Annual Meeting of Stockholders to be held onApril 28, 2004.

 

The Company has adopted a Code of Ethics applicable to the ChiefExecutive Officer, Chief Financial Officer, Controller and other employeesperforming similar functions as designated by the Company’s Chief ExecutiveOfficer.  A copy of the Code of Ethicsis available on the Company’s website at http://www.doverdowns.com. The Companywill post on its website any amendments to, or waivers from, its Code of Ethicsas required by law.

 

Executive Officers of the Registrant.  As of December 31, 2003, the executiveofficers of the registrant were:

 
| **Name**            |   | **Position**                                                       |   | **Age** |   | **Term of  Office** |
|---------------------|--------|--------------------------------------------------------------------|--------|---------|--------|---------------------|
|                |   |                                                               |   |    |   |                |
| Denis McGlynn       |   | President and  Chief Executive Officer                             |   | 58      |   | 11/79 to date       |
|                |   |                                                               |   |    |   |                |
| Edward J. Sutor     |   | Executive Vice President  and Chief Operating Officer              |   | 54      |   | 3/99 to date        |
|                |   |                                                               |   |    |   |                |
| Timothy R. Horne    |   | Sr. Vice President-Finance, Treasurer  and Chief Financial Officer |   | 37      |   | 11/96 to date       |
|                |   |                                                               |   |    |   |                |
| Klaus M. Belohoubek |   | Sr. Vice President-General Counsel  and Secretary                  |   | 44      |   | 7/99 to date        |

 

Our Chairman of the Board, Henry B. Tippie, is a non-employee directorand, therefore, not an executive officer of the Company.  Mr. Tippie also serves as Chairman of theBoard to DVD as a non-employee director and has served DVD in that capacity, oras Vice Chairman of the Board, for over 5 years.

 

Denis McGlynn also serves as President and Chief Executive Officer toDVD, a position he has held for 23 years.

 

Edward J. Sutor previously served as Executive Vice President to DVD, aposition he held from 1999 to 2002. From 1983 until 1999, Mr. Sutor served as Senior Vice President ofFinance at Caesars Atlantic City.

 

Timothy R. Horne previously served as Vice President-Finance and ChiefFinancial Officer to DVD, a position he held for over 5 years.

 

Klaus M. Belohoubek also serves as Sr. Vice President-General Counseland Secretary to DVD.  He has held thatposition since 1999 and has represented DVD in various legal capacities since1990.  Mr. Belohoubek also has served asVice President-General Counsel and Secretary to Rollins Truck Leasing Corp.

 

**Item11.         ExecutiveCompensation**

 

The information called for by this Item 11 isincorporated by reference to the Gaming & Entertainment Proxy Statement tobe filed pursuant to Regulation 14A for the Annual Meeting of Stockholders tobe held on April 28, 2004.

 

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**Item12.         SecurityOwnership Of Certain Beneficial Owners And Management And Related StockholderMatters**

 

The information called for by this Item 12 isincorporated by reference to the Gaming & Entertainment Proxy Statement tobe filed pursuant to Regulation 14A for the Annual Meeting of Stockholders tobe held on April 28, 2004.

 

**Item13.         CertainRelationships And Related Transactions**

 

The information called for by this Item 13 isincorporated by reference to the Gaming & Entertainment Proxy Statement tobe filed pursuant to Regulation 14A for the Annual Meeting of Stockholders tobe held on April 28, 2004.

 

**Item14.   Principal Accountant Fees And Services**

 

The information called for by this Item 14 isincorporated by reference to the Gaming & Entertainment Proxy Statement tobe filed pursuant to Regulation 14A for the Annual Meeting of Stockholders tobe held on April 28, 2004.

 

**Item15.         Exhibits,Financial Statement Schedules And Reports On Form 8-K**

 
| (a)(1) |   | Financial Statements – See  accompanying Index to Consolidated Financial Statements on page 30. |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                 |
|   | (2)    |                                                                                                 | Financial Statement Schedules – None. |
|   |   |                                                                                                 |   |
|   | (3)    |                                                                                                 | Exhibits: |
|   |   |                                                                                                 |   |
|   | 2.1    |                                                                                                 | Amended and Restated Agreement Regarding  Distribution and Plan of Reorganization, dated as of February 15, 2002, by  and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.)  and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by  reference to Exhibit 2.1 to the Form 10 filed on February 26, 2002, which was  declared effective on March 7, 2002). |
|   |   |                                                                                                 |   |
|   | 3.1    |                                                                                                 | Certificate of Incorporation of Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit 3.1 to the  Form 10 filed on November 21, 2001, which was declared effective on March 7,  2002). |
|   |   |                                                                                                 |   |
|   | 3.2    |                                                                                                 | Amended and Restated By-laws of Dover Downs Gaming &  Entertainment, Inc. dated March 1, 2002 (incorporated herein by reference to  Exhibit 3.2 to the Form 10 filed on March 7, 2002). |
|   |   |                                                                                                 |   |
|   | 4.1    |                                                                                                 | Form of Common Stock Certificate of Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit 4.1 to the  Form 10 filed on November 21, 2001, which was declared effective on March 7,  2002). |
|   |   |                                                                                                 |   |
|   | 4.2    |                                                                                                 | Rights Agreement dated as of January 2, 2002 between Dover Downs  Gaming & Entertainment, Inc. and Mellon Investor Services, as Rights  Agent (incorporated herein by reference to Exhibit 4.2 to the Form 10 filed  on January 16, 2002, which was declared effective on March 7, 2002). |
|   |   |                                                                                                 |   |
|   | 10.1   |                                                                                                 | Dover Downs Gaming & Entertainment, Inc. 2002 Employee Stock  Option Plan (incorporated herein by reference to Exhibit 10.1 to the Form 10  filed on January 16, 2002, which was declared effective on March 7, 2002). |

 

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| 10.2   |   | Employee Benefits Agreement, dated as of January 15, 2002, by and  between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and  Dover Downs Gaming & Entertainment, Inc. (incorporated herein by  reference to Exhibit 10.2 to the Form 10 filed on January 16, 2002, which was  declared effective on March 7, 2002).            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.3   |   | Transition Support Services Agreement, dated as of January 15, 2002,  by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment,  Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein  by reference to Exhibit 10.3 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).  |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.4   |   | Tax Sharing Agreement, dated as of January 15, 2002, by and between  Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover  Downs Gaming & Entertainment, Inc. (incorporated herein by reference to  Exhibit 10.4 to the Form 10 filed on January 16, 2002, which was declared  effective on March 7, 2002).                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Real Property Agreement dated as of January 15, 2002, by and between  Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover  Downs Gaming & Entertainment, Inc. (incorporated herein by reference to  Exhibit 10.5 to the Form 10 filed on January 16, 2002, which was declared  effective on March 7, 2002).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.6   |   | Project Consulting and Management Agreement between Dover Downs, Inc.  and Caesars World Gaming Development Corporation dated May 10, 1995  (incorporated herein by reference to the Registration Statement of Dover  Downs Entertainment, Inc., Number 333-8147, on Form S-1 dated July 15, 1996,  which was declared effective on October 3, 1996). |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | First Amendment to Project Consulting and Management Agreement  between Dover Downs, Inc. and Caesars World Gaming Development Corporation  dated October 25, 1996 (incorporated herein by reference to the Form 10-K of  Dover Downs Entertainment, Inc. (Commission file number 1-11929) dated  February 27, 2001).                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Second Amendment to Project Consulting and Management Agreement  between Dover Downs, Inc. and Caesars World Gaming Development Corporation  dated December 2, 2000 (incorporated herein by reference to the Form 10-K of  Dover Downs Entertainment, Inc. (Commission file number 1-11929) dated February  27, 2001).                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Agreement between Dover Downs, Inc. and Delaware Standardbred Owners  Association, Inc. dated October 22, 2003.                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | 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).                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | 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).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.12  |   | Amended and Restated Guaranty  and Suretyship Agreement by and between Dover Downs, Inc. and Wilmington  Trust Company, as agent, dated as of March 25, 2002 (incorporated  herein by reference to Exhibit 10.7 to the Form 10-Q filed on May 10, 2002).                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.13  |   | 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).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.14  |   | 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.                                                                                                                                                                 |

 

27

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| 21     |   | List of Subsidiaries of Dover Downs Gaming & Entertainment, Inc.                                                                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Sec.  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Sec.  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                            |
| 99.1   |   | Information Statement dated as of March 7, 2002 (incorporated herein  by reference to Exhibit 99.1 to the Form 10 filed on March 7, 2002).                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                            |
| 99.2   |   | Audit Committee Charter of Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to the Company’s Proxy  Statement to be filed pursuant to Regulation 14A for the Annual Meeting of  Stockholders to be held on April 28, 2004). |
|   |   |                                                                                                                                                                                                                                                            |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                                                             |

 

The Company furnished a Form 8-K on October 30, 2003 announcing that ithad issued a press release on the same date regarding its third quarter financialresults.

 

28

----

 

**Signatures**

 

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

 
| DATED: | March 9, 2004 |   |   |   |   |   |   |       | Dover Downs Gaming & Entertainment,  Inc.                      |   |
|--------|---------------|--------|--------|--------|--------|--------|--------|------------|--------------------------------------------------------------------|--------|
|   |          |   |   |   |   |   |   | Registrant |                                                               |
|   |          |   |   |   |   |   |   |       |                                                               |
|   |          |   |   |   |   |   |   | BY:        | /s/ Denis McGlynn                                                  |   |   |
|   |          |   |   |   |   |   |   |       | Denis McGlynn  President and Chief Executive Officer  and Director |   |
|        |               |        |        |        |        |        |        |            |                                                                    |        |  |  |  |

 

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated:

 
| /s/ Timothy R. Horne     |   | Sr. Vice President-Finance,           | March 9, 2004 |
|--------------------------|--------|---------------------------------------|---------------|
| Timothy R. Horne         |   | Treasurer and Chief Financial Officer |          |
|                     |   |                                  |          |
| /s/ Henry B. Tippie      |   | Chairman of the Board                 | March 9, 2004 |
| Henry B. Tippie          |   |                                  |          |
|                     |   |                                  |          |
| /s/ Kenneth K. Chalmers  |   | Director and Chairman                 | March 9, 2004 |
| Kenneth K. Chalmers      |   | of the Audit Committee                |          |
|                     |   |                                  |          |
| /s/ R. Randall Rollins   |   | Director                              | March 9, 2004 |
| R. Randall Rollins       |   |                                  |          |
|                     |   |                                  |          |
| /s/ Patrick J. Bagley    |   | Director                              | March 9, 2004 |
| Patrick J. Bagley        |   |                                  |          |
|                     |   |                                  |          |
| /s/ John W. Rollins, Jr. |   | Director                              | March 9, 2004 |
| John W. Rollins, Jr.     |   |                                  |          |
|                     |   |                                  |          |
| /s/ Melvin L. Joseph     |   | Director                              | March 9, 2004 |
| Melvin L. Joseph         |   |                                  |          |
|                     |   |                                  |          |
| /s/ Jeffrey W. Rollins   |   | Director                              | March 9, 2004 |
| Jeffrey W. Rollins       |   |                                  |          |

 

29

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| **INDEX TO  CONSOLIDATED FINANCIAL STATEMENTS**                                                                      | **Page** |
|----------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                 |     |
| Independent Auditors’ Report                                                                                    | 31       |
|                                                                                                                 |     |
| Consolidated Statement of Earnings and  Comprehensive Earnings for the years ended December 31, 2003,  2002 and 2001 | 32       |
|                                                                                                                 |     |
| Consolidated Balance Sheet at December 31, 2003 and 2002                                                             | 33       |
|                                                                                                                 |     |
| Consolidated Statement of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                           | 34       |
|                                                                                                                 |     |
| Notes to the Consolidated Financial  Statements                                                                      | 35       |

 

30

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**INDEPENDENT AUDITORS’REPORT**

 

The Stockholders and Board of Directors,Dover Downs Gaming & Entertainment, Inc.:

 

We have audited the accompanying consolidated balance sheet of DoverDowns Gaming & Entertainment, Inc. and subsidiaries (the Company) as ofDecember 31, 2003 and 2002, and the related consolidated statements of earningsand comprehensive earnings and cash flows for each of the years in thethree-year period ended December 31, 2003. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable 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, 2003 and2002, and the results of their operations and their cash flows for each of theyears in the three-year period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States of America.

 

 
|                                                                                                            | KPMG LLP |
|-----------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                            |     |
| Philadelphia, Pennsylvania  January 28, 2004, except  as to Note 6, which is  as of February 19, 2004 |     |

 

31

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

 

### **CONSOLIDATEDSTATEMENT OF EARNINGSAND COMPREHENSIVE EARNINGS**

** **
|                                    |   | **Years ended  December 31,** |        |
|-----------------------------------------|--------|-------------------------------|-------------|
|                                    |   | **2003**                      |        | **2002** |   | **2001** |   |
| Revenues:                               |   |                          |        |   |   |   |   |
| Gaming                                  |   | $                             | 175,023,000 |   | $ | 193,723,000 |   | $ | 175,065,000 |   |
| Other operating                         |   | 32,476,000                    |        | 26,083,000 |   | 12,550,000 |   |
| Gross revenues                          |   | 207,499,000                   |        | 219,806,000 |   | 187,615,000 |   |
| Less – promotional allowances      |   | 18,667,000                    |        | 13,331,000 |   | 6,322,000 |   |
|                                    |   | 188,832,000                   |        | 206,475,000 |   | 181,293,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Expenses:                               |   |                          |        |   |   |   |   |
| Gaming                                  |   | 138,423,000                   |        | 148,817,000 |   | 132,587,000 |   |
| Other operating                         |   | 9,899,000                     |        | 10,351,000 |   | 5,205,000 |   |
| Depreciation                            |   | 6,287,000                     |        | 5,176,000 |   | 2,211,000 |   |
| General and administrative              |   | 4,317,000                     |        | 5,061,000 |   | 4,676,000 |   |
|                                    |   | 158,926,000                   |        | 169,405,000 |   | 144,679,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Operating earnings                      |   | 29,906,000                    |        | 37,070,000 |   | 36,614,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Interest income                         |   | —                        |        | — |   | 45,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Interest expense                        |   | (842,000                      | )           | (903,000 | ) | (1,065,000 | ) |
|                                    |   |                          |        |   |   |   |   |
| Earnings before income taxes            |   | 29,064,000                    |        | 36,167,000 |   | 35,594,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Income taxes                            |   | 11,827,000                    |        | 14,725,000 |   | 14,499,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Net earnings                            |   | 17,237,000                    |        | 21,442,000 |   | 21,095,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Change in minimum pension liability     |   | 127,000                       |        | (127,000 | ) | — |   |
|                                    |   |                          |        |   |   |   |   |
| Comprehensive earnings                  |   | $                             | 17,364,000  |   | $ | 21,315,000 |   | $ | 21,095,000 |   |
|                                    |   |                          |        |   |   |   |   |
| Net earnings per common share (Note 3): |   |                          |        |   |   | (unaudited | ) |
| Basic                                   |   | $                             | 0.65        |   | $ | 0.80 |   | $ | 0.79 |   |
| Diluted                                 |   | $                             | 0.65        |   | $ | 0.80 |   | $ | 0.79 |   |

 

The Notes to the Consolidated FinancialStatements are an integral part of these consolidated statements.

 

32

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

 

**CONSOLIDATED BALANCE SHEET**

** **
|                                                                                                                                       |   | **December  31,** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                                       |   | **2003**          |        | **2002** |   |
| **ASSETS**                                                                                                                                 |   |              | ** **  |   | ** ** |
| Current assets:                                                                                                                            |   |              |        |   |   |
| Cash and cash equivalents                                                                                                                  |   | $                 | 14,138,000  |   | $ | 12,836,000 |   |
| Accounts receivable                                                                                                                        |   | 1,914,000         |        | 2,991,000 |   |
| Due from State of Delaware                                                                                                                 |   | 8,670,000         |        | 9,624,000 |   |
| Inventories                                                                                                                                |   | 1,801,000         |        | 1,154,000 |   |
| Prepaid expenses and other                                                                                                                 |   | 2,414,000         |        | 1,462,000 |   |
| Receivable from Dover Motorsports, Inc.                                                                                                    |   | —            |        | 793,000 |   |
| Income taxes receivable                                                                                                                    |   | —            |        | 859,000 |   |
| Deferred income taxes                                                                                                                      |   | 878,000           |        | 539,000 |   |
| Total current assets                                                                                                                       |   | 29,815,000        |        | 30,258,000 |   |
|                                                                                                                                       |   |              |        |   |   |
| Property and equipment, net                                                                                                                |   | 122,344,000       |        | 122,248,000 |   |
| Total assets                                                                                                                               |   | $                 | 152,159,000 |   | $ | 152,506,000 |   |
|                                                                                                                                       |   |              |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                              |   |              | ** **  |   | ** ** |
| Current liabilities:                                                                                                                       |   |              |        |   |   |
| Accounts payable                                                                                                                           |   | $                 | 6,516,000   |   | $ | 7,091,000 |   |
| Purses due horsemen                                                                                                                        |   | 7,957,000         |        | 9,666,000 |   |
| Accrued liabilities                                                                                                                        |   | 6,015,000         |        | 6,253,000 |   |
| Payable to Dover Motorsports, Inc.                                                                                                         |   | 96,000            |        | — |   |
| Income taxes payable                                                                                                                       |   | 53,000            |        | — |   |
| Deferred revenue                                                                                                                           |   | 261,000           |        | 131,000 |   |
| Total current liabilities                                                                                                                  |   | 20,898,000        |        | 23,141,000 |   |
|                                                                                                                                       |   |              |        |   |   |
| Notes payable to banks                                                                                                                     |   | 31,225,000        |        | 40,890,000 |   |
| Deferred income taxes                                                                                                                      |   | 5,061,000         |        | 4,036,000 |   |
|                                                                                                                                       |   |              |        |   |   |
| Commitments and contingencies (see Notes to  the Consolidated Financial Statements)                                                        |   |              |        |   |   |
|                                                                                                                                       |   |              |        |   |   |
| Stockholders’ equity:                                                                                                                 |   |              |        |   |   |
| Preferred stock, $.10 par value; 1,000,000  shares authorized; issued and  outstanding: none                                               |   | —            |        | — |   |
| Common stock, $.10 par value; 74,000,000  shares authorized; issued and  outstanding: December 31, 2003-10,333,112; 2002-10,503,057 shares |   | 1,033,000         |        | 1,050,000 |   |
| Class A common stock, $.10 par value;  50,000,000 shares authorized; issued and  outstanding: December 31, 2003 and 2002-16,145,059 shares |   | 1,615,000         |        | 1,615,000 |   |
| Additional paid-in capital                                                                                                                 |   | 67,454,000        |        | 68,960,000 |   |
| Retained earnings                                                                                                                          |   | 24,873,000        |        | 12,941,000 |   |
| Accumulated other comprehensive loss                                                                                                       |   | —            |        | (127,000 | ) |
| Total stockholders’ equity                                                                                                            |   | 94,975,000        |        | 84,439,000 |   |
| Total liabilities and stockholders’ equity                                                                                            |   | $                 | 152,159,000 |   | $ | 152,506,000 |   |

 

The Notes to the Consolidated FinancialStatements are an integral part of these consolidated statements.

 

33

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

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

** **
|                                                                                 |   | **Years  ended December 31,** |       |
|--------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                 |   | **2003**                      |       | **2002** |   | **2001** |   |
| Operating activities:                                                                |   |                          |       |   |   |   |   |
| Net earnings                                                                         |   | $                             | 17,237,000 |   | $ | 21,442,000 |   | $ | 21,095,000 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |   |                          |       |   |   |   |   |
| Depreciation                                                                         |   | 6,287,000                     |       | 5,176,000 |   | 2,211,000 |   |
| Amortization of credit facility origination  fees                                    |   | 31,000                        |       | 60,000 |   | — |   |
| Deferred income taxes                                                                |   | 1,116,000                     |       | 2,642,000 |   | (33,000 | ) |
| Changes in assets and liabilities:                                                   |   |                          |       |   |   |   |   |
| Accounts receivable                                                                  |   | 1,077,000                     |       | (415,000 | ) | (360,000 | ) |
| Due from State of Delaware                                                           |   | 954,000                       |       | (1,480,000 | ) | (836,000 | ) |
| Inventories                                                                          |   | (647,000                      | )          | (288,000 | ) | (537,000 | ) |
| Prepaid expenses and other                                                           |   | (1,068,000                    | )          | 136,000 |   | (238,000 | ) |
| Accounts payable                                                                     |   | (575,000                      | )          | (3,870,000 | ) | 2,181,000 |   |
| Purses due horsemen                                                                  |   | (1,709,000                    | )          | 2,097,000 |   | 1,311,000 |   |
| Accrued liabilities                                                                  |   | 62,000                        |       | 1,001,000 |   | 547,000 |   |
| Payable to/receivable from Dover  Motorsports, Inc.                                  |   | 371,000                       |       | (793,000 | ) | — |   |
| Income taxes payable/receivable                                                      |   | 912,000                       |       | (1,975,000 | ) | 1,821,000 |   |
| Deferred revenue                                                                     |   | 130,000                       |       | 99,000 |   | (8,000 | ) |
| Net cash provided by operating activities                                            |   | 24,178,000                    |       | 23,832,000 |   | 27,154,000 |   |
|                                                                                 |   |                          |       |   |   |   |   |
| Investing activities:                                                                |   |                          |       |   |   |   |   |
| Capital expenditures                                                                 |   | (6,383,000                    | )          | (20,652,000 | ) | (63,827,000 | ) |
| Net cash used in investing activities                                                |   | (6,383,000                    | )          | (20,652,000 | ) | (63,827,000 | ) |
|                                                                                 |   |                          |       |   |   |   |   |
| Financing activities:                                                                |   |                          |       |   |   |   |   |
| Borrowings from revolving debt                                                       |   | 158,480,000                   |       | 171,178,000 |   | — |   |
| Repayments of revolving debt                                                         |   | (168,145,000                  | )          | (130,288,000 | ) | — |   |
| Repayment of debt to Dover Motorsports,  Inc.                                        |   | —                        |       | (45,000,000 | ) | — |   |
| Credit facility origination fees                                                     |   | —                        |       | (137,000 | ) | — |   |
| Dividends paid                                                                       |   | (5,305,000                    | )          | (3,333,000 | ) | — |   |
| Repurchase of common stock                                                           |   | (1,523,000                    | )          | — |   | — |   |
| Proceeds from stock options exercised                                                |   | —                        |       | 73,000 |   | — |   |
| Change in payable to/receivable from Dover  Motorsports, Inc.                        |   | —                        |       | 1,730,000 |   | 38,341,000 |   |
| Net cash (used in) provided by financing  activities                                 |   | (16,493,000                   | )          | (5,777,000 | ) | 38,341,000 |   |
|                                                                                 |   |                          |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                |   | 1,302,000                     |       | (2,597,000 | ) | 1,668,000 |   |
| Cash and cash equivalents, beginning of  year                                        |   | 12,836,000                    |       | 15,433,000 |   | 13,765,000 |   |
| Cash and cash equivalents, end of year                                               |   | $                             | 14,138,000 |   | $ | 12,836,000 |   | $ | 15,433,000 |   |
|                                                                                 |   |                          |       |   |   |   |   |
| Supplemental  information:                                                           |   |                          |       |   |   |   |   |
| Interest paid                                                                        |   | $                             | 980,000    |   | $ | 630,000 |   | $ | — |   |
| Income taxes paid                                                                    |   | $                             | 10,325,000 |   | $ | 14,081,000 |   | $ | 12,711,000 |   |

 

The Notes to the Consolidated FinancialStatements are an integral part of these consolidated statements.

 

34

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

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1—DoverMotorsports, Inc. Spin-off Of Its Gaming Business**

 

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

 

Dover Motorsports, Inc. (“DVD”), formerlyDover Downs Entertainment, Inc., completed its tax-free spin-off of DoverDowns, Inc., its gaming business, effective March 31, 2002.  To accomplish the spin-off, DVD contributed100 percent of the issued and outstanding common stock of Dover Downs, Inc. tothe Company, and then distributed all of the capital stock of the Company toDVD stockholders. Holders of DVD common stock or Class A common stock received0.7 shares of Gaming & Entertainment common stock or Class A common stock foreach share of DVD common stock or Class A common stock owned at the close ofbusiness on March 18, 2002, the record date for the spin-off. Each share ofcommon stock or Class A common stock distributed was accompanied by one stockpurchase right. Based on an Internal RevenueService Private Letter Ruling, the spin-off is tax-free to DVD and itsstockholders, except for cash received for any fractional shares.

 

Immediately following thespin-off, DVD owned no shares of the Company, and Gaming & Entertainment becamean independent public company.  A totalof 9,998,976 shares of Gaming & Entertainment common stock and 16,638,359shares of Gaming & Entertainment Class A common stock were distributed inconnection with the spin-off.  Also aspart of the spin-off, a $9.5 million payable to DVD was cancelled.

 

In conjunction with thespin-off, the Company and DVD entered into various agreements that addressedthe allocation of assets and liabilities between the two companies and thatdefine the companies’ relationship after the separation.  These are the Agreement RegardingDistribution and Plan of Reorganization, the Real Property Agreement, theEmployee Benefits Agreement, the Transition Support Services Agreement and theTax Sharing Agreement.

 

The Agreement RegardingDistribution and Plan of Reorganization set forth the principal corporatetransactions required to effect the separation of the gaming business from themotorsports business, and the continuation of the gaming business followingsuch separation, including the allocation between the Company and DVD ofcertain assets and liabilities, and the distribution of shares of the Company’scommon stock and Class A common stock. As a result of the spin-off, all assets and liabilities relating to thegaming business were assumed and are owned by the Company or its subsidiaries,and all assets and liabilities relating to the motorsports business wereassumed and are owned by DVD or its subsidiaries.

 

The Real Property Agreementgoverns certain real property transfers, leases and easements affecting theCompany’s Dover, Delaware facility.

 

The Employee Benefits Agreementprovided for the transfer of Company employees from employee benefits underplans or programs sponsored by DVD to those sponsored by the Company.  In connection with the spin-off and pursuantto the terms of the Employee Benefits Agreement, DVD arranged for the transferof the assets and liabilities associated with DVD’s defined-benefit pensionplan and the 401(k) plan sponsored by DVD with respect to employees who becameemployees of the Company (or remain employed by Dover Downs, Inc.) after thespin-off to the Company.

 

The Transition Support ServicesAgreement provides for each of the Company and DVD to provide each other withcertain administrative and operational services.  The party receiving the services is required to pay for themwithin 30 business days after receipt of an invoice at rates agreed upon by theCompany and DVD.  Each party willprovide these services until terminated by the party receiving the service orby the party providing the service after April 1, 2003.

 

35

----

 

The Tax Sharing Agreement provides for, among other things, thetreatment of income tax matters for periods beginning before and including thedate of the spin-off and any taxes resulting from transactions effected inconnection with the spin-off. With respect to any period ending on or beforethe spin-off or any tax period in which the spin-off occurs, DVD:

 

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

 

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

 

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

 

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

 

Refer to NOTE 10 – Related Party Transactionsfor further discussion.

 

**NOTE 2—BusinessOperations**

 

Dover Downs Gaming & Entertainment, Inc. is a diversified gamingand entertainment company whose operations consist of Dover Downs Slots – an80,000 square foot video lottery (slots) casino complex (which after the latestconstruction estimated to be completed by March 31, 2004 will be 91,000 squarefeet); the Dover Downs Hotel and Conference Center – featuring luxuryaccommodations with conference, banquet, fine dining, ballroom and concert hallfacilities; and the Dover Downs Raceway – a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

Our entertainment complex is located in Dover, the capital of the Stateof Delaware. Approximately 70% of our customers come from Maryland,Pennsylvania, Virginia and the District of Columbia. .

 

Dover Downs, Inc. was incorporated in 1967 and began motorsports andharness horse racing operations in 1969. As a result of several restructurings, Dover Downs, Inc. became a whollyowned subsidiary of DVD, and transferred all of the motorsports operations toDover International Speedway, Inc. Consequently, Dover Downs, Inc. became the operating entity for all ofDVD’s gaming operations.  Dover Downs,Inc. ultimately became a wholly owned subsidiary of Gaming & Entertainment,which was incorporated in the State of Delaware (the “State”) in December 2001in connection with its spin-off from DVD.

 

The Company is authorized to conduct video lottery operations as a“Licensed Agent” under the Delaware State Lottery Code. Pursuant to Delaware’sHorse Racing Redevelopment Act, enacted in 1994, the Delaware State LotteryOffice administers and controls the operation of the video lottery.

 

The Company’s license from the Delaware Harness Racing Commission (the“Commission”) to hold harness race meetings on our premises and to offer pari-mutuelwagering on live and simulcast horse races must be renewed on an annual basis.In order to maintain its license to conduct video lottery operations, theCompany is required to maintain its harness horse racing license.  The Company has received an annual licensefrom the Commission for the past 35 consecutive years and management believesthat its relationship with the Commission remains good.

 

Due to the nature of the Company’s business activities, it is subjectto various federal, state and local regulations.

 

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**NOTE 3—Summary ofSignificant Accounting Policies**

 

*Basis of consolidation and presentation—*Theconsolidated financial statements include the accounts of Gaming &Entertainment and its wholly owned subsidiaries.  Intercompany transactions and balances have been eliminated. Theconsolidated financial statements for periods prior to the effective date ofthe spin-off have been prepared on the historical cost basis and present theCompany’s results of operations and cash flows directly related to DVD’s gamingoperations.

 

The consolidated financial statements included herein may notnecessarily be indicative of the results of operations, financial position andcash flows of Gaming & Entertainment in the future or had it operated as aseparate, independent company for periods prior to the effective date of thespin-off. The consolidated financial statements included herein for periodsprior to the effective date of the spin-off on March 31, 2002 do not reflectany changes in the financing and operations of Gaming & Entertainment thatoccurred as a result of the spin-off.

 

*Cash and cash equivalents—*The Companyconsiders as cash equivalents all highly liquid investments with an originalmaturity of three months or less.

 

*Inventories—*Inventories, primarily food andbeverage items, are stated at the lower of cost or market with cost beingdetermined on the first-in, first-out basis.

 

*Property and equipment—*Property and equipmentis stated at cost.  Depreciation isprovided for financial reporting purposes using the straight-line method overthe following estimated useful lives:

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

 

The carrying values of property and equipment are evaluated forimpairment based upon expected undiscounted future cash flows.  If events or circumstances indicated thatthe carrying value of an asset may not be recoverable, an impairment loss wouldbe recognized equal to the difference between the carrying value of the assetand its fair value.

 

*Interest capitalization—*Interest iscapitalized in connection with the construction of major facilities. Thecapitalized interest is amortized over the estimated useful life of the assetto which it relates. During the year ended December 31, 2003, the Companyincurred $842,000 of interest cost, none of which was capitalized.  During the years ended December 31, 2002 and2001, the Company incurred $1,254,000 and $2,645,000 of interest cost,respectively, of which $351,000 and $1,580,000, respectively, was capitalized.

 

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

 

*Revenue and expense recognition—*Gamingrevenues represent the net win from video lottery (slot) machine wins andlosses and commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food andbeverage sales and other miscellaneous income.

 

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For the video lottery operations, which account for more than 80% ofgross 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 the Company’s consolidatedfinancial statements as gaming revenue. The Delaware State Lottery Officesweeps the win from the video lottery operations, collects the State’s share ofthe win and the amount due to the vendors under contract with the State whoprovide the video lottery (slot) machines and associated computer systems,collects the amount allocable to purses for harness horse racing, and remitsthe remainder to the Company as its commission for acting as a Licensed Agent.Gaming expenses include the amounts collected by the State (i) for the State’sshare of the win, (ii) for remittance to the providers of the video lottery(slot) machines and associated computer systems, and (iii) for harness horseracing purses. The Company recognizes revenues from pari-mutuel commissionsearned from live harness horse racing and importing of simulcast signals fromother race tracks when the race occurs. Revenues from hotel rooms, food andbeverage sales and other miscellaneous income are recognized at the time theservice is provided.

 

The retail value of hotel rooms, food, beverage and other items thatare provided to customers without charge has been included in gross revenues,and a corresponding amount has been deducted as promotional allowances. 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.

 

The Company currently has a point loyalty program for its video lotterycustomers which allows them to earn points based on the volume of their videolottery activity.  The points are issuedon the basis that they expire after one year if the customer has no videolottery play during that time period. The points can be redeemed for various services and merchandisethroughout the gaming facility; however, they are not redeemable for cash orcasino play. The Company records the points as an expense when they are redeemedby the customers.

 

*Advertising costs—*The cost of generaladvertising is charged to operations as incurred.

 

*Preopening (start-up) costs*—Preopening costsrepresent primarily the direct salaries and other operating costs incurred bythe Company prior to opening the Dover Downs Hotel and Conference Center. TheCompany accounted for these start-up activities under provisions of theAmerican Institute of Certified Public Accountants (“AICPA”) Statement ofPosition 98-5, *Reporting on the Costs of Start-Up Activities*, whichrequires the cost of start-up activities to be expensed as incurred.

 

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

 

|                        |   | **Years ended December 31,** |   |
|-----------------------------|--------|------------------------------|--------|
|                        |   | **2003**                     |   | **2002** |   | **2001** |   |
| Basic EPS                   |   | 26,511,000                   |   | 26,643,000 |   | 26,569,000 |   |
| Effect of  dilutive options |   | 26,000                       |   | 82,000 |   | 208,000 |   |
| Diluted EPS                 |   | 26,537,000                   |   | 26,725,000 |   | 26,777,000 |   |

 

For the years ended December 31, 2003 and2002, options to purchase 667,960 and 243,639 shares of commonstock, respectively, were outstanding, but were not included in the computationof diluted EPS because the options’ exercise prices were greater than theaverage market price of the common shares during the period.

 

Earnings per share amounts and weighted average shares outstanding forperiods prior to April 1, 2002, the day after the effective date of thespin-off from DVD, are presented on a pro forma basis to reflect such spin-off.

 

The pro forma average outstanding common shares and Class A commonshares were derived from DVD’s common shares and Class A common sharesoutstanding for the periods presented using the distribution ratio of 0.7shares of Gaming & Entertainment common stock and Class A common stock foreach share of DVD common stock and Class A common stock, respectively.  Outstanding stock options of Gaming &Entertainment were calculated assuming the stock options related to eachindividual who became a Gaming & Entertainment employee or both a DVD and aGaming & Entertainment employee subsequent to the spin-off were outstandingGaming & Entertainment options during each period presented.

 

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*Accounting for stock options—*The Company accounts for stock options inaccordance with FASB Statement No. 123, *Accounting for Stock-Based Compensation*,as amended by FASB Statement No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure – an amendment of FASB Statement No. 123*.  Statement No. 123 defines a fair-valuebased method of accounting for stock-based compensation plans; however,it allows the continued use of the intrinsic value method under AccountingPrinciples Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations.  TheCompany has elected to continue to use the intrinsic value method and based onthis method did not record any stock-based compensation expense during theyears ended December 31, 2003, 2002 and 2001.

 

The following table illustrates the effect on net earnings and netearnings per common share if the Company had applied the fair-value recognitionprovisions of Statement No. 123 to stock-based employee compensation:

 
|                                                                                                              |   | **Years ended December 31,** |       |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                              |   | **2003**                     |       | **2002** |   |
| Net earnings,  as reported                                                                                        |   | $                            | 17,237,000 |   | $ | 21,442,000 |   |
| Deduct: Total  stock-based employee compensation expense  determined under fair-value based method for all awards |   | (608,000                     | )          | (285,000 | ) |
| Pro forma net  earnings                                                                                           |   | $                            | 16,629,000 |   | $ | 21,157,000 |   |
|                                                                                                              |   |                         |       |   |   |
| Net earnings  per common share:                                                                                   |   |                         |       |   |   |
| Basic – as  reported                                                                                         |   | $                            | 0.65       |   | $ | 0.80 |   |
| Basic – pro  forma                                                                                           |   | $                            | 0.63       |   | $ | 0.79 |   |
|                                                                                                              |   |                         |       |   |   |
| Diluted – as  reported                                                                                       |   | $                            | 0.65       |   | $ | 0.80 |   |
| Diluted – pro  forma                                                                                         |   | $                            | 0.63       |   | $ | 0.79 |   |

 

For disclosure purposes, the Company determined compensation cost forits stock options based upon the fair value at the grant date using theBlack-Scholes option-pricing model with the following assumptions:

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

 

The weighted-average fair value of options granted during the yearsended December 31, 2003 and 2002 was $4.02 and $4.33, respectively.

 

*Use of estimates—*The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

*Fair value of financial instruments—*Thecarrying amount reported in the balance sheet for current assets and currentliabilities approximates their fair value because of the short maturity ofthese instruments.  The carrying valueof long-term debt at December 31, 2003 and 2002 approximates its fair valuebased on the interest rates available on similar borrowings.

 

*Segment information*—The Company accounts for its operating segment in accordance with FASBStatement No. 131, *Disclosures About Segments of an Enterprise andRelated Information*. Statement No. 131 establishes guidelines for public companies indetermining operating segments based on those used for internal reporting tomanagement.  Based on theseguidelines, the Company reports information under a single gaming andentertainment segment.

 

*Reclassifications*—Certain reclassifications have been made to theprior years consolidated financial statements to conform to the current yearpresentation.  These reclassificationshad no effect on net earnings.

 

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*Recent accounting pronouncements—*In June 2001, the FASB issued Statement No. 143, *Accountingfor Asset Retirement Obligations*, which addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  The standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and (or) normal use of the asset.  Statement No. 143 requires that the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred if a reasonable estimate of fair value can bemade.  The fair value of the liabilityis added to the carrying amount of the associated asset and this additionalcarrying amount is depreciated over the life of the asset.  The liability is accreted at the end of eachperiod through charges to operating expense. If the obligation is settled for other than the carrying amount of theliability, a gain or loss on settlement would be recognized.  We adopted the provisions of Statement No.143 effective January 1, 2003.  Theadoption of Statement No. 143 did not have an impact on our results ofoperations, financial position or cash flows.

 

On April 30, 2002, the FASB issued StatementNo. 145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections*. The Statement updates, clarifies andsimplifies existing accounting pronouncements. Statement No. 145 rescindsStatement No. 4, *Reporting Gains and Losses from Extinguishment ofDebt*, which required all gainsand losses from extinguishment of debt to be aggregated and, if material,classified as an extraordinary item, net of related income tax effects. As aresult, the criteria in APB Opinion No. 30 will now be used to classify thosegains and losses. Statement No. 64, *Extinguishments of Debt Made to Satisfy Sinking-FundRequirements*, amended StatementNo. 4, and is no longer necessary because Statement No. 4 has been rescinded.Statement No. 145 amends Statement No. 13, *Accounting for Leases*, to require that certain lease modifications thathave economic effects similar to sale-leaseback transactions be accounted forin the same manner as sale-leaseback transactions.  Certain provisions ofStatement No. 145 are effective for fiscal years beginning after May 15, 2002,while other provisions are effective for transactions occurring after May 15,2002.  The adoption of StatementNo. 145 did not have an impact on our results of operations, financial positionor cash flows.

 

The Emerging Issues Task Force (“EITF”) was discussing certain topicsof issue number 00-22, *Accounting for “Points” and Certain Other Time orVolume Based Sales Incentive Offers, and Offers for Free Products or Servicesto be Delivered in the Future*, which would cover how point and otherloyalty programs should be accounted for. The EITF was considering the issuebroadly to include all industries that utilize point and other loyaltyprograms.  In November 2002, the EITFremoved this topic from its agenda due to the initiation of a subsequent FASBproject on revenue recognition, which is expected to address similar issues.  The Company will apply the provisions ofthis project for its points program once the FASB issues a consensus on thetopic.  The Company currently has apoint loyalty program for its video lottery customers which allows them to earnpoints based on the volume of their video lottery activity.  The points are issued on the basis that theyexpire after one year if the customer has no video lottery play during thattime period.  The points can be redeemedfor various services and merchandise throughout the gaming facility; however,they are not redeemable for cash or casino play. The Company records the pointsas an expense when they are redeemed by the customers. The value of all pointsoutstanding as of December 31, 2003 and 2002 was $4,592,000 and $4,373,000,respectively.

 

In November 2002, the FASB issued Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others an Interpretation of FASB Statements No.5, 57 and 107 and recission of FASB Interpretation No. 34* (“FIN45”). FIN 45 requires that a guarantor recognize, at the inception of certainguarantees, a liability for the fair value of the obligation undertaken inissuing such guarantee. FIN 45 also requires additional disclosure requirementsabout a guarantor’s obligations under certain guarantees that it has issued.The initial recognition and measurement provisions of this interpretation areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002 and the disclosure requirements are effective for financialstatement periods ending after December 15, 2002.  The adoption of FIN 45 did not have an impact on our results ofoperations, financial position or cash flows.

 

In December 2003, FASB Statement No. 132 (revised), *Employers’Disclosures about Pensions and Other Postretirement Benefits*, wasissued.  Statement No. 132 (revised)prescribes employers’ disclosures about pension plans and other postretirementbenefit plans; it does not change the measurement or recognition of thoseplans.  The statement retains andrevises the disclosure requirements contained in the original Statement No.132.  It also requires additionaldisclosures about the assets, obligations, cash flows, and net periodic benefitcost of defined benefit plans and other postretirement benefit plans, as wellas, interim disclosures.  The statementgenerally is effective for fiscal years ending after December 15, 2003.

 

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**NOTE 4—Property andEquipment**

 

Property and equipment consists of the following as ofDecember 31:

 
|                              |   | **2003**    |        | **2002**    |   |
|-----------------------------------|--------|-------------|-------------|-------------|--------|
| Land                              |   | $           | 1,842,000   |        | $      | 1,842,000 |   |
| Casino facility                   |   | 28,132,000  |        | 28,011,000  |   |
| Hotel facility                    |   | 65,974,000  |        | 65,888,000  |   |
| Harness racing facilities         |   | 7,930,000   |        | 8,025,000   |   |
| General facilities                |   | 14,224,000  |        | 12,186,000  |   |
| Furniture, fixtures and equipment |   | 28,973,000  |        | 27,782,000  |   |
| Construction in progress          |   | 3,068,000   |        | 843,000     |   |
|                              |   | 150,143,000 |        | 144,577,000 |   |
| Less accumulated depreciation     |   | (27,799,000 | )           | (22,329,000 | )      |
|                              |   | $           | 122,344,000 |        | $      | 122,248,000 |   |

 

Depreciation expense was $6,287,000, $5,176,000 and $2,211,000 for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

**NOTE 5—AccruedLiabilities**

 

Accrued liabilities consists of the following as of December 31:

 
|                                     |   | **2003**  |      | **2002**  |   |
|------------------------------------------|--------|-----------|-----------|-----------|--------|
| Payroll and related items                |   | $         | 1,455,000 |      | $      | 1,498,000 |   |
| Win due to Delaware State Lottery Office |   | 1,810,000 |      | 1,193,000 |   |
| Pension                                  |   | 931,000   |      | 1,371,000 |   |
| Management fee                           |   | 653,000   |      | 840,000   |   |
| Other                                    |   | 1,166,000 |      | 1,351,000 |   |
|                                     |   | $         | 6,015,000 |      | $      | 6,253,000 |   |

#### ** **

#### **NOTE 6—Indebtedness**

 

At December 31, 2003, the Company had a$45,000,000 credit facility that was to expire on December 31, 2004.  The Company amended its credit facilityeffective February 19, 2004, to reduce it to $40,000,000 and extend its term toApril 30, 2006.  All other terms of thefacility remain unchanged.  Interest is based, at the Company’s option, upon(i) LIBOR plus 0.75% or (ii) the base rate (the greater of the prime rate orthe federal funds rate plus 0.5%) minus 1%. The terms of the credit facility contain, among others, minimumnet worth, interest coverage and maximum leverage covenant requirements.  Material adverse changes in the Company’sresults of operation could impact its ability to maintain financial ratiosnecessary to satisfy these requirements. Thefacility is for seasonal funding needs, capital improvements and other generalcorporate purposes.  In addition,$45,000,000 of the facility was used to pay down amounts outstanding under theprior DVD credit facilities on April 1, 2002 in connection with our spin-offfrom DVD.  At December 31, 2003, theCompany was in compliance with all terms of the facility and there was$31,225,000 outstanding at a weighted average interest rate of 1.99%.  After consideration of stand by letters ofcredit outstanding, $13,675,000 was available pursuant to the facility atDecember 31, 2003.

 

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**NOTE 7—Income Taxes**

 

The current and deferred income tax provisions (benefit) are asfollows:

 
|               |   | **Years ended  December 31,** |       |
|--------------------|--------|-------------------------------|------------|
|               |   | **2003**                      |       | **2002** |   | **2001** |   |
| Current:           |   |                          |       |   |   |   |   |
| Federal            |   | $                             | 8,450,000  |   | $ | 9,491,000 |   | $ | 11,432,000 |   |
| State              |   | 2,261,000                     |       | 2,592,000 |   | 3,100,000 |   |
|               |   | 10,711,000                    |       | 12,083,000 |   | 14,532,000 |   |
| Deferred:          |   |                          |       |   |   |   |   |
| Federal            |   | 849,000                       |       | 2,066,000 |   | (52,000 | ) |
| State              |   | 267,000                       |       | 576,000 |   | 19,000 |   |
|               |   | 1,116,000                     |       | 2,642,000 |   | (33,000 | ) |
| Total income taxes |   | $                             | 11,827,000 |   | $ | 14,725,000 |   | $ | 14,499,000 |   |
|                    |        |                               |            |  |  |  |  |  |  |  |  |  |

 

Deferred income taxes relate to the temporary differences betweenfinancial accounting income and taxable income and are primarily attributableto differences between the book and tax basis of property and equipment. TheCompany believes that it is more likely than not that the deferred tax assetswill be realized based upon reversals of existing taxable temporary differencesand estimated future taxable income.

 

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

 
|                                |   | **Years ended  December 31,** |   |
|-------------------------------------|--------|-------------------------------|--------|
|                                |   | **2003**                      |   | **2002** |   | **2001** |   |
| Federal tax at statutory rate       |   | 35.0                          | %      | 35.0 | % | 35.0 | % |
| State taxes, net of federal benefit |   | 5.7                           | %      | 5.7 | % | 5.7 | % |
| Effective income tax rate           |   | 40.7                          | %      | 40.7 | % | 40.7 | % |

 

Prior to the spin-off, the Company was included as part of DVD’sconsolidated federal income tax return; however, the income tax expensepresented in the consolidated financial statements has been computed on aseparate return basis.  The Company andDVD have entered into a Tax Sharing Agreement to reflect each company’s rightsand obligations relating to payments and refunds of taxes that are attributableto periods beginning before and including the date of the spin-off described inNOTE 1**-**DoverMotorsports, Inc. Spin-off Of Its Gaming Business. The agreement provides forpayments between the companies to reflect tax liabilities that may arise before,after and because of the spin-off. During the third quarter of 2002, pursuant to the Tax Sharing Agreement,the Company paid DVD $2.7 million for its portion of DVD’s 2002 consolidatedfederal income tax liability.  Since thespin-off of the Company from DVD was effective on March 31, 2002, DVD’s 2002federal income tax return included the operations of the Company for the firstquarter of the year.

 

For the year ended December 31, 2003, DVDreported a net operating loss for federal income tax purposes.  The loss was carried back to 2001, a periodprior to the spin-off, which generated an alternative minimum tax creditcarryforward, a portion of which is required to be paid to DVD under the TaxSharing Agreement; therefore, during the fourth quarter of 2003 Gaming &Entertainment recorded a $330,000 payable to DVD for the Company’s portion ofthe carryforward. Gaming & Entertainment anticipates paying the amount inthe first quarter of 2004.

 

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**NOTE 8—Pension Plans**

 

Prior to the spin-off from DVD, the Company’s employees participated inDVD’s noncontributory, tax qualified defined-benefitpension plan.  Effective April 1, 2002,the Company established the Dover Downs Gaming & Entertainment, Inc. defined-benefit pension plan.  Pursuant to the terms of the EmployeeBenefits Agreement, DVD arranged for the transfer to Gaming & Entertainmentof the assets and liabilities associated with the defined-benefit pension plan sponsored by DVD with respect toemployees who are now Gaming & Entertainment employees.  Benefits provided by the Gaming &Entertainment pension plan are based on years of service and employees’remuneration over their term of employment. Pension costs are funded in accordance with the provisions of theInternal Revenue Code. The Company also maintains a nonqualified,noncontributory defined-benefitpension plan for certain employees to restore pension benefits reduced byfederal income tax regulations. The cost associated with the plan is determinedusing the same actuarial methods and assumptions as those used for thequalified pension plan.

 

The following table sets forth the plans’funded status and amounts recognized in the Company’s consolidated balancesheet as of December 31:
|                                              |   | **2003**   |      | **2002**   |   |
|---------------------------------------------------|--------|------------|-----------|------------|--------|
| Change in  benefit obligation:                    |   |       |      |       |   |
| Benefit  obligation at beginning of period        |   | $          | 3,415,000 |       | $      | — |   |
| Service cost                                      |   | 714,000    |      | 429,000    |   |
| Interest cost                                     |   | 206,000    |      | 132,000    |   |
| Transfer from  DVD Plan                           |   | —     |      | 2,546,000  |   |
| Actuarial  (gain) loss                            |   | (30,000    | )         | 308,000    |   |
| Benefit  obligation at end of period              |   | 4,305,000  |      | 3,415,000  |   |
|                                              |   |       |      |       |   |
| Change in plan  assets:                           |   |       |      |       |   |
| Fair value of  plan assets at beginning of period |   | 1,081,000  |      | —     |   |
| Actual gain  (loss) on plan assets                |   | 241,000    |      | (127,000   | )      |
| Transfer from  DVD Plan                           |   | —     |      | 958,000    |   |
| Employer  contribution                            |   | 975,000    |      | 250,000    |   |
| Fair value of  plan assets at end of period       |   | 2,297,000  |      | 1,081,000  |   |
|                                              |   |       |      |       |   |
| Unfunded status                                   |   | (2,008,000 | )         | (2,334,000 | )      |
| Unrecognized  net loss                            |   | 1,000,000  |      | 1,177,000  |   |
| Unrecognized  prior service cost                  |   | 77,000     |      | 86,000     |   |
| Net amount  recognized                            |   | $          | (931,000  | )          | $      | (1,071,000 | ) |

 

The following table presents the amounts recognized in the Company’sconsolidated balance sheet as of December 31:

 
|                                  |   | **2003** |     | **2002** |   |
|---------------------------------------|--------|----------|----------|----------|--------|
| Accrued benefit  cost                 |   | $        | (931,000 | )        | $      | (1,371,000 | ) |
| Intangible  asset                     |   | —   |     | 85,000   |   |
| Deferred income  taxes                |   | —   |     | 88,000   |   |
| Accumulated  other comprehensive loss |   | —   |     | 127,000  |   |
|                                  |   | $        | (931,000 | )        | $      | (1,071,000 | ) |

 

Theprojected benefit obligation, accumulated benefit obligation and fair value ofplan assets for pension plans with accumulated benefit obligations in excess ofplan assets were $4,305,000, $3,069,000 and $2,297,000 respectively, as ofDecember 31, 2003, and $3,415,000 $2,452,000 and $1,081,000, respectively, asof December 31, 2002.

 

TheCompany plans to contribute approximately $1,100,000 to its pension plans in2004.

 

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

 

The components of net periodicpension cost are as follows:

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

 

Prior to the effective date of the spin-off from DVD, net periodicpension cost was allocated to the Company by DVD.  The amount allocated was $502,000 during the year ended December31, 2001.

 

Theprincipal assumptions used to determine the net periodic pension cost for theyears ended December 31, 2003 and 2002, and the actuarial value of theprojected benefit obligation at December 31, 2003 and 2002 (the measurementdates) for the Company’s pension plans are as follows:

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

 

For2003, the Company assumed a long-term rate of return on plan assets of 9%. Indeveloping the 9% expected long-term rate of return assumption, the Companyreviewed asset class return expectations and long-term inflation assumptionsand considered its post spin-off and DVD’s pre spin-off historical compoundedreturn, which was consistent with our long-term rate of return assumption.

 

TheCompany’s pension plan asset allocation at December 31, 2003 and 2002, andtarget allocation for 2004 are as follows: 

 
|                              |   | **Percentage of Plan  Assets at December 31,** |   | **Target  Allocation** |   |
|-----------------------------------|--------|------------------------------------------------|--------|------------------------|--------|
| **Asset  Category**               |   | **2003**                                       |   | **2002**               |   | **2004** |   |
| Equity  securities                |   | 72                                             | %      | 39                     | %      | 70 | % |
| Debt securities                   |   | 19                                             | %      | 21                     | %      | 20 | % |
| Other (money market mutual funds) |   | 9                                              | %      | 40                     | %      | 10 | % |
| Total                             |   | 100                                            | %      | 100                    | %      | 100 | % |

 

The Company’s investment goals are to maximize returns subject tospecific risk management policies.  Itsrisk management policies permit investments in mutual funds, and prohibitdirect investments in debt and equity securities and derivative financialinstruments.  The Company addressesdiversification by the use of mutual fund investments whose underlyinginvestments are in domestic and international equity and fixed incomesecurities.  These mutual funds arereadily marketable and can be sold to fund benefit payment obligations as theybecome payable.

 

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Pursuant to the terms of the Employee Benefits Agreement, DVD arrangedfor the transfer of the assets and liabilities associated with the 401(k) plansponsored by DVD with respect to employees who are now Gaming &Entertainment employees to Gaming & Entertainment. Effective January 1,2003, the Company maintains its own defined contribution 401(k) plan whichpermits participation by substantially all employees. Prior to January 1, 2003,the Company participated in DVD’s 401(k) plan.

 

**NOTE 9—Stockholders’Equity**

 

Changes in the components of stockholders’ equity are as follows (inthousands, except per share data):

 
|                                                             |   | **Common  Stock** |   | **Class A  Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Loss** |   | **DVD  Equity  Investment** |   |
|------------------------------------------------------------------|--------|-------------------|--------|----------------------------|--------|----------------------------------|--------|------------------------|--------|---------------------------------------------|--------|-----------------------------|--------|
| **Balance at Dec. 31, 2000**                                     |   | $                 | — |                       | $      | —                           |   | $                      | — |                                        | $      | —                      |   | $ | — |   | $ | 81,558 |   |
| Net earnings                                                     |   | —            |   | —                     |   | —                           |   | —                 |   | —                                      |   | 21,095                      |   |
| **Balance at Dec. 31, 2001**                                     |   | —            |   | —                     |   | —                           |   | —                 |   | —                                      |   | 102,653                     |   |
| Net earnings from January 1, 2002 through  March 31, 2002        |   | —            |   | —                     |   | —                           |   | —                 |   | —                                      |   | 5,168                       |   |
| Cancellation of payable to DVD                                   |   | —            |   | —                     |   | —                           |   | —                 |   | —                                      |   | 9,520                       |   |
| Spin-off transaction                                             |   | 1,000             |   | 1,664                      |   | 114,677                          |   | —                 |   | —                                      |   | (117,341                    | )      |
| DVD debt paid down on April 1, 2002                              |   | —            |   | —                     |   | (45,000                          | )      | —                 |   | —                                      |   | —                      |   |
| Net earnings from April 1, 2002 through  December 31, 2002       |   | —            |   | —                     |   | —                           |   | 16,274                 |   | —                                      |   | —                      |   |
| Proceeds from stock options exercised                            |   | 1                 |   | —                     |   | 72                               |   | —                 |   | —                                      |   | —                      |   |
| Dividends paid, $.125 per share                                  |   | —            |   | —                     |   | —                           |   | (3,333                 | )      | —                                      |   | —                      |   |
| Transfer of pension liability from DVD                           |   | —            |   | —                     |   | (789                             | )      | —                 |   | —                                      |   | —                      |   |
| Change in minimum pension liability, net of  income taxes of $88 |   | —            |   | —                     |   | —                           |   | —                 |   | (127                                        | )      | —                      |   |
| Conversion of Class A common stock to  common stock              |   | 49                |   | (49                        | )      | —                           |   | —                 |   | —                                      |   | —                      |   |
| **Balance at Dec. 31, 2002**                                     |   | 1,050             |   | 1,615                      |   | 68,960                           |   | 12,941                 |   | (127                                        | )      | —                      |   |
| Net earnings                                                     |   | —            |   | —                     |   | —                           |   | 17,237                 |   | —                                      |   | —                      |   |
| Dividends paid, $.20 per share                                   |   | —            |   | —                     |   | —                           |   | (5,305                 | )      | —                                      |   | —                      |   |
| Change in minimum pension liability, net of  income taxes of $88 |   | —            |   | —                     |   | —                           |   | —                 |   | 127                                         |   | —                      |   |
| Repurchase and retirement of common stock                        |   | (17               | )      | —                     |   | (1,506                           | )      | —                 |   | —                                      |   | —                      |   |
| **Balance at Dec. 31, 2003**                                     |   | $                 | 1,033  |                       | $      | 1,615                            |   | $                      | 67,454 |                                        | $      | 24,873                      |   | $ | — |   | $ | — |   |

 

Gaming & Entertainment has 125,000,000 shares of authorized capitalstock which consists of 74,000,000 shares of common stock, par value $.10 pershare; 50,000,000 shares of Class A common stock, par value $.10 per share; and1,000,000 shares of preferred stock, par value $.10 per share.

 

The holders of common stock are entitled to one vote per share and theholders of our Class A common stock are entitled to 10 votes per share.  There is no cumulative voting.  Shares of Class A common stock areconvertible at any time into our shares of common stock on a one-for-one basisat the option of the stockholder. Subject to rights of any preferredstockholder, holders of our common stock and Class A common stock are entitledto receive on a pro rata basis such dividends, if any, as may be declared fromtime to time by the Board of Directors out of funds legally available for thatpurpose. At the discretion of the Company’s Board of Directors, it may pay tothe holders of common stock a cash dividend greater than the dividend, if any,paid to the holders of Class A common stock.

 

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Under Delaware law, a change of ownership of a Licensed Agent willautomatically terminate its license 90 days after the change of ownershipoccurs, unless the Lottery Director determines after application to issue a newlicense to the new owners.  Change ofownership may occur if any new individual or entity acquires, directly orindirectly, 10% or more of the Licensed Agent or if more than 20% of the legalor beneficial interest in the Licensed Agent is transferred, whether by director indirect means.  The Commission mayrequire extensive background investigations of any new owner acquiring a 10% orgreater interest in a Licensed Agent, including criminal backgroundchecks.  Accordingly, the Company has arestrictive legend on its shares of common stock which require that (a) anyholders of common stock found to be disqualified or unsuitable or notpossessing the qualifications required by any appropriate gaming authoritycould be required to dispose of such stock and (b) any holder of common stockintending to acquire 10% or more of the outstanding common stock of the Companymust first obtain prior written approval from the Delaware State LotteryOffice.

 

The Company adopted a stockholder rights plan in 2002 prior to theeffective date of the spin-off from DVD. The rights are attached to and tradein tandem with our common stock and Class A common stock. Each right entitlesthe registered holder to purchase from the Company one share of common stock ata purchase price of $200 per share. The rights, unless earlier redeemed by ourBoard of Directors, will detach and trade separately from our common stock uponthe occurrence of certain events such as the unsolicited acquisition by a thirdparty of beneficial ownership of 10% or more of our outstanding combined commonstock and Class A common stock or the announcement by a third party of theintent to commence a tender or exchange offer for 10% or more of ouroutstanding combined common stock and Class A common stock. After the rightshave detached, the holders of such rights would generally have the ability topurchase such number of either shares of our common stock or stock of anacquirer of the Company having a market value equal to twice the exercise priceof the right being exercised, thereby causing substantial dilution to a personor group of persons attempting to acquire control of the Company. The rightsmay serve as a significant deterrent to unsolicited attempts to acquire controlof Gaming & Entertainment, including transactions involving a premium tothe market price of our stock.  Therights expire on January 1, 2012, unless earlier redeemed.

 

On January 28,2004, the Board of Directors of the Company declared a quarterly cash dividendon both classes of common stock of $.05 per share.  The dividend is payable on March 10, 2004 to stockholders ofrecord at the close of business on February 10, 2004.

 

On October 23,2002, the Board of Directors authorized the repurchase of up to 2,000,000shares of the Company’s outstanding common stock.  The purchases may be made in the open market or in privatelynegotiated transactions as conditions warrant. The repurchase authorization does not obligate the Company to acquireany specific number of shares and may be suspended at any time.  During the year ended December 31, 2003, theCompany purchased and retired 169,945 shares of its outstanding common stock atan average purchase price of $8.96 per share. There were no shares repurchased during the year ended December 31,2002.

 

Prior to the effective date of the spin-offfrom DVD, certain Gaming & Entertainment employees participated in the DVDstock option plan.  In conjunction withthe spin-off, Gaming & Entertainment adopted a stock option plan pursuant to which the Company’s Board of Directorsmay grant up to 1,500,000 stock options to officers, key employees anddirectors at not less than 100% of the fair market value at the date of thegrant.  The stock options haveeight-year terms and generally vest equally over a period of six years from thedate of grant.  Following thespin-off, outstanding stock option grants under the DVD plan held by Gaming &Entertainment employees were replaced with Gaming & Entertainment stockoption grants.  The Gaming &Entertainment grants had the same relative ratio of the exercise price tomarket value and the same vesting provisions, option periods and other applicableterms and conditions as the DVD stock option grants being replaced.

 

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Option activity was as follows: 

 
|                               |   | **December  31,** |   |
|------------------------------------|--------|-------------------|--------|
|                               |   | **2003**          |   | **2002** |   |
| Number of options:                 |   |              |   |   |   |
| Outstanding at beginning of period |   | 612,160           |   | — |   |
| Spin-off issuances                 |   | —            |   | 393,446 |   |
| Granted                            |   | 309,000           |   | 277,000 |   |
| Exercised                          |   | —            |   | (10,781 | ) |
| Expired                            |   | (58,800           | )      | (47,505 | ) |
| Outstanding at end of period       |   | 862,360           |   | 612,160 |   |
|                               |   |              |   |   |   |
| At period end:                     |   |              |   |   |   |
| Options available for grant        |   | 626,859           |   | 877,059 |   |
| Options exercisable                |   | 254,116           |   | 173,091 |   |
| Weighted average exercise price:   |   |              |   |   |   |
| Options granted                    |   | $                 | 9.52   |   | $ | 12.05 |   |
| Options exercised                  |   | $                 | — |   | $ | 6.74 |   |
| Options outstanding                |   | $                 | 10.02  |   | $ | 10.27 |   |
| Options exercisable                |   | $                 | 9.24   |   | $ | 8.35 |   |

 

Thefollowing table summarizes information about the stock options outstandingunder the Company’s option plan as of December 31, 2003:

 
| **Range of Exercise Prices** |   | **Number  Outstanding** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Number  Exercisable** |    | **Weighted  Average  Exercise  Price** |   |
|------------------------------|--------|-------------------------|--------|----------------------------------------|--------|-----------------------------------------------------|--------|-------------------------|---------|----------------------------------------|--------|
| $   6.74 - $  9.94 |   | 566,653                 |   | $                                      | 9.03   |                                                | 2.5yrs |                    | 174,378 |                                   | $      | 8.12 |   |
| $ 11.16 -$13.31              |   | 295,707                 |   | $                                      | 11.92  |                                                | 4.7yrs |                    | 79,738  |                                   | $      | 11.70 |   |
| $  6.74 - $13.31        |   | 862,360                 |   | $                                      | 10.02  |                                                | 3.3yrs |                    | 254,116 |                                   | $      | 9.24 |   |

 

**NOTE 10—Related PartyTransactions**

 

During the years ended December 31, 2003,2002 and 2001, Gaming & Entertainment allocated corporate costs of$1,969,000, $495,000 and $2,307,000, respectively, to DVD for certainadministrative and operations services, including DVD’s use of officespace.  The allocation was based on bothan allocation to the business that directly incurred the costs and an analysisof each company’s share of the costs. In connection with DVD’s 2003 NASCAR event weekends, Gaming &Entertainment provided certain catering services for which DVD was invoiced$443,000.  DVD invoiced Gaming &Entertainment $206,000 for tickets purchased to the 2003 events and other eventrelated items. As of December 31, 2003 and 2002, Gaming & Entertainment’sconsolidated balance sheet includes a $96,000 payable to and a $793,000receivable from DVD, respectively, for the aforementioned costs and for otherpayments made by the Company on DVD’s behalf. The Company settled the $96,000 liability in the first quarter of2004.  The net costs incurred by eachcompany for these services are not necessarily indicative of the costs thatwould have been incurred if the companies had been separate, independententities and/or had otherwise independently managed these functions; however,management believes that these costs are reasonable.

 

For the year ended December 31, 2003, DVDreported a net operating loss for federal income tax purposes.  The loss was carried back to 2001, a periodprior to the spin-off, which generated an alternative minimum tax creditcarryforward, a portion of which is required to be paid to DVD under the TaxSharing Agreement (see below); therefore, during the fourth quarter of 2003Gaming & Entertainment recorded a $330,000 payable to DVD for the Company’sportion of the carryforward. Gaming & Entertainment anticipates paying theamount in the first quarter of 2004.

 

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

 

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The Company’s useof DVD’s 5/8-mile harness racing track is under an easement granted to theCompany by DVD which does not require the payment of any rent. Under the termsof the easement the Company has exclusive use of the harness track during theperiod beginning November 1 of each year and ending April 30 of the followingyear, together with set up and tear down rights for the two weeks before andafter such period.  The harness track islocated on property owned by DVD and is on the inside of DVD’s motorsportssuperspeedway.  The Company’s indoorgrandstands are used by DVD at no charge in connection with its motorsportsevents. DVD also leases its principal executive office space from theCompany.  Various easements andagreements relative to access, utilities and parking have also been enteredinto between DVD and the Company relative to their respective Dover, Delawarefacilities.

 

In conjunction with theCompany’s spin-off from DVD, the two companies entered into various agreementsthat addressed the allocation of assets and liabilities between the companiesand that define the companies’ relationship after the separation.  These are the Agreement RegardingDistribution and Plan of Reorganization, the Real Property Agreement, theEmployee Benefits Agreement, the Transition Support Services Agreement and theTax Sharing Agreement.  The companieshave several common directors and officers. Refer to NOTE 1—Dover Motorsports, Inc. Spin-off Of Its Gaming Businessfor further discussion.

 

The Company purchased administrative services from Rollins TruckLeasing Corp. and affiliated companies (“RTLC”), which were related to Gaming& Entertainment through common ownership, during the year ended December31, 2001. The total cost of these services, which has been included in generaland administrative expenses in the consolidated statement of earnings, was$71,000. RTLC ceased to provide these services effective in April 2001.

 

**NOTE 11—Commitmentsand Contingencies**

 

In May 1995, Dover Downs, Inc., a subsidiary of the Company, enteredinto a long-term management agreement with Caesars World Gaming DevelopmentCorporation (“Caesars”). Caesars acts as our agent to manage our video lotterycasino and is paid a management fee based on the operating results of thecasino. Caesars has been properly licensed by the Delaware State Lottery Officeto perform these functions. The Company does not expect to renew the agreementwhen it expires in December 2004 as we no longer rely on any Caesars’ employeesor systems.  Caesars’ performance-basedfees were $5,042,000, $7,440,000 and $7,498,000 for the years ended December31, 2003, 2002 and 2001. Amounts owed to Caesars at December 31, 2003 and 2002totaled $653,000 and $840,000, respectively, and are included in accruedliabilities.

 

**NOTE 12—QuarterlyResults (unaudited)**

** **
|                               |   | **March 31** |       | **June 30** |       | **September  30** |       | **December  31 (a)** |       |
|------------------------------------|--------|--------------|------------|-------------|------------|-------------------|------------|----------------------|------------|
| **Year Ended December 31, 2003**   |   |         | ** ** |        | ** ** |              | ** ** |                 | ** ** |
| Net revenues                       |   | $            | 44,199,000 |        | $          | 48,042,000        |       | $                    | 50,299,000 |   | $ | 46,292,000 |   |
| Operating earnings                 |   | 6,968,000    |       | 7,643,000   |       | 8,256,000         |       | 7,039,000            |       |
| Net earnings                       |   | 4,007,000    |       | 4,385,000   |       | 4,782,000         |       | 4,063,000            |       |
| Net earnings per share-basic       |   | $            | 0.15       |        | $          | 0.17              |       | $                    | 0.18       |   | $ | 0.15 |   |
| Net earnings per share-diluted     |   | $            | 0.15       |        | $          | 0.17              |       | $                    | 0.18       |   | $ | 0.15 |   |
| **Year Ended December 31, 2002**   |   |         | ** ** |        | ** ** |              | ** ** |                 | ** ** |
| Net revenues                       |   | $            | 49,780,000 |        | $          | 52,970,000        |       | $                    | 56,123,000 |   | $ | 47,602,000 |   |
| Operating earnings                 |   | 8,710,000    |       | 9,934,000   |       | 10,960,000        |       | 7,466,000            |       |
| Net earnings                       |   | 5,168,000    |       | 5,703,000   |       | 6,333,000         |       | 4,238,000            |       |
| Net earnings per share-basic (b)   |   | $            | 0.19       |        | $          | 0.21              |       | $                    | 0.24       |   | $ | 0.16 |   |
| Net earnings per share-diluted (b) |   | $            | 0.19       |        | $          | 0.21              |       | $                    | 0.24       |   | $ | 0.16 |   |

 

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(a)              Included in the Company’s 2003 and 2002fourth quarter results are proceeds of $1,300,000 ($771,000 after income taxes)and $250,000 ($148,000 after income taxes), respectively, relating to thesettlement of a business interruption insurance claim.

 

(b)             Net earnings per share amounts for periods priorto April 1, 2002, the day after the effective date of the spin-off from DVD,are presented on a pro forma basis to reflect such spin-off.

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