**United States**

**Securities and Exchange Commission**

**Washington, D.C. 20549**

 

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**Form 10-K**

 

| **Annual Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|-------------------------------------------------------------------------------------------|
|                                                                                      |
| **For the fiscal  year ended December 31, 2002**                                          |
|                                                                                      |
| **Commission  file number 1-16791**                                                       |

 

| **Dover Downs Gaming & Entertainment, Inc.**           |
|------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)     |
|                                                       |   |   |
| **Delaware**                                               |   | **51-0414140** |
| (State or Other Jurisdiction of Incorporation)             |   | (I.R.S. Employer Identification Number) |
|                                                       |   |   |
| **1131 North DuPont Highway, Dover, Delaware  19901** |
| (Address of principal executive offices)                   |
|                                                       |   |   |
| **(302) 674-4600**                                         |
| (Registrant’s telephone number, including area code)  |

 

Securities registeredpursuant to Section 12(b) of the Act:

 

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

 

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

 

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 Form10-K. o

 

The aggregate market value ofcommon stock held by non-affiliates of the registrant was $86,968,411 as ofFebruary 28, 2003.

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).Yesý  Noo

 

The aggregate market value ofcommon stock held by non-affiliates of the registrant was $120,802,637 as ofJune 30, 2002 (the last day of our most recently completed second quarter).

 

As of February 28, 2003, thenumber of shares of each class of the Registrant’s common stock outstanding isas follows:

| Common  Stock -         | 10,413,012 shares |
|-------------------------|-------------------|
| Class  A Common Stock - | 16,145,059 shares |

 

**Documents Incorporated by Reference**

Portions of the Registrant’sProxy Statement in connection with the Annual Meeting of Stockholders to beheld April 23, 2003 are incorporated by reference into Part III, Items 10through 13 of this report.

 

 

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**Part I**

 

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

 

**Item 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; theDover Downs Hotel and Conference Center – featuring luxury accommodations withconference, banquet, fine dining, ballroom and concert hall facilities; and theDover Downs Raceway – a harness racing track with pari-mutuel wagering on liveand simulcast horse races.

 

Our entertainmentcomplex is located in Dover, the capital of the State of Delaware. We drawpatrons from several major metropolitan areas. Philadelphia, Baltimore andWashington, D.C. are all within a 2 hour drive. According to the 2000 UnitedStates Census, approximately 32.8 million people live within 150 miles of thecomplex.

 

Gaming & Entertainment became a publicly tradedentity effective March 31, 2002 when it was spun-off from Dover Motorsports,Inc. (f/k/a Dover Downs Entertainment, Inc.) (“DVD”).  We were incorporated in the State of Delaware in December 2001 tocreate a public holding company to effect the spin-off.  Our operating subsidiary, Dover Downs, Inc.was incorporated in 1967 and began motorsports and harness horse racingoperations in 1969.

 

In 1996, Dover Downs, Inc.transferred all of its motorsports operations to another DVD subsidiary, DoverInternational Speedway, Inc.  DoverDowns, Inc. became the operating entity for all of DVD’s gaming operationsprior to becoming our subsidiary at the time of the spin-off.

 

**DoverDowns Slots**

 

Our videolottery (slot) machine casino opened in December 1995 with approximately 500video lottery (slot) machines. Due to its popularity, the video lottery (slot) machinecasino has expanded three times since its opening and the number of machineshas increased steadily to its current level of 2,000. The most recent expansionof the gaming operations to our 80,000 square foot casino was completed inMarch 2000.

 

The videolottery (slot) machines range from our popular nickel machines to $50 machinesin the Premium Slots area. Additional amenities include the Garden Cafe, whichbecomes a lounge with live entertainment most evenings, and the Winners CircleRestaurant.  The Las Vegas style “videolottery casino” housing the gaming equipment was designed and built usingexpertise from Caesars World Gaming Development Corporation (“Caesars”), aleader in the gaming industry.  Ourfacilities are open every day of the year, except Christmas and Easter.  Our casino was visited by more than2,600,000 patrons in 2002.

 

The DelawareState Lottery Office administers and controls our video lottery (slot) machineoperations. We are a licensed agent authorized to conduct video lotteryoperations under the Delaware State Lottery Code and one of only threelocations permitted to do so in the State of Delaware. We are permitted by lawto set the payout to customers between 87% and 95%. Since the introduction ofthe video lottery (slot) machine operations, we have maintained an averagepayout of approximately 91.2%. We believe that this represents a competitivepayout percentage.

 

We have amanagement agreement with Caesars, under which, Caesars is our agent tosupervise, manage and operate our video lottery (slot) machine casino. Caesarshas been properly licensed by the Delaware State Lottery Office to performthese functions. We pay to Caesars a management fee based on pre-tax incomegenerated by the video lottery operations. Effective January 1, 2001, weamended our management agreement with Caesars to decrease the percentagemanagement fee paid to them by 20% while modifying the agreement to cover all2,000 video lottery machines in operation for the remainder of the term, whichexpires in December 2004.

 

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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 have implemented extensive procedures for financialand accounting controls, safekeepingand accounting of monies, and security provisions. Security over the gamingoperations involves the integration of surveillance cameras, observation andoversight by employees, security and gaming staff, and various securityfeatures built into the video lottery (slot) machines. The above, when combinedwith proper internal control procedures and daily monitoring of each videolottery (slot) machine by the Delaware State Lottery Office, are intended tomaintain the security, integrity and accountability of the video lotteryoperations.

 

**DoverDowns Hotel and Conference Center**

 

Our new luxury hotel facility, the Dover Downs Hoteland Conference Center, is located adjacent to our casino.  Phase one of the facility was partially opened in the first quarter of 2002 and wascompleted in April 2002.  Thehotel and conference center includes 232 rooms, a multi-purposeballroom/concert hall, a fine dining restaurant, swimming pool and health spa.Additional construction that occurred in adjacent facilities during the firstphase includes, among other things, building a new 425-seat buffet restaurant,renovating the enclosed harness racing grandstand with state-of-the-artsimulcasting facilities, and building an HVAC plant. The second phase, ifimplemented, is expected to include an additional 250 rooms. With this newfacility, we are capitalizing on the need for luxury hotel accommodations inthe Dover area and offering a wider range of entertainment options to ourpatrons, including concerts featuring prominent entertainers, live boxing,gourmet dining, trade shows and conferences. The new facility allows us to attract new patrons and lengthen the stayof current patrons.

 

**DoverDowns Raceway**

 

Dover Downs Raceway haspresented pari-mutuel harness racing events for 34 consecutive years. Liveharness races are conducted at Dover Downs Raceway between November and Apriland are simulcast to tracks and other off-track betting locations across NorthAmerica on each of the Company’s more than 140 live race dates. Our racescurrently are transmitted to more than 440 tracks and off-track bettinglocations. The harness horse racing track is a 5/8-mile track and is lightedfor nighttime operations.  The track isadjacent to our casino and hotel and conference center on land owned by DVD onthe inside of DVD’s auto racing superspeedway. Use of the track is under an easement granted by DVD.

 

Dover Downs Raceway hasnewly constructed facilities for pari-mutuel wagering on both live harnesshorse racing and on simulcast thoroughbred and harness horse racing receivedfrom numerous tracks across North America. Within our main grandstand is thenewly renovated simulcast parlor where our patrons can wager on harness andthoroughbred races received by satellite into Dover Downs Raceway year round.Television monitors throughout the parlor area provide views of all racessimultaneously and the parlor’s betting windows are connected to a centralcomputer allowing bets to be received on all races from all tracks.

 

Harness racing in theState of Delaware is governed by the Delaware Harness Racing Commission. Wehold a license from the Commission authorizing us to hold harness race meetingson our premises and to offer pari-mutuel wagering on live and simulcast horseraces.

 

Harness racing refers toany racing of horses in which the horses competing or participating areharnessed to a sulky, carriage or similar vehicle and are not mounted by ajockey. Pari-mutuel wagering refers to pooled betting by which the wageringpublic, not the track, determines the odds and the payoff. The track retains acommission, which is a percentage of the total amount wagered (“handle”).Simulcasting refers to the transmission of live horse racing by television,cable or satellite signal from one race track to another with pari-mutuelwagering being conducted at the sending and receiving track and a portion ofthe handle being shared by the sending and receiving tracks.

 

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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 DownsRaceway and is intended to provide increased vitality for Delaware’s horseracing industry.

 

We have an agreement with DSOA, or DelawareStandardbred Owner’s Association,Inc., effective August 1, 2000 and continuing through July 31, 2003. DSOA’smembership consists of owners, trainers, and drivers of harness horsesparticipating in harness race meetings at our facilities and elsewhere in theUnited States and Canada. DSOA has been organized and exists for the purpose ofpromoting the sport of harness racing; improving the lot of owners, drivers,and trainers of harness racing horses participating in race meetings;establishing health, welfare and insurance programs for owners, drivers, andtrainers of harness racing horses; negotiating with harness racing tracks onbehalf of owners, trainers, drivers, and grooms of harness racing horses; andgenerally rendering assistance to them whenever and wherever possible. Underthe DSOA agreement, we are required to distribute as purses for races conductedat our facilities, a percentage of our retained share of pari-mutuel revenues,depending on the level of the average daily dollar handle.

 

We enjoy a good relationship with representatives ofDSOA and anticipate that this relationshipwill continue. We believe that the DSOA agreement is typical of similaragreements in the industry.

 

**Licensingand Regulation 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 Director of the DelawareState Lottery Office.  We are a“Licensed Agent” authorized to conduct video lottery (slot) operations underthe Delaware State Lottery Code.

 

A “video lottery machine” is defined by law as anymachine 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 towinning players.  A machine shall beconsidered a video lottery machine notwithstanding the use of an electroniccredit system making the deposit of bills, coins or tokens unnecessary.  Various video lottery machines are in use atour casino.  All accept $1, $5, $10,$20, $50 and $100 bills.  The maximumbet permitted by regulation has been increased to $100 per machine.  The Company is currently prohibited byregulation from extending any credit to its gaming customers.

 

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The Director of the Delaware State Lottery Office hasdiscretion to adopt such rules and regulations as the Director deems necessaryor desirable for the efficient and economical operation and administration ofthe system, including (i) type and number of games permitted, (ii) pricing ofgames, (iii) numbers and sizes of prizes, (iv) manner of payment, (v) value ofbills, coins or tokens needed to play, (vi) requirements for licensing agentsand service providers, (vii) standards for advertising, marketing andpromotional materials used by Licensed Agents, (viii) procedures for accountingand reporting, (ix) registration, kind, type, number and location of videolottery machines on a Licensed Agent’s premises, (x) security arrangements forthe video lottery system, and (xi) reporting and auditing of financialinformation of Licensed Agents.

 

*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 Directormay deem necessary relating to competence, honesty and integrity, such that aperson’s reputation, habits and associations do not pose a threat to the publicinterest of the State or to the reputation of or effective regulation andcontrol of the video lottery; it being specifically understood that any personconvicted of any felony, a crime involving gambling, or a crime of moralturpitude within 10 years prior to applying for a license or at any timethereafter shall be deemed unfit.

 

There are similar licensure requirements for 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.

 

*Revocation,Suspension or Modification of License*. The Director of theDelaware State Lottery Office may revoke or suspend the license of a LicensedAgent, such as Gaming & Entertainment, for “cause.”  “Cause” is broadly defined and couldpotentially include falsifying any application for license or report required bythe rules and regulations, the failure to report any information required bythe rules and regulations, the material violation of any rules and regulationspromulgated by the Director or any conduct by the licensee which undermines thepublic confidence in the video lottery system or serves the interest oforganized 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 Director.  A hearing officer’sdecision revoking or suspending the license shall be appealable to the DelawareSuperior Court under the provisions of the Administrative Procedures Act.  All existing or new officers, directors, keyemployees and owners of a Licensed Agent are subject to backgroundinvestigation.  Failure to satisfy thebackground investigation may constitute cause for suspension or revocation ofthe License.

 

*OwnershipChanges*.  Under Delawarelaw, a change of ownership of a Licensed Agent will automatically terminate itslicense 90 days after the change of ownership occurs, unless the Director ofthe Delaware State Lottery Office 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 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 Corporation mustfirst obtain 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 DelawareHarness Racing Commission and must conduct a minimum of 80 live race days eachracing season, subject to the availability of racing stock.

 

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*ControlOver Equipment and Technology*.  The Company does not own or lease the video lottery machines orcomputer systems used by the State of Delaware in connection with its videolottery gaming operations.  The Directorof the Delaware State Lottery Office enters into contracts directly with theproviders of the video lottery machines and computer systems (the “TechnologyProviders”).  Equipment is provided tothe State by sale or lease and all Technology Providers must be licensed by theDirector.  There are also limitations onthe number of video lottery machines that may be used at any one facility thatare supplied 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-MutuelWagering*

 

Harness racing in the State of Delaware is governed bythe Delaware Harness Racing Commission (the “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

 

*Thelicense must be renewed on a yearly basis*.  The Commission may reject an application fora license for any cause which it deems sufficient and the action of theCommission is final.  The Commission mayalso suspend or revoke a license which it has issued and its action in thatrespect is final, subject to review, upon questions of law only, by theSuperior Court of the County within which the license was granted.  The action of the Commission stands unless anduntil reversed by the Court.  TheCompany has received an annual license from the Commission for the past 34consecutive years and management believes that its relationship with theCommission remains good.  However, therecan be no assurances that the Company will continue to be licensed by theDelaware Harness Racing Commission in the future.

 

Under the law, the Commission has broad powers ofsupervision and regulation.  TheCommission may prescribe rules, regulations and conditions under which all harnessracing and betting pools shall be conducted; may regulate the performance ofany service or the sale of any article on the premises of a licensee; maycompel the production of books and documents of a licensee and require thatbooks and records be kept in such manner as the Commission may prescribe; mayvisit, investigate and place accountants or other persons as it deemsnecessary, at the expense of a licensee, in the office, track or place ofbusiness of a licensee; may summon witnesses and administer oaths; and 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 the meeting.  A licensee must deposit with the Commission,ten days before a race meeting, a policy of insurance against personal injuryliability in an amount to be approved by the Commission.

 

*USTA. *Any license granted by theDelaware Harness Racing Commission is also subject to such reasonable rules andregulations as may be prescribed from time to time by the United StatesTrotting Association.  The United StatesTrotting Association sets various rules relating to the conduct of harnessracing.  According to its Articles ofIncorporation, the purposes of the Association shall include the improvement ofthe breed of trotting and pacing horses, the establishment of rules regulatingstandards and the registration of such horses thereunder, the advancement andpromotion of the interest of harness racing in the United States, theinvestigation, ascertainment and registration of the pedigrees of such horses,the regulation and government of the conduct of the sport of harness racing,the establishment of rules for the conduct thereof, not inconsistent with thelaws of the various states, and the sanctioning of the holding of exhibitionsof such horses and meetings for the racing thereof, the issuance of licenses toqualified persons to officiate at harness race meetings and exhibitions, theissuance of licenses to the owners of horses permitting the exhibition andracing of such horses and the qualification thereof, the issuance of licensesto drivers of horses participating in such races or exhibitions, and providingfor the enforcement of the rules promulgated by the Association, and providingfor the fixing of penalties, fines, and the suspension or expulsion frommembership, or privileges or for any other misconduct detrimental to the sport.

 

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* *

*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 withrespect to 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.

 

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.

 

**Competition**

 

The U.S. gaming industry is intensely competitive andfeatures many participants, including riverboat casinos, dockside casinos, land-basedcasinos, video lottery and poker machines, whether or not located in casinos,native American gaming, pari-mutuel wagering on live and simulcast horseracing, off track betting, state run lotteries, internet gambling and otherforms of gambling. Gaming competition is particularly intense in each of thesemarkets. Many of our competitors have more gaming industry experience, arelarger and have significantly greater financial and other resources than we do.

 

The legalization of 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 currently is in Maryland and Pennsylvania, which ifenacted, would further expand state gambling and wagering opportunities,including video lottery (slot) machines at racetracks. Enactment of suchlegislation could increase our competition and could adversely affect ourbusiness, financial condition and overall profitability.

 

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 locatedapproximately 100 miles from our entertainment facility and offers a full rangeof gaming products.

 

Competition in horseracing is varied since racetracks in the surrounding area differ in manyrespects. Some tracks only offer thoroughbred or harness horse racing; othershave both. Tracks have live racing seasons that may or may not overlap withneighboring tracks. Depending on the purse structure, tracks that are fartherapart may compete with each other more for 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 ofDelaware, we face little direct live competition from the State’s other twotracks. Harrington Raceway, a south central Delaware fairgrounds track,conducts harness horse racing periodically between May and November. There isno overlap presently with our live race season. Delaware Park, a northernDelaware track, conducts thoroughbred horse racing from April throughmid-November. Its race season only overlaps with ours for approximately sixweeks each year.

 

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We competewith harness and thoroughbred racing and simulcasting facilities in the neighboringstates of Pennsylvania, Maryland and New Jersey.  We also receive simulcast harness and thoroughbred races fromapproximately 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 to theseevents 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.

 

The State of Delaware hasenacted a ban on smoking in all indoor public facilities with certain minorexceptions such as fire halls and fraternal organization premises wherefundraising takes place.  The ban becameeffective November 27, 2002.  The newlaw prohibits smoking inside the Company’s casino, hotel and conference center,restaurants, harness track indoor grandstands and simulcasting facilities,provided that smoking will be permitted in up to 25% of the rooms in thehotel.  We continue to pursuelegislative and administrative avenues of relief from the new law.  If the smoking ban continues in its currentform and if a significant number of our smoking patrons choose to discontinueor shorten their visits as a result of an indoor smoking ban and cannot bereplaced with other patrons, the Company’s business, financial condition andprofitability could be adversely affected.

 

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

 

**GrowthStrategies**

 

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, enhance ourgaming products with additional entertainment offerings, and create an excitinggaming environment while focusing on areas that we believe will increase ourrevenue and profitability. Our efforts in this regard include the following:

 

*CapitalizeOn Our New Luxury Hotel And Conference Center*

 

Our new luxury hotel facility, the Dover Downs Hoteland Conference Center, is located adjacent to our casino.  Thefacility was partially opened in the first quarter of 2002 and was completed inApril 2002.  The first phase ofthe hotel and conference center includes 232 rooms, a multi-purposeballroom/concert hall, a fine dining restaurant, swimming pool and health spa.Additional construction that occurred in adjacent facilities during the firstphase includes, among other things, building a new 425-seat buffet restaurant,renovating the enclosed harness racing grandstand with state-of-the-artsimulcasting facilities, and building an HVAC plant. The second phase, ifimplemented, is expected to include an additional 250 rooms. With this newfacility, we are capitalizing on the need for luxury hotel accommodations inthe Dover area and offering a wider range of entertainment options to ourpatrons, including concerts featuring prominent entertainers, live boxing,gourmet dining, trade shows and conferences. The new facility allows us to attract new patrons and lengthen the stayof current patrons.

 

*IncreaseThe Utilization Of Our Casino*

 

We currently have 2,000 video lottery (slot) machinesat our Dover facility, the maximum presently permitted by statute.

 

We use a sophisticated database marketing program todevelop long-term relationships with our patrons and to target promotions tospecific customer segments. Our Capital Club, a slots players club and trackingsystem, allows us to identify customers and to reward their level of playthrough awards programs. Membership in this club currently stands atapproximately 150,000 active patrons. We expect to increase attendance at bothour casino and

 

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hotel and conference center through effective promotional use of ourdatabase and by making improvements to our facilities and gaming offeringsbased on what we learn from our Capital Club members. For example, we continueto add machines with differing denominations and progressive slot machines withlarge jackpot sizes because they offer patrons a more exciting gamingexperience.

 

We are also seeking regulatory approval or legislationto allow us to expand our hours ofoperation and increase our betting limits.

 

*IncreaseThe Attendance And Wagering On Live Harness Horse Racing Through IncreasedPurse Levels*

 

With a percentage of video lottery (slot) machinerevenues supplementing the purses forthe horsemen, we have experienced dramatic increases in the amount of ourpurses. The result is that we continue to attract higher quality horses.Bettors are attracted to races with larger purses and typically wager more onthe higher quality and more predictable horses. We have completed variousupgrades to enhance the harness horse racing facilities, including renovationsto the track and grounds, receiving barn and paddock areas and, more recently, haveconstructed a new simulcast parlor with state-of-the-art facilities that allowyear round wagering. We continue to focus on improvements that we believe allowus to increase attendance and wagering.

 

As of the end of our 2002 season, our average daily pursedistribution had increased to$164,000 from $8,000 in 1995. According to information published by the HarnessTracks of America, Inc., an association we belong to comprised of harness racetracks throughout the world, this level would have us ranked second amongthirty-six United States harness tracks in daily purse distribution.

 

With more money available for purses, we have suchprestigious events as our annual“Progress Pace” with a $400,000 purse, an event which attracts the country’stop three-year-old horses.

 

*ExpandOur Existing Simulcasting*

 

We conduct simulcasting and pari-mutuel wagering 360days per year. As our racing product continues to improve, we expect tocontinue to increase the number of other tracks and off track wageringfacilities that receive our racing signal during our race season and the amountof wagering which occurs on our events. We also expect to continue to increasethe amount of wagering at our site from the harness and thoroughbred raceswhose signals we import from other North American tracks.

 

*SeekAdditional Gaming And Entertainment Opportunities*

 

We intend topursue acquisitions and strategic partnerships in the gaming business if andwhen attractive opportunities arise.

 

**Seasonality**

 

Gaming & Entertainment’s quarterly operatingresults are affected by weather and the general economic conditions in theUnited States. Our quarterlyoperating results are generally distributed evenly throughout the year.However, the results for any quarter are not necessarily indicative of resultsto be expected in any future period.

 

**Employees**

 

As of December 31, 2002, Gaming & Entertainmenthad approximately 782 full-time employees and 148 part-time employees. Weengage temporary personnel to assist during our live harness racing season.None of our employees are party to a collective bargaining agreement and webelieve that our relationship with our employees is good.

 

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**Available Information**

 

We file annual, quarterly and current reports,information statements and other information with the SEC. The public may readand copy any materials we file with the SEC at the SEC’s Public Reference Roomat 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtaininformation on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,proxy and information statements, and other information regarding issuers thatfile electronically with the SEC.  The addressof 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 iswww.doverdowns.com. We provide a link on our website, under Investor Relations,to our filings with the SEC, including our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendmentsto those reports.

 

**Item 2.      Properties**

 

We own our principal executive office located inDover, Delaware.  Dover Downs Slots—our80,000 square foot casino; the Dover DownsHotel and Conference Center—featuring luxury accommodations with conference,banquet, fine dining, ballroom and concert hall facilities; and the Dover DownsRaceway—indoor grandstands, betting and simulcasting parlors, all at ourentertainment complex situated on approximately 78 acres of land owned by us.

 

Use of DVD’s5/8-mile harness racing track is under an easement granted by DVD which doesnot require the payment of any rent. Under the terms of the easement we haveexclusive use of the harness track during the period beginning November 1 ofeach year and ending April 30 of the following year, together with set up andtear down rights for the two weeks before and after such period.  The harness track is located on propertyowned by DVD and is on the inside of DVD’s motorsports superspeedway.  DVD’s motorsports superspeedway and outdoorgrandstands are immediately adjacent to our casino complex. The indoorgrandstands we use for harness racing are in the building that houses ourpari-mutuel betting and simulcasting parlors and are adjacent to our casino. Weallow DVD free use of these indoor grandstands in connection with two annualmotorsports event weekends and also lease certain office and parking space toDVD. Various easements and agreements relative to access, utilities and parkinghave also been entered into between us and DVD.

 

**Item 3.      Legal Proceedings**

 

We are aparty to ordinary routine litigation incidental to our business.  Management does not believe that theresolution of any of these matters is likely to have a serious negative effecton our financial condition, cash flows or profitability.

 

**Item 4.      Submission Of Matters To A Vote Of SecurityHolders**

 

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

 

10

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**Part II**

 

**Item 5.      Market For The Registrant’s CommonStock And Related Stockholder Matters**

 

Gaming & Entertainment’s common stock is listed onthe New York Stock Exchange under the ticker symbol “DDE.”  Gaming & Entertainment Class A commonstock is not publicly traded but is freely convertible into Gaming &Entertainment common stock at any time at the option of the holderthereof.  As of February 28, 2003, therewere 10,413,012 shares of common stock and 16,145,059 shares of Class A commonstock outstanding.  There were 1,178holders of record for common stock and 16 holders of record for Class A commonstock.

 

The range of closing share pricesfor the Company’s common stock on the New York Stock Exchange and the dividendsdeclared for the year ended December 31, 2002, beginning after the Company’sspin-off from DVD, are detailed in the following table.  The Company’s spin-off from DVD becameeffective on March 31, 2002, at which time Gaming & Entertainment became anindependent public company.

 

| **Quarter Ended:**  |   | **High** |   | **Low** |   | **Dividends  Declared** |   |
|---------------------|--------|----------|--------|---------|--------|-------------------------|--------|
|                |   |     |   |    |   |                    |   |
| June  30, 2002      |   | $        | 14.87  |    | $      | 11.65                   |   | $ | 0.0375 |   |
| September  30, 2002 |   | 12.94    |   | 7.62    |   | 0.0375                  |   |
| December  31, 2002  |   | 10.41    |   | 8.00    |   | 0.05                    |   |
|                     |        |          |        |         |        |                         |        |  |  |  |

 

**Item 6.      Selected Financial Data**

 

The following table summarizes certain selectedconsolidated financial data of Gaming & Entertainment, which has beenderived from the Consolidated Financial Statements of Gaming &Entertainment for the years ended December 31, 2002 and 2001, the six monthsended December 31, 2000 and for each of the three years ended June 30, 2000.The historical information may not be indicative of Gaming &Entertainment’s future performance as an independent public company. Thisinformation set forth below should be read in conjunction with “Management’sDiscussion And Analysis of Financial Condition And Results of Operations,” the“Consolidated Financial Statements” and the notes thereto, included elsewherein this document.

 

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** **

**Five Year Selected Financial Data**

** **
|                                                                                |   | **Years Ended  December 31,** |       | **Six Months  Ended  Dec. 31,  2000** |       | **Years  Ended June 30,** |       |
|-------------------------------------------------------------------------------------|--------|-------------------------------|------------|---------------------------------------|------------|---------------------------|------------|
|                                                                                |   | **2002**                      |       | **2001**                              |       |                      | **2000**   |   | **1999** |   | **1998** |   |
| **Consolidated  Statement of Earnings Data (in thousands, except per share data):** |   |                          | ** ** |                                  | ** ** |                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenues:                                                                           |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
| Gaming                                                                              |   | $                             | 193,723    |                                  | $          | 175,065                   |       | $ | 79,897 |   | $ | 158,398 |   | $ | 130,519 |   | $ | 108,923 |   |
| Other                                                                               |   | 26,083                        |       | 12,550                                |       | 5,796                     |       | 10,567 |   | 9,093 |   | 6,332 |   |
| Gross  revenues                                                                     |   | 219,806                       |       | 187,615                               |       | 85,693                    |       | 168,965 |   | 139,612 |   | 115,255 |   |
| Less:  promotional allowances                                                       |   | 13,331                        |       | 6,322                                 |       | 2,941                     |       | 4,450 |   | 3,651 |   | 1,978 |   |
|                                                                                |   | 206,475                       |       | 181,293                               |       | 82,752                    |       | 164,515 |   | 135,961 |   | 113,277 |   |
| Expenses:                                                                           |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
| Gaming                                                                              |   | 148,817                       |       | 132,587                               |       | 58,731                    |       | 118,987 |   | 97,766 |   | 80,755 |   |
| Other  operating                                                                    |   | 10,351                        |       | 5,205                                 |       | 2,360                     |       | 4,821 |   | 4,306 |   | 3,864 |   |
| Depreciation                                                                        |   | 5,176                         |       | 2,211                                 |       | 1,037                     |       | 1,798 |   | 1,269 |   | 1,237 |   |
| General  and administrative                                                         |   | 5,061                         |       | 4,676                                 |       | 1,991                     |       | 3,375 |   | 2,694 |   | 2,974 |   |
| Total  expenses                                                                     |   | 169,405                       |       | 144,679                               |       | 64,119                    |       | 128,981 |   | 106,035 |   | 88,830 |   |
| Operating  earnings                                                                 |   | 37,070                        |       | 36,614                                |       | 18,633                    |       | 35,534 |   | 29,926 |   | 24,447 |   |
| Interest  expense, net                                                              |   | 903                           |       | 1,020                                 |       | —                    |       | 216 |   | 85 |   | — |   |
| Earnings  before income taxes                                                       |   | 36,167                        |       | 35,594                                |       | 18,633                    |       | 35,318 |   | 29,841 |   | 24,447 |   |
| Income  taxes                                                                       |   | 14,725                        |       | 14,499                                |       | 7,577                     |       | 14,366 |   | 12,145 |   | 10,000 |   |
| Net  earnings                                                                       |   | $                             | 21,442     |                                  | $          | 21,095                    |       | $ | 11,056 |   | $ | 20,952 |   | $ | 17,696 |   | $ | 14,447 |   |
|                                                                                |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
|                                                                                |   |                          |       | **(unaudited)**                       |       | **(unaudited)**           |       | **(unaudited)** |   |   |   |   |   |
| Earnings per common  share(a):                                                      |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
| Basic                                                                               |   | $                             | 0.80       |                                  | $          | 0.79                      |       | $ | 0.42 |   | $ | 0.82 |   |   |   |   |   |
| Diluted                                                                             |   | $                             | 0.80       |                                  | $          | 0.79                      |       | $ | 0.42 |   | $ | 0.82 |   |   |   |   |   |
|                                                                                |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
| Dividends  declared per common share                                                |   | $                             | 0.125      |                                  | —     |                      | —     |   | — |   | — |   | — |   |
|                                                                                |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
| **Selected  Consolidated Operating Data (unaudited):**                              |   |                          |       |                                  |       |                      |       |   |   |   |   |   |   |
| Total  slots facility attendance  (in thousands)                                    |   | 2,615                         |       | 2,512                                 |       | 1,212                     |       | 2,343 |   | 1,933 |   | 1,921 |   |
| Avg.  number of slot machines                                                       |   | 2,000                         |       | 2,000                                 |       | 2,000                     |       | 1,723 |   | 1,191 |   | 1,000 |   |
| Casino  square footage                                                              |   | 80,000                        |       | 80,000                                |       | 80,000                    |       | 80,000 |   | 65,000 |   | 41,000 |   |

 
|                                                  |   | **December  31,** |   | **June 30,** |   |
|-------------------------------------------------------|--------|-------------------|--------|--------------|--------|
|                                                  |   | **2002**          |   | **2001**     |   | **2000** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                  |   |              |   |         |   |   |   |   |   |   |   | **(unaudited)** |   |
| **Consolidated  Balance Sheet Data  (in thousands):** |   |              |   |         |   |   |   |   |   |   |   |   |   |
| Working  capital (deficit)                            |   | $                 | 7,117  |         | $      | (3,173 | ) | $ | 37,166 |   | $ | 31,486 |   | $ | 19,796 |   | $ | 14,932 |   |
| Total  assets                                         |   | 148,658           |   | 131,257      |   | 93,857 |   | 85,137 |   | 59,887 |   | 39,962 |   |
| Long-term  debt                                       |   | 40,890            |   | —       |   | — |   | — |   | — |   | — |   |
| Total  stockholders’ equity(b)                   |   | 84,439            |   | 102,653      |   | 81,558 |   | 70,502 |   | 49,550 |   | 31,854 |   |
|                                                       |        |                   |        |              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)             Earnings per commonshare information for periods prior to April1, 2002, the day after the effective date of the spin-off from DVD, hasbeen calculated using the pro forma average outstanding common shares and ClassA common shares for Gaming & Entertainment. The pro forma averageoutstanding common shares and Class A common shares were derived from DVD’scommon shares and Class A common shares outstanding for the periods presentedusing the distribution ratio of 0.7 shares of Gaming & Entertainment commonstock and Class A common stock for each share of DVD common stock and Class Acommon stock, respectively. Outstanding stock options of Gaming & Entertainmenthave been calculated assuming the stock options related to each individual whobecame a Gaming & 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.

 

(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.

 

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

 

The following discussion is based upon and should beread in conjunction with theconsolidated financial statements and related notes included elsewhere in thisAnnual Report on Form 10-K.

 

**Resultsof Operations**

 

Gaming revenues represent the net win from videolottery (slot) machine wins and losses and commissions from pari-mutuelwagering.  Other operating revenuesconsist of hotel rooms revenue, food and beverage sales and other miscellaneousincome.

 

For the video lottery operations, which account formore than 85% of gross revenues for all periods presented, the differencebetween the amount wagered by bettors and the amount paid out to bettors isreferred to as the win. The win is included in the amount recorded in theCompany’s financial statements as gaming revenue. The Delaware State LotteryOffice sweeps the win from the video lottery operations, collects the State’sshare of the win and the amount due to the vendors under contract with theState who provide the video lottery 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 lotterymachines and associated computer systems, and (iii) for harness horse racingpurses. The Company recognizes revenues from pari-mutuel commissions earnedfrom live harness horse racing and importing of simulcast signals from otherrace tracks when the race occurs. Revenues from hotel rooms and food andbeverage sales are recognized at the time the service is provided.

 

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

 

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

 

Gaming revenues increased by$18,658,000, or 10.7%, to $193,723,000, primarily the result of increased playin the casino.  The opening of the DoverDowns Hotel and Conference Center and other expanded marketing and promotionalactivities were the major contributors to the increased slot machine play. The232-room luxury hotel and conference center was partially opened in the firstquarter of 2002 and was completed in April 2002. The new facility allowsus to attract new patrons and lengthen the stay of current patrons.  Through November 2002, slot win grew eachmonth at an average rate of 12.7%.  OnNovember 27, 2002, the Delaware Clean Indoor Air Act became effective.  The act prohibitssmoking inside the Company’s casino, hotel and conference center, restaurants,harness track indoor grandstands and simulcasting facilities, provided thatsmoking will be permitted in up to 25% of the rooms in the hotel.  Prior to the effective date of the act, wederived significant revenues from designated smoking areas.  Gaming revenues declined 13.1% in December2002 compared to December 2001. If the smoking ban continues in its currentform and if a significant number of our smoking patrons choose to discontinueor shorten their visits as a result of an indoor smoking ban and cannot bereplaced with other patrons, the Company’s revenues, earnings and cash flowswill continue to be negatively impacted.

 

Other operating revenues, whichconsist of hotel rooms revenue, food and beverage sales and other miscellaneousincome, increased by $13,533,000, or 107.8%, to $26,083,000, primarily theresult of the opening of the Dover Downs Hotel and Conference Center in April2002.

 

Promotional allowances includethe retail value of hotel rooms, food, beverage and other items that areprovided to customers without charge. The increase in promotional allowances is primarily due to the openingof the Dover Downs Hotel and Conference Center in 2002.

 

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Gaming expenses increased by$16,230,000, or 12.2%, reflecting the higher gaming revenues. Amountsretained by the State of Delaware, and the amount collected by the State ofDelaware for payment to the vendors under contract with the State who providethe video lottery machines and associated computer systems increased by$7,204,000 and $503,000, respectively. Amounts allocated from the video lottery operation for harness horseracing purses were $22,307,000 in 2002 compared with $20,232,000 in 2001. Theother significant expense increases were wages and related employee benefits of$1,129,000 and the cost of promotional allowances of $4,521,000.

 

Other operating expensesincreased by $5,146,000, primarily the result of operating expenses associatedwith the Dover Downs Hotel and Conference Center.

 

Depreciation expense increasedby $2,965,000 primarily due to the opening of the Dover Downs Hotel andConference Center in 2002.

 

General and administrativeexpenses increased by $385,000 to $5,061,000 from $4,676,000 in 2001, primarilydue to increased wage and benefit costs.

 

Net interest expense decreasedby $117,000 primarily as a result of the Company’s average interest ratedecreasing from 5.73% during 2001 to 2.95% during 2002.  The Company capitalized $351,000 of interestrelated to the construction of major facilities in 2002 compared with$1,580,000 in 2001.  Capitalization ofinterest on the Dover Downs Hotel and Conference Center ceased when the facilityfully opened.

 

The Company’s effective incometax rate was 40.7% for the years ended December 31, 2002 and 2001.

 

Net earnings were $21,442,000 in 2002as compared to $21,095,000 in 2001. Theincrease of $347,000, or 1.6%, was primarily due to increased play in thecasino and hotel revenues from the opening of the Dover Downs Hotel andConference Center, offset by related gaming and hotel costs and increaseddepreciation expense.

 

*YearEnded December 31, 2001 vs. Year Ended December 31, 2000 (unaudited)*

 

Gaming revenues increased by $14,199,000, or 8.8%, to$175,065,000, primarily the result of expanding the casino facility andincreasing the number of video lottery (slot) machines from an average of 1,945during the year ended December 31, 2000 to 2,000 during the year ended December31, 2001, and also from the results of expanded marketing and promotionalactivities related to our video lottery casino.

 

Other operating revenues, whichconsist of food and beverage sales and other miscellaneous income, increased by$1,122,000, or 9.8%, to $12,550,000, primarily the result of expanding thecasino facility which in turn led to elevated patron volume.

 

Promotional allowances includethe retail value of food, beverage and other items that are provided tocustomers without charge.  The increaseof $964,000 in 2001 is primarily due to our expanded marketing and promotionalactivities related to our video lottery casino.

 

Gaming expenses increased by $12,227,000, or 10.2%,reflecting the higher revenues. Amounts retained by the State of Delawareincreased by $5,798,000 in 2001.  Prioryear operating expenses were reduced by $2,475,000 as a result of the Companyreversing a portion of prior accruals for disputed management fees as discussedbelow. Amounts allocated from the video lottery operation for harness horseracing purses were $20,232,000 in 2001 compared with $18,593,000 in 2000. Theother significant expense increases were wages and related employee benefits of$1,547,000 and the cost of promotional allowances of $762,000.

 

Other operating expenses increased by $428,000primarily due to additional wages and related employee benefits and operatingsupplies in our food and beverage department necessary to service the expandedcasino facility.

 

Depreciation expense increased by $224,000 primarilydue to capital expenditures related to our Phase IV video lottery casinoexpansion completed in March 2000.

 

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General and administrative expenses increased by$1,406,000 to $4,676,000 from $3,270,000 in 2000, primarily due to pre-openingexpenses for the Dover Downs Hotel & Conference Center.

 

Net interest expense was $1,020,000 for the year endedDecember 31, 2001 as compared to $189,000 for the year ended December 31, 2000.The interest expense resulted from increased borrowings on DVD’s revolvingcredit facility which was allocated to Gaming & Entertainment. Wecapitalized $1,580,000 of interest related to the construction of majorfacilities in 2001 compared with $321,000 in 2000.

 

Our effective income tax rate was 40.7% for the yearsended December 31, 2001 and 2000.

 

Net earnings decreased by $473,000, primarily as aresult of increased general and administrative costs from pre-opening expensesrelated to the Dover Downs Hotel and Conference Center and increased interestexpense related to construction of the Dover Downs Hotel and Conference Center,offset by increased play in the casino. Also, prior year operating expenseswere reduced by $2,475,000 as a result of the Company reversing a portion ofprior accruals for disputed management fees.

 

*SixMonths Ended December 31, 2000 Compared With Six Months Ended December 31, 1999(unaudited)*

 

Gaming revenues increased by $2,468,000, or 3.2%, to$79,897,000, the result of having an average of 2,000 video lottery (slot)machines during the six-month period ended December 31, 2000 compared with anaverage of 1,555 video lottery (slot) machines during the six-month periodended December 31, 1999, and expanded marketing and promotional activitiesrelated to our video lottery casino.

 

Other operating revenues, whichconsist of food and beverage sales and other miscellaneous income, increased by$861,000, or 17.4%, to $5,796,000, primarily the result of expanding the casinofacility which in turn led to elevated patron volume.

 

Promotional allowances includethe retail value of food, beverage and other items that are provided tocustomers without charge.  The increaseof $908,000 in the six months ended December 31, 2000 is primarily due to ourexpanded marketing and promotional activities related to our video lotterycasino.

 

Gaming expenses increased by $1,344,000 reflecting thehigher revenues. Amounts retained by the State of Delaware increased by$1,601,000 during the six months ended December 31, 2000. Amounts allocatedfrom the video lottery operation for harness horse racing purses were$9,321,000 during the six months ended December 31, 2000 compared with$9,036,000 during the six months ended December 31, 1999. Wages and relatedemployee benefits increased by $1,261,000 during the six months ended December31, 2000 due to the opening of our Phase IV casino expansion. Additionalcustomer promotional allowances of $675,000 were the other significantincrease. The aforementioned increases in gaming operating expenses were offsetby $2,475,000 from the reversal of prior accruals for management fees thatresulted from amending the casino management agreement with Caesars to decreasethe percentage management fee paid to Caesars for the remaining term of theagreement by 20%. In prior years and during the six months ended December 31,2000, we accrued amounts that Caesars claimed were due as a result of casinoexpansions, but which we disputed. As a result of the amendment to themanagement agreement, we settled the dispute with Caesars and a portion of theaforementioned accrued amounts were reversed.

 

Other operating expenses remained consistent with thesame period of the prior year.

 

Depreciation increased by $189,000 or 22.3% due tocapital expenditures related to our Phase IV video lottery casino expansion inMarch 2000.

 

General and administrative expenses decreased by$105,000 to $1,991,000 from $2,096,000 primarily due to a reduction in employeebenefit costs.

 

There was no interest income or expense during thesix-month period ended December 31, 2000 compared with $27,000 of interestexpense during the six- month period ended December 31, 1999. We capitalized$200,000 and

 

15

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$41,000 of interest during the six-month periods ended December 31,2000 and 1999, respectively, related to the construction of major facilities.

 

Our effective income tax rate was 40.7% for thesix-month periods ended December 31, 2000 and 1999.

 

Net earnings increased by $614,000 primarily due tothe increased play in the casino and the one-time net gain related to theamended management agreement with Caesars.

 

*FiscalYear 2000 Compared With Fiscal Year 1999*

 

Gaming revenues increased by $27,879,000, or 21.4%, to$158,398,000, primarily the result of having an average of 1,723 video lottery(slot) machines in fiscal 2000 compared with an average of 1,191 video lottery(slot) machines in fiscal 1999, and expanded marketing and promotionalactivities related to our video lottery casino.

 

Other operating revenues, whichconsist of food and beverage sales and other miscellaneous income, increased by$1,474,000, or 16.2%, to $10,567,000, primarily the result of expanding thecasino facility which in turn led to elevated patron volume.

 

Promotional allowances includethe retail value of food, beverage and other items that are provided tocustomers without charge.  The increasein fiscal 2000 is primarily due to our expanded marketing and promotionalactivities related to our video lottery casino.

 

Gaming expenses increased by $21,221,000 reflectingthe higher revenues. Amounts retained by the State of Delaware increased by$13,840,000 in fiscal 2000. Amounts allocated from the video lottery operationfor harness horse racing purses were $18,308,000 in fiscal 2000 compared with$15,173,000 in fiscal 1999. The other significant expense increases were wagesand related employee benefits of $2,704,000 and the cost of promotionalallowances of $732,000.

 

Other operating expenses increased by $515,000primarily due to additional wages and related employee benefits, costs of goodssold and operating supplies in our food and beverage department necessary toservice the expanded casino facility.

 

Depreciation increased by $529,000 or 41.7% due tocapital expenditures related to our casino expansions completed in fiscal 2000and 1999.

 

General and administrative expenses increased by$681,000 to $3,375,000 from $2,694,000, primarily due to an increase in wagesand related employee benefits. As a percentage of total revenues, our fiscal2000 general and administrative costs remained consistent with fiscal 1999.

 

Net interest expense was $216,000 in fiscal 2000compared to $85,000 in fiscal 1999. The increased interest expense resultedfrom borrowings on DVD’s revolving credit agreement, offset by thecapitalization of $161,000 and $268,000 of interest in fiscal 2000 and 1999,respectively, related to the construction of major facilities.

 

Our effective income tax rate was 40.7% for the fiscalyears ended June 30, 2000 and 1999.

 

Net earnings increased by $3,256,000, primarily due tothe increased levels of play in the casino.

 

**Liquidityand Capital Resources**

 

Net cashprovided by operating activities was $25,137,000 for the year ended December31, 2002 compared to $29,537,000 for the year ended December 31, 2001.  The decrease in 2002 as compared to 2001 wasprimarily due to the timing of certain construction payments related to theDover Downs Hotel and Conference Center, offset by an increase in earningsafter income taxes but before depreciation and amortization from $23,306,000 in2001 to $26,678,000 in 2002.

 

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Net cash used in investing activities was $20,652,000for the year ended December 31, 2002compared to $63,827,000 for the year ended December 31, 2001.  The decrease in 2002 as compared with 2001was primarily due to the completion of construction of the Dover Downs Hoteland Conference Center in April 2002.

 

Net cash used in financing activities was $5,777,000 forthe year ended December 31, 2002 compared to net cash provided by financingactivities of $38,341,000 for the year ended December 31, 2001.  The change was primarily due to a decreasein net borrowings needed as a result of a decrease in capital expenditurescompared to 2001.  Additionally, theCompany paid $3,333,000 in regular quarterly cash dividends during 2002.

 

We have a $55 million unsecuredrevolving line of credit, $45 million of which was used to pay down a portionof the DVD credit facility on April 1, 2002 in connection with our spin-offfrom DVD.  Based on current businesstrends, we believe that our cash flows from operations and the funds availablepursuant to our $55 million revolving credit facility will be sufficient tomeet our short and long-term cash needs. Any significant expansion of our gaming facility that the Company maydecide to undertake, any significant acquisitions, or any material adversechange in our operations could cause the need for additional financing.  Effective December 31, 2003, the terms ofthe credit facility reduce the facility by $10 million to $45 million.

 

On January 29, 2003, the Board of Directors of theCompany declared a quarterly cash dividend on both classes of common stock of$.05 per share.  The dividend was paidon March 10, 2003 to shareholders of record at the close of business onFebruary 10, 2003.

 

On October 23, 2002, the Board of Directors authorizedthe repurchase 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 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 has purchased 97,545 shares of itsoutstanding common stock at an average price of $8.87 per share.

 

Based on current businessconditions, the Company expects to make capital expenditures of approximately $5-10million during 2003.  These projectsprimarily relate to improvements at our video lottery casino, additionalamenities at our luxury hotel and site improvements, such as parking andsignage.  The Company expects that itsnet cash flows from operating activities and funds available from its creditfacility will be sufficient to provide for its working capital needs andcapital spending requirements at least through 2003, as well as any cashdividends the board of directors may declare. As a result, we would expect cash flows from operating activities andfunds available from our credit facility to also provide for long-termliquidity.

 

**Contractual Obligations**

 

At December 31, 2002, the Company had the followingcontractual obligations:

 
|                         |   | **Total** |       | **Payments  Due by Period** |          |
|------------------------------|--------|-----------|------------|-----------------------------|---------------|
| **Contractual obligations:** |   |      | **2003**   |                        | **2004-2005** |   | **2006-2007** |   | **Thereafter** |   |
| Notes  payable to banks      |   | $         | 40,890,000 |                        | $             | — |   | $ | 40,890,000 |   | $ | — |   | $ | — |   |
|                              |        |           |            |                             |               |  |  |  |  |  |  |  |  |  |  |  |

 

In May 1995, Dover Downs, Inc., a subsidiary of theCompany, entered into a long-term management agreement with Caesars.  Caesars acts as our agent to manage ourvideo lottery casino. Caesars has been properly licensed by the Delaware StateLottery Office to perform these functions. Effective January 1, 2001, theCompany and Caesars amended the casino management agreement to decrease thepercentage management fee paid to Caesars by 20% while modifying the agreementto cover all 2,000 video lottery machines currently in operation for theremainder of the term that expires December 2004.  Amounts owed to Caesars under the agreement at December 31, 2002for services provided through that date totaled $840,000 and are included inaccrued liabilities.

 

17

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**Related Party Transactions**

 

During the year ended December31, 2002, Gaming & Entertainment allocated corporate costs of $495,000 toDVD.  As of December 31, 2002, Gaming& Entertainment’s consolidated balance sheet includes a $793,000 receivablefrom DVD for the aforementioned costs and for other payments made by theCompany on DVD’s behalf.  The allocationwas based on both an allocation to the business that directly incurred thecosts and an analysis of each company’s share of the costs.  The net costs incurred by each company forthese services are not necessarily indicative of the costs that would have beenincurred if the companies had been separate, independent entities and/or hadotherwise independently managed these functions; however, management believesthat these costs are reasonable.

 

During the third quarter of 2002, pursuant to the TaxSharing Agreement (see below), the Company paid DVD $2.7 million for itsportion of DVD’s consolidated federal income tax liability for 2002.  Since the spin-off of the Company from DVDwas effective on March 31, 2002, DVD’s 2002 federal income tax return willinclude the operations of the Company for the first quarter of the year.

 

Our use of DVD’s 5/8-mileharness racing track is under an easement granted by DVD which does not requirethe payment of any rent. Under the terms of the easement Gaming &Entertainment 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.  Our indoor grandstandsare used by DVD at no charge in connection with its motorsports events.  DVD also leases its principal executiveoffice space from us. Various easements and agreements relative to access,utilities and parking have also been entered into between DVD and the Company.

 

In conjunction with the spin-off,the Company and DVD entered into various agreements that address the allocationof assets and liabilities between the two companies and that define thecompanies’ relationship after the separation. The Transition Support Services Agreement provides for each of DVD andthe Company to provide each other with certain administrative and operationalservices subsequent to the spin-off.   TheTax Sharing Agreement provides for, among other things, the treatment of incometax matters for periods beginning before and including the date of the spin-offand any taxes resulting from transactions effected in connection with thespin-off.   Refer to NOTE 1 – DoverMotorsports, Inc. Spin-Off Of Its Gaming Business of the Consolidated FinancialStatements included elsewhere in this Form 10-K for further discussion.

 

**Critical Accounting Policies**

 

The accounting policies described below are those theCompany considers critical in preparing its consolidated financial statementsand/or include significant estimates made by management using informationavailable at the time the estimates are made. However, as described below,these estimates could change materially if different information or assumptionswere used. The descriptions below are summarized and have been simplified forclarity.

 

*PointsProgram*

 

The Company currently has a point loyalty program forits video lottery customers which allows them to earn points based on thevolume of their video lottery activity. The points are issued on the basis that they expire after one year if thecustomer has no video lottery play during that time period.  The Company records the points as an expensewhen they are redeemed by the customers.

 

*AccruedPension Cost*

 

The benefits provided by the Company’s defined-benefitpension plans are based on years of service and employee’s remuneration overtheir employment with the Company.  TheCompany establishes accrued pension costs in accordance with the provisions ofFinancial Accounting Standards Board (“FASB”) Statement No. 87, *Employers’Accounting for Pensions.* Accrued pension costs are developed usingactuarial principles and assumptions which consider a number of factors,including estimates for discount rate, assumed rate of compensation increase,and expected long-term rate of return on assets.  Changes in these estimates would impact the amounts that theCompany records in its consolidated financial statements.

 

18

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*Property and Equipment*

 

Property and equipment are recorded at cost.Depreciation is provided for financial reporting purposes using thestraight-line method over estimated useful lives ranging from 5 to 10 years forfurniture, fixtures and equipment and up to 40 years for facilities.  These estimates require assumptions that arebelieved to be reasonable. Long-lived assets are evaluated for impairmentannually and when an event occurs that indicates an impairment may exist.

 

**RecentAccounting Pronouncements**

 

In June 2001, the FASB issued Statement No. 142, *Goodwill andOther Intangible Assets*. Statement No. 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead be tested forimpairment at least annually in accordance with the provisions of Statement No.142. We adopted the provisions of Statement No. 142 effective January 1,2002.  Since we do not have any assetsthat are subject to Statement No. 142, the adoption of this statement did nothave an impact on our results of operations, financial position or cash flows.

 

In June 2001, the FASB issuedStatement No. 143, *Accounting for Asset Retirement Obligations*,which addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  The standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development and (or) normal use ofthe asset.  Statement No. 143 requiresthat the fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The fair valueof the liability is added to the carrying amount of the associated asset andthis additional carrying 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 are required and plan to adopt theprovisions of Statement No. 143 in 2003. The adoption of Statement No. 143 is not expected to have asignificant impact on our results of operations, financial position or cashflows.

 

In August 2001, the FASB issuedStandard No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,which addresses financial accounting and reporting for the impairment ordisposal of long-lived assets.  WhileStatement No. 144 supersedes FASB Statement No. 121, *Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of*, it retains manyof the fundamental provisions of that Statement.  Statement No. 144 also supersedes the accounting and reportingprovisions of APB Opinion No. 30, *Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions*, for the disposal ofa segment of a business.  However, itretains the requirement in Opinion No. 30 to report separately discontinuedoperations and extends that reporting to a component of an entity that eitherhas been disposed of (by sale, abandonment, or in a distribution to owners) oris classified as held for sale.  We adoptedthe provisions of Statement No. 144 effective January 1, 2002. Theadoption of Statement No. 144 did not have a significant impact on our resultsof operations, financial position or cash flows.

 

On April 30, 2002, the FASBissued Statement No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections*. TheStatement updates, clarifies and simplifies existing accounting pronouncements.Statement No. 145 rescinds Statement No. 4, *Reporting Gains and Losses fromExtinguishment of Debt*, whichrequired all gains and losses from extinguishment of debt to be aggregated and,if material, classified as an extraordinary item, net of related income taxeffect. As a result, the criteria in APB Opinion 30 will now be used toclassify those gains and losses. Statement No. 64, *Extinguishments of Debt Made to SatisfySinking-Fund Requirements*,amended Statement No. 4, and is no longer necessary because Statement 4 hasbeen rescinded. Statement No. 145 amends Statement No. 13, *Accountingfor Leases*, to require thatcertain lease modifications that have economic effects similar tosale-leaseback transactions be accounted for in the same manner assale-leaseback transactions.  Certain provisions of Statement No. 145 areeffective for fiscal years beginning after May 15, 2002, while other provisionsare effective for transactions occurring after May 15, 2002.  The adoption of Statement No. 145 isnot expected to have a significant impact on our results of operations,financial position or cash flows.

 

In June 2002, the FASB issued Statement No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*, whichrequires that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred and nullifies EmergingIssues Task Force (“EITF”) 94-3, *Liability Recognition for Certain*

 

19

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* *

*EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*.  The Company adopted Statement No. 146 in January 2003.  The adoption of Statement No. 146 did nothave a significant impact on our results of operations, financial position orcash flows.

 

In December 2002, the FASB issued Statement No. 148, *Accounting**for Stock-BasedCompensation – Transition and Disclosure – an amendment of FASB Statement No.123*. Statement No. 148 amends Statement No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, Statement No. 148 amendsthe disclosure requirements of Statement No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The transition guidance and annual disclosureprovisions of Statement No. 148 are effective for financial statements issuedfor fiscal years ending after December 15, 2002. The interim disclosureprovisions are effective for financial reports containing financial statementsfor interim periods beginning after December 15, 2002. We have applied thedisclosure provisions in Statement No. 148 in our 2002 consolidated financialstatements and the accompanying notes included elsewhere in this report. Theadoption of Statement No. 148 is not expected to have a significant impact onour results of operations, financial position or cash flows because the Companydoes not expect to adopt the fair value method of accounting.

 

The EITF was discussing certain topics of issue number00-22, *Accountingfor “Points” and Certain Other Time or Volume Based Sales Incentive Offers, andOffers for Free Products or Services to be Delivered in the Future,*whichwould cover how point and other loyalty programs should be accounted for.**TheEITF was considering the issue broadly to include all industries that utilizepoint and other loyalty programs.  InNovember 2002, the EITF removed this topic from its agenda due to theinitiation of a subsequent FASB project on revenue recognition, which isexpected to address similar issues.  TheCompany will apply the provisions of this project for its points program oncethe FASB issues a consensus on the topic. 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 Company records the points as an expense when they are redeemed bythe customers. The value of all points outstanding as of December 31, 2002 and2001 was $4,373,000 and $4,232,000, respectively.

 

The Company adopted the provisions of EITF 00-14, *Accountingfor Certain Sales Incentives*, effective January 1, 2002, which wascodified, along with EITF issue 00-25, *Vendor Income Statement Characterization ofConsideration Paid to a Reseller of a Vendors Products,* and certaintopics of EITF issue 00-22 into EITF 01-9, *Accounting for Consideration Given by a Vendor to aCustomer or Reseller of the Vendor’s Products*.  Accordingly, the Company has classifiedcertain operating expenses, such as coupons, as a reduction of revenues for allperiods presented.

 

In November2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers an Interpretation of FASB Statements No. 5, 57 and 107 and recission ofFASB Interpretation No. 34* (“FIN 45”). FIN 45 requires that aguarantor recognize, at the inception of certain guarantees, a liability forthe fair value of the obligation undertaken in issuing such guarantee. FIN 45also requires additional disclosure requirements about a guarantor’sobligations under certain guarantees that it has issued. The initialrecognition and measurement provisions of this interpretation are applicable ona prospective basis to guarantees issued or modified after December 31, 2002and the disclosure requirements are effective for financial statement periodsending after December 15, 2002.  Theadoption of FIN 45 is not expected to have a significant impact on our resultsof operations, financial position or cash flows and had no impact on ourdisclosures as of December 31, 2002.

 

**Factors That May Affect OperatingResults; Forward-Looking Statements**

 

In addition to historical information, this AnnualReport on Form 10-K includes forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended, relating to ourfinancial condition, profitability, liquidity, resources, business outlook,proposed acquisitions, market forces, corporate strategies, consumerpreferences, contractual commitments, legal matters, capital requirements andother matters. The Private Securities Litigation Reform Act of 1995 provides asafe harbor for forward-looking statements. To comply with the terms of thesafe harbor, we note that a variety of factors could cause our actual resultsand

 

20

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experience to differ substantially from the anticipated results orother expectations expressed in our forward-looking statements. When words andexpressions such as: “believes,” “expects,” “anticipates,” “estimates,”“plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,”“possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similarwords or expressions are used in this document, as well as statementscontaining phrases such as “in our view,” “there can be no assurance,”“although no assurance can be given,” or “there is no way to anticipate withcertainty,” forward-looking statements are being made.

 

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

 

•       success ofor 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;

 

•       our abilityto finance future business requirements;

 

•       our abilityto effectively compete in the marketplace;

 

•       theavailability of adequate levels of insurance;

 

•       our abilityto successfully integrate acquired companies and businesses;

 

•       managementretention and development;

 

•       changes inFederal, state, and local laws and regulations, including environmental, gaminglicense and tax legislation;

 

•       the effectof weather conditions or travel on attendance at our facilities;

 

•       military orother government actions; and

 

•       national orlocal 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 anyforward-looking statements. Given these risks and uncertainties,stockholders should not overly rely or attach undue weight to ourforward-looking statements as an indication of our actual future results.

 

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

 

The Delaware State Lottery Office and the DelawareHarness Racing Commission regulate our gaming operations. Our license from theDelaware Harness Racing Commission must be renewed on an annual basis. To keepour license for video lottery (slot) machine gaming, we must remain licensedfor harness horse racing by the Delaware Harness Racing Commission and conductat least 80 live race days each racing season, subject to the availability ofharness race horses. The Delaware Harness Racing Commission has broaddiscretion to reject any

 

21

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application for a license or suspend or revoke a license once it isissued. The Director of the Delaware State Lottery Office has broad discretionto revoke, suspend or modify the terms of a video lottery license. Anymodification or termination of existing licensing regulations or anyrevocation, suspension or modification of our licenses could adversely affectour business, financial condition and overall profitability.

 

*OurGaming Activities Are Subject To Extensive Government Regulation And AnyAdditional Government Regulation Or Taxation Of Gaming Activities CouldSubstantially Reduce Our Revenue Or Profit*

 

Video lottery (slot) machine gaming, harness horseracing and pari-mutuel wagering are subject to extensive government regulation.Delaware law regulates the percentage of commission we are entitled to receivefrom our gaming revenues, which comprises a significant portion of our overallrevenues. The State of Delaware granted us a license to conduct video lottery(slot) machine operations and a license to conduct harness horse races andpari-mutuel wagering. The laws under which these licenses are granted could bemodified or repealed at any time and we could be required to terminate ourgaming operations. If we are required to terminate our gaming operations or ifthe amount of the commission we receive from the State of Delaware forconducting our gaming operations is decreased, our business operations andoverall profitability would be significantly impaired.

 

We believe that the prospect of significant additionaltax revenue is one of the primary reasons why jurisdictions have legalizedgaming. As a result, gaming operators are typically subject to significanttaxes and fees in addition to normal federal and state corporate income taxes.These taxes and fees are subject to increase at any time. We pay substantialtaxes and fees with respect to our operations and will likely incur similarburdens in any other jurisdiction in which we may conduct gaming operations inthe future. Any material increase in taxes or fees, or the adoption ofadditional taxes or fees, may have a material adverse effect on our futurefinancial results.

 

*TheState of Delaware’s Public Smoking Ban Could Negatively Impact Our Revenues andEarnings*

 

The State of Delaware hasenacted a ban on smoking in all indoor public facilities with certain minorexceptions such as fire halls and fraternal organization premises wherefundraising takes place.  The ban becameeffective November 27, 2002.  The newlaw prohibits smoking inside the Company’s casino, hotel and conference center,restaurants, harness track indoor grandstands and simulcasting facilities,provided that smoking will be permitted in up to 25% of the rooms in thehotel.  Prior to the ban becomingeffective, a significant amount of our revenues were from slot machines insmoking areas.  Through November 2002,slot win grew each month at an average rate of 12.7%.  In the month of December 2002, our revenues decreased 13.1% ascompared to the same period last year. We continue to pursue legislative and administrative avenues of relieffrom the new law.  If the smoking bancontinues in its current form and if a significant number of our smokingpatrons choose to discontinue or shorten their visits as a result of an indoorsmoking ban and cannot be replaced with other patrons, the Company’s revenues,earnings and cash flows will continue to be negatively impacted.

 

*All OfOur Facilities Are In One Location*

 

Our facilities are located adjacent to one another ata single location in Dover, Delaware. Any prolonged disruption of operations atthese facilities due to destruction of or material damage to the facilities orother reasons could adversely affect our financial condition and results ofoperations. We maintain property and business interruption insurance to protectagainst such types of disruption, but there can be no assurance that theproceeds 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.

* *

*We DoNot Own Or Lease 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 video lotterygaming operations. The Director of the Delaware State Lottery Office enters intocontracts directly with the providers of the video lottery (slot) machines andcomputer systems. The State of Delaware purchases or leases all equipment andthe Director licenses all technology providers. Our operations could bedisrupted if a licensed technology provider violates its agreement with theState or ceases to be licensed for any reason. Such an event would be outsideof our control and could adversely affect our gaming revenues.

 

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* *

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

 

We compete in local and regional markets with horsetracks, off-track betting parlors, state run lotteries, casinos and othergaming facilities. Many of our competitors have resources that are greater thanours. We cannot be certain that we will maintain our market share or competemore effectively with our competitors. The legalization of additional casino orother gaming 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 currently is in Maryland and Pennsylvania, which ifenacted, would further expand state gambling and wagering opportunities,including video lottery (slot) machines at racetracks. Enactment of suchlegislation could increase our competition and could adversely affect ourbusiness, financial condition and overall profitability.

 

**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 $40,890,000 at December 31, 2002 under our revolving creditfacility.  A change in interest rates ofone percent on the balance outstanding at December 31, 2002 would cause achange in total annual interest costs of $409,000. The carrying values of theseborrowings approximate their fair values at December 31, 2002.

 

**Item 8.      Financial Statements And SupplementaryData**

 

Gaming & Entertainment’s consolidated financialstatements and the Independent Auditors’ Report included in this report areshown on the Index to Consolidated Financial Statements on page 30.

 

**Item 9.     Disagreements With Accountants OnAccounting And Financial Disclosure**

 

None.

 

**Part III**

 

**Item 10.   Directors And Executive Officers Of TheRegistrant**

 

Except as presented below, the information called forby this Item 10 is incorporated by reference to the Gaming & EntertainmentProxy Statement to be filed pursuant to Regulation 14A for the Annual Meetingof Stockholders to be held on April 23, 2003.

 

Executive Officers of the Registrant.  As of December 31, 2002, the executiveofficers of the registrant were:

 
| **Name**            |   | **Position**                                             |   | **Age** |   | **Term of Office** |
|---------------------|--------|----------------------------------------------------------|--------|---------|--------|--------------------|
|                |   |                                                     |   |    |   |               |
| Denis McGlynn       |   | President and  Chief Executive Officer                   |   | 57      |   | 11/79 to date      |
|                |   |                                                     |   |    |   |               |
| Edward J. Sutor     |   | Executive Vice  President  and Chief Operating Officer   |   | 53      |   | 3/99 to date       |
|                |   |                                                     |   |    |   |               |
| Timothy R. Horne    |   | Sr. Vice  President-Finance  and Chief Financial Officer |   | 36      |   | 11/96 to date      |
|                |   |                                                     |   |    |   |               |
| Klaus M. Belohoubek |   | Sr. Vice  President-General Counsel  and Secretary       |   | 43      |   | 7/99 to date       |
|                |   |                                                     |   |    |   |               |
| Robert M. Comollo   |   | Treasurer                                                |   | 55      |   | 11/81 to date      |

 

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Our Chairman of the Board, Henry B. Tippie, is anon-employee director and, therefore, not an executive officer of Gaming &Entertainment.  Mr. Tippie also servesas Chairman of the Board to DVD as a non-employee director and has served DVDin that capacity, or as Vice Chairman of the Board, for over 5 years.

 

Denis McGlynn also serves as President and ChiefExecutive Officer to DVD, a position he has held for 22 years.

 

Edward J. Sutor previously served as Executive VicePresident to DVD, a position he held since 1999.  From 1983 until 1999, Mr. Sutor served as Senior Vice Presidentof Finance at Caesars Atlantic City.

 

Timothy R. Horne previously served as VicePresident-Finance and Chief Financial Officer to DVD, a position he held forover 5 years.

 

Klaus M. Belohoubek also serves as Sr. VicePresident-General Counsel and Secretary to DVD.  He has held that position since 1999 and has represented DVD invarious legal capacities since 1990. Mr. Belohoubek also has served as Vice President-General Counsel andSecretary to Rollins Truck Leasing Corp.

 

Robert M. Comollo previously served as Treasurer toDVD, a position he held for over 20 years.

 

**Item 11.   Executive Compensation**

 

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 23, 2003.

 

**Item 12.   Security Ownership Of Certain BeneficialOwners And Management**

 

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 23, 2003.

 

**Item 13.   Certain Relationships and RelatedTransactions**

 

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 23, 2003.

 

**Item 14.Controls and Procedures**

 

(a)    Evaluation of DisclosureControls and Procedures

 

Dover Downs Gaming &Entertainment, Inc.’s Chief Executive Officer and Chief Financial Officer haveevaluated the Company’s disclosure controls and procedures (as defined inapplicable federal securities law) within 90 days of the filing of this annualreport, and they concluded that these controls and procedures are effective.

 

(b)    Changes in InternalControls

 

There are no significantchanges in internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their most recent evaluation.

 

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**Item 15.   Exhibits, Financial Statement SchedulesAnd 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).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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).                                                             |

 

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| 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 August  24, 2000 (incorporated herein by reference to Exhibit 10.9 to the Form 10  filed on November 21, 2001, which was declared effective on March 7, 2002).                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 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).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 21     |   | List of Subsidiaries of  Dover Downs Gaming & Entertainment, Inc.                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 99.1   |   | Information Statement  dated as of March 7, 2002 (incorporated herein by reference to Exhibit 99.1  to the Form 10 filed on March 7, 2002).                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 99.2   |   | Audit Committee Charter  of Dover Downs Gaming & Entertainment, Inc. (incorporated herein by  reference to Exhibit 99.2 to the Form 10 filed on November 21, 2001, which  was declared effective on March 7, 2002).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 99.3   |   | Certification  of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 99.4   |   | Certification  of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
|   |   | No reports on Form 8-K  were filed by Gaming & Entertainment for the quarter ended December 31,  2002.                                                                                                                                                                                                                                             |

 

 

26

----

 

**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 13, 2003 |   | 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 and Chief Financial Officer | March  13, 2003 |
|---------------------------|--------|---------------------------------------------------------|-----------------|
| Timothy  R. Horne         |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  Henry B. Tippie      |   | Chairman  of the Board                                  | March  13, 2003 |
| Henry  B. Tippie          |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  Kenneth K. Chalmers  |   | Director  and Chairman of the Audit Committee           | March  13, 2003 |
| Kenneth  K. Chalmers      |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  R. Randall Rollins   |   | Director                                                | March  13, 2003 |
| R.  Randall Rollins       |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  Patrick J. Bagley    |   | Director                                                | March  13, 2003 |
| Patrick  J. Bagley        |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  John W. Rollins, Jr. |   | Director                                                | March  13, 2003 |
| John  W. Rollins, Jr.     |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  Melvin L. Joseph     |   | Director                                                | March  13, 2003 |
| Melvin  L. Joseph         |   |                                                    |            |
|                      |   |                                                    |            |
| /s/  Jeffrey W. Rollins   |   | Director                                                | March  13, 2003 |
| Jeffrey  W. Rollins       |   |                                                    |            |

 

27

----

 

**CERTIFICATIONOF CHIEF EXECUTIVE OFFICER PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Denis McGlynn,certify that:

 

1.     I have reviewed this annual report on Form10-K of Dover Downs Gaming & Entertainment, Inc.;

 

2.               Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date: March 13, 2003                                 |
|------------------------------------------------------|
|                                                 |
|                                                 |
| /s/  Denis McGlynn                                   |   |
| Denis  McGlynn                                       |
| President  and Chief Executive  Officer and Director |

 

28

----

 

**CERTIFICATION OF CHIEF FINANCIALOFFICER PURSUANT TO**

**SECTION 302 OF THE SARBANES-OXLEY ACTOF 2002**

 

I, Timothy R.Horne, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Dover Downs Gaming & Entertainment,Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 13, 2003                                     |
|----------------------------------------------------------|
|                                                     |
|                                                     |
| /s/  Timothy R. Horne                                    |   |
| Timothy  R. Horne                                        |
| Sr.  Vice President-Finance and  Chief Financial Officer |

 

29

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

** **
|                                                                                                                                                                                     |   | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| Independent Auditors’  Report on Consolidated Financial Statements                                                                                                                  |   | 31       |
|                                                                                                                                                                                     |   |     |
| Consolidated  Statement of Earnings and Comprehensive Earnings for the years ended December  31, 2002 and 2001, the six-months ended December 31, 2000 and the year ended  June 30, 2000 |   | 32       |
|                                                                                                                                                                                     |   |     |
| Consolidated Balance Sheet  at December 31, 2002 and 2001                                                                                                                                |   | 33       |
|                                                                                                                                                                                     |   |     |
| Consolidated  Statement of Cash Flows for the years ended December 31, 2002 and 2001, the  six-months ended December 31, 2000 and the year ended June 30, 2000                           |   | 34       |
|                                                                                                                                                                                     |   |     |
| Notes to  the Consolidated Financial Statements                                                                                                                                          |   | 35       |

 

30

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

The Stockholders and Board of Directors,

Dover Downs Gaming& Entertainment, Inc.:

 

We have audited theaccompanying consolidated balance sheet of Dover Downs Gaming &Entertainment, Inc. and subsidiaries (the Company), as of December 31, 2002 and2001, and the related consolidated statements of earnings and comprehensiveearnings and cash flows for the years ended December 31, 2002 and 2001, thesix-months ended December 31, 2000 and the year ended June 30, 2000. Theseconsolidated financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Dover Downs Gaming &Entertainment, Inc. and subsidiaries as of December 31, 2002 and 2001, and theresults of their operations and their cash flows for the years ended December31, 2002 and 2001, the six-months ended December 31, 2000 and the year endedJune 30, 2000, in conformity with accounting principles generally accepted inthe United States of America.

 

KPMG LLP

 

Philadelphia, Pennsylvania

January 29, 2003

 

31

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

### **CONSOLIDATEDSTATEMENT OF EARNINGS**AND COMPREHENSIVE EARNINGS

** **
|                                 |   | **Years ended December 31,** |        | **Six months ended  December 31,2000** |   | **Year ended  June 30,2000** |   |
|--------------------------------------|--------|------------------------------|-------------|----------------------------------------|--------|------------------------------|--------|
|                                 |   | **2002**                     |        | **2001**                               |   |                         |   |
| Revenues:                            |   |                         |        |                                   |   |                         |   |   |   |
| Gaming                               |   | $                            | 193,723,000 |                                   | $      | 175,065,000                  |   | $ | 79,897,000 |   | $ | 158,398,000 |   |
| Other operating                      |   | 26,083,000                   |        | 12,550,000                             |   | 5,796,000                    |   | 10,567,000 |   |
| Gross revenues                       |   | 219,806,000                  |        | 187,615,000                            |   | 85,693,000                   |   | 168,965,000 |   |
| Less –  promotional allowances  |   | 13,331,000                   |        | 6,322,000                              |   | 2,941,000                    |   | 4,450,000 |   |
|                                 |   | 206,475,000                  |        | 181,293,000                            |   | 82,752,000                   |   | 164,515,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Expenses:                            |   |                         |        |                                   |   |                         |   |   |   |
| Gaming                               |   | 148,817,000                  |        | 132,587,000                            |   | 58,731,000                   |   | 118,987,000 |   |
| Other operating                      |   | 10,351,000                   |        | 5,205,000                              |   | 2,360,000                    |   | 4,821,000 |   |
| Depreciation                         |   | 5,176,000                    |        | 2,211,000                              |   | 1,037,000                    |   | 1,798,000 |   |
| General and  administrative          |   | 5,061,000                    |        | 4,676,000                              |   | 1,991,000                    |   | 3,375,000 |   |
|                                 |   | 169,405,000                  |        | 144,679,000                            |   | 64,119,000                   |   | 128,981,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Operating  earnings                  |   | 37,070,000                   |        | 36,614,000                             |   | 18,633,000                   |   | 35,534,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Interest income                      |   | —                       |        | 45,000                                 |   | 9,000                        |   | — |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Interest expense                     |   | (903,000                     | )           | (1,065,000                             | )      | (9,000                       | )      | (216,000 | ) |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Earnings before  income taxes        |   | 36,167,000                   |        | 35,594,000                             |   | 18,633,000                   |   | 35,318,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Income taxes                         |   | 14,725,000                   |        | 14,499,000                             |   | 7,577,000                    |   | 14,366,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Net earnings                         |   | 21,442,000                   |        | 21,095,000                             |   | 11,056,000                   |   | 20,952,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Minimum pension  liability           |   | (127,000                     | )           | —                                 |   | —                       |   | — |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
| Comprehensive  earnings              |   | $                            | 21,315,000  |                                   | $      | 21,095,000                   |   | $ | 11,056,000 |   | $ | 20,952,000 |   |
|                                 |   |                         |        |                                   |   |                         |   |   |   |
|                                 |   |                         |        | **(unaudited)**                        |   | **(unaudited)**              |   | **(unaudited)** |   |
| Earnings per  common share (Note 3): |   |                         |        |                                   |   |                         |   |   |   |
| Basic                                |   | $                            | 0.80        |                                   | $      | 0.79                         |   | $ | 0.42 |   | $ | 0.82 |   |
| Diluted                              |   | $                            | 0.80        |                                   | $      | 0.79                         |   | $ | 0.42 |   | $ | 0.82 |   |

 

 

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

 

32

----

 

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

** **

**CONSOLIDATEDBALANCE SHEET**

** **
|                                                                                                                              |   | **December  31,** |        |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                              |   | **2002**          |        | **2001** |   |
| **ASSETS**                                                                                                                        |   |              | ** **  |   | ** ** |
| Current assets:                                                                                                                   |   |              |        |   |   |
| Cash and cash  equivalents                                                                                                        |   | $                 | 10,874,000  |   | $ | 12,166,000 |   |
| Accounts  receivable                                                                                                              |   | 1,105,000         |        | 1,450,000 |   |
| Due from State  of Delaware                                                                                                       |   | 9,624,000         |        | 8,144,000 |   |
| Inventories                                                                                                                       |   | 1,154,000         |        | 866,000 |   |
| Prepaid expenses  and other                                                                                                       |   | 1,462,000         |        | 1,436,000 |   |
| Receivable from  Dover Motorsports, Inc.                                                                                          |   | 793,000           |        | — |   |
| Income taxes  receivable                                                                                                          |   | 859,000           |        | — |   |
| Deferred income  taxes                                                                                                            |   | 539,000           |        | 423,000 |   |
| Total current  assets                                                                                                             |   | 26,410,000        |        | 24,485,000 |   |
|                                                                                                                              |   |              |        |   |   |
| Property and  equipment, net                                                                                                      |   | 122,248,000       |        | 106,772,000 |   |
| Total assets                                                                                                                      |   | $                 | 148,658,000 |   | $ | 131,257,000 |   |
|                                                                                                                              |   |              |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                    |   |              | ** **  |   | ** ** |
| Current  liabilities:                                                                                                             |   |              |        |   |   |
| Accounts payable                                                                                                                  |   | $                 | 2,364,000   |   | $ | 6,949,000 |   |
| Purses due  horsemen                                                                                                              |   | 9,666,000         |        | 7,569,000 |   |
| Accrued  liabilities                                                                                                              |   | 7,132,000         |        | 3,779,000 |   |
| Payable to Dover  Motorsports, Inc.                                                                                               |   | —            |        | 7,790,000 |   |
| Income taxes  payable                                                                                                             |   | —            |        | 1,539,000 |   |
| Deferred revenue                                                                                                                  |   | 131,000           |        | 32,000 |   |
| Total current  liabilities                                                                                                        |   | 19,293,000        |        | 27,658,000 |   |
|                                                                                                                              |   |              |        |   |   |
| Notes payable to  banks                                                                                                           |   | 40,890,000        |        | — |   |
| Deferred income  taxes                                                                                                            |   | 4,036,000         |        | 946,000 |   |
|                                                                                                                              |   |              |        |   |   |
| 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, 2002-10,503,057 shares         |   | 1,050,000         |        | — |   |
| Class A common  stock, $.10 par value; 50,000,000 shares authorized; issued and outstanding:  December 31, 2002-16,145,059 shares |   | 1,615,000         |        | — |   |
| Additional  paid-in capital                                                                                                       |   | 68,960,000        |        | — |   |
| Retained earnings                                                                                                                 |   | 12,941,000        |        | — |   |
| Accumulated  other comprehensive loss                                                                                             |   | (127,000          | )           | — |   |
| Dover  Motorsports, Inc. equity investment                                                                                        |   | —            |        | 102,653,000 |   |
| Total  stockholders’ equity                                                                                                  |   | 84,439,000        |        | 102,653,000 |   |
| Total  liabilities and stockholders’ equity                                                                                  |   | $                 | 148,658,000 |   | $ | 131,257,000 |   |

 

 

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

 

33

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

** **
|                                                                                  |   | **Years ended December 31,** |       | **Six months  ended  December 31,  2000** |   | **Year ended  June 30,  2000** |   |
|---------------------------------------------------------------------------------------|--------|------------------------------|------------|-------------------------------------------|--------|--------------------------------|--------|
|                                                                                  |   | **2002**                     |       | **2001**                                  |   |                           |   |
| Cash flows from  operating activities:                                                |   |                         |       |                                      |   |                           |   |   |   |
| Net earnings                                                                          |   | $                            | 21,442,000 |                                      | $      | 21,095,000                     |   | $ | 11,056,000 |   | $ | 20,952,000 |   |
| Adjustments to  reconcile net earnings to net cash  provided by operating activities: |   |                         |       |                                      |   |                           |   |   |   |
| Depreciation.                                                                         |   | 5,176,000                    |       | 2,211,000                                 |   | 1,037,000                      |   | 1,798,000 |   |
| Amortization of  credit facility origination fees                                     |   | 60,000                       |       | —                                    |   | —                         |   | — |   |
| Deferred income  taxes                                                                |   | 2,642,000                    |       | (33,000                                   | )      | 96,000                         |   | 312,000 |   |
| Changes in  assets and liabilities:                                                   |   |                         |       |                                      |   |                           |   |   |   |
| Accounts  receivable                                                                  |   | 345,000                      |       | (740,000                                  | )      | 1,473,000                      |   | (1,302,000 | ) |
| Due from State  of Delaware                                                           |   | (1,480,000                   | )          | (836,000                                  | )      | (4,132,000                     | )      | (244,000 | ) |
| Inventories                                                                           |   | (288,000                     | )          | (537,000                                  | )      | (25,000                        | )      | (109,000 | ) |
| Prepaid expenses  and other                                                           |   | 136,000                      |       | (238,000                                  | )      | (387,000                       | )      | 71,000 |   |
| Receivable  from/payable to Dover Motorsports, Inc.                                   |   | (793,000                     | )          | —                                    |   | —                         |   | — |   |
| Accounts payable                                                                      |   | (4,585,000                   | )          | 5,325,000                                 |   | (799,000                       | )      | 1,191,000 |   |
| Purses due  horsemen                                                                  |   | 2,097,000                    |       | 1,311,000                                 |   | 3,276,000                      |   | (165,000 | ) |
| Accrued  liabilities                                                                  |   | 2,261,000                    |       | 166,000                                   |   | (3,538,000                     | )      | 2,196,000 |   |
| Income taxes  receivable/payable                                                      |   | (1,975,000                   | )          | 1,821,000                                 |   | (1,717,000                     | )      | 906,000 |   |
| Deferred revenue                                                                      |   | 99,000                       |       | (8,000                                    | )      | 28,000                         |   | (84,000 | ) |
| Net cash  provided by operating activities                                            |   | 25,137,000                   |       | 29,537,000                                |   | 6,368,000                      |   | 25,522,000 |   |
|                                                                                  |   |                         |       |                                      |   |                           |   |   |   |
| Cash flows from  investing activities:                                                |   |                         |       |                                      |   |                           |   |   |   |
| Capital  expenditures                                                                 |   | (20,652,000                  | )          | (63,827,000                               | )      | (6,545,000                     | )      | (11,314,000 | ) |
| Net cash used in  investing activities                                                |   | (20,652,000                  | )          | (63,827,000                               | )      | (6,545,000                     | )      | (11,314,000 | ) |
|                                                                                  |   |                         |       |                                      |   |                           |   |   |   |
| Cash flows from  financing activities:                                                |   |                         |       |                                      |   |                           |   |   |   |
| Borrowings from  revolving debt                                                       |   | 171,178,000                  |       | —                                    |   | —                         |   | — |   |
| Repayments of  revolving debt                                                         |   | (130,288,000                 | )          | —                                    |   | —                         |   | — |   |
| Repayment of  debt to Dover Motorsports, Inc.                                         |   | (45,000,000                  | )          | —                                    |   | —                         |   | — |   |
| Credit facility  origination fees                                                     |   | (137,000                     | )          | —                                    |   | —                         |   | — |   |
| Dividends paid                                                                        |   | (3,333,000                   | )          | —                                    |   | —                         |   | — |   |
| Proceeds from  stock options exercised                                                |   | 73,000                       |       | —                                    |   | —                         |   | — |   |
| Change in payable  to/receivable from Dover Motorsports, Inc.                         |   | 1,730,000                    |       | 38,341,000                                |   | 1,964,000                      |   | (15,648,000 | ) |
| Net cash (used  in) provided by financing activities                                  |   | (5,777,000                   | )          | 38,341,000                                |   | 1,964,000                      |   | (15,648,000 | ) |
| Net (decrease)  increase in cash and cash equivalents                                 |   | (1,292,000                   | )          | 4,051,000                                 |   | 1,787,000                      |   | (1,440,000 | ) |
| Cash and cash  equivalents, beginning of period                                       |   | 12,166,000                   |       | 8,115,000                                 |   | 6,328,000                      |   | 7,768,000 |   |
| Cash and cash  equivalents, end of period                                             |   | $                            | 10,874,000 |                                      | $      | 12,166,000                     |   | $ | 8,115,000 |   | $ | 6,328,000 |   |
|                                                                                  |   |                         |       |                                      |   |                           |   |   |   |
| Supplemental  information:                                                            |   |                         |       |                                      |   |                           |   |   |   |
| Interest paid                                                                         |   | $                            | 630,000    |                                      | $      | —                         |   | $ | — |   | $ | 57,000 |   |
| Income taxes  paid                                                                    |   | $                            | 14,081,000 |                                      | $      | 12,711,000                     |   | $ | 9,198,000 |   | $ | 13,148,000 |   |

 

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

 

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1—Dover Motorsports, Inc. Spin-off Of Its Gaming Business**

 

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

 

Dover Motorsports,Inc. (“DVD”), formerly Dover Downs Entertainment, Inc., completed its tax-freespin-off of Dover Downs, Inc., its gaming business, effective March 31,2002.  To accomplish the spin-off, DVDcontributed 100 percent of the issued and outstanding common stock of DoverDowns, Inc. to the Company, and then distributed all of the capital stock ofthe Company to DVD stockholders. Holders of DVD common stock or Class A commonstock received 0.7 shares of Gaming & Entertainment common stock or Class Acommon stock for each share of DVD common stock or Class A common stock owned atthe close of business on March 18, 2002, the record date for the spin-off. Eachshare of common stock or Class A common stock distributed was accompanied byone stock purchase right. Based on anInternal Revenue Service Private Letter ruling, the spin-off is tax-free to DVDand its stockholders, except for cash received for any fractional shares.

 

Immediately following the spin-off, DVD owned no shares of the Company,and Gaming & Entertainment became an independent public company.  A total of 9,998,976 shares of Gaming &Entertainment common stock and 16,638,359 shares of Gaming & EntertainmentClass A common stock were distributed in connection with the spin-off.  Also as part of the spin-off, a $9.5 millionpayable to DVD was cancelled.

 

In conjunction with the spin-off, the Company and DVD have entered intovarious agreements that address the allocation of assets and liabilitiesbetween the two companies and that define the companies’ relationship after theseparation.  These are the AgreementRegarding Distribution and Plan of Reorganization, the Real Property Agreement,the Employee Benefits Agreement, the Transition Support Services Agreement, andthe Tax Sharing Agreement.

 

The Plan of Reorganization sets forth the principal corporatetransactions required to effect the separation of the gaming business from themotorsports business, the continuation of the gaming business following suchseparation, including the allocation between the Company and DVD of certainassets and liabilities, and the distribution of shares of the Company’s commonstock and Class A common stock.  As aresult of the spin-off, all assets and liabilities relating to the gamingbusiness are owned and assumed by the Company or its subsidiaries, and allassets and liabilities relating to the motorsports business are owned andassumed by DVD or its subsidiaries.

 

The Real Property Agreement governs certain real property transfers,leases and easements affecting our Dover, Delaware facility.

 

The Employee Benefits Agreement provides for the transition fromemployee benefits under plans or programs sponsored by DVD to those sponsoredby the Company.  In connection with thespin-off and pursuant to the terms of the Employee Benefits Agreement, DVDarranged for the transfer of the assets and liabilities associated with DVD’sdefined-benefit pension plan and the 401(k) plan sponsored by DVD with respectto employees who became employees of the Company (or remain employed by DoverDowns, Inc.) after the spin-off to the Company.

 

The Transition Support Services Agreement provides for each of theCompany and DVD to provide each other with certain administrative andoperational services.  The partyreceiving the services is required to pay for them within 30 business daysafter receipt of an invoice at rates agreed upon by the Company and DVD.  Each party will provide these services untilterminated by the party receiving the service or by the party providing theservice after the expiration of a one-year transition period.  Refer to NOTE 10 — Related PartyTransactions for further discussion.

 

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

 

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

 

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

 

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

 

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

 

**NOTE2—Business Operations**

 

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; theDover Downs Hotel and Conference Center – featuring luxury accommodations withconference, banquet, fine dining, ballroom and concert hall facilities; and theDover Downs Raceway – a harness racing track with pari-mutuel wagering on liveand simulcast horse races.  Thesefacilities are located in close proximity to the major metropolitan areas ofPhiladelphia, Baltimore and Washington, D.C.

 

Dover Downs, Inc. was incorporated in 1967 and beganmotorsports and harness horse racing operations in 1969.  As a result of several restructurings, DoverDowns, Inc. became a wholly owned subsidiary of Dover Downs Entertainment,Inc., and transferred all of the motorsports operations to Dover InternationalSpeedway, Inc.  Consequently, DoverDowns, Inc. became the operating entity for all of Dover Downs Entertainment,Inc.’s gaming operations.  Gaming &Entertainment was incorporated in the State of Delaware in December 2001 inconnection with the aforementioned spin-off from Dover Downs Entertainment,Inc.

 

The Company is authorized to conduct video lotteryoperations as a “Licensed Agent” under the Delaware State Lottery Code.Pursuant to Delaware’s Horse Racing Redevelopment Act, enacted in 1994, theDelaware State Lottery Office administers and controls the operation of thevideo lottery.

 

The Company’s license from the Delaware Harness RacingCommission must be renewed on an annual basis. In order to maintain its licenseto conduct video lottery operations, the Company is required to maintain itsharness horse racing license.

 

Due to the nature of the Company’s businessactivities, it is subject to various federal, state and local regulations.  Refer to NOTE 11 — Commitments andContingencies.

 

**NOTE3—Summary of Significant Accounting Policies**

 

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

 

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The consolidated financial statements included hereinmay not necessarily be indicative of the results of operations, financialposition and cash flows of Gaming & Entertainment in the future or had itoperated as a separate, independent company during the periods presented. Theconsolidated financial statements included herein for periods prior to theeffective date of the spin-off on March 31, 2002 do not reflect any changes inthe financing and operations of Gaming & Entertainment that occurred as aresult 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 foodand beverage items, are stated at the lower of cost or market with cost beingdetermined on the first-in, first-out (FIFO) basis.

 

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

 

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

 

The carrying values of property and equipment areevaluated for impairment based upon expected undiscounted future cashflows.  If events or circumstancesindicated that the carrying value of an asset may not be recoverable, animpairment loss would be recognized equal to the difference between thecarrying value of the asset and its fair value.

 

Interest is capitalized in connection with theconstruction of major facilities. The capitalized interest is amortized overthe estimated useful life of the asset to which it relates. During the yearsended December 31, 2002 and 2001, the six-month period ended December 31, 2000and the year ended June 30, 2000, the Company incurred $1,254,000, $2,645,000,$209,000 and $377,000 of interest cost, respectively, of which $351,000,$1,580,000, $200,000 and $161,000, 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 financial statements based upon enacted statutory tax rates ineffect 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.

 

For the video lottery operations, which account formore than 85% of gross revenues for all periods presented, the differencebetween the amount wagered by bettors and the amount paid out to bettors isreferred to as the win. The win is included in the amount recorded in theCompany’s financial statements as gaming revenue. The Delaware State LotteryOffice sweeps the win from the video lottery operations, collects the State’sshare of the win and the amount due to the vendors under contract with theState who provide the video lottery 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 winnings, (ii) for remittance to the providers of the videolottery 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 and food andbeverage sales are recognized at the time the service is provided.

 

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

 

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* *

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

 

*Preopening (start-up) costs*—Preopeningcosts represent primarily the direct salaries and other operating costsincurred by the Company prior to opening the Dover Downs Hotel and ConferenceCenter. The Company accounts for these start-up activities under provisions ofthe American 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*.  The number of weighted average shares usedin computing basic and diluted EPS are as follows:

 

|                       |   | **Years ended December 31,** |   | **Six months  ended Dec. 31,  2000** |   | **Year Ended  June 30,  2000** |   |
|----------------------------|--------|------------------------------|--------|--------------------------------------|--------|--------------------------------|--------|
|                       |   | **2002**                     |   | **2001**                             |   |                           |   |
| Basic EPS                  |   | 26,643,000                   |   | 26,569,000                           |   | 26,510,000                     |   | 25,537,000 |   |
| Effect of dilutive options |   | 82,000                       |   | 208,000                              |   | 39,000                         |   | 156,000 |   |
| Diluted EPS                |   | 26,725,000                   |   | 26,777,000                           |   | 26,549,000                     |   | 25,693,000 |   |

 

Options to purchase 243,639 shares of common stockwere outstanding as of December 31, 2002, but were not included in thecomputation of diluted EPS because the options’ exercise prices were greaterthan the average market price of the common shares.

 

Earnings per share amounts andweighted average shares outstanding for periods prior to April 1, 2002, the dayafter the effective date of the spin-off from DVD, are presented on a pro formabasis to reflect such spin-off.

 

The pro forma average outstanding common shares andClass A common shares were derived from DVD’s common shares and Class A commonshares outstanding for the periods presented using the distribution ratio of0.7 shares of Gaming & Entertainment common stock and Class A common stockfor each share of DVD common stock and Class A common stock, respectively.  Outstanding stock options of Gaming &Entertainment have been 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.

 

*Accounting for stock options–*The Company accounts for stock options inaccordance with FASB Statement No. 123, *Accounting for Stock–Based Compensation*.  Statement No. 123 defines a fair-value basedmethod of accounting for stock-based compensation plans; however, it allows thecontinued use of the intrinsic value method under Accounting Principles Board(“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.The Company has elected to continue to use the intrinsic value method and basedon this method did not record any stock-based compensation expense during theyears ended December 31, 2002 and 2001, the six months ended December 31, 2000and the year ended June 30, 2000.  Referto NOTE 9 — Stockholders’ Equity for further discussion.

 

The following table illustrates the effect on netearnings and earnings per share if the Company had applied the fair valuerecognition provisions of Statement No. 123, *Accounting for Stock-Based Compensation*,to stock based employee compensation:

 

|                                                                                                                    |   | **Year ended  Dec. 31, 2002** |       |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
| Net earnings, as reported                                                                                               |   | $                             | 21,442,000 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based  method for all  awards |   | (285,000                      | )          |
| Pro forma net earnings                                                                                                  |   | $                             | 21,157,000 |   |
|                                                                                                                    |   |                          |       |
| Net earnings per common share:                                                                                          |   |                          |       |
| Basic – as reported                                                                                                |   | $                             | 0.80       |   |
| Basic – pro forma                                                                                                  |   | $                             | 0.79       |   |
|                                                                                                                    |   |                          |       |
| Diluted – as reported                                                                                              |   | $                             | 0.80       |   |
| Diluted – pro forma                                                                                                |   | $                             | 0.79       |   |

 

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*Use of estimates—*The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the 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, 2002 approximates its fair value based on theinterest rates available on similar borrowings.

 

*Segment information*—The Company accounts for its operating segment inaccordance with FASB Statement 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 and entertainmentsegment.

 

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

 

*Recent accounting pronouncements—*In June2001, the FASB issued Statement No. 142, *Goodwill and Other Intangible Assets*.  Statement No. 142 requires that goodwill andintangible assets with indefinite useful lives no longer be amortized, butinstead be tested for impairment at least annually in accordance with theprovisions of Statement No. 142. We adopted the provisions of Statement No. 142effective January 1, 2002.  Since we donot have any assets that are subject to Statement No. 142, the adoption of thisstatement did not have an impact on our results of operations, financialposition or cash flows.

 

In June 2001, the FASB issuedStatement No. 143, *Accounting for Asset Retirement Obligations*,which addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  The standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development and (or) normal use ofthe asset.  Statement No. 143 requiresthat the fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The fair valueof the liability is added to the carrying amount of the associated asset andthis additional carrying 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 are required and plan to adopt theprovisions of Statement No. 143 in 2003. The adoption of Statement No. 143 is not expected to have asignificant impact on our results of operations, financial position or cashflows.

 

In August 2001, the FASB issuedStandard No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,which addresses financial accounting and reporting for the impairment ordisposal of long-lived assets.  WhileStatement No. 144 supersedes FASB Statement No. 121, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of*, itretains many of the fundamental provisions of that Statement.  Statement No. 144 also supersedes theaccounting and reporting provisions of APB Opinion No. 30, *Reporting the Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions*,for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to reportseparately discontinued operations and extends that reporting to a component ofan entity that either has been disposed of (by sale, abandonment, or in adistribution to owners) or is classified as held for sale.  We adopted the provisions of Statement No.144 effective January 1, 2002. The adoption of Statement No. 144 did nothave a significant impact on our results of operations, financial position orcash flows.

 

On April 30, 2002, the FASBissued Statement No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections*. TheStatement updates, clarifies and simplifies existing accounting pronouncements.Statement No. 145 rescinds Statement No. 4, *Reporting Gains and Losses fromExtinguishment of Debt*, whichrequired all gains and losses from extinguishment of debt to be aggregated and,if material, classified as an extraordinary item, net of related income taxeffect. As a result, the criteria in APB

 

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Opinion 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 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 is not expected to have a significant impact on our results ofoperations, financial position or cash flows.

 

In June 2002, the FASB issued Statement No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*, whichrequires that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred and nullifies EmergingIssues Task Force (“EITF”) 94-3, *Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring)*.  TheCompany adopted Statement No. 146 in January 2003.  The adoption of Statement No. 146 did not have a significantimpact on our results of operations, financial position or cash flows.

 

In December 2002, the FASB issued Statement No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure – an amendment of FASBStatement No. 123*. Statement No. 148 amends Statement No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, Statement No. 148 amendsthe disclosure requirements of Statement No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The transition guidance and annual disclosureprovisions of Statement No. 148 are effective for financial statements issuedfor fiscal years ending after December 15, 2002. The interim disclosureprovisions are effective for financial reports containing financial statementsfor interim periods beginning after December 15, 2002. We have applied thedisclosure provisions in Statement No. 148 in our 2002 consolidated financialstatements and the accompanying notes. The adoption of Statement No. 148 is notexpected to have a significant impact on our results of operations, financialposition or cash flows because the Company does not expect to adopt the fairvalue method of accounting.

 

The EITF was discussing certain topics of issue number00-22, *Accountingfor “Points” and Certain Other Time or Volume Based Sales Incentive Offers, andOffers for Free Products or Services to be Delivered in the Future*,which would cover how point and other loyalty programs should be accounted for.The EITF was considering the issue broadly to include all industries thatutilize point and other loyalty programs. In November 2002, the EITF removed this topic from its agenda due to theinitiation of a subsequent FASB project on revenue recognition, which isexpected to address similar issues.  TheCompany will apply the provisions of this project for its points program oncethe FASB issues a consensus on the topic. The Company currently has a point loyalty program for its video lotterycustomers which allows them to earn points based on the volume of their video lotteryactivity.  The points are issued on thebasis that they expire after one year if the customer has no video lottery playduring that time period.  The Companyrecords the points as an expense when they are redeemed by the customers. Thevalue of all points outstanding as of December 31, 2002 and 2001 was $4,373,000and $4,232,000, respectively.

 

The Company adopted the provisions of EITF 00-14, *Accountingfor Certain Sales Incentives*, effective January 1, 2002, which wascodified, along with EITF issue 00-25, *Vendor Income Statement Characterization ofConsideration Paid to a Reseller of a Vendors Products,* and certaintopics of EITF issue 00-22 into EITF 01-9, *Accounting for Consideration Given by a Vendor to aCustomer or Reseller of the Vendor’s Products*.  Accordingly, the Company has classifiedcertain operating expenses, such as coupons, as a reduction of revenues for allperiods presented.

 

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 certain guarantees,a liability for the fair value of the obligation undertaken in issuing suchguarantee. FIN 45 also requires additional disclosure requirements about aguarantor’s obligations under certain guarantees that it has issued. Theinitial recognition and measurement provisions of this interpretation areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002 and the disclosure

 

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requirements are effective for financial statement periods ending afterDecember 15, 2002.  The adoption of FIN45 is not expected to have a significant impact on our results of operations,financial position or cash flows and had no impact on our disclosures as ofDecember 31, 2002.

 

*Fiscal year—*On January 19, 2001, theCompany changed its fiscal year-end from June 30 to December 31. The six-monthperiod ended December 31, 2000 transitions the Company’s reporting period tothe new fiscal year-end. Summarized statement of earnings information is asfollows:

 

|                |   | **Six months  ended  December 31,** |       | **Years  ended December 31,** |   |
|---------------------|--------|-------------------------------------|------------|-------------------------------|--------|
|                |   | **2000**                            |       | **1999**                      |   | **2000** |   | **1999** |   |
|                |   |                                |       | **(unaudited)**               |   | **(unaudited)** |   | **(unaudited)** |   |
| Net revenues        |   | $                                   | 82,752,000 |                          | $      | 80,331,000 |   | $ | 166,936,000 |   | $ | 153,141,000 |   |
| Operating  earnings |   | 18,633,000                          |       | 17,624,000                    |   | 36,542,000 |   | 33,711,000 |   |
| Income taxes        |   | 7,577,000                           |       | 7,155,000                     |   | 14,785,000 |   | 13,707,000 |   |
| Net earnings        |   | 11,056,000                          |       | 10,440,000                    |   | 21,568,000 |   | 19,969,000 |   |
|                     |        |                                     |            |                               |        |  |  |  |  |  |  |  |  |

 

**NOTE4—Property and Equipment**

 

Property and equipment consists of the following as ofDecember 31:

 

|                               |   | **2002**    |        | **2001**    |   |
|------------------------------------|--------|-------------|-------------|-------------|--------|
| Land                               |   | $           | 1,842,000   |        | $      | 1,233,000 |   |
| Casino facility                    |   | 28,011,000  |        | 27,995,000  |   |
| Hotel facility                     |   | 65,888,000  |        | —      |   |
| Harness racing  facilities         |   | 8,025,000   |        | 7,995,000   |   |
| General  facilities                |   | 12,186,000  |        | 10,047,000  |   |
| Furniture, fixtures  and equipment |   | 27,782,000  |        | 11,587,000  |   |
| Construction in  progress          |   | 843,000     |        | 65,144,000  |   |
|                               |   | 144,577,000 |        | 124,001,000 |   |
| Less accumulated  depreciation     |   | (22,329,000 | )           | (17,229,000 | )      |
|                               |   | $           | 122,248,000 |        | $      | 106,772,000 |   |

 

Depreciation expense was $5,176,000, $2,211,000,$1,037,000 and $1,798,000 for the years ended December 31, 2002 and 2001, thesix months ended December 31, 2000, and the year ended June 30, 2000,respectively.

 

**NOTE5—Accrued Liabilities**

 

Accrued liabilities consists of the following as ofDecember 31:

 

|                                      |   | **2002**  |      | **2001**  |   |
|-------------------------------------------|--------|-----------|-----------|-----------|--------|
| Payroll and  related items                |   | $         | 1,498,000 |      | $      | 1,018,000 |   |
| Win due to  Delaware State Lottery Office |   | 1,444,000 |      | 385,000   |   |
| Pension cost                              |   | 1,371,000 |      | —    |   |
| Management fee                            |   | 840,000   |      | 1,080,000 |   |
| Other                                     |   | 1,979,000 |      | 1,296,000 |   |
|                                      |   | $         | 7,132,000 |      | $      | 3,779,000 |   |

#### ** **

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#### **NOTE6—Indebtedness**

 

The Company has a $55,000,000 credit facility, asamended, that expires on December 31, 2004. $45 million of the facility was used to pay down amounts outstandingunder the prior DVD credit facilities on April 1, 2002 in connection with ourspin-off from DVD.  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 would impact its ability to maintain financial ratiosnecessary to satisfy these requirements. Thefacility is for seasonal funding needs, capital improvements and other generalcorporate purposes. At December 31, 2002, the Company was in compliance withall terms of the facility and there was $40,890,000 outstanding at a weightedaverage interest rate of 2.51%.  Afterconsideration of stand by letters of credit outstanding, $14,010,000 wasavailable pursuant to the facility. Effective December 31, 2003, the terms of the credit facility reduce thefacility to $45,000,000.

 

**NOTE7—Income Taxes**

 

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

 

|                |   | **Years ended December 31,** |       | **Six months  ended****December 31,  2000** |   | **Year ended****June 30,  2000** |   |
|---------------------|--------|------------------------------|------------|---------------------------------------------|--------|----------------------------------|--------|
|                |   | **2002**                     |       | **2001**                                    |   |                             |   |
| Current:            |   |                         |       |                                        |   |                             |   |   |   |
| Federal             |   | $                            | 9,491,000  |                                        | $      | 11,432,000                       |   | $ | 5,880,000 |   | $ | 11,046,000 |   |
| State               |   | 2,592,000                    |       | 3,100,000                                   |   | 1,601,000                        |   | 3,008,000 |   |
|                |   | 12,083,000                   |       | 14,532,000                                  |   | 7,481,000                        |   | 14,054,000 |   |
| Deferred:           |   |                         |       |                                        |   |                             |   |   |   |
| Federal             |   | 2,066,000                    |       | (52,000                                     | )      | 76,000                           |   | 246,000 |   |
| State               |   | 576,000                      |       | 19,000                                      |   | 20,000                           |   | 66,000 |   |
|                |   | 2,642,000                    |       | (33,000                                     | )      | 96,000                           |   | 312,000 |   |
| Total income  taxes |   | $                            | 14,725,000 |                                        | $      | 14,499,000                       |   | $ | 7,577,000 |   | $ | 14,366,000 |   |

 

Deferred income taxes relate to the temporarydifferences between financial accounting income and taxable income and areprimarily attributable to differences between the book and tax basis ofproperty and equipment. The Company believes that it is more likely than notthat the deferred tax assets will be realized based upon reversals of existingtaxable temporary differences and future income.

 

A reconciliation of the effective income tax rate withthe applicable statutory federal income tax rate is as follows: 

 

|                                 |   | **Years ended December 31,** |   | **Six months  ended  December 31,  2000** |   | **Year ended  June 30,  2000** |   |
|--------------------------------------|--------|------------------------------|--------|-------------------------------------------|--------|--------------------------------|--------|
|                                 |   | **2002**                     |   | **2001**                                  |   |                           |   |
| Federal tax at  statutory rate       |   | 35.0                         | %      | 35.0                                      | %      | 35.0                           | %      | 35.0 | % |
| State taxes, net  of federal benefit |   | 5.7                          | %      | 5.7                                       | %      | 5.7                            | %      | 5.7 | % |
| Effective income  tax rate           |   | 40.7                         | %      | 40.7                                      | %      | 40.7                           | %      | 40.7 | % |

 

Prior to the spin-off, the Company was included aspart of DVD’s consolidated federal income tax return; however, the income taxexpense presented in the Consolidated Financial Statements has been computed ona separate return basis.  During thethird quarter of 2002, pursuant to the Tax Sharing Agreement (see below), theCompany 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 will include the operations of the Company for thefirst quarter of the year.

 

42

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The Company and DVD have entered into a tax-sharingagreement to reflect each company’s rights and obligations relating to paymentsand refunds of taxes that are attributable to periods beginning before andincluding the date of the spin-off described in NOTE 1**-**Dover Motorsports, Inc.Spin-off Of Its Gaming Business. The agreement provides for payments betweenthe companies to reflect tax liabilities that may arise before, after andbecause of the spin-off.

 

**NOTE8—Pension Plan**

 

Prior to the spin-off from DVD, the Company’semployees participated in DVD’s noncontributory, tax qualified defined-benefit pension plan.  Effective April 1, 2002, the Companyestablished the Dover Downs Gaming & Entertainment, Inc. defined-benefit pension plan.  Pursuant to the terms of the EmployeeBenefits Agreement, DVD arranged for the transfer of the assets and liabilitiesassociated with the defined-benefitpension plan sponsored by DVD with respect to employees who are now Gaming& Entertainment employees to Gaming & Entertainment.  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’ fundedstatus and amounts recognized in the Company’s consolidated balance sheet as ofDecember 31, 2002:

 

| Change in benefit obligation:                    |   |       |       |
|--------------------------------------------------|--------|------------|------------|
| Benefit obligation at beginning of period        |   | $          | —     |   |
| Service cost                                     |   | 429,000    |       |
| Interest cost                                    |   | 132,000    |       |
| Transfer from DVD Plan                           |   | 2,546,000  |       |
| Actuarial loss                                   |   | 308,000    |       |
| Benefit obligation at end of period              |   | 3,415,000  |       |
|                                             |   |       |       |
| Change in plan assets:                           |   |       |       |
| Fair value of plan assets at beginning of period |   | —     |       |
| Actual loss on plan assets                       |   | (127,000   | )          |
| Transfer from DVD Plan                           |   | 958,000    |       |
| Employer contribution                            |   | 250,000    |       |
| Fair value of plan assets at end of period       |   | 1,081,000  |       |
|                                             |   |       |       |
| Unfunded status                                  |   | (2,334,000 | )          |
| Unrecognized net loss                            |   | 1,177,000  |       |
| Unrecognized prior service cost                  |   | 86,000     |       |
| Net amount recognized                            |   | $          | (1,071,000 | ) |

 

At December 31, 2002, the assetsof the plans were invested 39% in equity funds, 21% in intermediate bond fundsand the remainder in money market funds. The discount rate, assumed rate of compensation increase and expectedlong–term rate of return on assets for the year ended December 31, 2002was 6.5%, 5.0% and 9.0%, respectively.

 

The components of net periodicpension cost for the year ended December 31, 2002 are as follows:

 

| Service cost                       |   | $       | 429,000 |   |
|------------------------------------|--------|---------|---------|--------|
| Interest cost                      |   | 132,000 |    |
| Expected return on plan assets     |   | (63,000 | )       |
| Recognized net actuarial loss      |   | 28,000  |    |
| Amortization of prior service cost |   | 6,000   |    |
|                               |   | $       | 532,000 |   |

 

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Prior to the effective date of the spin-off from DVD,net periodic pension expense was allocated to the Company.  The amounts allocated were $502,000,$143,000 and $286,000 during the year ended December 31, 2001, the six-monthperiod ended December 31, 2000 and the year ended June 30, 2000, respectively.

 

The following table presents the amounts recognized inthe Company’s consolidated balance sheet as of December 31, 2002:

 

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

 

A minimum pension liability is required when theactuarial present value of accumulated benefits exceeds plan assets and accruedpension liabilities.  The accumulatedbenefit obligation for the pension plans was $2,453,000 at December 31, 2002.

 

Pursuant to the terms of the Employee BenefitsAgreement, DVD arranged for the transfer of the assets and liabilitiesassociated with the 401(k) plan sponsored by DVD with respect to employees whoare now Gaming & Entertainment employees to Gaming & Entertainment.Effective January 1, 2003, the Company maintains its own defined contribution401(k) plan which permits participation by substantially all employees. Priorto January 1, 2003, the Company participated in DVD’s 401(k) plan.

 

**NOTE9—Stockholders’ Equity**

 

Changes in the components of stockholders’ equity areas follows (in thousands, except per share data):

 
|                                                       |   | **Common  Stock** |   | **Class A  Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulate  Other  Comprehensive  Loss** |   | **DVD  Equity  Investment** |   |
|------------------------------------------------------------|--------|-------------------|--------|----------------------------|--------|----------------------------------|--------|------------------------|--------|--------------------------------------------|--------|-----------------------------|--------|
| **Balance  at June 30, 1999**                              |   | $                 | — |                       | $      | —                           |   | $                      | — |                                       | $      | —                      |   | $ | — |   | $ | 49,550 |   |
| Net earnings                                               |   | —            |   | —                     |   | —                           |   | —                 |   | —                                     |   | 20,952                      |   |
| **Balance at June 30, 2000**                               |   | —            |   | —                     |   | —                           |   | —                 |   | —                                     |   | 70,502                      |   |
| Net earnings (six months)                                  |   | —            |   | —                     |   | —                           |   | —                 |   | —                                     |   | 11,056                      |   |
| **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                             | )      | —                 |   | —                                     |   | —                      |   |
| 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 | ) | $ | — |   |

 

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Gaming & Entertainment has 125,000,000 shares ofauthorized capital stock which consists of 74,000,000 shares of common stock,par value $.10 per share; 50,000,000 shares of Class A common stock, par value$.10 per share; and 1,000,000 shares of Preferred Stock, par value $.10 pershare.

 

The holders of common stock are entitled to one voteper share and the holders of our Class A common stock are entitled to 10 votesper share.  There is no cumulativevoting.  Shares of Class A common stockare convertible at any time into our shares of common stock on a one-for-onebasis at 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 Board of Directors, it may pay to the holdersof common stock a cash dividend greater than the dividend, if any, paid to theholders of Class A common stock.

 

The Company adopted a stockholder rights plan in 2002prior to the effective date of the spin-off. The rights are attached to andtrade in tandem with our common stock and Class A common stock. Each rightentitles the registered holder to purchase from the Company one share of commonstock at a purchase price of $200 per share. The rights, unless earlierredeemed by our Board of Directors, will detach and trade separately from ourcommon stock upon the occurrence of certain events such as the unsolicitedacquisition by a third party of beneficial ownership of 10% or more of ouroutstanding combined common stock and Class A common stock or the announcementby a third party of the intent to commence a tender or exchange offer for 10%or more of our outstanding combined common stock and Class A common stock.After the rights have detached, the holders of such rights would generally havethe ability to purchase such number of either shares of our common stock orstock of an acquirer of the Company having a market value equal to twice theexercise price of the right being exercised, thereby causing substantialdilution to a person or group of persons attempting to acquire control of theCompany. The rights may serve as a significant deterrent to unsolicitedattempts to acquire control of Gaming & Entertainment, includingtransactions involving a premium to the market price of our stock.  The rights expire on January 1, 2012, unlessearlier redeemed.

 

On January 29, 2003, the Board of Directors of the Companydeclared a quarterly cash dividend on both classes of common stock of $.05 pershare.  The dividend was paid on March10, 2003 to shareholders of record at the close of business on February 10,2003.

 

On October 23, 2002, the Board of Directors authorizedthe repurchase 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 notobligate the Company to acquire any specific number of shares and may besuspended at any time.

 

Prior to the effective date of the spin-off, certainGaming & Entertainment employees participated in the DVD stock optionplan.  In conjunction with the spin-off,Gaming & Entertainment adopted a stock option plan pursuant to which the Company’s Board of Directors may grant up to1,500,000 stock options to officers, key employees and directors at not lessthan 100% of the fair market value at the date of the grant.  The stock options have eight-year terms andgenerally vest equally over a period of six years from the date of grant.  Following the spin-off, outstandingstock option grants under the DVD plan held by Gaming & Entertainmentemployees were replaced with Gaming & Entertainment stock optiongrants.  The Gaming & Entertainmentgrants had the same relative ratio of the exercise price to market value andthe same vesting provisions, option periods and other applicable terms andconditions as the DVD stock option grants being replaced.

 

The Company applies APB Opinion No. 25 and relatedinterpretations, as permitted by Statement No. 123, in accounting for its stockoption plan. Accordingly, no compensation cost has been recognized for itsstock option plan. For disclosure purposes, the Company determined compensationcost for its stock options based upon the fair value at the grant date usingthe Black-Scholes option-pricing model with the following assumptions:

 

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

 

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The weighted-average fair value of options grantedduring the year ended December 31, 2002 was $4.33.

 

Option activity was as follows: 

 

|                                |   | **December  31,  2002** |   |
|-------------------------------------|--------|-------------------------|--------|
| Number of  options:                 |   |                    |   |
| Outstanding at  beginning of period |   | —                  |   |
| Spin-off  issuances                 |   | 393,446                 |   |
| Granted                             |   | 277,000                 |   |
| Exercised                           |   | (10,781                 | )      |
| Expired                             |   | (47,505                 | )      |
| Outstanding at  end of period       |   | 612,160                 |   |
|                                |   |                    |   |
| At period end:                      |   |                    |   |
| Options  available for grant        |   | 877,059                 |   |
|                                |   |                    |   |
| Weighted average  exercise price:   |   |                    |   |
| Options granted                     |   | $                       | 12.05  |   |
| Options  exercised                  |   | $                       | 6.74   |   |

 

The following table summarizes information about thestock options outstanding under the Company’s option plan as of December 31,2002:

 
| **Range of  Exercise Prices** |   | **Number  Outstanding** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Number  Exercisable** |    | **Weighted  Average  Exercise  Price** |   |
|-------------------------------|--------|-------------------------|--------|----------------------------------------|--------|-----------------------------------------------------|--------|-------------------------|---------|----------------------------------------|--------|
| $  6.74-$   9.72    |   | 294,454                 |   | $                                      | 8.48   |                                                | 4.1yrs |                    | 142,638 |                                   | $      | 7.71 |   |
| $11.16-$13.31                 |   | 317,706                 |   | $                                      | 11.55  |                                                | 6.8yrs |                    | 30,453  |                                   | $      | 11.34 |   |
| $  6.74-$13.31           |   | 612,160                 |   | $                                      | 10.27  |                                                |   |                    | 173,091 |                                   | $      | 8.35 |   |

 

**NOTE10—Related Party Transactions**

 

During the years ended December31, 2002 and 2001, the six months ended December 31, 2000 and the year endedJune 30, 2000, Gaming & Entertainment allocated corporate costs of$495,000, $2,307,000, $828,000 and $1,640,000, respectively, to DVD.  As of December 31, 2002, Gaming &Entertainment’s consolidated balance sheet includes a $793,000 receivable fromDVD for the aforementioned costs and for other payments made by the Company onDVD’s behalf.  The allocation was basedon both an allocation to the business that directly incurred the costs and ananalysis of each company’s share of the costs.  The net costs incurred by each company for these services are notnecessarily indicative of the costs that would have been incurred if thecompanies had been separate, independent entities and/or had otherwise independentlymanaged these functions; however, management believes that these costs arereasonable.

 

During the third quarter of 2002, pursuant to the TaxSharing Agreement, 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 will include the operations ofthe Company for the first quarter of the year.

 

Our use of DVD’s 5/8-mileharness racing track is under an easement granted by DVD which does not requirethe payment of any rent. Under the terms of the easement Gaming &Entertainment 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.  Our indoor grandstandsare used by DVD at no charge in connection with its motorsports events. DVDalso leases its principal executive office space from us. Various easements andagreements relative to access, utilities and parking have also been enteredinto between DVD and the Company.

 

46

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In conjunction with the spin-off,the Company and DVD entered into various agreements that address the allocationof assets and liabilities between the two companies and that define thecompanies’ relationship after the separation. The Transition Support Services Agreement provides for each of DVD andthe Company to provide each other with certain administrative and operationalservices subsequent to the spin-off.   TheTax Sharing Agreement provides for, among other things, the treatment of incometax matters for periods beginning before and including the date of the spin-offand any taxes resulting from transactions effected in connection with thespin-off.  Refer to NOTE 1—DoverMotorsports, Inc. Spin-off Of Its Gaming Business for further discussion.

 

The Company purchased administrative services fromRollins Truck Leasing Corp. and affiliated companies (“RTLC”), which wererelated to Gaming & Entertainment through common ownership, during the yearended December 31, 2001, the six-month period ended December 31, 2000 and theyear ended June 30, 2000. The total cost of these services, which have beenincluded in general and administrative expenses in the Consolidated Statementof Earnings, was $71,000, $233,000 and $420,000, respectively. RTLC ceased toprovide these services effective in April 2001.

 

**NOTE11—Commitments and Contingencies**

 

The State of Delaware hasenacted a ban on smoking in all indoor public facilities with certain minorexceptions such as fire halls and fraternal organization premises wherefundraising takes place.  The ban becameeffective November 27, 2002.  The newlaw prohibits smoking inside the Company’s casino, hotel and conference center,restaurants, harness track indoor grandstands and simulcasting facilities,provided that smoking will be permitted in up to 25% of the rooms in thehotel.  Prior to the ban becomingeffective, a significant amount of our revenues were from slot machines insmoking areas.  Through November 2002,slot win grew each month at an average rate of 12.7%.  In the month of December 2002, our revenues decreased 13.1% ascompared to the same period last year. We continue to pursue legislative and administrative avenues of relieffrom the new law.  If the smoking bancontinues in its current form and if a significant number of our smokingpatrons choose to discontinue or shorten their visits as a result of an indoorsmoking ban and cannot be replaced with other patrons, the Company’s revenues,earnings and cash flows will continue to be negatively impacted.

 

In May 1995, Dover Downs, Inc., a subsidiary of theCompany, entered into a long-term management agreement with Caesars WorldGaming Development Corporation (“Caesars”). Caesars acts as our agent to manageour video lottery casino. Caesars has been properly licensed by the DelawareState Lottery Office to perform these functions. Effective January 1, 2001, theCompany and Caesars amended the casino management agreement to decrease thepercentage management fee paid to Caesars by 20% while modifying the agreementto cover all 2,000 video lottery machines currently in operation for theremainder of the term that expires December 2004. During the six months endedDecember 31, 2000 and fiscal year 2000, the Company accrued $1,512,000 and $3,148,000,respectively, that Caesars claimed were due as a result of casino expansions,but which the Company disputed. As a result of the amendment to the managementagreement, the Company and Caesars settled the dispute, and the Companyreversed a portion of the prior accruals for management fees which resulted ina $2,475,000 reduction to operating expenses in December 2000. Caesars’performance-based fees were $7,440,000 and $7,498,000 for the years endedDecember 31, 2002 and 2001, $2,468,000 for the six months ended December 31,2000 and $6,383,000 in fiscal 2000. Amounts owed to Caesars at December 31,2002 and 2001 totaled $840,000 and $1,080,000, respectively, and are includedin accrued liabilities.

 

47

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**NOTE12—Quarterly Results (unaudited)**

 
|                             |   | **March 31** |       | **June 30** |       | **September  30** |       | **December  31** |       |
|----------------------------------|--------|--------------|------------|-------------|------------|-------------------|------------|------------------|------------|
| **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        |       |
|                             |   |         |       |        |       |              |       |             |       |
| Earnings per  share-basic        |   | $            | 0.19       |        | $          | 0.21              |       | $                | 0.24       |   | $ | 0.16 |   |
| Earnings per  share diluted      |   | $            | 0.19       |        | $          | 0.21              |       | $                | 0.24       |   | $ | 0.16 |   |
|                             |   |         | ** ** |        | ** ** |              | ** ** |             | ** ** |
| **Year Ended December 31, 2001** |   |         | ** ** |        | ** ** |              | ** ** |             | ** ** |
| Net revenues                     |   | $            | 44,908,000 |        | $          | 44,687,000        |       | $                | 47,983,000 |   | $ | 43,715,000 |   |
| Operating  earnings              |   | 9,788,000    |       | 9,122,000   |       | 9,453,000         |       | 8,251,000        |       |
| Net earnings                     |   | 5,729,000    |       | 5,414,000   |       | 5,298,000         |       | 4,654,000        |       |
|                             |   |         |       |        |       |              |       |             |       |
| Earnings per  share-basic        |   | $            | 0.22       |        | $          | 0.20              |       | $                | 0.20       |   | $ | 0.17 |   |
| Earnings per  share diluted      |   | $            | 0.21       |        | $          | 0.20              |       | $                | 0.20       |   | $ | 0.17 |   |

 

Earnings per share amounts 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.

 

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