**United States**

**Securities and Exchange Commission**

**Washington, D.C.  20549**

 

**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, 2010**

 

**Commission file number   1-16791**

 

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

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

**(302) 674-4600**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

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

 

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

 

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

 

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

 

The aggregate market value of common stock held by non-affiliates of the registrant was $43,160,373 as of June 30, 2010 (the last day of our most recently completed second quarter).

 

As of February 25, 2011, the number of shares of each class of the registrant’s common stock outstanding is as follows:

 
|       | Common Stock -                   15,797,795   shares |       |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | Class A Common Stock -   16,603,173   shares                                                                          | ** ** |

 

**Documents Incorporated by Reference**

 

Portions of the registrant’s Proxy Statement in connection with the Annual Meeting of Stockholders to be held April 27, 2011 are incorporated by reference into Part III, Items 10 through 14 of this report.

 

 

 

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**Part I**

 

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

 
| **Item   1.** | ** ** | **Business** |
|---------------|------------|--------------|

 

We are a diversified gaming and entertainment company whose operations consist of:

 

·                  Dover Downs Casino — a 165,000-square foot casino complex featuring popular table games, including craps, roulette and card games such as blackjack, Spanish 21, baccarat, 3-card and pai gow poker, the latest in slot machine offerings, multi-player electronic table games, the Crown Royal poker room, a Race & Sports Book operation, the Dover Downs’ Fire & Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italian restaurant, as well as several bars, restaurants and four retail outlets;

 

·                  Dover Downs Hotel and Conference Center — a 500 room AAA Four Diamond hotel with conference, banquet, ballroom and concert hall facilities; and

 

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

 

All of our operations are located at our entertainment complex in Dover, the capital of the State of Delaware.

 

During the third quarter of 2009, we opened our Race & Sports Book operation and Frankie’s Italian restaurant.  The Race & Sports Book features parlay sports wagering on National Football League (“NFL”) games and pari-mutuel wagering on live and simulcast horse races.  In January 2010, the Delaware legislature authorized table games at the facilities of the State’s three video lottery agents.  On June 25, 2010, we opened our table game operations with 40 tables including blackjack, craps and roulette tables.  The Crown Royal poker room opened on July 14, 2010 with 12 poker tables and was expanded to 18 tables in September.

 

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

 

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

 

Dover Downs, Inc. is authorized to conduct video lottery, sports wagering and table game operations as one of three “Licensed Agents” under the Delaware State Lottery Code. Licensing, administration and control of gaming operations in Delaware is under the Delaware State Lottery Office and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement.

 

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

 

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annual license from the Harness Racing Commission for the past 42 consecutive years and management believes that our relationship with the Commission remains good.

 

Due to the nature of our business activities, we are subject to various federal, state and local regulations.  As part of our license arrangements, we are subject to various taxes and fees which are subject to change by the Delaware legislature.

 

**Dover Downs Casino**

 

Our casino opened in December 1995 with approximately 500 slot machines.  Due to its popularity, the casino has expanded six times since its opening and the number of machines has increased to 2,774 at December 31, 2010.  The most recent expansion, which was completed in September of 2008, added approximately 68,000 square-feet of space bringing our casino complex to 165,000 square-feet.  We are open for business 24 hours per day, seven days per week.  Our facilities are open every day of the year, except Christmas and Easter, and we estimate that the facility was visited by****approximately****2.7 million patrons in 2010.

 

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

 

In January 2010, the Delaware legislature authorized table games at the facilities of the State’s three video lottery agents.  On June 25, 2010, we opened our table game operations with 40 tables including blackjack, craps and roulette tables.  The Crown Royal poker room opened on July 14, 2010 with 12 poker tables and was expanded to 18 tables in September.

 

Dover Downs, Inc. is authorized to conduct video lottery, sports wagering and table game operations as one of three “Licensed Agents” under the Delaware State Lottery Code. Licensing, administration and control of gaming operations in Delaware is under the Delaware State Lottery Office and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement. We are required by law to set the payout on our slot machines to customers between 87% and 95%.

 

We use sophisticated database marketing to enable us to develop long-term relationships with our patrons and to target promotions to specific customer segments. Our Capital Club®, a slots players club and tracking system, allows us to identify customers and to reward their level of play through various marketing programs. Membership in this club currently stands at approximately 170,000 active patrons.

 

We have implemented extensive procedures for financial and accounting controls, safekeeping and accounting of monies, and security provisions. Security over the gaming operations involves the integration of surveillance cameras, observation and oversight by employees, security and gaming staff, and various security features built into our equipment. The above, when combined with proper internal control procedures and daily monitoring by the Delaware State Lottery Office and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement, are intended to maintain the security, integrity and accountability of our gaming operations.

 

**Dover Downs Hotel**

 

Our luxury hotel facility, the Dover Downs Hotel and Conference Center, is the largest hotel in the State of Delaware and connects to our casino.  The facility includes 500 rooms, including eleven luxury spa suites, a multi-purpose ballroom/concert hall, a fine dining restaurant, swimming pool and a luxurious 6,000 square-foot full-service spa.  By offering a wide range of entertainment options to our patrons, including concerts featuring prominent entertainers, live boxing, gourmet dining, spa facilities, trade shows and conferences, we believe we are able to attract new patrons and lengthen the stay of current patrons.  Since opening the Dover Downs Hotel in 2002, we have managed its operations ourselves.  In 2010, hotel occupancy averaged 84% and the hotel was awarded the AAA Four Diamond Award for the eighth consecutive year.

 

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**Dover Downs Raceway**

 

Dover Downs Raceway has presented pari-mutuel harness racing events for 42 consecutive years. Live harness races are conducted at Dover Downs Raceway from late October until April and are simulcast to more than 300 tracks and other off-track betting locations across North America on each of our more than 130 live race dates.  During our harness racing season, we have historically used the 5/8-mile harness racing track that is located on DVD’s property and is on the inside of its one-mile motorsports superspeedway.  In order to continue this historic use, DVD granted a perpetual easement to the harness track to us at the time of the spin-off.  This perpetual easement allows us to have exclusive use of the harness track during the period beginning 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 after such period.  The easement requires that we maintain the harness track but does not require the payment of any rent.  Additional amenities include the Winners Circle® Restaurant overlooking the horse racing track.

 

Within our Race & Sports Book operation is the simulcast parlor where our patrons can wager on harness and thoroughbred races received by satellite into our facility year round from numerous tracks across North America.  Television monitors throughout the area provide views of all races simultaneously and the betting windows are connected to a central computer allowing bets to be received on all races from all tracks.

 

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

 

In harness racing, competing horses are harnessed to a two-wheeled sulky, which carries the driver.  Pari-mutuel wagering is pooled betting by which the wagering public, not the track, determines the odds and the payoff. The track retains a commission, which is a percentage of the total amount wagered, or the “handle.”  Simulcasting is the transmission of live horse racing by television, cable or satellite signal from one race track to another with pari-mutuel wagering being conducted at the sending and receiving track and a portion of the handle being shared by the sending and receiving tracks.

 

The legislation authorizing our gaming operations under the Delaware Lottery was initially adopted in June 1994, and is referred to as the “Horse Racing Redevelopment Act.” The Delaware General Assembly’s stated purpose in approving the legislation was to (i) provide non-state supported assistance in the form of increased economic activity and vitality for Delaware’s harness and thoroughbred horse racing industries, which activity and vitality will enable the industry to improve its facilities and breeding stock, and cause increased employment; and (ii) restrict the location of gaming operations to locations where wagering is already permitted and controls exist. A portion of the proceeds from our gaming operations is allocated to increase the purses for harness horse races held at Dover Downs Raceway and is intended to provide increased vitality for Delaware’s horse racing industry.

 

We have an agreement with the Delaware Standardbred Owner’s Association, Inc. (“DSOA”) effective September 1, 2010 and continuing through August 31, 2014.  DSOA’s membership consists of owners, trainers and drivers of harness horses participating in harness race meetings at our facilities and elsewhere in the United States and Canada. The DSOA has been organized and exists for the purpose of promoting the sport of harness racing; improving the lot of owners, drivers and trainers of harness racing horses participating in race meetings; establishing health, welfare and insurance programs for owners, drivers and trainers of harness racing horses; negotiating with harness racing tracks on behalf of owners, trainers, drivers and grooms of harness racing horses; and generally rendering assistance to them whenever and wherever possible. Under the DSOA agreement, we are required to distribute as purses for races conducted at our facilities a percentage of our retained share of pari-mutuel revenues.

 

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

 

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**Licensing and Regulation by Gaming and Other Authorities**

 

*General*

 

We are subject to extensive federal, state and local regulations related to our operations, particularly our video lottery, sports wagering and table game operations, live harness racing and pari-mutuel wagering. These operations are contingent upon continued government approval of such operations as forms of legalized gaming and could be subjected at any time to additional or more restrictive regulations.  The following is a brief outline of some of the more significant regulations affecting our gaming operations and not intended as a recitation of all regulations applicable to our business.

 

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

 

*Video Lottery, Sports Wagering and Table Game Operations*

 

*General. *Video lottery, sports wagering and table game operations are by statute operated and administered by the Director of the Delaware State Lottery Office (the “Lottery Director”) and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement.  We are a Licensed Agent authorized to conduct these activities under the Delaware State Lottery Code.

 

The Lottery Director has discretion to adopt such rules and regulations as the Lottery Director deems necessary or desirable for the efficient and economical operation and administration of the lottery, including (i) type and number of games permitted, (ii) pricing of games, (iii) numbers and sizes of prizes, (iv) manner of payment, (v) value of bills, coins or tokens needed to play, (vi) requirements for licensing agents and service providers, (vii) standards for advertising, marketing and promotional materials used by Licensed Agents, (viii) procedures for accounting and reporting, (ix) registration, kind, type, number and location of  machines or equipment on a Licensed Agent’s premises, (x) security arrangements for the gaming systems, and (xi) reporting and auditing of financial information of Licensed Agents.

 

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

 

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

 

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

 

*Revocation, Suspension or Modification of License*.  The Lottery Director may revoke or suspend the license of a Licensed Agent, such as ours, for “cause.”  “Cause” is broadly defined and could potentially include falsifying any application for license or report required by the rules and regulations, the failure to report any information required by the rules and regulations, the material violation of any rules and regulations promulgated by the Lottery Director or any conduct by the licensee which undermines the public confidence in the lottery or serves the interest of organized gambling or crime and criminals in any manner.  A license may be revoked for an unintentional violation of any federal, state or local law, rule or regulation provided that the violation is not cured within a reasonable time as determined by the Lottery Director.  A hearing officer’s decision revoking or suspending the license shall be appealable to the Delaware Superior Court under the provisions of the Administrative Procedures Act.  All existing

 

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or new officers, directors, key employees and owners of a Licensed Agent are subject to background investigation.  Failure to satisfy the background investigation may constitute cause for suspension or revocation of the License.

 

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

 

*Harness Racing Events*.  In order to maintain our gaming license with the Delaware Lottery, we are required to maintain our license for harness horse racing with the Harness Racing Commission and must conduct a minimum of 90 live race days each racing season, subject to the availability of racing stock.

 

*Control Over Equipment and Technology*.  We do not own or lease the slot machines or computer systems used by the State in connection with our video lottery gaming operations.  The Lottery Director enters into contracts directly with the providers of the slot machines and computer systems and we are not a party to those negotiations.  At our expense, the State purchases or leases all equipment and the Lottery Director licenses all technology providers. Our operations could be disrupted if a licensed technology provider violates its agreement with the State or ceases to be licensed for any reason.  Such an event would be outside of our control and could adversely affect our gaming revenues.

 

*Harness Racing and Pari-Mutuel Wagering*

 

*Licensing Requirements. *Harness racing in the State of Delaware is governed by the Delaware Harness Racing Commission.  We hold a license from the Commission by which we are authorized to hold harness race meetings on our premises and to make, conduct and sell pools by the use of pari-mutuel machines or totalizators.  The license must be renewed on an annual basis.  The Commission may reject an application for a license for any cause which it deems sufficient and the action of the Commission is final.  The Commission may also suspend or revoke a license which it has issued and its action in that respect is final, subject to review, upon questions of law only, by the Superior Court of the County within which the license was granted.  The action of the Commission stands unless and until reversed by the Court.  We have received an annual license from the Commission for the past 42 consecutive years and management believes that our relationship with the Commission remains good.  However, there can be no assurances that we will continue to be licensed by the Commission in the future.

 

Under the law, the Commission has broad powers of supervision and regulation.  The Commission may prescribe rules, regulations and conditions under which all harness racing and betting pools shall be conducted; may regulate the performance of any service or the sale of any article on the premises of a licensee; may compel the production of books and documents of a licensee and require that books and records be kept in such manner as the Commission may prescribe; may visit, investigate and place accountants or other persons as it deems necessary, at the expense of a licensee, in the office, track or place of business of a licensee; may summon witnesses and administer oaths; and may require the removal of any employee or official employed by a licensee.  All proposed extensions, additions or improvements to the property of a licensee are subject to the approval of the Commission.

 

The Commission is required to inspect a licensee’s racing plant not less than five days prior to a race meeting and may withdraw the license for the meeting if the racing plant is found to be unsafe for animals 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 injury liability in an amount to be approved by the Commission.

 

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*USTA. *Any license granted by the Commission is also subject to such reasonable rules and regulations as may be prescribed from time to time by the United States Trotting Association (“USTA”).  The USTA sets various rules relating to the conduct of harness racing.  According to its Articles of Incorporation, the purposes of the USTA shall include the improvement of the breed of trotting and pacing horses, the establishment of rules regulating standards and the registration of such horses thereunder, the advancement and promotion of the interest of harness racing in the United States, the investigation, 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 the laws of the various states, and the sanctioning of the holding of exhibitions of such horses and meetings for the racing thereof, the issuance of licenses to qualified persons to officiate at harness race meetings and exhibitions, the issuance of licenses to the owners of horses permitting the exhibition and racing of such horses and the qualification thereof, the issuance of licenses to drivers of horses participating in such races or exhibitions, and providing for the enforcement of the rules promulgated by the USTA, and providing for the fixing of penalties, fines, and the suspension or expulsion from membership, or privileges or for any other misconduct detrimental to the sport.

 

*Gaming Taxes and Fees*

 

We believe that the prospect of significant additional tax revenue is one of the primary reasons why jurisdictions have legalized gaming. As a result, gaming operators are typically subject to significant taxes 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 substantial taxes and fees with respect to our operations and the State’s share of our gaming win has been increased several times over the past few years.  We would likely incur similar burdens in any other jurisdiction in which we may conduct gaming operations in the future.  Any material increase in taxes or fees, or the adoption of additional taxes or fees, may have a material adverse effect on our future financial results.

 

*Compliance with Other Laws*

 

We are subject to various federal, state and local laws and regulations in addition to gaming regulations.  These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising.  Laws and regulations governing the use and development of real estate may delay or complicate any improvements we choose to make and/or increase the costs of any improvements or our costs of operating.

 

The Internal Revenue Service (“IRS”) requires operators of casinos located in the United States to file information returns for United States citizens, including names and addresses of winners, for all winnings in excess of stipulated amounts. The IRS also requires operators to withhold taxes on certain winnings.

 

Regulations adopted by the Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”) require us to report currency transactions in excess of stipulated amounts occurring within a gaming day, including identification of the patron by name and social security number. FinCEN has also established regulations that require us to file suspicious activity reports on all transactions that we know, suspect, or have reason to suspect fall into specific categories that are deemed to be suspicious. We believe our programs meet the requirements of the applicable regulations.

 

Laws and regulations are always subject to change, can be interpreted differently in the future, and new laws and regulations may be enacted which could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and our company. Furthermore, noncompliance with one or more of these laws and regulation could result in the imposition of substantial penalties against us.

 

**Competition**

 

The gaming industry in the United States is intensely competitive and features many participants, including riverboat casinos, dockside casinos, land-based casinos, slot and poker machines, whether or not located in casinos, native American gaming, pari-mutuel wagering on live and simulcast horse racing, off-track betting, state run lotteries, internet gambling and other forms of gambling. Gaming competition is particularly intense in each of these sectors.

 

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We compete in local and regional markets with horse tracks, off-track betting parlors, state run lotteries, casinos and other gaming facilities.  In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including shopping, collegiate and professional athletic events, television and movies, concerts and travel.  Many of our gaming competitors are in jurisdictions with a lower tax burden.  As gambling opportunities in the region continue to proliferate, there can be no assurance that we will maintain our state or regional market share or be able to compete effectively with our competitors and this could adversely affect our business, financial condition and overall profitability.  Approximately 68% of our Capital Club® member gaming win comes from out of state patrons.

 

The introduction or expansion of gaming in neighboring jurisdictions, particularly Maryland, Virginia, West Virginia, Washington, D.C., Pennsylvania or New Jersey, or the legalization of additional gaming venues in Delaware, could have a material adverse effect on our cash flows and results of operations.  Delaware is surrounded by jurisdictions which permit slot machines, such as Pennsylvania, New Jersey, Maryland and West Virginia, and all of these jurisdictions — with the exception of Maryland — also permit table games.  Additional venues are expected in Maryland and management has estimated that approximately 41% of our total gaming win comes from Maryland patrons.  Some of these patrons may prefer the convenience of facilities closer to home.

 

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

 

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

 

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

 

Within the State of Delaware, we face little direct live competition from the State’s other two tracks. Harrington Raceway, a south central Delaware fairgrounds track, conducts harness horse racing periodically between April and October. There is no overlap presently with our live race season. Delaware Park, a northern Delaware track, conducts thoroughbred horse racing from April through mid-November. Its race season only overlaps with ours for approximately one week each year.

 

We compete with harness and thoroughbred racing and simulcasting facilities in the neighboring states of Pennsylvania, Maryland and New Jersey.  We also receive simulcast harness and thoroughbred races from approximately 90 race tracks.

 

Competition for our hotel varies and consists of local and regional competition. With respect to hotel accommodations only, we compete with a variety of nearby hotels in the Dover area; however, none of these offer the luxury accommodations and amenities that we offer.  Our hotel is the only hotel in the Dover area, and one of only three hotels in the State, to receive the AAA Four Diamond Award.  With respect to trade shows, conferences, concerts and hotel room packages tied to these events or tied to our casino and other gaming offerings, we compete at a regional level with the other gaming operations referred to above and with convention centers and larger hotels in major cities such as Philadelphia, Washington, D.C., Baltimore and Wilmington.

 

In addition, our activities compete with other leisure, entertainment and recreational activities.

 

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**Growth Strategies**

 

We offer a unique gaming and entertainment experience and make available to our patrons a number of different options: slot machine gaming, table game wagering, sports wagering, live harness horse racing, luxury hotel accommodations, fine dining, full service spa, national recording and entertainment acts, night club, retail shopping, live boxing and simulcasting of thoroughbred and harness horse races from across North America. Our mission is simple: to provide all of our customers a premier gaming and entertainment experience with a focus on unparalleled customer service.  Our growth strategy is to foster customer loyalty by following this mission, focus on our most valuable customers, expand and improve the quality of our gaming positions, enhance our gaming products with additional entertainment offerings and create an exciting gaming environment while focusing on areas that we believe will increase our revenue and profitability. Our efforts in this regard include the following:

 

*Increase The Utilization Of Our Casino*

 

We use a sophisticated database marketing program to enable us to develop long-term relationships with our patrons and to target promotions to specific customer segments.  Our Capital Club, a players club and tracking system, allows us to identify customers and to reward their level of play through various marketing programs. Membership in this club currently stands at approximately 170,000 active patrons.  We attempt to increase attendance at both our casino and hotel through effective promotional use of our database and by making improvements to our facilities and gaming offerings based on what we learn from our Capital Club members. For example, we continually add the most popular machines, have added live table games, as well as multi-player electronic table games and other amenities requested by our customers.

 

In January 2010, the Delaware legislature authorized table games at the facilities of the State’s three video lottery agents.  On June 25, 2010, we opened our table game operations with 40 tables including blackjack, craps and roulette tables.  The Crown Royal poker room opened on July 14, 2010 with 12 poker tables and was expanded to 18 tables in September.  We will attempt to develop a database of regional table game customers to similarly target promotions to this new group of players.  Given the tax rate and labor intensive nature of table game operations, revenue growth in this area will be a strategy we will be particularly focused on.

 

*Capitalize On Our Luxury Hotel*

 

Our luxury hotel facility, the Dover Downs Hotel, connects to our casino.  It is the only hotel in the Dover area, and one of only three hotels in the State, to receive the AAA Four Diamond Award.  The facility includes 500 rooms, including eleven luxury spa suites, a multi-purpose ballroom/concert hall, a fine dining restaurant, swimming pool and a luxurious 6,000 square-foot spa.  By offering a wide range of entertainment options to our patrons, including concerts featuring prominent entertainers, live boxing, gourmet dining, trade shows and conferences, we believe we are able to attract new patrons and lengthen the stay of current patrons.

 

*Pursue Management Agreements*

 

We entered into a letter of intent on October 14, 2008 with UG Entertainment LLC to provide management services for the operation of a video lottery facility at Underground Atlanta.  UGE has made presentations to the Georgia Lottery relative to the possibility of commencing video lottery operations at Underground Atlanta.  Such video lottery operations are not presently authorized and would require regulatory action by the Georgia Lottery.  The letter of intent between us and UGE provides for a five year management agreement and affords us two renewal options for two years each subject to the attainment of certain financial criteria by the new facility. The letter of intent contemplates that the parties will negotiate and enter into an acceptable management agreement with terms and conditions comparable to management agreements of a similar nature.  Our compensation would consist of a management fee based on gross revenues and an incentive fee based on net earnings before taxes.  The letter of intent also contemplates that we will have the right to purchase up to 10% of the equity of UGE.

 

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We intend to pursue similar management opportunities in other jurisdictions.

 

**Seasonality**

 

Our quarterly operating results are affected by weather and the general economic conditions in the United States.  Our quarterly operating results are generally distributed evenly throughout the year.  However, the results for any quarter are not necessarily indicative of results to be expected in any future period.

 

**Employees**

 

As of December 31, 2010, we had 1,081 full-time employees and 265 part-time employees. We engage temporary personnel to assist during our live harness racing season.  None of our employees are party to a collective bargaining agreement and we believe that our relationship with our employees is good.

 

**Available Information**

 

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

 

**Internet Address**

 

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

 
| **Item   1A.** | ** ** | **Risk   Factors** |
|----------------|------------|--------------------|

 

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

 

In the section that follows below, in cautionary statements made elsewhere in this report, and in other filings we have made with the SEC, we list important factors that could cause our actual results to differ from our expectations.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors described below and other factors set forth in or incorporated by reference in this report.

 

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

 

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Additional information concerning these, or other factors, which could cause the actual results to differ materially from those in our forward-looking statements is contained from time to time in our other SEC filings.  Copies of those filings are available from us and/or the SEC.

 

*Our Gaming Activities Compete Directly With Other Gaming Facilities And Other Entertainment Businesses*

 

We compete in local and regional markets with horse tracks, off-track betting parlors, state run lotteries, casinos and other gaming facilities.  In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including shopping, collegiate and professional athletic events, television and movies, concerts and travel.  Many of our gaming competitors are in jurisdictions with a lower tax burden.  As gambling opportunities in the region continue to proliferate, there can be no assurance that we will maintain our state or regional market share or be able to compete effectively with our competitors and this could adversely affect our business, financial condition and overall profitability.  Approximately 68% of our Capital Club® member gaming win comes from out of state patrons.

 

The introduction or expansion of gaming in neighboring jurisdictions, particularly Maryland, Virginia, West Virginia, Washington, D.C., Pennsylvania or New Jersey, or the legalization of additional gaming venues in Delaware, could have a material adverse effect on our cash flows and results of operations.  Delaware is surrounded by jurisdictions which permit slot machines, such as Pennsylvania, New Jersey, Maryland and West Virginia, and all of these jurisdictions — with the exception of Maryland — also permit table games.  Additional venues are expected in Maryland and management has estimated that approximately 41% of our total gaming win comes from Maryland patrons.  Some of these patrons may prefer the convenience of facilities closer to home.

 

*All Of Our Facilities Are In One Location*

 

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

 

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

 

Licensing, administration and control of gaming operations in Delaware is under the Delaware State Lottery Office and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement.  Our gaming license must be renewed on an annual basis. To keep our gaming license, we must remain licensed for harness horse racing by the Delaware Harness Racing Commission and conduct at least 90 live race days each racing season, subject to the availability of harness race horses. The Commission has broad discretion to reject any application for a license or suspend or revoke a license once it is issued. The Director of the Delaware State Lottery Office (the “Lottery Director”) has broad discretion to revoke, suspend or modify the terms of our license. Any modification or termination of existing licensing regulations or any revocation, suspension or modification of our licenses could adversely affect our business, financial condition and overall profitability.

 

*Our Gaming Activities Are Subject To Extensive Government Regulation And Any Additional Government Regulation Or Taxation Of Gaming Activities Could Substantially Reduce Our Revenue Or Profit*

 

Slot machine gaming, sports betting, table games, harness horse racing and pari-mutuel wagering are subject to extensive government regulation.  Delaware law regulates the win we are entitled to retain and the percentage of commission we are entitled to receive from our gaming revenues, which comprises a significant portion of our overall revenues.  The State granted us a license to conduct our gaming operations and a license to conduct harness

 

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

 

We believe that the prospect of significant additional tax revenue is one of the primary reasons why jurisdictions have legalized gaming. As a result, gaming operators are typically subject to significant taxes 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 substantial taxes and fees with respect to our operations and the State’s share of our gaming win has been increased several times over the past few years. Any material increase in taxes or fees, or the adoption of additional taxes or fees, may have a material adverse effect on our future financial results.

 

We are subject to various federal, state and local laws and regulations in addition to gaming regulations.  These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising.  Laws and regulations governing the use and development of real estate may delay or complicate any improvements we choose to make and/or increase the costs of any improvements or our costs of operating.

 

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

 

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

 

*We Have a Significant Amount of Indebtedness*

 

As of December 31, 2010, we had total outstanding long-term debt of $78,600,000 under our credit facility.  This indebtedness and any future increases in our outstanding borrowings could:

 

·                  make it more difficult for us to satisfy our debt obligations;

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

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

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

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

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

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

 

In addition, our credit facility contains financial ratios that we are required to meet and other restrictive covenants that, among other things, limit or restrict our ability to borrow additional funds, make acquisitions, create liens on our properties and make investments.  Our ability to meet these financial ratios and covenants can be affected by events beyond our control, and there can be no assurance that we will.  If there were an event of default under our credit facility, the lenders could elect to declare all amounts outstanding to be immediately due and payable.

 

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*We Do Not Own Or Lease Our Slot Machines And Related Technology*

 

We do not own or lease the slot machines or computer systems used by the State in connection with our video lottery gaming operations.  The Lottery Director enters into contracts directly with the providers of the slot machines and computer systems and we are not a party to those negotiations.  At our expense, the State purchases or leases all equipment and the Lottery Director licenses all technology providers. Our operations could be disrupted if a licensed technology provider violates its agreement with the State or ceases to be licensed for any reason.  Such an event would be outside of our control and could adversely affect our gaming revenues.

 

*Due to Our Concentrated Stock Ownership, Stockholders May Have No Effective Voice In Our Management*

 

We have elected to be treated as a “controlled corporation” as defined by New York Stock Exchange Rule 303A.  We are a controlled corporation because a single person, Henry B. Tippie, the Chairman of our Board of Directors, controls in excess of fifty percent of our voting power.  This means that he has the ability to determine the outcome of the election of directors at our annual meetings and to determine the outcome of many significant corporate transactions, many of which only require the approval of a majority of our voting power.  Such a concentration of voting power could also have the effect of delaying or preventing a third party from acquiring us at a premium.  In addition, as a controlled corporation, we are not required to comply with certain New York Stock Exchange rules.

 

*Our Success Depends on the Availability and Performance of Key Personnel*

 

Our continued success depends upon the availability and performance of our senior management team which possesses unique and extensive industry knowledge and experience.  Our inability to retain and attract key employees in the future, could have a negative effect on our operations and business plans.

 

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

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

 

We have not received any written comments that were issued within 180 days before December 31, 2010, the end of the fiscal year covered by this report, from the SEC staff regarding our periodic or current reports under the Securities Exchange Act of 1934 that remain unresolved.

 
| **Item   2.** | ** ** | **Properties** |
|---------------|------------|----------------|

 

We own our principal executive office located in Dover, Delaware; Dover Downs Casino — a 165,000-square foot casino complex featuring popular table games, including craps, roulette and card games such as blackjack, Spanish 21, baccarat, 3-card and pai gow poker, the latest in slot machine offerings, multi-player electronic table games, the Crown Royal poker room, and our Race & Sports Book operation; the Dover Downs Hotel and Conference Center — a 500 room AAA Four Diamond hotel with conference, banquet, ballroom and concert hall facilities; and have a perpetual easement to Dover Downs Raceway — a harness racing track. Our casino offers pari-mutuel wagering on live racing from this raceway and simulcast horse races.  The casino facility includes the Dover Downs’ Fire & Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italian restaurant, as well as several bars, restaurants and four retail outlets, all of which are located at our entertainment complex situated on approximately 69 acres of land owned by us.

 

Prior to our spin-off from DVD in 2002, both companies shared certain real property in Dover, Delaware.  At the time of the spin-off, some of this real property was transferred to us to ensure that the real property holdings of each company was aligned with its past uses and future business needs.  During our harness racing season, we have

 

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historically used the 5/8-mile harness racing track that is located on DVD’s property and is on the inside of its one-mile motorsports superspeedway.  In order to continue this historic use, DVD granted a perpetual easement to the harness track to us at the time of the spin-off.  This perpetual easement allows us to have exclusive use of the harness track during the period beginning 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 after such period.  The easement requires that we maintain the harness track but does not require the payment of any rent.

 

Various easements and agreements relative to access, utilities and parking have also been entered into between us and DVD relative to our respective Dover, Delaware facilities.  DVD pays rent to us for the lease of its principal executive office space.  We also allow DVD to use our indoor grandstands in connection with DVD’s two annual motorsports weekends.  We do not assess rent for this nominal use and may discontinue the use at our discretion.

 

**Intellectual Property**

 

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

 
| **Item   3.** | ** ** | **Legal   Proceedings** |
|---------------|------------|-------------------------|

 

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

 
| **Item   4.** | ** ** | **Reserved** |
|---------------|------------|--------------|

 

**Executive Officers Of The Registrant**

 

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

 

**Part II**

 
| **Item 5.** | ** ** | **Market   For Registrant’s Common Equity, Related Stockholder Matters And Issuer   Purchases Of Equity Securities** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------|

 

Our common stock is listed on the New York Stock Exchange under the ticker symbol “DDE.”  Our Class A common stock is not publicly traded but is freely convertible on a one-for-one basis into common stock at any time at the option of the holder thereof.  As of February 25, 2011, there were 15,797,795 shares of common stock and 16,603,173 shares of Class A common stock outstanding.  There were 907 holders of record for common stock and 22 holders of record for Class A common stock.

 

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The high and low sales prices for our common stock on the New York Stock Exchange and the dividends declared per share for the years ended December 31, 2010 and 2009 are detailed in the following table.

 
| **Quarter Ended:** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends   Declared** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|--------------------------|------------|
| December 31, 2010  |       | $        | 3.60       |    | $          | 3.33                     |       | $ | 0.03 |   |
| September 30, 2010 |       | $        | 3.59       |    | $          | 2.80                     |       | $ | 0.03 |   |
| June 30, 2010      |       | $        | 4.46       |    | $          | 2.73                     |       | $ | 0.03 |   |
| March 31, 2010     |       | $        | 4.06       |    | $          | 3.41                     |       | $ | 0.03 |   |
|                    |       |     |       |    |       |                     |       |
| December 31, 2009  |       | $        | 6.12       |    | $          | 3.47                     |       | $ | 0.05 |   |
| September 30, 2009 |       | $        | 7.45       |    | $          | 4.25                     |       | $ | 0.05 |   |
| June 30, 2009      |       | $        | 7.25       |    | $          | 2.80                     |       | $ | 0.05 |   |
| March 31, 2009     |       | $        | 5.15       |    | $          | 2.56                     |       | $ | 0.05 |   |

 

On October 23, 2002, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time.  No repurchases were made in the fourth quarter of 2010 and we had remaining purchase authority of 1,653,333 shares.

 
| **Item 6.** | ** ** | **Selected   Financial Data** |
|-------------|------------|-------------------------------|

 

Not applicable.

 
| **Item   7.** | ** ** | **Management’s   Discussion And Analysis Of Financial Condition And Results Of Operations** |
|---------------|------------|--------------------------------------------------------------------------------------------------|

 

The following discussion is based upon and should be read together with the consolidated financial statements and notes thereto included elsewhere in this document.

 

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

 

·                  Dover Downs Casino — a 165,000-square foot casino complex featuring popular table games, including craps, roulette and card games such as blackjack, Spanish 21, baccarat, 3-card and pai gow poker, the latest in slot machine offerings, multi-player electronic table games, the Crown Royal poker room, and a Race & Sports Book operation;

 

·                  Dover Downs Hotel and Conference Center — a 500 room AAA Four Diamond hotel with conference, banquet, ballroom and concert hall facilities; and

 

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

 

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

 

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

 

·                  Proximity to major population bases,

·                  Competition in the market,

·                  The quantity and types of slot machines and table games available,

 

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·                  The quality of the physical property,

·                  Other amenities offered on site,

·                  Customer service levels,

·                  Marketing programs, and

·                  General economic conditions.

 

We believe that we hold a strong position in each of these areas.  Our entertainment complex is located in Dover, the capital of the State of Delaware. We draw patrons from several major metropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all within a two hour drive. According to the 2000 United States Census, approximately 32.8 million people live within 150 miles of our complex.  There are significant barriers to entry related to the gaming business in Delaware.  By law, currently only the three existing horse racing facilities in the State are allowed to have a gaming license.  Our property is similar to properties found in the country’s largest gaming markets.  Our luxury hotel is the only casino-hotel in Delaware, providing a strong marketing tool, especially to higher-end players.  We also utilize our slot marketing system to allow for more efficient marketing programs and the highest levels of customer service.  Our facility offers the most conference space of any hotel in Delaware.

 

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

 

**Results of Operations**

 

Gaming revenues represent (i) the net win from slot machine and table games (ii) our portion of the net win from sports wagering and (iii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.  Revenues do not include the retail amount of hotel rooms, food and beverage and other miscellaneous goods and services provided without charge to customers as promotional items. The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statement of earnings.

 

For the casino operations, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win. The win is included in the amount recorded in our consolidated financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the casino operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the slot machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to us as our commission for acting as a Licensed Agent.  Gaming expenses include the amounts collected by the State (i) for the State’s share of the win, (ii) for remittance to the providers of the slot machines and associated computer systems, and (iii) for harness horse racing purses.  We recognize revenues from sports wagering commissions when the event occurs.  We recognize revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs. Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

 

*Year Ended December 31, 2010 vs. Year Ended December 31, 2009*

 

Gaming revenues increased by $3,412,000, or 1.6%, to $217,267,000 in 2010 as a result of beginning table game operations on June 25, 2010 with 40 tables including blackjack, poker, craps and roulette.  In July 2010, we opened 12 poker tables which were expanded to 18 tables in September.  Partially offsetting the increase in table gaming revenues was a decrease in slot machine play in our casino which was significantly impacted by record snow fall in the region during the first quarter and continuing challenging economic conditions and the related impact on consumer spending.  Our average number of slot machines was 2,824 in 2010 as compared to 3,036 in 2009.  The lower number of slot machines resulted from the removal of machines to make room for our new table game operations.

 

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Other operating revenues were $20,882,000 in 2010 as compared to $18,944,000 in 2009.  Cash rooms revenue increased $559,000 in 2010 mainly due to an increase in convention and transient sales and cash sales from our casino customers.  Cash food and beverage revenues increased $1,532,000 to $13,674,000 from $12,142,000 in 2009 due primarily to higher banquet sales and the opening of our Race & Sports Book restaurant and Frankie’s Italian restaurant in September 2009.  Partially offsetting these increases was a decrease in our cash services revenue.  Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $18,306,000 and $18,255,000 in 2010 and 2009, respectively.

 

Gaming expenses increased by $12,508,000, or 7.1%, primarily as a result of the opening of our table game operations and significantly higher slot gaming taxes that resulted from legislation passed in May of 2009.  The impact of this legislative initiative resulted in an increase in our slot gaming taxes of approximately $5,600,000 in 2010.  Partially offsetting these increases were lower gaming taxes, computer system fees and harness horse racing purses due to the lower slot machine gaming revenues.

 

Other operating expenses increased by $1,369,000, or 9.3%, due to the higher revenues.

 

General and administrative expenses increased in 2010 to $6,922,000 from $6,678,000 in 2009.  The increase was primarily due to the expensing of costs relating to a proposed merger with Dover Motorsports, Inc. (a company related through common ownership).  The merger agreement was terminated in October 2010.

 

Depreciation expense remained consistent at $12,059,000 in 2010 as compared to $11,939,000 in 2009.

 

Interest expense increased by $878,000 due to a higher average interest rate on our amended credit facility.

 

Our effective income tax rate was 41.3% in 2010 as compared to 40.9% in 2009.  The increase was the result of the non-deductible portion of the restricted stock awards that vested during 2010.

 

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

 

Gaming revenues decreased by $6,023,000, or 2.7%, to $213,855,000 in 2009 primarily as a result of decreased play in our casino.  We believe that the decrease in casino play can be attributed to increased regional competition, the general downturn in economic conditions and the related impact on consumer spending.  We believe that the decrease would have been more significant but for the opening of our Phase VI casino expansion in the third quarter of 2008 and our efforts to provide our customers with enhanced casino products and other amenities.  Our average number of machines was 3,036 in 2009 as compared to 2,888 in 2008.  As a result of our hotel expansion, our average number of available rooms increased 4.9% compared with 2008.

 

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

 

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

 

Other operating expenses decreased by $1,343,000, or 8.3%.  Expenses related to our food and beverage operations were lower primarily from the lower revenues.  Additionally, we instituted cost cutting measures that allowed us to improve our profit margin on our other operations.  These decreased expenses were partially offset by expenses related to our new Race & Sports Book restaurant and Frankie’s Italian restaurant in September 2009.  Additionally, we

 

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experienced lower expenses as a result of promoting fewer concerts in 2009.  We also incurred approximately $500,000 in expenses during the fourth quarter of 2008 related to the termination of two restaurant leases on our property.

 

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

 

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

 

Depreciation expense was $11,939,000 in 2009 as compared to $10,849,000 in 2008.  The increase resulted primarily from a full year of depreciation related to our Phase VI casino expansion that opened during the third quarter of 2008.

 

Interest expense decreased by $1,108,000 due to a lower average interest rate on our credit facility as well as lower average outstanding borrowings on our credit facility.  We capitalized interest of $567,000 in 2008 related to our hotel and casino expansions.  No interest was capitalized in 2009.

 

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

 

**Liquidity and Capital Resources**

 

Net cash provided by operating activities was $23,494,000 for the year ended December 31, 2010 compared to $27,737,000 for the year ended December 31, 2009.  The decrease was primarily due to the lower earnings.

 

Net cash used in investing activities was $5,578,000 for the year ended December 31, 2010 compared to $4,537,000 for the year ended December 31, 2009 and was primarily related to capital improvements.  Capital expenditures for 2010 related primarily to the start up of table game operations.  Capital expenditures for 2009 related primarily to final payments made for our Phase VI casino expansion and our new Race & Sports Book operation.

 

Net cash used in financing activities was $20,512,000 for the year ended December 31, 2010 compared to $19,674,000 for the year ended December 31, 2009.  During 2010, we repaid $16,525,000 of our credit facility.  During 2009, we repaid $13,200,000 of our credit facility.  We paid $3,870,000 and $6,415,000 in cash dividends during 2010 and 2009, respectively.  We repurchased and retired $117,000 of our outstanding common stock during 2010 compared to $59,000 during 2009.

 

On January 26, 2011, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.03 per share.  The dividend is payable on March 10, 2011 to shareholders of record at the close of business on February 10, 2011.

 

On October 23, 2002, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time.  No purchases of our equity securities were made pursuant to this authorization during 2010 or 2009.  At December 31, 2010, we had remaining repurchase authority of 1,653,333 shares.

 

Based on current business conditions, we expect to make capital expenditures of approximately $3,000,000 to $3,500,000 during 2011.  Additionally, we expect to contribute approximately $2,400,000 to our pension plans in 2011.

 

At December 31, 2010, we had a $105,000,000 credit facility with a bank group.  The maximum borrowing limit under the facility reduces to $95,000,000 on April 1, 2011 and to $82,500,000 on April 1, 2012 and the agreement terminates on January 1, 2013.  Interest is based, at our option, upon LIBOR plus a margin that varies

 

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between 175 and 350 basis points (275 basis points at December 31, 2010) depending on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the “leverage ratio”) or the base rate minus 100 basis points plus a margin that varies between 25 and 200 basis points (125 basis points at December 31, 2010) depending on the leverage ratio.  In either case, the minimum interest rate on borrowings under the agreement ranges from 275 to 400 basis points depending on the leverage ratio (325 basis points at December 31, 2010).  The base rate option is not available for the portion of indebtedness equal to the notional amount under our interest rate swap agreement.  The credit facility has minimum net worth, interest coverage and maximum leverage requirements.  Material adverse changes in our results of operations could impact our ability to satisfy these requirements.  In addition, the credit agreement also includes a material adverse change clause.  The facility is for seasonal funding needs, capital improvements and other general corporate purposes.  At December 31, 2010, we were in compliance with all terms of the facility and there was $78,600,000 outstanding at a weighted average interest rate of 3.30%.  At December 31, 2010, $26,400,000 was available pursuant to the facility; however, in order to maintain compliance with the required quarterly debt covenant calculations as of December 31, 2010 $15,225,000 could have been borrowed as of that date.

 

Effective January 15, 2009, we entered into an interest rate swap agreement that effectively converts $35,000,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes on future interest expense.  The agreement terminates on April 17, 2012.  Pursuant to this agreement, we pay a fixed interest rate of 1.74%, plus a margin that varies between 175 and 350 basis points depending on our leverage ratio (275 basis points at December 31, 2010).  The minimum interest rate on borrowings under the agreement ranges from 275 to 400 basis points depending on the leverage ratio (325 basis points at December 31, 2010).  In return, the issuing lender refunds to us the variable-rate interest paid to the bank group under our revolving credit agreement on the same notional principal amount, excluding the margin.

 

We expect that our net cash flows from operating activities and funds available from our credit facility will be sufficient to provide for our working capital needs and capital spending requirements at least through the next twelve months, as well as any cash dividends our Board of Directors may declare.  We expect cash flows from operating activities and funds available from our credit facility to also provide for long-term liquidity.

 

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

 

**Contractual Obligations**

 

At December 31, 2010, we had the following contractual obligations:

 
| ** **                                                   | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **Total**  | ** ** | **2011**                                  | ** ** | **2012 – 2013** | ** ** | **2014 – 2015** | ** ** | **Thereafter** | ** ** |
| Revolving line of credit(a)                                  |       | $          | 78,600,000 |                                      | $          | — |   | $ | 78,600,000 |   | $ | — |   | $ | — |   |
| Estimated interest payments on revolving line of   credit(b) |       | 5,880,000  |       | 3,116,000                                 |       | 2,764,000 |   | — |   | — |   |
| Pension contributions(c)                                     |       | 2,400,000  |       | 2,400,000                                 |       | — |   | — |   | — |   |
|                                                         |       | $          | 86,880,000 |                                      | $          | 5,516,000 |   | $ | 81,364,000 |   | $ | — |   | $ | — |   |

 

----

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

 

(b) The future interest payments on our revolving credit agreement were estimated using the current outstanding principal as of December 31, 2010.  For $35,000,000 of our outstanding borrowings, we used the fixed interest rate per the interest rate swap agreement through the termination date of the swap agreement.

 

(c) We expect to contribute approximately $2,400,000 to our pension plans for 2011.  For years subsequent to 2011, we are unable to estimate what our pension contributions will be.

 

19

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**Related Party Transactions**

 

See NOTE 11 — Related Party Transactions to our consolidated financial statements included elsewhere in this document for a full description of related party transactions.

 

**Critical Accounting Policies**

 

The accounting policies described below are those considered critical by us in preparing our consolidated financial statements and/or include significant estimates made by management using information available at the time the estimates are made.  As described below, these estimates could change materially if different information or assumptions were used.

 

*Property and Equipment*

 

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

 

*Accrued Pension Cost*

 

The benefits provided by our defined-benefit pension plans are based on years of service and employee’s remuneration over their employment with us.  Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for the discount rate, assumed rate of compensation increase, and expected long-term rate of return on assets.  Changes in these estimates would impact the amounts that we record in our consolidated financial statements and our funding contributions to the plans.

 

**Recent Accounting Pronouncements**

 

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

 

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

 

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

 

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

 

Not applicable.

 

**Item 8.****            Financial Statements And Supplementary Data**

 

Our consolidated financial statements and the Report of Independent Registered Public Accounting Firm included in this report are shown on the Index to Consolidated Financial Statements on page 29.

 

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

 

None.

 

20

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**Item 9A.****         Controls and Procedures**

 

*(a) Evaluation of Disclosure Controls and Procedures*

 

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

 

Based on their evaluation as of December 31, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

*(b) Changes in Internal Control Over Financial Reporting*

 

There have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2010 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

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

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2010.  KPMG LLP independently assessed the effectiveness of our internal control over financial reporting as of December 31, 2010.  KPMG LLP has issued their report which is included herein.

 

*(d) Report of Independent Registered Public Accounting Firm*

 

The Board of Directors and Stockholders

Dover Downs Gaming & Entertainment, Inc.:

 

We have audited Dover Downs Gaming & Entertainment, Inc.’s (the Company’s) internal control over financial reporting as of December 31, 2010, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying *Management’s Report on Internal Control Over Financial Reporting (Item 9A(c))*. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

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

 

21

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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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

 

In our opinion, Dover Downs Gaming & Entertainment, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Dover Downs Gaming & Entertainment, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of earnings and comprehensive earnings and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 4, 2011 expressed an unqualified opinion on those consolidated financial statements.

 
|   | KPMG LLP |
|--------|----------|

 

Philadelphia, Pennsylvania

March 4, 2011

 

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

 

None.

 

**Part III**

 

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

 

Except as presented below, biographical information relating to our directors and executive officers, information regarding our audit committee financial experts and information on Section 16(a) Beneficial Ownership Reporting Compliance called for by this Item 10 are incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on April 27, 2011.

 

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

 

22

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Executive Officers of the Registrant.  As of December 31, 2010, our executive officers were:

 
| **Name**            | ** ** | **Position**                                                        | ** ** | **Age** | ** ** | **Term of Office** | ** ** |
|---------------------|------------|---------------------------------------------------------------------|------------|---------|------------|------------------------------|------------|
|                |       |                                                                |       |    |       |                         |       |
| Denis McGlynn       |       | President   and Chief Executive Officer                             |       | 64      |       | 11/79   to date              |       |
|                |       |                                                                |       |    |       |                         |       |
| Edward J. Sutor     |       | Executive   Vice President and Chief Operating Officer              |       | 61      |       | 3/99   to date               |       |
|                |       |                                                                |       |    |       |                         |       |
| Timothy R. Horne    |       | Sr.   Vice President-Finance, Treasurer and Chief Financial Officer |       | 44      |       | 11/96   to date              |       |
|                |       |                                                                |       |    |       |                         |       |
| Klaus M. Belohoubek |       | Sr.   Vice President-General Counsel and Secretary                  |       | 51      |       | 7/99   to date               |       |

 

Our Chairman of the Board, Henry B. Tippie, is a non-employee director and, therefore, not an executive officer. Mr. Tippie has served as Chairman of the Board since our spin-off from DVD in 2002.  Mr. Tippie also serves as Chairman of the Board to DVD as a non-employee director.

 

Denis McGlynn has served as our President and Chief Executive Officer for 31 years.  Mr. McGlynn also serves as President and Chief Executive Officer to DVD.

 

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

 

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

 

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

 

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

 

The information called for by this Item 11 is incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on April 27, 2011.

 

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

 

The information called for by this Item 12 is incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on April 27, 2011.

 

23

----

 

**Equity Compensation Plan Information**

 

We have a stock incentive plan which provides for the grant of up to 2,250,000 shares of common stock to our officers and key employees through stock options and/or awards valued in whole or in part by reference to our common stock, such as restricted stock awards.  Refer to NOTE 9 — Stockholders’ Equity to our consolidated financial statements included elsewhere in this document for further discussion.  Securities authorized for issuance under equity compensation plans at December 31, 2010 are as follows:

 
| **Plan Category**                                       | ** ** | **Number of   securities to be   issued upon   exercise of   outstanding   options, warrants   and rights** | ** ** | **Weighted-average   exercise price of   outstanding   options, warrants   and rights** | ** ** | **Number of securities   remaining available for   future issuance under   equity compensation   plans (excluding   securities reflected in   column (a))** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                         |       | (a)                                                                                                                                            |       | (b)                                                                                                         |       | (c)                                                                                                                                                                                                                |       |
| Equity compensation plans approved by security   holders     |       | 339,276                                                                                                                                        |       | $                                                                                                           | 6.35       |                                                                                                                                                                                                               | 735,827    |   |
|                                                         |       |                                                                                                                                           |       |                                                                                                        |       |                                                                                                                                                                                                               |       |
| Equity compensation plans not approved by security   holders |       | —                                                                                                                                         |       | —                                                                                                      |       | —                                                                                                                                                                                                             |       |
| Total                                                        |       | 339,276                                                                                                                                        |       | $                                                                                                           | 6.35       |                                                                                                                                                                                                               | 735,827    |   |

 

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

 

The information called for by this Item 13 is incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on April 27, 2011.

 

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

 

The information called for by this Item 14 is incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on April 27, 2011.

 

**Part IV**

 

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

 

(a)(1)       Financial Statements — See accompanying Index to Consolidated Financial Statements on page 29.

 

(2)      Financial Statement Schedules — None.

 

(3)       Exhibits:

 

2.1       Amended and Restated Agreement Regarding Distribution and Plan of Reorganization, dated as of February 15, 2002, by and between Dover Motorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 2.1 to the Form 10 filed on February 26, 2002, which was declared effective on March 7, 2002).

 

3.1       Certificate of Incorporation of Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 3.1 to the Form 10 filed on November 21, 2001, which was declared effective on March 7, 2002).

 

3.2       Amended and Restated By-laws of Dover Downs Gaming & Entertainment, Inc. dated March 1, 2002 (incorporated herein by reference to Exhibit 3.2 to the Form 10 filed on March 7, 2002).

 

24

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| 4.1    |   | Form of   Common Stock Certificate of Dover Downs Gaming &   Entertainment, Inc. (incorporated herein by reference to   Exhibit 4.1 to the Form 10 filed on November 21, 2001, which   was declared effective on March 7, 2002).                                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2    |   | Rights   Agreement dated as of January 2, 2002 between Dover Downs   Gaming & Entertainment, Inc. and Mellon Investor Services, as   Rights Agent (incorporated herein by reference to Exhibit 4.2 to the   Form 10 filed on January 16, 2002, which was declared effective on   March 7, 2002).                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1   |   | Employee   Benefits Agreement, dated as of January 15, 2002, by and between Dover   Motorsports, Inc. (formerly known as Dover Downs   Entertainment, Inc.) and Dover Downs Gaming &   Entertainment, Inc. (incorporated herein by reference to   Exhibit 10.2 to the Form 10 filed on January 16, 2002, which   was declared effective on March 7, 2002).           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2   |   | Transition   Support Services Agreement, dated as of January 15, 2002, by and between   Dover Motorsports, Inc. (formerly known as Dover Downs   Entertainment, Inc.) and Dover Downs Gaming &   Entertainment, Inc. (incorporated herein by reference to   Exhibit 10.3 to the Form 10 filed on January 16, 2002, which   was declared effective on March 7, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3   |   | Tax   Sharing Agreement, dated as of January 15, 2002, by and between Dover   Motorsports, Inc. (formerly known as Dover Downs   Entertainment, Inc.) and Dover Downs Gaming &   Entertainment, Inc. (incorporated herein by reference to   Exhibit 10.4 to the Form 10 filed on January 16, 2002, which   was declared effective on March 7, 2002).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4   |   | Real   Property Agreement dated as of January 15, 2002, by and between Dover   Motorsports, Inc. (formerly known as Dover Downs   Entertainment, Inc.) and Dover Downs Gaming &   Entertainment, Inc. (incorporated herein by reference to   Exhibit 10.5 to the Form 10 filed on January 16, 2002, which   was declared effective on March 7, 2002).                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Agreement   between Dover Downs, Inc. and Delaware Standardbred Owners Association, Inc.   dated September 1, 2010 (incorporated herein by reference to   Exhibit 10.1 to the Form 10-Q filed on November 5, 2010).                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6   |   | Credit   Agreement among Dover Downs Gaming & Entertainment, Inc. and   Wilmington Trust Company, as agent, dated as of January 15, 2002   (incorporated herein by reference to Exhibit 10.10 to the Form 10   filed on January 16, 2002, which was declared effective on March 7,   2002).                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Amended   and Restated Credit Agreement among Dover Downs Gaming &   Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of   March 25, 2002 (incorporated herein by reference to Exhibit 10.6 to   the Form 10-Q filed on May 10, 2002).                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Amended   and Restated Guaranty and Suretyship Agreement by and between Dover Downs, Inc.   and Wilmington Trust Company, as agent, dated as of March 25, 2002   (incorporated herein by reference to Exhibit 10.7 to the Form 10-Q   filed on May 10, 2002).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Amendment   to Amended and Restated Credit Agreement among Dover Downs Gaming &   Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of   August 12, 2002 (incorporated herein by reference to Exhibit 10.1   to the Form 10-Q filed on November 4, 2002).                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Second   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of February 19, 2004 (incorporated herein by reference   to Exhibit 10.14 to the Form 10-K filed on March 9, 2004).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | Third   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of November 5, 2004 (incorporated herein by reference to   Exhibit 10.14 to the Form 10-K filed on March 10, 2005).                                                                                                  |

 

25

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| 10.12  |   | Fourth   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of December 14, 2005 (incorporated herein by reference   to Exhibit 10.1 to the Form 8-K filed on December 16, 2005). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.13  |   | Fifth   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of April 18, 2006 (incorporated herein by reference to   Exhibit 10.1 to the Form 8-K filed on April 21, 2006).        |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.14  |   | Sixth   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of March 30, 2007 (incorporated herein by reference to   Exhibit 10.2 to the Form 8-K filed on March 30, 2007).        |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.15  |   | Seventh   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of January 15, 2009 (incorporated herein by reference to   Exhibit 10.15 to the Form 10-K filed on March 6, 2009).   |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.16  |   | Eighth   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of February 27, 2009 (incorporated herein by reference   to Exhibit 10.16 to the Form 10-K filed on March 6, 2009).   |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.17  |   | Ninth   Amendment to Amended and Restated Credit Agreement among Dover Downs   Gaming & Entertainment, Inc. and Wilmington Trust Company, as   agent, dated as of February 19, 2010 (incorporated herein by reference   to Exhibit 10.1 to the Form 8-K filed on February 25, 2010).  |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.18  |   | Amended   and Restated Employment and Non-Compete Agreement between Dover Downs   Gaming & Entertainment, Inc. and Denis McGlynn dated   February 13, 2006 (incorporated herein by reference to Exhibit 10.1   to the Form 8-K filed on February 17, 2006).                           |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.19  |   | Amended   and Restated Employment and Non-Compete Agreement between Dover Downs   Gaming & Entertainment, Inc. and Edward J. Sutor dated   February 13, 2006 (incorporated herein by reference to Exhibit 10.2   to the Form 8-K filed on February 17, 2006).                         |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.20  |   | Amended   and Restated Employment and Non-Compete Agreement between Dover Downs   Gaming & Entertainment, Inc. and Timothy R. Horne dated   February 13, 2006 (incorporated herein by reference to Exhibit 10.3   to the Form 8-K filed on February 17, 2006).                        |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.21  |   | Amended   and Restated Employment and Non-Compete Agreement between Dover Downs Gaming &   Entertainment, Inc. and Klaus M. Belohoubek dated February 13, 2006   (incorporated herein by reference to Exhibit 10.4 to the Form 8-K   filed on February 17, 2006).                     |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.22  |   | Amendment   to certain agreements between Dover Downs Gaming &   Entertainment, Inc. and selected executives and directors (incorporated   herein by reference to Exhibit 10.1 to the Form 10-Q filed on   November 3, 2008).                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.23  |   | Non-Compete   Agreement between Dover Downs Gaming & Entertainment, Inc. and   Henry B. Tippie dated June 16, 2004 (incorporated herein by reference to   Exhibit 10.7 to the Form 10-Q filed on August 6, 2004).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.24  |   | Dover   Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan,   as Amended and Restated (incorporated herein by reference to Exhibit A   to our Proxy Statement filed on March 29, 2004).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.25  |   | Form of   Incentive Stock Option Agreement Used with Dover Downs Gaming &   Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated   (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q   filed on November 3, 2004).                                 |

 

26

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| 10.26  |   | Form of   Restricted Stock Grant Agreement Used with Dover Downs Gaming &   Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated   (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q   filed on November 3, 2004). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.27  |   | Description   of Annual Salary and Certain Discretionary Incentives to Executive Officers   (incorporated herein by reference to the Current Report on Form 8-K   dated January 3, 2011).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.28  |   | Letter   of Intent dated October 14, 2008 between Dover Downs Gaming Management   Corp. and UG Entertainment, LLC (incorporated herein by reference to   Exhibit 10.1 to the Current Report on Form 8-K filed on   January 14, 2009).                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| 21.1   |   | List   of Subsidiaries of Dover Downs Gaming & Entertainment, Inc.                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                    |
| 24.1   |   | Powers   of Attorney for Directors                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.1   |   | Certification   of Chief Executive Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Certification   of Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32.1   |   | Certification   of Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted   Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32.2   |   | Certification   of Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted   Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                    |
| 99.1   |   | Information   Statement dated as of March 7, 2002 (incorporated herein by reference to   Exhibit 99.1 to the Form 10 filed on March 7, 2002).                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                    |
| 99.2   |   | Audit   Committee Charter of Dover Downs Gaming & Entertainment, Inc.   (incorporated herein by reference to Exhibit B to our Proxy Statement   filed on March 30, 2010).                                                                                       |

 

27

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**Signatures**

 

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

 

 
| DATED:   | March 4,   2011 |                                                   | Dover Downs Gaming &   Entertainment, Inc. |
|----------|----------------------|--------------------------------------------------------|----------------------------------------------------------|
|     | Registrant           |
|     |                 |
|     |                 |
|     | BY:                  | /s/   Denis McGlynn                                    |
|     |                 | Denis   McGlynn                                        |
| * * |                 | *President   and Chief Executive Officer and Director* |

 

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

 
| /s/   Denis McGlynn    |   | *President   and Chief Executive Officer and Director* | March 4,   2011 |
|------------------------|--------|--------------------------------------------------------|----------------------|
| Denis   McGlynn        |   | (Principal   Executive Officer)                        |                 |
|                   |   |                                                   |                 |
| /s/   Timothy R. Horne |   | *Sr.   Vice President — Finance,*                 | March 4,   2011 |
| Timothy   R. Horne     |   | *Treasurer   and Chief Financial Officer*              |                 |
|                   |   | (Principal   Financial and Accounting Officer)         |                 |

 

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

 
| /s/   Henry B. Tippie           |   | *Chairman   of the Board*                        | March 4,   2011 |
|---------------------------------|--------|--------------------------------------------------|----------------------|
| Henry   B. Tippie               |   |                                             |                 |
|                            |   |                                             |                 |
| /s/   Kenneth K. Chalmers       |   | *Director   and Chairman of the Audit Committee* | March 4,   2011 |
| Kenneth   K. Chalmers           |   |                                             |                 |
|                            |   | * *                                         |                 |
| /s/   R. Randall Rollins        |   | *Director*                                       | March 4,   2011 |
| R.   Randall Rollins            |   |                                             |                 |
|                            |   |                                             |                 |
| /s/   Patrick J. Bagley         |   | *Director*                                       | March 4,   2011 |
| Patrick   J. Bagley             |   |                                             |                 |
|                            |   |                                             |                 |
| /s/   John W. Rollins, Jr. |   | *Director*                                       | March 4,   2011 |
| John   W. Rollins, Jr.     |   |                                             |                 |
|                            |   |                                             |                 |
| /s/   Jeffrey W. Rollins        |   | *Director*                                       | March 4,   2011 |
| Jeffrey   W. Rollins            |   |                                             |                 |
|                            |   |                                             |                 |
| /s/   Denis McGlynn             |   | *As   Attorney-in-Fact and Director*             | March 4,   2011 |
| Denis   McGlynn                 |   |                                             |                 |

 

28

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                                                                   | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Statement of Management   Responsibility                                                                                     |       | 30       |
|                                                                                                                         |       |     |
| Report of Independent   Registered Public Accounting Firm                                                                    |       | 31       |
|                                                                                                                         |       |     |
| Consolidated Statements of   Earnings and Comprehensive Earnings for the years ended December 31,   2010, 2009 and 2008 |       | 32       |
|                                                                                                                         |       |     |
| Consolidated Balance   Sheets at December 31, 2010 and 2009                                                             |       | 33       |
|                                                                                                                         |       |     |
| Consolidated   Statements of Cash Flows for the years ended December 31, 2010, 2009 and   2008                          |       | 34       |
|                                                                                                                         |       |     |
| Notes to the   Consolidated Financial Statements                                                                             |       | 35       |

 

29

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**STATEMENT OF MANAGEMENT RESPONSIBILITY**

 

Dover Downs Gaming & Entertainment, Inc. and subsidiaries’ (the “Company”) management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information included in the Company’s 2010 Annual Report on Form 10-K. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and reflect the effects of certain estimates and judgments made by management.

 

The Company’s management also is responsible for establishing and maintaining a system of internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management’s authorization. The system is regularly monitored by direct management review and by internal auditors who conduct an extensive program of audits throughout the Company.  The Director of Internal Audit reports directly to the Audit Committee of the Board of Directors.  We have confidence in our financial reporting, the underlying system of internal controls, and our people, who are objective in their responsibilities and operate under the Company’s Code of Business Conduct and with the highest level of ethical standards.  These standards are a key element of the Company’s control system.

 

The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in *Internal Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on the Company’s evaluation, management of the Company concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.

 

The Audit Committee of the Board of Directors, which is comprised entirely of independent directors, has direct and private access to and meets regularly with management, the internal auditors and the independent registered public accounting firm to review accounting, reporting, auditing and internal control matters.

 

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

 

30

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders

Dover Downs Gaming & Entertainment, Inc.:

 

We have audited the accompanying consolidated balance sheets of Dover Downs Gaming & Entertainment, Inc. and**subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of earnings and comprehensive earnings and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dover Downs Gaming & Entertainment, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dover Downs Gaming & Entertainment, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

KPMG LLP

 

Philadelphia, Pennsylvania

March 4, 2011

 

31

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

 

**CONSOLIDATED STATEMENTS OF EARNINGS**

**AND COMPREHENSIVE EARNINGS**

**(in thousands, except per share data)**

 
| ** **                                                                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                                                             |       |                                        |       |   |   |   |   |
| Gaming                                                                                                |       | $                                           | 217,267    |   | $ | 213,855 |   | $ | 219,878 |   |
| Other operating                                                                                       |       | 20,882                                      |       | 18,944 |   | 19,254 |   |
|                                                                                                  |       | 238,149                                     |       | 232,799 |   | 239,132 |   |
| Expenses:                                                                                             |       |                                        |       |   |   |   |   |
| Gaming                                                                                                |       | 188,293                                     |       | 175,785 |   | 169,360 |   |
| Other operating                                                                                       |       | 16,127                                      |       | 14,758 |   | 16,101 |   |
| General and administrative                                                                            |       | 6,922                                       |       | 6,678 |   | 6,317 |   |
| Impairment charge                                                                                     |       | —                                      |       | 2,177 |   | — |   |
| Depreciation                                                                                          |       | 12,059                                      |       | 11,939 |   | 10,849 |   |
|                                                                                                  |       | 223,401                                     |       | 211,337 |   | 202,627 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Operating earnings                                                                                    |       | 14,748                                      |       | 21,462 |   | 36,505 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Interest expense                                                                                      |       | 3,254                                       |       | 2,376 |   | 3,484 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Earnings before income taxes                                                                          |       | 11,494                                      |       | 19,086 |   | 33,021 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Income taxes                                                                                          |       | 4,751                                       |       | 7,809 |   | 13,510 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Net earnings                                                                                          |       | 6,743                                       |       | 11,277 |   | 19,511 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Unrealized loss on interest rate swap, net of   income taxes                                          |       | (245                                        | )          | (110 | ) | — |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Unrealized gain (loss) on available-for-sale   securities, net of income taxes                        |       | 3                                           |       | 10 |   | (19 | ) |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Reclassification adjustment for loss realized on   available-for-sale securities, net of income taxes |       | —                                      |       | 16 |   | — |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Change in pension net actuarial loss and prior   service cost, net of income taxes                    |       | (194                                        | )          | 1,186 |   | (1,995 | ) |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Comprehensive earnings                                                                                |       | $                                           | 6,307      |   | $ | 12,379 |   | $ | 17,497 |   |
|                                                                                                  |       |                                        |       |   |   |   |   |
| Net earnings per common share (Note 2):                                                               |       |                                        |       |   |   |   |   |
| Basic                                                                                                 |       | $                                           | 0.21       |   | $ | 0.35 |   | $ | 0.61 |   |
| Diluted                                                                                               |       | $                                           | 0.21       |   | $ | 0.35 |   | $ | 0.61 |   |

 

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

 

32

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

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share and per share data)**

 
| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                          | ** ** | **2010**              | ** ** | **2009** | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                     |       |                  |       |   |   |
| Cash                                                                                                                                                |       | $                     | 18,819     |   | $ | 21,415 |   |
| Accounts receivable                                                                                                                                 |       | 3,098                 |       | 2,636 |   |
| Due from State of Delaware                                                                                                                          |       | 9,829                 |       | 11,069 |   |
| Inventories                                                                                                                                         |       | 1,989                 |       | 2,170 |   |
| Prepaid expenses and other                                                                                                                          |       | 2,551                 |       | 2,151 |   |
| Receivable from Dover Motorsports, Inc.                                                                                                        |       | 18                    |       | 5 |   |
| Income taxes receivable                                                                                                                             |       | 617                   |       | 129 |   |
| Deferred income taxes                                                                                                                               |       | 1,349                 |       | 1,209 |   |
| Total current assets                                                                                                                                |       | 38,270                |       | 40,784 |   |
|                                                                                                                                                |       |                  |       |   |   |
| Property and equipment, net                                                                                                                         |       | 186,227               |       | 192,360 |   |
| Other assets                                                                                                                                        |       | 789                   |       | 863 |   |
| Total assets                                                                                                                                        |       | $                     | 225,286    |   | $ | 234,007 |   |
|                                                                                                                                                |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’   EQUITY**                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                                    |       | $                     | 3,742      |   | $ | 3,078 |   |
| Purses due horsemen                                                                                                                                 |       | 9,829                 |       | 10,219 |   |
| Accrued liabilities                                                                                                                                 |       | 12,286                |       | 8,788 |   |
| Deferred revenue                                                                                                                                    |       | 307                   |       | 306 |   |
| Total current liabilities                                                                                                                           |       | 26,164                |       | 22,391 |   |
|                                                                                                                                                |       |                  |       |   |   |
| Revolving line of credit                                                                                                                            |       | 78,600                |       | 95,125 |   |
| Liability for pension benefits                                                                                                                      |       | 4,949                 |       | 4,900 |   |
| Other liabilities                                                                                                                                   |       | 598                   |       | 186 |   |
| Deferred income taxes                                                                                                                               |       | 4,224                 |       | 4,166 |   |
| Total liabilities                                                                                                                                   |       | 114,535               |       | 126,768 |   |
|                                                                                                                                                |       |                  |       |   |   |
| Commitments and contingencies (see Notes to the   Consolidated Financial Statements)                                                                |       |                  |       |   |   |
|                                                                                                                                                |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                          |       |                  |       |   |   |
| Preferred stock, $.10 par value; 1,000,000 shares   authorized; shares issued and outstanding: none                                                 |       | —                |       | — |   |
| Common stock, $.10 par value; 74,000,000 shares   authorized; shares issued and outstanding: 15,637,022 and 15,461,219,   respectively              |       | 1,564                 |       | 1,546 |   |
| Class A common stock, $.10 par value;   50,000,000 shares authorized; shares issued and outstanding: 16,603,173 and   16,603,173, respectively |       | 1,660                 |       | 1,660 |   |
| Additional paid-in capital                                                                                                                          |       | 2,721                 |       | 1,664 |   |
| Retained earnings                                                                                                                                   |       | 106,432               |       | 103,559 |   |
| Accumulated other comprehensive loss                                                                                                                |       | (1,626                | )          | (1,190 | ) |
| Total stockholders’ equity                                                                                                                     |       | 110,751               |       | 107,239 |   |
| Total liabilities and stockholders’ equity                                                                                                     |       | $                     | 225,286    |   | $ | 234,007 |   |

 

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

 

33

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

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating activities:                                                                 |       |                                        |       |   |   |   |   |
| Net earnings                                                                          |       | $                                           | 6,743      |   | $ | 11,277 |   | $ | 19,511 |   |
| Adjustments to reconcile net earnings to net cash   provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                          |       | 12,059                                      |       | 11,939 |   | 10,849 |   |
| Amortization of credit facility origination fees                                      |       | 72                                          |       | 39 |   | 40 |   |
| Stock-based compensation                                                              |       | 1,192                                       |       | 952 |   | 998 |   |
| Deferred income taxes                                                                 |       | (85                                         | )          | 187 |   | (316 | ) |
| Impairment charge                                                                     |       | —                                      |       | 2,177 |   | — |   |
| Changes in assets and liabilities:                                                    |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                   |       | (462                                        | )          | 25 |   | 1,899 |   |
| Due from State of Delaware                                                            |       | 1,240                                       |       | (199 | ) | (340 | ) |
| Inventories                                                                           |       | (168                                        | )          | (145 | ) | (167 | ) |
| Prepaid expenses and other                                                            |       | (392                                        | )          | 42 |   | (768 | ) |
| Receivable from/payable to Dover   Motorsports, Inc.                             |       | (13                                         | )          | (16 | ) | (7 | ) |
| Income taxes receivable/payable                                                       |       | (187                                        | )          | (653 | ) | 193 |   |
| Accounts payable                                                                      |       | 664                                         |       | (184 | ) | (610 | ) |
| Purses due horsemen                                                                   |       | (390                                        | )          | 33 |   | (294 | ) |
| Accrued liabilities                                                                   |       | 3,498                                       |       | 1,369 |   | (4,521 | ) |
| Deferred revenue                                                                      |       | 1                                           |       | 94 |   | 114 |   |
| Other liabilities                                                                     |       | (278                                        | )          | 800 |   | 227 |   |
| Net cash provided by operating activities                                             |       | 23,494                                      |       | 27,737 |   | 26,808 |   |
|                                                                                  |       |                                        |       |   |   |   |   |
| Investing activities:                                                                 |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                  |       | (5,576                                      | )          | (4,535 | ) | (40,166 | ) |
| Proceeds from the sale of available-for-sale   securities                             |       | 65                                          |       | 102 |   | — |   |
| Purchase of available-for-sale securities                                             |       | (67                                         | )          | (104 | ) | (100 | ) |
| Net cash used in investing activities                                                 |       | (5,578                                      | )          | (4,537 | ) | (40,266 | ) |
|                                                                                  |       |                                        |       |   |   |   |   |
| Financing activities:                                                                 |       |                                        |       |   |   |   |   |
| Borrowings from revolving line of credit                                              |       | 116,300                                     |       | 157,875 |   | 186,725 |   |
| Repayments of revolving line of credit                                                |       | (132,825                                    | )          | (171,075 | ) | (170,825 | ) |
| Dividends paid                                                                        |       | (3,870                                      | )          | (6,415 | ) | (6,360 | ) |
| Repurchase of common stock                                                            |       | (117                                        | )          | (59 | ) | (1,040 | ) |
| Proceeds from stock options exercised                                                 |       | —                                      |       | — |   | 366 |   |
| Excess tax benefit on stock awards                                                    |       | —                                      |       | — |   | 25 |   |
| Net cash (used in) provided by financing   activities                                 |       | (20,512                                     | )          | (19,674 | ) | 8,891 |   |
|                                                                                  |       |                                        |       |   |   |   |   |
| Net (decrease) increase in cash                                                       |       | (2,596                                      | )          | 3,526 |   | (4,567 | ) |
| Cash, beginning of year                                                               |       | 21,415                                      |       | 17,889 |   | 22,456 |   |
| Cash, end of year                                                                     |       | $                                           | 18,819     |   | $ | 21,415 |   | $ | 17,889 |   |
|                                                                                  |       |                                        |       |   |   |   |   |
| Supplemental information:                                                             |       |                                        |       |   |   |   |   |
| Interest paid                                                                         |       | $                                           | 3,121      |   | $ | 2,801 |   | $ | 3,204 |   |
| Income taxes paid                                                                     |       | $                                           | 5,024      |   | $ | 8,275 |   | $ | 13,606 |   |
| Change in accounts payable for capital expenditures                                   |       | $                                           | —     |   | $ | (1,581 | ) | $ | (8,093 | ) |

 

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

 

34

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

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1—Business Operations**

 

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

 

We are a diversified gaming and entertainment company whose operations consist of:

 

·                  Dover Downs Casino — a 165,000-square foot casino complex featuring popular table games, including craps, roulette and card games such as blackjack, Spanish 21, baccarat, 3-card and pai gow poker, the latest in slot machine offerings, multi-player electronic table games, the Crown Royal poker room, a Race & Sports Book operation, the Dover Downs’ Fire & Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italian restaurant, as well as several bars, restaurants and four retail outlets;

 

·                  Dover Downs Hotel and Conference Center — a 500 room AAA Four Diamond hotel with conference, banquet, ballroom and concert hall facilities; and

 

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

 

All of our operations are located at our entertainment complex in Dover, the capital of the State of Delaware.

 

During the third quarter of 2009, we opened our Race & Sports Book operation and Frankie’s Italian restaurant.  The Race & Sports Book features parlay sports wagering on National Football League (“NFL”) games and pari-mutuel wagering on live and simulcast horse races.  In January 2010, the Delaware legislature authorized table games at the facilities of the State’s three video lottery agents.  In June 2010, we opened our table game operations with blackjack, craps and roulette tables.  The Crown Royal poker room opened in July 2010 and was expanded in September.

 

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

 

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

 

Dover Downs, Inc. is authorized to conduct video lottery, sports wagering and table game operations as one of three “Licensed Agents” under the Delaware State Lottery Code. Licensing, administration and control of gaming operations in Delaware is under the Delaware State Lottery Office and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement.

 

35

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Our license from the Delaware Harness Racing Commission to hold harness race meetings on our premises and to offer pari-mutuel wagering on live and simulcast horse races must be renewed on an annual basis. In order to maintain our gaming license, we are required to maintain our harness horse racing license.  We have received an annual license from the Harness Racing Commission for the past 42 consecutive years and management believes that our relationship with the Commission remains good.

 

Due to the nature of our business activities, we are subject to various federal, state and local regulations.  As part of our license arrangements, we are subject to various taxes and fees which are subject to change by the Delaware legislature.

 

**NOTE 2—Summary of Significant Accounting Policies**

 

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

 

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

 

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

 

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

 

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

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

 

We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  An impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its fair value.  Generally, fair value will be determined using valuation techniques such as the present value of future cash flows.

 

*Interest capitalization—*Interest is capitalized in connection with the construction of major facilities. The capitalized interest is amortized over the estimated useful life of the asset to which it relates.  During the years ended December 31, 2010 and 2009, no interest was capitalized.  During the year ended December 31, 2008, we incurred $4,051,000 of interest cost, of which $567,000 was capitalized.

 

*Income taxes—*Deferred income taxes are provided on all differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements based upon enacted statutory tax rates in effect at the balance sheet date.  Tax years after 2006 remain open to examination for federal and state income tax purposes.

 

*Point loyalty program—*We currently have a point loyalty program for our customers which allows them to earn points based on the volume of their gaming activity.  All reward points earned by customers are expensed in the period they are earned.  The estimated amount of points redeemable for cash is recorded as a reduction of gaming revenue and the estimated amount of points redeemable for services and merchandise is recorded as gaming

 

36

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expense. In determining the amount of the liability, which was $2,038,000 and $1,936,000, respectively, at December 31, 2010 and 2009, we estimate a redemption rate, a cost of rewards to be offered and the mix of cash, goods and services for which reward points will be redeemed.  We use historical data to estimate those amounts.

 

*Revenue and expense recognition—*Gaming revenues represent (i) the net win from slot machine and table games, (ii) our portion of the net win from sports wagering and (iii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.  Revenues do not include the retail amount of hotel rooms, food and beverage and other miscellaneous goods and services provided without charge to customers as promotional items of $18,306,000, $18,255,000 and $17,758,000 for the years ended December 31, 2010, 2009 and 2008, respectively.  The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statements of earnings.

 

For the casino operations, which account for approximately 90% of revenues for all periods presented, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win. The win is included in the amount recorded in our consolidated financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the casino operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the slot machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to us as our commission for acting as a Licensed Agent.  Gaming expenses include the amounts collected by the State (i) for the State’s share of the win, (ii) for remittance to the providers of the slot machines and associated computer systems, and (iii) for harness horse racing purses.  We recognize revenues from sports wagering commissions when the event occurs.  We recognize revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs. Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

 

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

 

*Net earnings per common share—*Basic and diluted net earnings per common share (“EPS”) are calculated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, “*Earnings Per Share*.”  Nonvested share-based payment awards that include rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities, and the two-class method of computing EPS is applied for all periods presented.

 

Our restricted stock awards include the right to dividends with respect to nonvested shares. The nonvested shares of our restricted stock grants are considered participating securities and must be included in our computation of EPS. Accordingly, we have computed EPS to include the impact of outstanding nonvested shares of restricted stock in the calculation of basic EPS.

 

The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2010, 2009 and 2008 (in thousands, except per share amounts):

 
| ** **                                                    | ** **   | **2010**     | ** **   | **2009**     | ** **   | **2008**     | ** **   |
|---------------------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| Net earnings per common share — basic:                   |         |         |         |         |         |         |         |
| Net earnings                                                  |         | $            | 6,743        |         | $            | 11,277       |         | $ | 19,511 |   |
| Net earnings allocated to nonvested restricted   stock awards |         | 144          |         | 203          |         | 230          |         |
| Net earnings available to common stockholders                 |         | $            | 6,599        |         | $            | 11,074       |         | $ | 19,281 |   |
|                                                          |         |         |         |         |         |         |         |
| Weighted-average shares outstanding                           |         | 31,555       |         | 31,492       |         | 31,436       |         |
| *** ***                                                  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Net earnings per common share — basic                    |         | $            | 0.21         |         | $            | 0.35         |         | $ | 0.61 |   |

 

37

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| ** **                                                    | ** **   | **2010**     | ** **   | **2009**     | ** **   | **2008**     | ** **   |
|---------------------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| Net earnings per common share — diluted:                 |         |         |         |         |         |         |         |
| Net earnings                                                  |         | $            | 6,743        |         | $            | 11,277       |         | $ | 19,511 |   |
| Net earnings allocated to nonvested restricted   stock awards |         | 144          |         | 203          |         | 230          |         |
| Net earnings available to common stockholders                 |         | $            | 6,599        |         | $            | 11,074       |         | $ | 19,281 |   |
| *** ***                                                  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Weighted-average shares outstanding                           |         | 31,555       |         | 31,492       |         | 31,436       |         |
| Dilutive stock options                                        |         | —       |         | —       |         | 91           |         |
| Weighted-average shares and dilutive shares   outstanding     |         | 31,555       |         | 31,492       |         | 31,527       |         |
| *** ***                                                  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Net earnings per common share — diluted                  |         | $            | 0.21         |         | $            | 0.35         |         | $ | 0.61 |   |

 

For the years ended December 31, 2010, 2009 and 2008, options to purchase 438,000, 635,000 and 667,000 shares of common stock, respectively, were outstanding but not included in the computation of diluted EPS because they would have been anti-dilutive.

 

*Accounting for stock-based compensation—*We recorded total stock-based compensation expense for our restricted stock awards and stock options of $1,192,000, $952,000 and $998,000 as general and administrative expenses for the years ended December 31, 2010, 2009 and 2008, respectively.  We recorded income tax benefits of $248,000, $351,000 and $406,000 for the years ended December 31, 2010, 2009 and 2008, respectively, related to our restricted stock awards.

 

*Use of estimates—*The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events.  These estimates and the underlying assumptions affect the reported amounts of assets and liabilities, disclosures about contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our best estimates and judgment.  We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances.  We adjust such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions.  As future events and their effects cannot be determined with precision, actual results could differ from these estimates.  Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

 

*Segment information*—We account for our operating segment in accordance with ASC Topic 280, *Segment Reporting*.  ASC Topic 280 establishes guidelines for public companies in determining operating segments based on those used for internal reporting to management.  Based on these guidelines, we report information under a single gaming and entertainment segment.

 

*Recent accounting pronouncements—*In April 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-16 codified in FASB ASC Topic 924, “*Accruals for Casino Jackpot Liabilities a consensus of the FASB Emerging Issues Task Force,*” which addresses diversity in practice in the accounting for casino base jackpot liabilities.  ASU 2010-16 clarifies that an entity should not accrue jackpot liabilities before a jackpot is won if the entity can avoid paying that jackpot.  Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot.  The provisions of ASU 2010-16 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The adoption of this pronouncement is not expected to have a material impact on our consolidated financial statements.

 

38

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**NOTE 3 — Impairment Charge**

 

We had previously completed architectural and engineering work related to a Phase 7 casino expansion that would have included, among other things, a new sports book facility and a parking garage.  Given the decision by the US Court of Appeals for the Third Circuit to limit the extent of sports wagering in Delaware and the higher gaming tax rates that were legislated in the third quarter of 2009, we decided not to proceed with these projects.  During the third quarter of 2009, we wrote off $2,177,000 of capitalized costs related to these expansion projects.

 

**NOTE 4—Property and Equipment**

 

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

 
| ** **                        | ** ** | **2010**    | ** **  | **2009**    | ** ** |
|-----------------------------------|------------|-------------|-------------|-------------|------------|
| Land                              |       | $           | 785,000     |        | $          | 785,000 |   |
| Casino facility                   |       | 77,002,000  |        | 75,131,000  |       |
| Hotel facility                    |       | 113,007,000 |        | 112,962,000 |       |
| Harness racing facilities         |       | 10,849,000  |        | 10,966,000  |       |
| General facilities                |       | 16,052,000  |        | 15,745,000  |       |
| Furniture, fixtures and equipment |       | 55,521,000  |        | 52,798,000  |       |
| Construction in progress          |       | 239,000     |        | 100,000     |       |
|                              |       | 273,455,000 |        | 268,487,000 |       |
| Less accumulated depreciation     |       | (87,228,000 | )           | (76,127,000 | )          |
|                              |       | $           | 186,227,000 |        | $          | 192,360,000 |   |

 

**NOTE 5—Accrued Liabilities**

 

Accrued liabilities consist of the following as of December 31:

 
| ** **                               | ** ** | **2010**  | ** ** | **2009**  | ** ** |
|------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty program                    |       | $         | 2,038,000  |      | $          | 1,936,000 |   |
| Payroll and related items                |       | 2,563,000 |       | 1,844,000 |       |
| Win due to Delaware State Lottery Office |       | 3,693,000 |       | 2,861,000 |       |
| Gaming license fees                      |       | 2,044,000 |       | 736,000   |       |
| Other                                    |       | 1,948,000 |       | 1,411,000 |       |
|                                     |       | $         | 12,286,000 |      | $          | 8,788,000 |   |

 

**NOTE 6—Credit Facility**

 

At December 31, 2010, we had a $105,000,000 credit facility with a bank group.  The maximum borrowing limit under the facility reduces to $95,000,000 on April 1, 2011 and to $82,500,000 on April 1, 2012 and the agreement terminates on January 1, 2013.  Interest is based, at our option, upon LIBOR plus a margin that varies between 175 and 350 basis points (275 basis points at December 31, 2010) depending on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the “leverage ratio”) or the base rate minus 100 basis points plus a margin that varies between 25 and 200 basis points (125 basis points at December 31, 2010) depending on the leverage ratio.  In either case, the minimum interest rate on borrowings under the agreement ranges from 275 to 400 basis points depending on the leverage ratio (325 basis points at December 31, 2010).  The base rate option is not available for the portion of indebtedness equal to the notional amount under our interest rate swap agreement.  The credit facility has minimum net worth, interest coverage and maximum leverage requirements.  Material adverse changes in our results of operations could impact our ability to satisfy these requirements.  In addition, the credit agreement also includes a material adverse change clause.  The facility is for seasonal funding needs, capital improvements and other general corporate purposes.  At December 31, 2010, we were in compliance with all terms of the facility and there was $78,600,000 outstanding at a weighted average interest rate of 3.30%.  At December 31, 2010, $26,400,000 was available pursuant to the facility; however, in order to maintain compliance with the required quarterly debt covenant calculations as of December 31, 2010 $15,225,000 could have been borrowed as of that date.

 

39

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Effective January 15, 2009, we entered into an interest rate swap agreement that effectively converts $35,000,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes on future interest expense.  The agreement terminates on April 17, 2012.  Pursuant to this agreement, we pay a fixed interest rate of 1.74%, plus a margin that varies between 175 and 350 basis points depending on our leverage ratio (275 basis points at December 31, 2010).  The minimum interest rate on borrowings under the agreement ranges from 275 to 400 basis points depending on the leverage ratio (325 basis points at December 31, 2010).  In return, the issuing lender refunds to us the variable-rate interest paid to the bank group under our revolving credit agreement on the same notional principal amount, excluding the margin.

 

**NOTE 7—Income Taxes**

 

The current and deferred income tax provisions are as follows:

 
| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Current:           |       |                                        |       |   |   |   |   |
| Federal            |       | $                                           | 3,825,000  |   | $ | 6,010,000 |   | $ | 10,845,000 |   |
| State              |       | 1,011,000                                   |       | 1,612,000 |   | 2,981,000 |   |
|               |       | 4,836,000                                   |       | 7,622,000 |   | 13,826,000 |   |
| Deferred:          |       |                                        |       |   |   |   |   |
| Federal            |       | (133,000                                    | )          | 126,000 |   | (227,000 | ) |
| State              |       | 48,000                                      |       | 61,000 |   | (89,000 | ) |
|               |       | (85,000                                     | )          | 187,000 |   | (316,000 | ) |
| Total income taxes |       | $                                           | 4,751,000  |   | $ | 7,809,000 |   | $ | 13,510,000 |   |

 

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

 
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Federal tax at statutory rate       |       | 35.0                                        | %          | 35.0 | % | 35.0 | % |
| State taxes, net of federal benefit |       | 5.7                                         | %          | 5.7 | % | 5.7 | % |
| Other                               |       | 0.6                                         | %          | 0.2 | % | 0.2 | % |
| Effective income tax rate           |       | 41.3                                        | %          | 40.9 | % | 40.9 | % |

 

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

 
| ** **                                              | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income tax assets:                             |       |       |       |       |       |
| Point loyalty program                                   |       | $          | 857,000    |       | $          | 787,000 |   |
| Accrued expenses                                        |       | 1,742,000  |       | 1,931,000  |       |
| Other                                                   |       | 953,000    |       | 686,000    |       |
| Total deferred income tax assets                        |       | 3,552,000  |       | 3,404,000  |       |
|                                                    |       |       |       |       |       |
| Deferred income tax liabilities:                        |       |       |       |       |       |
| Depreciation — property and equipment              |       | (6,427,000 | )          | (6,361,000 | )          |
| Total deferred income tax liabilities                   |       | (6,427,000 | )          | (6,361,000 | )          |
| Net deferred income tax liabilities                     |       | $          | (2,875,000 | )          | $          | (2,957,000 | ) |
|                                                    |       |       |       |       |       |
| Amounts recognized in the consolidated balance   sheet: |       |       |       |       |       |
| Current deferred income tax assets                      |       | $          | 1,349,000  |       | $          | 1,209,000 |   |
| Noncurrent deferred income tax liabilities              |       | (4,224,000 | )          | (4,166,000 | )          |
|                                                    |       | $          | (2,875,000 | )          | $          | (2,957,000 | ) |

 

40

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** **

**NOTE 8—Pension Plans**

 

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

 

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

 
| ** **                                     | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| Change in benefit obligation:                  |       |       |       |       |       |
| Benefit obligation at beginning of year        |       | $          | 12,308,000 |       | $          | 11,506,000 |   |
| Service cost                                   |       | 1,295,000  |       | 1,408,000  |       |
| Interest cost                                  |       | 773,000    |       | 683,000    |       |
| Actuarial loss (gain)                          |       | 484,000    |       | (1,116,000 | )          |
| Benefits paid                                  |       | (153,000   | )          | (173,000   | )          |
| Benefit obligation at end of year              |       | 14,707,000 |       | 12,308,000 |       |
|                                           |       |       |       |       |       |
| Change in plan assets:                         |       |       |       |       |       |
| Fair value of plan assets at beginning of year |       | 7,408,000  |       | 5,407,000  |       |
| Actual gain on plan assets                     |       | 818,000    |       | 1,174,000  |       |
| Employer contribution                          |       | 1,685,000  |       | 1,000,000  |       |
| Benefits paid                                  |       | (153,000   | )          | (173,000   | )          |
| Fair value of plan assets at end of year       |       | 9,758,000  |       | 7,408,000  |       |
|                                           |       |       |       |       |       |
| Unfunded status                                |       | $          | (4,949,000 | )          | $          | (4,900,000 | ) |

 

Amounts recognized in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31 are as follows:

 
| ** **         | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Net actuarial loss |       | $        | 2,142,000  |     | $          | 1,806,000 |   |
| Prior service cost |       | 16,000   |       | 25,000   |       |
|               |       | $        | 2,158,000  |     | $          | 1,831,000 |   |

 

The accumulated benefit obligation for all defined benefit pension plans was $12,731,000 and $10,082,000, respectively, as of December 31, 2010 and 2009.

 

The components of net periodic pension cost for the years ended December 31, 2010, 2009 and 2008 are as follows:

 
| ** **                     | ** ** | **2010** | ** ** | **2009** | ** ** | **2008**  | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Service cost                   |       | $        | 1,295,000  |     | $          | 1,408,000 |       | $ | 1,277,000 |   |
| Interest cost                  |       | 773,000  |       | 683,000  |       | 583,000   |       |
| Expected return on plan assets |       | (697,000 | )          | (501,000 | )          | (601,000  | )          |
| Recognized net actuarial loss  |       | 26,000   |       | 202,000  |       | 9,000     |       |
| Recognized prior service cost  |       | 9,000    |       | 8,000    |       | 9,000     |       |
|                           |       | $        | 1,406,000  |     | $          | 1,800,000 |       | $ | 1,277,000 |   |

 

For the year ending December 31, 2011, we expect to recognize the following amounts as components of net periodic benefit cost which are included in accumulated comprehensive loss as of December 31, 2010:

 
| Actuarial loss     |   | $     | 61,000 |   |
|--------------------|--------|-------|--------|--------|
| Prior service cost |   | 8,000 |   |
|               |   | $     | 69,000 |   |

 

41

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The principal assumptions used to determine the net periodic pension cost for the years ended December 31, 2010, 2009 and 2008, and the actuarial value of the benefit obligation at December 31, 2010 and 2009 (the measurement dates) for our pension plans are as follows:

 
| ** **                                       | ** ** | **Net Periodic Pension Cost** | ** ** | **Benefit Obligation** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2010**                                     | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted-average discount rate                   |       | 6.50                                         | %          | 6.10                        | %          | 6.50 | % | 6.20 | % | 6.50 | % |
| Weighted-average rate of compensation increase   |       | 5.00                                         | %          | 5.00                        | %          | 5.00 | % | 4.00 | % | 5.00 | % |
| Expected long-term rate of return on plan assets |       | 8.50                                         | %          | 8.50                        | %          | 8.50 | % | n/a |   | n/a |   |

 

For 2010, we assumed a long-term rate of return on plan assets of 8.50%.  In developing the 8.50% expected long-term rate of return assumption, we reviewed asset class return expectations and long-term inflation assumptions and considered our historical compounded return, which was consistent with our long-term rate of return assumption.

 

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

 

The fair values of our pension assets as of December 31, 2010 by asset category are as follows (refer to NOTE 10 — Financial Instruments for a description of Level 1, Level 2 and Level 3 categories):

 
| **Asset Category** | ** ** | **Total** | ** ** | **Quoted Prices in   Active Markets for   Identical Assets   (Level 1)** | ** ** | **Significant   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs   (Level 3)** | ** ** |
|-------------------------|------------|-----------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Mutual funds/ETFs:      |       |      |       |                                                                                                   |       |                                                   |       |                                                     |       |
| Equity-large cap        |       | $         | 2,516,000  |                                                                                                   | $          | 2,516,000                                              |       | $                                                        | —     |   | $ | — |   |
| Equity-small cap        |       | 358,000   |       | 358,000                                                                                                |       | —                                                 |       | —                                                   |       |
| Equity-international    |       | 1,289,000 |       | 1,289,000                                                                                              |       | —                                                 |       | —                                                   |       |
| Fixed income            |       | 4,124,000 |       | 4,124,000                                                                                              |       | —                                                 |       | —                                                   |       |
| Real estate             |       | 191,000   |       | 191,000                                                                                                |       | —                                                 |       | —                                                   |       |
| Money market            |       | 1,280,000 |       | 1,280,000                                                                                              |       | —                                                 |       | —                                                   |       |
| Total                   |       | $         | 9,758,000  |                                                                                                   | $          | 9,758,000                                              |       | $                                                        | —     |   | $ | — |   |

 

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

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

 

42

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We expect to contribute approximately $2,400,000 to our pension plans in 2011.

 

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

 
| 2011      |   | $ | 306,000   |   |
|-----------|--------|---|-----------|--------|
| 2012      |   | $ | 408,000   |   |
| 2013      |   | $ | 484,000   |   |
| 2014      |   | $ | 560,000   |   |
| 2015      |   | $ | 676,000   |   |
| 2016-2020 |   | $ | 5,255,000 |   |

 

We maintain a defined contribution 401(k) plan which permits participation by substantially all employees. Our matching contributions to the 401(k) plan were $179,000, $98,000 and $86,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

 

**NOTE 9—Stockholders’ Equity**

 

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

 
| ** **                                                                                                         | ** ** | **Common    Stock** | ** ** | **Class A   Common    Stock** | ** ** | **Additional   Paid-in    Capital** | ** ** | **Retained   Earnings** | ** ** | **Accumulated   Other   Comprehensive    Loss** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------------|------------|------------------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|
| **Balance at December 31,   2007**                                                                            |       | $                        | 1,474      |                                    | $          | 1,700                                    |       | $                       | 63         |                                                 | $          | 86,074 |   | $ | (278 | ) |
| Net earnings                                                                                                       |       | —                   |       | —                                  |       | —                                   |       | 19,511                  |       | —                                               |       |
| Dividends paid, $.20 per share                                                                                     |       | —                   |       | —                                  |       | —                                   |       | (6,360                  | )          | —                                               |       |
| Proceeds from stock options exercised                                                                              |       | 6                        |       | —                                  |       | 360                                      |       | —                  |       | —                                               |       |
| Issuance of nonvested stock awards, net of   forfeitures                                                           |       | 12                       |       | —                                  |       | (12                                      | )          | —                  |       | —                                               |       |
| Stock-based compensation                                                                                           |       | —                   |       | —                                  |       | 998                                      |       | —                  |       | —                                               |       |
| Excess tax benefit on stock awards                                                                                 |       | —                   |       | —                                  |       | 25                                       |       | —                  |       | —                                               |       |
| Change in pension net actuarial loss and prior   service cost, net of income tax benefit of $1,367                 |       | —                   |       | —                                  |       | —                                   |       | —                  |       | (1,995                                               | )          |
| Unrealized loss on available-for-sale securities,   net of income tax benefit of $12                               |       | —                   |       | —                                  |       | —                                   |       | —                  |       | (19                                                  | )          |
| Repurchase and retirement of common stock                                                                          |       | (11                      | )          | —                                  |       | (501                                     | )          | (528                    | )          | —                                               |       |
| Conversion of Class A common stock to common   stock                                                          |       | 40                       |       | (40                                     | )          | —                                   |       | —                  |       | —                                               |       |
| **Balance at December 31,   2008**                                                                            |       | 1,521                    |       | 1,660                                   |       | 933                                      |       | 98,697                  |       | (2,292                                               | )          |
| Net earnings                                                                                                       |       | —                   |       | —                                  |       | —                                   |       | 11,277                  |       | —                                               |       |
| Dividends paid, $.20 per share                                                                                     |       | —                   |       | —                                  |       | —                                   |       | (6,415                  | )          | —                                               |       |
| Issuance of nonvested stock awards, net of   forfeitures                                                           |       | 27                       |       | —                                  |       | (27                                      | )          | —                  |       | —                                               |       |
| Stock-based compensation                                                                                           |       | —                   |       | —                                  |       | 952                                      |       | —                  |       | —                                               |       |
| Tax shortfall from stock awards                                                                                    |       | —                   |       | —                                  |       | (137                                     | )          | —                  |       | —                                               |       |
| Unrealized loss on interest rate swap, net of   income tax benefit of $76                                          |       | —                   |       | —                                  |       | —                                   |       | —                  |       | (110                                                 | )          |
| Change in pension net actuarial loss and prior   service cost, net of income tax expense of $813                   |       | —                   |       | —                                  |       | —                                   |       | —                  |       | 1,186                                                |       |
| Unrealized gain on available-for-sale securities,   net of income tax expense of $7                                |       | —                   |       | —                                  |       | —                                   |       | —                  |       | 10                                                   |       |
| Reclassification adjustment for loss realized on   available-for-sale securities, net of income tax benefit of $11 |       | —                   |       | —                                  |       | —                                   |       | —                  |       | 16                                                   |       |
| Repurchase and retirement of common stock                                                                          |       | (2                       | )          | —                                  |       | (57                                      | )          | —                  |       | —                                               |       |
| **Balance at December 31,   2009**                                                                            |       | 1,546                    |       | 1,660                                   |       | 1,664                                    |       | 103,559                 |       | (1,190                                               | )          |
|                                                                                                                    |            |                          |            |                                         |            |                                          |            |                         |            |                                                      |            |  |  |  |  |  |

 

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| ** **                                                                                       | ** ** | **Common   Stock** | ** ** | **Class A   Common   Stock** | ** ** | **Additional   Paid-in   Capital** | ** ** | **Retained   Earnings** | ** ** | **Accumulated   Other   Comprehensive   Loss** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| Net earnings                                                                                     |       | —             |       | —                            |       | —                             |       | 6,743                   |       | —                                         |       |
| Dividends paid, $.12 per share                                                                   |       | —             |       | —                            |       | —                             |       | (3,870                  | )          | —                                         |       |
| Issuance of nonvested stock awards, net of   forfeitures                                         |       | 21                 |       | —                            |       | (21                                | )          | —                  |       | —                                         |       |
| Stock-based compensation                                                                         |       | —             |       | —                            |       | 1,192                              |       | —                  |       | —                                         |       |
| Unrealized loss on interest rate swap, net of   income tax benefit of $167                       |       | —             |       | —                            |       | —                             |       | —                  |       | (245                                           | )          |
| Change in pension net actuarial loss and prior   service cost, net of income tax benefit of $133 |       | —             |       | —                            |       | —                             |       | —                  |       | (194                                           | )          |
| Unrealized gain on available-for-sale securities,   net of income tax expense of $2              |       | —             |       | —                            |       | —                             |       | —                  |       | 3                                              |       |
| Repurchase and retirement of common stock                                                        |       | (3                 | )          | —                            |       | (114                               | )          | —                  |       | —                                         |       |
| **Balance at December 31,   2010**                                                          |       | $                  | 1,564      |                              | $          | 1,660                              |       | $                       | 2,721      |                                           | $          | 106,432 |   | $ | (1,626 | ) |
|                                                                                                  |            |                    |            |                                   |            |                                    |            |                         |            |                                                |            |  |  |  |  |  |

 

As of December 31, 2010 and 2009, accumulated other comprehensive loss consists of the following:

 
| ** **                                                                                                                                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net actuarial loss and prior service cost not yet   recognized in net periodic benefit cost, net of income tax benefit of   $877,000 and $744,000, respectively |       | $        | (1,281,000 | )        | $          | (1,087,000 | ) |
| Unrealized loss on interest rate swap, net of   income tax benefit of $243,000 and $76,000, respectively                                                        |       | (355,000 | )          | (110,000 | )          |
| Accumulated unrealized gain on available-for-sale   securities, net of income tax expense of $8,000 and $6,000, respectively                                    |       | 10,000   |       | 7,000    |       |
| Accumulated other comprehensive loss                                                                                                                            |       | $        | (1,626,000 | )        | $          | (1,190,000 | ) |

 

We have 125,000,000 shares of authorized 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 per share.

 

The holders of common stock are entitled to one vote per share and the holders of our Class A common stock are entitled to 10 votes per share.  There is no cumulative voting.  Shares of Class A common stock are convertible at any time into our shares of common stock on a one-for-one basis at the option of the stockholder. Subject to rights of any preferred stockholder, holders of our common stock and Class A common stock are entitled to receive on a pro rata basis such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. At the discretion of our Board of Directors, we may pay to the holders of common stock a cash dividend greater than the dividend, if any, paid to the holders of Class A common stock.

 

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

 

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We adopted a stockholder rights plan in 2002. The rights are attached to and trade in tandem with our common stock and Class A common stock. Each right entitles the registered holder to purchase from us one share of common stock at a purchase price of $200 per share. The rights, unless earlier redeemed by our Board of Directors, will detach and trade separately from our common stock upon the occurrence of certain events such as the unsolicited acquisition by a third party of beneficial ownership of 10% or more of our outstanding combined common stock and Class A common stock or the announcement by 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 have the ability to purchase such number of either shares of our common stock or stock of an acquirer of ours having a market value equal to twice the exercise price of the right being exercised, thereby causing substantial dilution to a person or group of persons attempting to acquire control of us. The rights may serve as a significant deterrent to unsolicited attempts to acquire control of us, including transactions involving a premium to the market price of our stock.  The rights expire on January 1, 2012, unless earlier redeemed.

 

On January 26, 2011, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $.03 per share.  The dividend is payable on March 10, 2011 to stockholders of record at the close of business on February 10, 2011.

 

On October 23, 2002, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time.  No purchases of our equity securities were made pursuant to this authorization during 2010 or 2009.  During the year ended December 31, 2008, we purchased and retired 98,500 shares of our outstanding common stock pursuant to this plan at an average purchase price of $9.09 per share, not including nominal brokerage commissions.  At December 31, 2010, we had remaining repurchase authority of 1,653,333 shares.

 

During the years ended December 31, 2010, 2009 and 2008, we purchased and retired 30,697, 15,325 and 13,881 shares of our outstanding common stock for $117,000, $59,000 and $139,000, respectively.  These purchases were made from employees in connection with the vesting of restricted stock awards under our stock incentive plan and were not pursuant to the aforementioned repurchase authorization. Since the vesting of a restricted stock award is a taxable event to our employees for which income tax withholding is required, the plan allows employees to surrender to us some of the shares that would otherwise have vested in satisfaction of their tax liability.  The surrender of these shares is treated by us as a purchase of the shares.

 

We have a stock incentive plan which provides for the grant of up to 2,250,000 shares of common stock to our officers and key employees through stock options and/or awards valued in whole or in part by reference to our common stock, such as nonvested stock awards.  Under the plan, option grants must have an exercise price of not less than 100% of the fair market value of the underlying shares of common stock at the date of the grant.  The stock options have eight-year terms and generally vest equally over a period of six years from the date of grant.  Once the options are exercised, our plan requires that the common stock be held for a minimum of one year.  The nonvested stock vests an aggregate of twenty percent each year beginning on the second anniversary date of the grant.  As of December 31, 2010, there were 735,827 shares available for granting options or stock awards.

 

Stock option activity for the year ended December 31, 2010 was as follows:

 
| ** **                            | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Remaining   Contractual   Term (in yrs)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| Outstanding at December 31, 2009 |       | 634,526                     |       | $                                            | 7.02       |                                                                       |       |                              |       |   |
| Expired                               |       | (295,250                    | )          | $                                            | 7.78       |                                                                       |       |                              |       |   |
| Outstanding at December 31, 2010 |       | 339,276                     |       | $                                            | 6.35       |                                                                       | .03        |                              | $          | — |   |
| Exercisable at December 31, 2010 |       | 339,276                     |       | $                                            | 6.35       |                                                                       | .03        |                              | $          | — |   |

 

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No stock options were granted during the three year period ending December 31, 2010.  No stock options were exercised during the years ended December 31, 2010 and 2009.  The total intrinsic value of stock options exercised during the year ended December 31, 2008 was $165,000 on the exercise date.

 

Nonvested stock option activity for the year ended December 31, 2010 was as follows:

 
| ** **                          | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Grant Date   Fair Value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 209                         |       | $                                                          | 2.60       |   |
| Vested                              |       | (209                        | )          | $                                                          | 2.60       |   |
| Nonvested at December 31, 2010 |       | —                      |       | $                                                          | —     |   |

 

The total fair value of stock options vested during the years ended December 31, 2010, 2009 and 2008 was $1,000, $203,000 and $385,000, respectively.  No compensation expense was recognized for the year ended December 31, 2010.  We recorded, within general and administrative expenses, compensation expense of $4,000 and $214,000 related to stock options for the years ended December 31, 2009 and 2008, respectively.  As of December 31, 2010, there was no unrecognized compensation cost related to nonvested stock options granted to employees under our stock incentive plan.

 

Nonvested restricted stock activity for the year ended December 31, 2010 was as follows:

 
| ** **                          | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Grant Date   Fair Value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 568,700                     |       | $                                                          | 7.38       |   |
| Granted                             |       | 209,500                     |       | $                                                          | 3.78       |   |
| Forfeited                           |       | (3,000                      | )          | $                                                          | 3.68       |   |
| Vested                              |       | (92,900                     | )          | $                                                          | 10.11      |   |
| Nonvested at December 31, 2010 |       | 682,300                     |       | $                                                          | 5.92       |   |

 

The aggregate market value of the nonvested restricted stock at the date of issuance is being amortized on a straight-line basis over the six-year service period or the service period remaining until normal retirement age, if shorter.  The total fair value of shares vested during the years ended December 31, 2010, 2009 and 2008 was $940,000, $681,000 and $451,000, respectively.  The grant-date fair value of restricted stock awards granted during the years ended December 31, 2010, 2009 and 2008 was $3.78, $3.68 and $10.51, respectively.  We recorded, within general and administrative expenses, compensation expense of $1,192,000, $948,000 and $784,000 related to restricted stock awards for the years ended December 31, 2010, 2009 and 2008, respectively.  As of December 31, 2010, there was $2,334,000 of total deferred compensation cost related to nonvested restricted stock awards granted to employees under our stock incentive plan.  That cost is expected to be recognized over a weighted-average period of 3.5****years.

 

**NOTE 10—Financial Instruments**

 

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

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

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

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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The following table summarizes the valuation of our financial instrument pricing levels as of December 31, 2010 and 2009:

 
| ** **                    | ** ** | **Total**  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **2010:**                     |       |       |       |             |       |             |       |             |       |
| Available-for-sale securities |       | $          | 140,000    |             | $          | 140,000          |       | $                | —     |   | $ | — |   |
| Interest rate swap            |       | (598,000   | )          | —           |       | (598,000         | )          | —           |       |
| ** **                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **2009:**                     | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Available-for-sale securities |       | $          | 125,000    |             | $          | 125,000          |       | $                | —     |   | $ | — |   |
| Interest rate swap            |       | (186,000   | )          | —           |       | (186,000         | )          | —           |       |

 

Our investments in available-for-sale securities consist of mutual funds.  These investments are included in other non-current assets on our consolidated balance sheets.

 

At December 31, 2010 and 2009, there was $78,600,000 and $95,125,000, respectively, outstanding under our revolving credit agreement.  The borrowings under our revolving credit agreement bear interest at the variable rate described in NOTE 6 — Credit Facility and therefore we believe approximate fair value.  We are subject to interest rate risk on the variable component of the interest rate. Our risk management objective is to lock in the interest cash outflows on a portion of our debt.  As a result, as described in NOTE 6 — Credit Facility, we entered into an interest rate swap agreement effectively converting a portion of the outstanding borrowings under the revolving credit agreement to a fixed-rate, thereby hedging against the impact of potential interest rate changes on future interest expense.  At December 31, 2010 and 2009, the interest rate swap had a negative fair value of $598,000 and $186,000, respectively, which is recorded in other liabilities.  The fair value of the interest rate swap was based on quotes from the issuer of the swap and represents the estimated amounts that we would expect to pay to terminate the swap.  We recognized $245,000 and $110,000, net of income taxes, in unrealized losses on our interest rate swap during 2010 and 2009, respectively.

 

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

 

**NOTE 11—Related Party Transactions**

 

During the years ended December 31, 2010, 2009 and 2008, we allocated costs of  $1,977,000, $1,983,000 and $2,104,000, respectively to DVD, a company related through common ownership, for certain administrative and operating services, including leased space.  DVD allocated certain administrative and operating service costs of $222,000, $225,000 and $295,000, respectively, to us for the years ended December 31, 2010, 2009 and 2008.  The allocations were based on an analysis of each company’s share of the costs.  In connection with DVD’s 2010, 2009 and 2008 NASCAR event weekends at Dover International Speedway, we provided certain services, primarily catering, for which DVD was invoiced $928,000, $999,000 and $1,237,000, respectively.  Additionally, DVD invoiced us $353,000, $375,000 and $434,000, respectively, for our rental of a skybox suite, tickets and other services during DVD’s 2010, 2009 and 2008 NASCAR event weekends at Dover International Speedway.  As of December 31, 2010 and 2009, our consolidated balance sheets included a $18,000 and $5,000 receivable from DVD, respectively, for the aforementioned items.  We settled these items in January of 2011 and 2010, respectively.  The net costs incurred by each company for these services are not necessarily indicative of the costs that would have been incurred if the companies had been unrelated entities and/or had otherwise independently managed these functions; however, management believes that these costs are reasonable.

 

Prior to our spin-off from DVD in 2002, both companies shared certain real property in Dover, Delaware.  At the time of the spin-off, some of this real property was transferred to us to ensure that the real property holdings of each company was aligned with its past uses and future business needs.  During our harness racing season, we have historically used the 5/8-mile harness racing track that is located on DVD’s property and is on the inside of its one-mile motorsports superspeedway.  In order to continue this historic use, DVD granted a perpetual easement to the harness track to us at the time of the spin-off.  This perpetual easement allows us to have exclusive use of the harness track during the period beginning 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 after such period.  The easement requires that we maintain the harness track but does not require the payment of any rent.

 

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Various easements and agreements relative to access, utilities and parking have also been entered into between us and DVD relative to our respective Dover, Delaware facilities.  DVD pays rent to us for the lease of its principal executive office space.  We also allow DVD to use our indoor grandstands in connection with DVD’s two annual motorsports weekends.  We do not assess rent for this nominal use and may discontinue the use at our discretion.

 

In conjunction with the spin-off from DVD, we and DVD entered into various agreements that addressed the allocation of assets and liabilities between the two companies and that define the companies’ relationship after the separation.  Among these are the Real Property Agreement and the Transition Support Services Agreement.

 

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

 

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

 

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

 

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

 

**NOTE 12—Commitments and Contingencies**

 

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

 

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

 

To the extent that any of the potential payments or benefits due under the agreements constitute an excess “parachute payment” under the Internal Revenue Code and result in the imposition of an excise tax, each agreement requires that we pay the amount of such excise tax plus any additional amounts necessary to place the officer or director in the same after-tax position as he would have been had no excise tax been imposed. We estimate that the tax gross ups that could be paid under the agreements in the event the agreements were triggered due to a change of control could be between $1,100,000 and $1,500,000 and these amounts have been included in the maximum contingent liability disclosed above. This maximum tax gross up assumes that none of the payments made after the hypothetical change in control would be characterized as reasonable compensation for services rendered. Each agreement with an executive officer provides that fifty percent of the monthly amount paid during the term is paid in consideration of the executive officer’s non-compete covenants. The exclusion of these amounts would reduce the calculated amount of excess parachute payments subject to tax. We are unable to conclude whether the Internal 

 

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

 

**NOTE 13—Quarterly Results (unaudited)**

 
| ** **                              | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30(a)** | ** ** | **December 31** | ** ** |
|-----------------------------------------|------------|-------------------|------------|------------------|------------|--------------------------|------------|----------------------|------------|
| **Year Ended December 31,   2010** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **               | ** ** | ** **           | ** ** |
| Revenues                                |       | $                 | 56,050,000 |             | $          | 58,458,000               |       | $                    | 65,700,000 |   | $ | 57,941,000 |   |
| Operating earnings                      |       | $                 | 3,876,000  |             | $          | 4,753,000                |       | $                    | 4,499,000  |   | $ | 1,620,000 |   |
| Net earnings                            |       | $                 | 1,673,000  |             | $          | 2,277,000                |       | $                    | 2,292,000  |   | $ | 501,000 |   |
| Net earnings per share-basic            |       | $                 | 0.05       |             | $          | 0.07                     |       | $                    | 0.07       |   | $ | 0.02 |   |
| Net earnings per share-diluted          |       | $                 | 0.05       |             | $          | 0.07                     |       | $                    | 0.07       |   | $ | 0.02 |   |
| ** **                              | ** ** | ** **        | ** ** | ** **       | ** ** | ** **               | ** ** | ** **           | ** ** |
| **Year Ended December 31,   2009** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **               | ** ** | ** **           | ** ** |
| Revenues                                |       | $                 | 59,080,000 |             | $          | 58,530,000               |       | $                    | 59,814,000 |   | $ | 55,375,000 |   |
| Operating earnings                      |       | $                 | 7,906,000  |             | $          | 7,308,000                |       | $                    | 2,632,000  |   | $ | 3,616,000 |   |
| Net earnings                            |       | $                 | 4,293,000  |             | $          | 3,938,000                |       | $                    | 1,231,000  |   | $ | 1,815,000 |   |
| Net earnings per share-basic            |       | $                 | 0.13       |             | $          | 0.12                     |       | $                    | 0.04       |   | $ | 0.06 |   |
| Net earnings per share-diluted          |       | $                 | 0.13       |             | $          | 0.12                     |       | $                    | 0.04       |   | $ | 0.06 |   |

 

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

 

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