**United States Securities andExchange 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 thefiscal year ended December 31, 2004**

 

**Commissionfile number      1-16791**

 

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

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                               | ** ** | **51-0414140**                           |
|------------------------------------------------------------|------------|------------------------------------------|
| (State or  other jurisdiction of incorporation)            |       | (I.R.S.  Employer Identification Number) |
|                                                       |       |                                     |
| **1131 North DuPont  Highway, Dover, Delaware 19901**      |
| (Address of  principal executive offices)                  |
|                                                       |       |                                     |
| **(302)  674-4600**                                        |
| (Registrant’s  telephone number, including area code) |

 

**Securities 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 whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ý   No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

The aggregate market value of common stockheld by non-affiliates of the registrant was $108,642,263 as of June 30,2004 (the last day of our most recently completed second quarter).

 

As of February 28, 2005, the number ofshares of each class of the registrant’s common stock outstanding is asfollows:

 

| Common Stock -         | ** ** | **9,564,163  shares**  |
|------------------------|------------|------------------------|
| Class A Common Stock - | ** ** | **14,339,687  shares** |

** **

 

**DocumentsIncorporated by Reference**

 

Portions of the registrant’s Proxy Statementin connection with the Annual Meeting of Stockholders to be held April 27,2005 are incorporated by reference into Part III, Items 10 through 14 of thisreport.

 

 

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**Part I**

 

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

 

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

 

Dover Downs Gaming &Entertainment, Inc. is a diversified gaming and entertainment company whoseoperations consist of Dover Downs Slots – a 91,000 square foot video lottery(slots) casino complex; the Dover Downs Hotel and Conference Center – featuringluxury accommodations with conference, banquet, fine dining, ballroom andconcert hall facilities; and Dover Downs Raceway – a harness racing track withpari-mutuel wagering on live and simulcast horse races.  Our entertainment complex is located inDover, the capital of the State of Delaware.

 

Gaming &Entertainment has two wholly owned subsidiaries: Dover Downs, Inc. and DoverDowns Management Corp.  Dover Downs, Inc.was incorporated in 1967 and began motorsports and harness racing operations in1969.  In June of 1994, legislationauthorizing video lottery operations in the State of Delaware (the “State”) wasadopted.  The Company’s video lottery(slots) casino operations began on December 29, 1995.  As a result of several restructurings, DoverDowns, Inc. became a wholly owned subsidiary of Dover Motorsports, Inc. (f/k/aDover Downs Entertainment, Inc.) (“DVD”), and became the operating entity forall of DVD’s gaming operations.

 

Dover Downs Gaming &Entertainment, Inc. was incorporated in the State in December of 2001 as awholly owned subsidiary of DVD. Effective March 31, 2002, DVD completed a tax-free spin-off of itsgaming operations by contributing 100% of the issued and outstanding commonstock of Dover Downs, Inc. to the Company, and subsequently distributing 100%of the issued and outstanding common stock of the Company to DVDstockholders.  Immediately following thespin-off, Dover Downs Gaming & Entertainment, Inc. became an independentpublic company.

 

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

 

The Company’s licensefrom the Delaware Harness Racing Commission (the “Commission”) to hold harnessrace meetings on our premises and to offer pari-mutuel wagering on live andsimulcast horse races must be renewed on an annual basis. In order to maintainits license to conduct video lottery operations, the Company is required tomaintain its harness horse racing license. The Company has received an annual license from the Commission for thepast 36 consecutive years and management believes that its relationship with theCommission remains good.

 

**Dover Downs Slots**

 

Our video lottery (slot)machine casino opened in December 1995 with approximately 500 videolottery (slot) machines.  Due to itspopularity, the video lottery (slot) machine casino has expanded four timessince its opening and the number of machines has increased steadily to 2,500(the maximum number allowed by the Director of the Delaware State LotteryOffice (the “Lottery Director”)) at December 31,2004. The most recent expansion occurred in the first quarter of 2004 with theconstruction of 11,000 additional square feet of gaming space and theinstallation of 500 machines within the existing casino complex.

 

Our video lottery (slot)machines range from our popular penny machines to $100 machines in the PremiumSlots area and include many popular franchise games found in the country’smajor gaming jurisdictions. Additional amenities include the Garden Cafe, whichbecomes a lounge with live entertainment most evenings, and the Winners CircleRestaurant.  The Las Vegas style videolottery casino housing the gaming equipment was designed and built usingexpertise from Caesars World Gaming Development Corporation (“Caesars”), aleader in the gaming industry.  Ourfacilities are open every day of the year, except Christmas and Easter.  Our casino was visited by an estimated 3million patrons in 2004.

 

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

 

Since our video lottery(slot) machine casino opened in 1995, we have been party to a management agreementwith Caesars, under which Caesars was our agent to supervise, manage andoperate our video lottery (slot) machine casino.  Effective December 28, 2004, thatmanagement agreement expired and we opted not to renew it.  Therefore, beginning in 2005 we will nolonger be required to pay to Caesars a management fee.

 

We use sophisticateddatabase marketing to develop long-term relationships with our patrons and totarget promotions to specific customer segments. Our Capital Club, a slotsplayers club and tracking system, allows us to identify customers and to rewardtheir level of play through awards programs. Membership in this club currentlystands at approximately 170,000 active patrons. During 2004, we installed a new state-of-the-art customer management andslot data system.  This system allows usto market our property more effectively and allows for the ultimate conversionof our casino floor to ticket-in, ticket-out (cashless) technology.  As of December 31, 2004, we haveconverted 528 of our 2,500 video lottery (slot) machines to ticket-in,ticket-out technology and we expect to have approximately 1,900 video lottery(slot) machines using the ticket-in/ticket-out technology by the end of 2005.

 

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

 

OnMay 30, 2003, a committee created by the Delaware House of Representatives (the“Committee”) issued a favorable assessment as to the merits of conductingsports wagering in the State through its video lottery agents.  The Committee concluded that sports gaming isfeasible in the State, outlined proposed structures for its implementation andprovided various financial projections. The report has been provided to the Delaware General Assembly forconsideration.  By Federal law, Delawareis the only state east of Montana, and one of only four states in the UnitedStates, where sports betting is legally permitted.  Enabling legislation would need to be passedby the Delaware General Assembly to establish sports gaming operations at ourproperty.

 

**Dover Downs Hotel and Conference Center**

 

Our luxury hotelfacility, the Dover Downs Hotel and Conference Center, is located adjacent toour casino.  Phase one of the facilitywas partially opened in the first quarter of 2002 and was completed in April 2002.  The hotel and conference center includes 232rooms, a multi-purpose ballroom/concert hall, a fine dining restaurant,swimming pool and health spa. Additional construction that occurred included, amongother things, building a 425-seat buffet restaurant, renovating the enclosedharness racing grandstand with state-of-the-art simulcasting facilities andbuilding an HVAC plant.  With thisfacility, we are capitalizing on the need for luxury hotel accommodations inthe Dover area and offering a wider range of entertainment options to ourpatrons, including concerts featuring prominent entertainers, live boxing,gourmet dining, trade shows and conferences. The facility allows us to attract new patrons and lengthen the stay ofcurrent patrons.  Since opening the DoverDowns Hotel and Conference Center, we have managed its operationsourselves.  In 2004, hotel occupancyaveraged almost 95% and the hotel was awarded the AAA Four Diamond Award forthe second consecutive year.

 

**Dover Downs Raceway**

 

Dover Downs Raceway haspresented pari-mutuel harness racing events for 36 consecutive years. Liveharness races are conducted at Dover Downs Raceway between November and April andare simulcast to tracks and other off-track betting locations across NorthAmerica on each of the Company’s more than 130 live race dates. Our racescurrently are transmitted to more than 400 tracks and off-track bettinglocations. The harness horse racing track is a

 

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5/8-mile track and is lighted for nighttimeoperations.  The track is adjacent to ourcasino and hotel and conference center on land owned by DVD on the inside ofDVD’s auto racing superspeedway.  Use ofthe track is pursuant to an easement granted by DVD.

 

Within our maingrandstand is the recently renovated simulcast parlor where our patrons canwager on harness and thoroughbred races received by satellite into Dover DownsRaceway year round from numerous tracks across North America.  Television monitors throughout the parlorarea provide views of all races simultaneously and the parlor’s betting windowsare connected to a central computer allowing bets to be received on all racesfrom all tracks.

 

Harness racing in theState of Delaware is governed by the Delaware Harness Racing Commission (the “Commission”).We hold a license from the Commission authorizing us to hold harness racemeetings on our premises and to offer pari-mutuel wagering on live andsimulcast horse races.

 

Harness racing refers toany racing of horses in which the horses competing or participating areharnessed to a two-wheeled sulky, which carries the driver.  Pari-mutuel wagering refers to pooled bettingby which the wagering public, not the track, determines the odds and thepayoff. The track retains a commission, which is a percentage of the totalamount wagered (“handle”). Simulcasting refers to the transmission of livehorse racing by television, cable or satellite signal from one race track toanother with pari-mutuel wagering being conducted at the sending and receivingtrack and a portion of the handle being shared by the sending and receivingtracks.

 

The legislationauthorizing video lottery operations in the State of Delaware was adopted in June 1994,and is referred to as the “Horse Racing Redevelopment Act.” The DelawareGeneral Assembly’s stated purpose in approving the legislation was to (i)provide non-state supported assistance in the form of increased economicactivity and vitality for Delaware’s harness and thoroughbred horse racingindustries, which activity and vitality will enable the industry to improve itsfacilities and breeding stock, and cause increased employment; and (ii)restrict the location of such lottery to locations where wagering is alreadypermitted and controls exist. A portion of the proceeds from the wagering onthe video lottery (slot) machines is allocated to increase the purses forharness horse races held at Dover Downs Raceway and is intended to provideincreased vitality for Delaware’s horse racing industry.

 

We have an agreement withthe Delaware Standardbred Owner’s Association, Inc. (“DSOA”) effective August 1,2003 and continuing through July 31, 2007. DSOA’s membership consists ofowners, trainers, and drivers of harness horses participating in harness racemeetings at our facilities and elsewhere in the United States and Canada. TheDSOA has been organized and exists for the purpose of promoting the sport ofharness racing; improving the lot of owners, drivers, and trainers of harnessracing horses participating in race meetings; establishing health, welfare andinsurance programs for owners, drivers, and trainers of harness racing horses;negotiating with harness racing tracks on behalf of owners, trainers, drivers,and grooms of harness racing horses; and generally rendering assistance to themwhenever and wherever possible. Under the DSOA agreement, we are required todistribute as purses for races conducted at our facilities, a percentage of ourretained share of pari-mutuel revenues, depending on the level of the averagedaily dollar handle.

 

We enjoy a goodrelationship with representatives of DSOA and anticipate that this relationshipwill continue. We believe that the DSOA agreement is typical of similar agreementsin the industry.

 

**Licensing and Regulation by Gaming and OtherAuthorities**

 

*General*

 

We are subject toextensive federal, state and local regulations related to our operations,particularly our video lottery (slot) operations, live harness racing andpari-mutuel wagering. These operations are contingent upon continued governmentapproval of such operations as forms of legalized gaming and could be subjectedat any time to additional or more restrictive regulations.  The following is a brief outline of some ofthe more significant regulations affecting our gaming operations and notintended as a recitation of all regulations applicable to our business.

 

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Delaware law regulatesthe percentage of commission we are entitled to receive from our gamingactivities, which comprises a significant portion of our overall revenues.  Our licenses to conduct video lottery (slot)machine operations, harness horse races and pari-mutuel wagering could bemodified or repealed at any time and we could be required to terminate ourgaming operations.

 

*Video Lottery (Slot) Operations*

 

*General. *Video lottery (slot)operations are by statute operated and administered by the LotteryDirector.  We are a Licensed Agentauthorized to conduct video lottery (slot) operations under the Delaware StateLottery Code.

 

A “video lottery (slot)machine” is defined by law as any machine in which bills, coins or tokens aredeposited in order to play in a game of chance in which the results, includingoptions available to the player, are randomly and immediately determined by themachine.  A machine may use spinningreels or video displays or both, and may or may not dispense coins or tokensdirectly to winning players.  A machineshall be considered a video lottery (slot) machine notwithstanding (i) the useof an electronic credit system making the deposit of bills, coins or tokensunnecessary, or (ii) the fact that the video lottery (slot) machine hasemployed dual function terminal technology. Various video lottery (slot) machines are in use at our casino.  All accept $5, $10, $20, $50 and $100 bills.

 

The Lottery Director hasdiscretion to adopt such rules and regulations as the Lottery Director deemsnecessary or desirable for the efficient and economical operation andadministration of the system, including (i) type and number of games permitted,(ii) pricing of games, (iii) numbers and sizes of prizes, (iv) manner ofpayment, (v) value of bills, coins or tokens needed to play, (vi) requirementsfor licensing agents and service providers, (vii) standards for advertising,marketing and promotional materials used by Licensed Agents, (viii) proceduresfor accounting and reporting, (ix) registration, kind, type, number andlocation of video lottery (slot) machines on a Licensed Agent’s premises, (x)security arrangements for the video lottery system, and (xi) reporting andauditing of financial information of Licensed Agents.

 

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

 

There are continuinglicensure requirements for all officers, directors, key employees and personswho own directly or indirectly 10% or more of a Licensed Agent, which licensurerequirements shall include the satisfaction of such security, fitness andbackground standards as the Lottery Director may deem necessary relating tocompetence, honesty and integrity, such that a person’s reputation, habits andassociations do not pose a threat to the public interest of the State or to thereputation of or effective regulation and control of the video lottery; itbeing specifically understood that any person convicted of any felony, a crimeinvolving gambling, or a crime of moral turpitude within 10 years prior toapplying for a license or at any time thereafter shall be deemed unfit.

 

There are similarlicensure requirements for providers of the video lottery (slot) machines andcertain companies that seek to provide services to a Licensed Agent.

 

*Revocation, Suspension orModification of License*. The Lottery Director may revoke orsuspend the license of a Licensed Agent, such as ours, for “cause.”  “Cause” is broadly defined and couldpotentially include falsifying any application for license or report requiredby the rules and regulations, the failure to report any information required bythe rules and regulations, the material violation of any rules and regulationspromulgated by the Lottery Director or any conduct by the licensee whichundermines the public confidence in the video lottery system or serves theinterest of organized gambling or crime and criminals in any manner.  A license may be revoked for an unintentionalviolation of any federal, state or local law, rule or regulation provided thatthe violation is not cured within a reasonable time as determined by theLottery Director.  A hearing officer’sdecision revoking or suspending the license shall be appealable to the DelawareSuperior Court under the provisions of the Administrative Procedures Act.  All existing or new officers, directors, keyemployees and owners of a Licensed Agent are subject to backgroundinvestigation.  Failure to satisfy thebackground investigation may constitute cause for suspension or revocation ofthe License.

 

*Ownership Changes*.  Under Delaware law, a change of ownership ofa Licensed Agent will automatically terminate its license 90 days after thechange of ownership occurs, unless the Lottery Director determines afterapplication to issue a new license to the new owners.  Change of ownership may occur if any newindividual or

 

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entity acquires, directly or indirectly, 10% or moreof the Licensed Agent or if more than 20% of the legal or beneficial interestin the Licensed Agent is transferred, whether by direct or indirect means.  The Commission may require extensivebackground investigations of any new owner acquiring a 10% or greater interestin a Licensed Agent, including criminal background checks.  Accordingly, the Company has a restrictivelegend on its shares of common stock which require that (a) any holders ofcommon stock found to be disqualified or unsuitable or not possessing thequalifications required by any appropriate gaming authority could be requiredto dispose of such stock and (b) any holder of common stock intending toacquire 10% or more of the outstanding common stock of the Company must firstobtain prior written approval from the Delaware State Lottery Office.

 

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

 

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

 

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

 

*Licensing Requirements. *Harness racing in the Stateof Delaware is governed by the Delaware Harness Racing Commission.  The Company holds a license from theCommission by which it is authorized to hold harness race meetings on itspremises and to make, conduct and sell pools by the use of pari-mutuel machinesor totalizators.  The license must berenewed on an annual basis.  TheCommission may reject an application for a license for any cause which it deemssufficient and the action of the Commission is final.  The Commission may also suspend or revoke alicense which it has issued and its action in that respect is final, subject toreview, upon questions of law only, by the Superior Court of the County withinwhich the license was granted.  Theaction of the Commission stands unless and until reversed by the Court.  The Company has received an annual licensefrom the Commission for the past 36 consecutive years and management believesthat its relationship with the Commission remains good.  However, there can be no assurances that theCompany will continue to be licensed by the Commission in the future.

 

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

 

The Commission isrequired to inspect a licensee’s racing plant not less than five days prior toa race meeting and may withdraw the license for the meeting if the racing plantis found to be unsafe for animals or persons or is not rendered safe prior tothe opening of the meeting.  A licenseemust deposit with the Commission, ten days before a race meeting, a policy ofinsurance against personal injury liability in an amount to be approved by theCommission.

 

*USTA. *Any license granted by theCommission is also subject to such reasonable rules and regulations as may beprescribed from time to time by the United States Trotting Association (“USTA”).  The USTA sets various rules relating to theconduct of harness racing.  According toits Articles of Incorporation, the purposes of the USTA shall include theimprovement of the breed of trotting and pacing horses, the establishment ofrules regulating standards and the registration of such horses thereunder, theadvancement and promotion of the interest of harness racing in

 

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the United States, the investigation, ascertainmentand registration of the pedigrees of such horses, the regulation and governmentof the conduct of the sport of harness racing, the establishment of rules forthe conduct thereof, not inconsistent with the laws of the various states, andthe sanctioning of the holding of exhibitions of such horses and meetings forthe racing thereof, the issuance of licenses to qualified persons to officiateat harness race meetings and exhibitions, the issuance of licenses to theowners of horses permitting the exhibition and racing of such horses and the qualificationthereof, the issuance of licenses to drivers of horses participating in suchraces or exhibitions, and providing for the enforcement of the rulespromulgated by the USTA, and providing for the fixing of penalties, fines, andthe suspension or expulsion from membership, or privileges or for any othermisconduct detrimental to the sport.

 

*Gaming Taxes and Fees*

 

We believe that theprospect of significant additional tax revenue is one of the primary reasonswhy jurisdictions have legalized gaming. As a result, gaming operators are typically subject to significant taxesand fees in addition to normal federal and state corporate income taxes.  These taxes and fees are subject to increaseat any time.  We pay substantial taxesand fees with respect to our operations and would likely incur similar burdensin any other jurisdiction in which we may conduct gaming operations in thefuture.

 

*Compliance with Other Laws*

 

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

 

The Internal RevenueService, or IRS, requires operators of casinos located in the U.S. to fileinformation returns for U.S. citizens, including names and addresses ofwinners, for all winnings in excess of stipulated amounts. The IRS alsorequires operators to withhold taxes on certain winnings.

 

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

 

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

 

**Competition**

 

The gaming industry inthe United States is intensely competitive and features many participants,including riverboat casinos, dockside casinos, land-based casinos, videolottery (slot) and poker machines, whether or not located in casinos, nativeAmerican gaming, pari-mutuel wagering on live and simulcast horse racing, offtrack betting, state run lotteries, internet gambling and other forms ofgambling. Gaming competition is particularly intense in each of these markets.

 

Within the State ofDelaware, our competition is limited to two gaming facilities: Delaware Park, anorthern Delaware thoroughbred track with 2,500 video lottery (slot) machines,and Harrington Raceway, a southern central Delaware fairgrounds harness trackwith 1,435 video lottery (slot) machines. By statute, no additional video lottery (slot) machine operations arepermitted in the State and each of the three permitted locations is presentlylimited to 2,500 video lottery (slot) machines. The introduction or expansionof gaming in neighboring jurisdictions, particularly Maryland, Virginia,Washington, D.C., Pennsylvania or New Jersey, or the legalization of additionalgaming venues in Delaware, could have a material adverse effect on our cashflows and results of operations. From

 

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time to time, legislation is proposed for adoption inthese jurisdictions which, if enacted, could further expand gamingopportunities and result in increased competition.  For example, in 2005, the Maryland Senatepassed a bill providing for various gaming venues for the third straight year.The Maryland House responded by passing its own bill which differs as topermissible venues, numbers of machines authorized, tax structure and sitingapprovals. No consensus has yet been reached on compromise legislation capableof passing both the House and the Senate.

 

In July 2004,Pennsylvania adopted legislation which authorizes up to 61,000 slot machines atvarious existing and proposed venues throughout the state.  It is difficult for us to predict the effectthat such legislation will have on us, but we estimate that one or morefacilities in Pennsylvania are likely to begin operations during 2006. Pennsylvaniawill have one of the highest effective tax rates on slot machine gaming in thecountry and will charge an up front $50,000,000 license fee to the horse racingand casino venues that are granted a gaming license. Management has estimatedthat slot win from Pennsylvania patrons represents approximately 7% of ourtotal slot win.

 

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

 

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

 

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

 

Within the State ofDelaware, we face little direct live competition from the State’s other twotracks. Harrington Raceway, a south central Delaware fairgrounds track,conducts harness horse racing periodically between May and November. There isno overlap presently with our live race season. Delaware Park, a northernDelaware track, conducts thoroughbred horse racing from April throughmid-November. Its race season only overlaps with ours for approximately sixweeks each year.

 

We compete with harnessand thoroughbred racing and simulcasting facilities in the neighboring statesof Pennsylvania, Maryland and New Jersey. We also receive simulcast harness and thoroughbred races fromapproximately 80 race tracks.

 

Competition for our hoteland conference center varies and consists of local and regional competition. Withrespect to hotel accommodations only, we compete with a variety of nearbyhotels in the Dover area; however, few of these offer the luxury accommodationsthat we offer.  Our hotel is the onlyhotel in the Dover area, and one of only three hotels in the State, to receivethe AAA Four Diamond Award.  With respectto trade shows, conferences, concerts and hotel room packages tied to theseevents or tied to our casino and other gaming offerings, we compete at a regionallevel with the other gaming operations referred to above and with conventioncenters and larger hotels in major cities such as Philadelphia, Washington,D.C., Baltimore and Wilmington.

 

In addition, ouractivities compete with other leisure, entertainment and recreationalactivities.

 

**Growth Strategies**

 

We offer a unique gamingand entertainment experience and make available to our patrons a number ofdifferent options: slot machine gaming, live harness horse racing, fine dining,national recording and entertainment acts, live boxing and simulcasting ofthoroughbred and harness horse races from across the United States. Our missionis simple: to provide all of our customers a premier gaming and entertainmentexperience with a focus on quality customer service. Our growth strategy is tofoster customer loyalty by following this mission, focus on our

 

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most valuable customers, expand and improve thequality of our slot gaming positions, enhance our gaming products withadditional entertainment offerings and create an exciting gaming environmentwhile focusing on areas that we believe will increase our revenue andprofitability. Our efforts in this regard include the following:

 

*Increase The Utilization Of Our Casino*

 

Duringthe first quarter of 2004, the Company constructed 11,000 additional squarefeet of gaming space and installed 500 machines within its existing casinocomplex.  This brings the Company’s totalnumber of video lottery (slot) machines to 2,500 (the maximum numbercurrently allowed by the Lottery Director) atDecember 31, 2004.

 

We use a sophisticateddatabase marketing program to develop long-term relationships with our patronsand to target promotions to specific customer segments.  Our Capital Club, a slots players club andtracking system, allows us to identify customers and to reward their level ofplay through awards programs. Membership in this club currently stands atapproximately 170,000 active patrons. During 2004, we installed a new state-of-the-art customer management andslot data system.  This system allows usto market our property more effectively and allows for the ultimate conversionof our casino floor to ticket-in, ticket-out (cashless) technology.  As of December 31, 2004, we haveconverted 528 of our 2,500 video lottery (slot) machines to ticket-in,ticket-out technology and we expect to have approximately 1,900 video lottery(slot) machines using the ticket-in/ticket-out technology by the end of2005.  We expect to increase attendanceat both our casino and hotel and conference center through effectivepromotional use of our database and by making improvements to our facilitiesand gaming offerings based on what we learn from our Capital Club members. Forexample, we continue to add machines with differing denominations andprogressive slot machines with large jackpot sizes because they offer patrons amore exciting gaming experience.

 

OnMay 30, 2003, a committee created by the Delaware House of Representativesissued a favorable assessment as to the merits of conducting sports wagering inthe State through its video lottery agents. The Committee concluded that sports gaming is feasible in the State,outlined proposed structures for its implementation and provided various financialprojections.  The report has beenprovided to the General Assembly for consideration.  By Federal law, Delaware is the only stateeast of Montana, and one of only four states in the United States, where sportsbetting is legally permitted.  Enablinglegislation would need to be passed by the Delaware General Assembly toestablish sports gaming operations at our property.

 

*Capitalize On Our Luxury Hotel And ConferenceCenter*

 

Our luxury hotelfacility, the Dover Downs Hotel and Conference Center, is located adjacent toour casino.  It is the only hotel in theDover area, and one of only three hotels in the State, to receive the AAA FourDiamond Award.  The facility waspartially opened in the first quarter of 2002 and was completed in April 2002.  The first phase of the hotel and conferencecenter includes 232 rooms, a multi-purpose ballroom/concert hall, a fine diningrestaurant, swimming pool and health spa. Additional construction that occurredin adjacent facilities during the first phase included, among other things,building a new 425-seat buffet restaurant, renovating the enclosed harnessracing grandstand with state-of-the-art simulcasting facilities and building anHVAC plant. The second phase, if implemented, is designed to include anadditional 268 rooms. With this facility, we are capitalizing on the need forluxury hotel accommodations in the Dover area and offering a wider range ofentertainment options to our patrons, including concerts featuring prominententertainers, live boxing, gourmet dining, trade shows and conferences.  The facility allows us to attract new patronsand lengthen the stay of current patrons.

 

*Increase The Attendance And Wagering On LiveHarness Horse Racing Through Increased Purse Levels*

 

With a percentage ofvideo lottery (slot) machine revenues supplementing the purses for thehorsemen, we have experienced dramatic increases in the amount of ourpurses.  As of the end of our 2003-2004season, our average daily purse distribution had increased to $193,000 from$8,000 in 1995. According to information published by the Harness Tracks ofAmerica, Inc., an association we belong to comprised of harness race tracksthroughout the world, this level would have us ranked second among thirty-sixUnited States harness tracks in daily purse distribution.  The result is that we continue to attracthigher quality horses.  We have suchprestigious events as our annual “Progress Pace” with an estimated $400,000purse, an event which attracts the country’s top three-year-old horses.  Bettors are attracted to races with largerpurses and typically wager more on the higher quality and more predictablehorses. We have also completed various upgrades to enhance the harness horseracing facilities, including

 

9

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renovations to the track and grounds, receiving barnand paddock areas and, more recently, our simulcast parlor which hasstate-of-the-art facilities that allow year round wagering. We continue tofocus on improvements that we believe allow us to increase attendance and wagering,including wagering on our events from other tracks and off track wageringfacilities that receive our racing signal during our race season.

 

**Seasonality**

 

Gaming &Entertainment’s quarterly operating results are affected by weather and thegeneral economic conditions in the United States.  Our quarterly operating results are generallydistributed evenly throughout the year. However, the results for any quarterare not necessarily indicative of results to be expected in any future period.

 

**Employees**

 

As of December 31,2004, Gaming & Entertainment had approximately 821 full-time employees and172 part-time employees. We engage temporary personnel to assist during ourlive harness racing season. None of our employees are party to a collectivebargaining agreement and we believe that our relationship with our employees isgood.

 

#### **AvailableInformation**

 

We file annual, quarterlyand current reports, information statements and other information with theUnited States Securities and Exchange Commission (the “SEC”). The public mayread and copy any materials we file with the SEC at the SEC’s Public ReferenceRoom at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtaininformation on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,proxy and information statements, and other information regarding issuers thatfile electronically with the SEC.  Theaddress of that site is http://www.sec.gov.

 

#### **Internet Address**

 

We maintain a websitewhere additional information concerning our business and various upcomingevents can be found.  The address of ourInternet website is http://www.doverdowns.com. We provide a link on ourwebsite, under Investor Relations, to our filings with the SEC, including ourannual report on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and all amendments to those reports.

 

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

 

We own our principalexecutive office located in Dover, Delaware; Dover Downs Slots—our 91,000square foot casino; the Dover Downs Hotel and Conference Center—featuringluxury accommodations with conference, banquet, fine dining, ballroom andconcert hall facilities; and the Dover Downs Raceway—indoor grandstands,betting and simulcasting parlors, all of which are located at our entertainmentcomplex situated on approximately 78 acres of land owned by us.

 

The Company’s use of DVD’s5/8-mile harness racing track is pursuant to an easement granted to the Companyby DVD which does not require the payment of any rent. Under the terms of theeasement the Company has exclusive use of the harness track during the periodbeginning November 1 of each year and ending April 30 of thefollowing year, together with set up and tear down rights for the two weeksbefore and after such period.  Theharness track is located on property owned by DVD and is on the inside of DVD’smotorsports superspeedway.  The Company’sindoor grandstands are used by DVD at no charge in connection with itsmotorsports events. DVD also leases its principal executive office space fromthe Company.  Various easements andagreements relative to access, utilities and parking have also been enteredinto between DVD and the Company relative to their respective Dover, Delawarefacilities.

 

10

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

 

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

 

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

 

No matters were submittedduring the fourth quarter of the fiscal year covered by this report to a voteof security holders.

 

**Part II**

 

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

 

Gaming &Entertainment’s common stock is listed on the New York Stock Exchange under theticker symbol “DDE.”  Gaming &Entertainment Class A common stock is not publicly traded but is freelyconvertible into Gaming & Entertainment common stock at any time at theoption of the holder thereof.  As of February 28,2005, there were 9,564,163 shares of common stock and 14,339,687 shares ofClass A common stock outstanding.  Therewere 1,096 holders of record for common stock and 18 holders of record forClass A common stock.

 

The high and low salesprices for the Company’s common stock on the New York Stock Exchange and thedividends declared per share for the years ended December 31, 2004 and2003 are detailed in the following table.

 

| **Quarter Ended:**       | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends  Declared** | ** ** |
|--------------------------|------------|----------|------------|---------|------------|-------------------------|------------|
| December 31,  2004  |       | $        | 13.10      |    | $          | 9.38                    |       | $ | 0.06 |   |
| September 30,  2004 |       | 11.29    |       | 8.86    |       | 0.06                    |       |
| June 30,  2004      |       | 11.99    |       | 10.50   |       | 0.06                    |       |
| March 31,  2004     |       | 11.05    |       | 9.40    |       | 0.05                    |       |
|                     |       |     |       |    |       |                    |       |
| December 31,  2003  |       | $        | 10.00      |    | $          | 8.02                    |       | $ | 0.05 |   |
| September 30,  2003 |       | 10.35    |       | 7.97    |       | 0.05                    |       |
| June 30,  2003      |       | 10.04    |       | 8.80    |       | 0.05                    |       |
| March 31,  2003     |       | 10.15    |       | 8.45    |       | 0.05                    |       |

 

11

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###### **Equity Compensation PlanInformation**

 

TheCompany has a stock incentive plan which provides for the grant of up to1,500,000 shares of stock to our officers and key employees through stock options and/or awards valued in whole or in partby reference to our common stock, such as restricted stock awards.  Refer to NOTE 9—Stockholders’ Equityof the consolidated financial statements included elsewhere in this Form 10-Kfor further discussion.  Securitiesauthorized for issuance under equity compensation plans at December 31,2004 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     |       | 757,090                                                                                               |       | $                                                                                   | 10.32      |                                                                                                                                                  | 680,129    |   |
|                                                        |       |                                                                                                  |       |                                                                                |       |                                                                                                                                                  |       |
| Equity  compensation plans not approved by security holders |       | —                                                                                                |       | —                                                                              |       | —                                                                                                                                                |       |
| Total                                                       |       | 757,090                                                                                               |       | $                                                                                   | 10.32      |                                                                                                                                                  | 680,129    |   |

 

The following tabledetails the Company’s purchases of equity securities for the three months endedDecember 31, 2004 (the average price paid per share does not includenominal brokerage commissions):

 
| **Period**                                           | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly Announced Plans  or Programs** | ** ** | **Maximum  Number  of Shares that  May Yet Be  Purchased  Under the Plans  or Programs** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| October 1,  2004 – October 31, 2004   |       | 500                                    |       | $                                   | 9.99       |                                                                                    | 500        |                                                                                     | 1,779,155  |   |
| November 1,  2004 – November 30, 2004 |       | —                                 |       | $                                   | —     |                                                                                    | —     |                                                                                     | 4,427,082  |   |
| December 1,  2004 – December 31, 2004 |       | 2,640,421                              |       | $                                   | 12.00      |                                                                                    | 2,640,421  |                                                                                     | 1,779,155  |   |
| Total                                                |       | 2,640,921                              |       | $                                   | 12.00      |                                                                                    | 2,640,921  |                                                                                     | 1,779,155  |   |

 

On October 23, 2002,the Company’s Board of Directors authorized the repurchase of up to 2,000,000shares of the Company’s outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization does notobligate the Company to acquire any specific number of shares and may besuspended at any time.

 

On November 5, 2004,the Company’s Board of Directors authorized the Company to commence a tenderoffer to purchase up to 1,040,421 shares of its common stock and up to1,607,506 shares of its Class A common stock at a fixed price of $12.00 pershare.  The offer commenced on Wednesday,November 10, 2004 and expired at 5:00 P.M., eastern standard time, onFriday, December 10, 2004.  TheCompany purchased 1,040,421 shares of its common stock and 1,600,000 shares ofits Class A common stock for $32,045,000, including expenses, in connectionwith the tender offer.

 

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

 

The following tablesummarizes certain selected consolidated financial data of Gaming &Entertainment, which has been derived from the consolidated financialstatements of Gaming & Entertainment for the years ended December 31,2004, 2003, 2002 and 2001, the six months ended December 31, 2000 and theyear ended June 30, 2000.  Thisinformation set forth below should be read in conjunction with management’sdiscussion and analysis of financial condition and results of operations, theconsolidated financial statements and the notes thereto, included elsewhere inthis document.

 

**Five YearSelected Financial Data**

 
| ** **                                                                          | ** ** | ** ** | ** **    | **Six Months  Ended  Dec. 31,  2000** | ** ** | **Year Ended  June 30,  2000** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|---------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                          | ** ** | ** ** | ** **    |
| **Years Ended December 31,**                                                   | ** ** |
| **2004**                                                                            | ** ** | **2003**   | ** **    | **2002**                              | ** ** | **2001**                            | ** ** |
| **Consolidated  Statement of Earnings Data (in thousands, except per share data):** | ** ** | ** ** | ** **    | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                           |       |       |          |                                  |       |                                |       |   |   |   |   |   |   |
| Gaming                                                                              |       | $          |  193,922 |                                  | $          |  175,023                       |       | $ |  193,723 |   | $ |  175,065 |   | $ |  79,897 |   | $ |  158,398 |   |
| Other  operating                                                                    |       | 33,795     |          | 32,476                                |       | 26,083                              |       | 12,550 |   | 5,796 |   | 10,567 |   |
| Gross  revenues                                                                     |       | 227,717    |          | 207,499                               |       | 219,806                             |       | 187,615 |   | 85,693 |   | 168,965 |   |
| Less -  promotional allowances                                                      |       | 19,973     |          | 18,667                                |       | 13,331                              |       | 6,322 |   | 2,941 |   | 4,450 |   |
| -  non-recurring gaming charge                                                      |       | 448        |          | —                                |       | —                              |       | — |   | — |   | — |   |
|                                                                                |       | 207,296    |          | 188,832                               |       | 206,475                             |       | 181,293 |   | 82,752 |   | 164,515 |   |
| Expenses:                                                                           |       |       |          |                                  |       |                                |       |   |   |   |   |   |   |
| Gaming                                                                              |       | 152,725    |          | 138,423                               |       | 148,817                             |       | 132,587 |   | 58,731 |   | 118,987 |   |
| Non-recurring  gaming charge                                                        |       | 1,802      |          | —                                |       | —                              |       | — |   | — |   | — |   |
| Other  operating                                                                    |       | 13,013     |          | 9,899                                 |       | 10,351                              |       | 5,205 |   | 2,360 |   | 4,821 |   |
| General and  administrative                                                         |       | 4,603      |          | 4,317                                 |       | 5,061                               |       | 4,676 |   | 1,991 |   | 3,375 |   |
| Depreciation                                                                        |       | 6,791      |          | 6,287                                 |       | 5,176                               |       | 2,211 |   | 1,037 |   | 1,798 |   |
|                                                                                |       | 178,934    |          | 158,926                               |       | 169,405                             |       | 144,679 |   | 64,119 |   | 128,981 |   |
| Operating  earnings                                                                 |       | 28,362     |          | 29,906                                |       | 37,070                              |       | 36,614 |   | 18,633 |   | 35,534 |   |
| Interest  expense, net                                                              |       | 762        |          | 842                                   |       | 903                                 |       | 1,020 |   | — |   | 216 |   |
| Earnings  before income taxes                                                       |       | 27,600     |          | 29,064                                |       | 36,167                              |       | 35,594 |   | 18,633 |   | 35,318 |   |
| Income taxes                                                                        |       | 11,219     |          | 11,827                                |       | 14,725                              |       | 14,499 |   | 7,577 |   | 14,366 |   |
| Net earnings                                                                        |       | $          |  16,381  |                                  | $          |  17,237                        |       | $ |  21,442 |   | $ |  21,095 |   | $ |  11,056 |   | $ |  20,952 |   |
|                                                                                |       |       |          |                                  |       |                                |       |   |   |   |   |   |   |
| Net earnings  per common share (a):                                                 |       |       |          |                                  |       |                                |       | (unaudited | ) | (unaudited | ) | (unaudited | ) |
| Basic                                                                               |       | $          |  0.62    |                                  | $          |  0.65                          |       | $ |  0.80 |   | $ |  0.79 |   | $ |  0.42 |   | $ |  0.82 |   |
| Diluted                                                                             |       | $          |  0.62    |                                  | $          |  0.65                          |       | $ |  0.80 |   | $ |  0.79 |   | $ |  0.42 |   | $ |  0.82 |   |
|                                                                                |       |       |          |                                  |       |                                |       |   |   |   |   |   |   |
| Dividends  declared per common share                                                |       | $          |  0.23    |                                  | $          |  0.20                          |       | $ |  0.125 |   |   |   |   |   |   |   |
|                                                                                |       |       |          |                                  |       |                                |       |   |   |   |   |   |   |
| **Selected  Consolidated Operating Data (unaudited):**                              |       |       |          |                                  |       |                                |       |   |   |   |   |   |   |
| Avg. number  of slot machines                                                       |       | 2,432      |          | 2,000                                 |       | 2,000                               |       | 2,000 |   | 2,000 |   | 1,723 |   |
| Casino  square footage                                                              |       | 91,000     |          | 80,000                                |       | 80,000                              |       | 80,000 |   | 80,000 |   | 80,000 |   |

 
| ** **                                           | ** ** | **December 31,** | ** ** | **June 30,  2000** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2004**              | ** ** | **2003**                | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | ** ** |
| **Consolidated  Balance Sheet Data (in thousands):** |       |                  |       |                    |       |   |   |   |   |   |   |   |   |
| Working  capital (deficit)                           |       | $                     | 8,505      |                    | $          | 8,917 |   | $ | 7,117 |   | $ | (3,173 | ) | $ | 37,166 |   | $ | 31,486 |   |
| Total assets                                         |       | 160,300               |       | 152,159                 |       | 152,506 |   | 135,650 |   | 101,013 |   | 90,553 |   |
| Long-term  debt                                      |       | 51,950                |       | 31,225                  |       | 40,890 |   | — |   | — |   | — |   |
| Total  stockholders’ equity (b)                 |       | 72,770                |       | 94,975                  |       | 84,439 |   | 102,653 |   | 81,558 |   | 70,502 |   |
|                                                      |            |                       |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          Net earnings per commonshare information for periods prior to April 1, 2002, the day after theeffective date of the spin-off from DVD, was calculated using the pro formaaverage outstanding common shares and Class A common shares for Gaming &Entertainment. The pro forma average outstanding common shares and Class Acommon shares were derived from DVD’s common shares and Class A common sharesoutstanding for the periods presented using the distribution ratio of 0.7shares of Gaming & Entertainment common stock and Class A common stock foreach share of DVD common stock and Class A common stock, respectively.Outstanding stock options of Gaming & Entertainment were calculatedassuming the stock options related to each individual who became a Gaming &Entertainment employee or both a DVD and a Gaming & Entertainment employeesubsequent to the spin-off were outstanding Gaming & Entertainment optionsduring each period presented.

 

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

 

On November 5, 2004, the Company’s Boardof Directors authorized the Company to commence a tender offer to purchase upto 1,040,421 shares of its common stock and up to 1,607,506 shares of its ClassA common stock at a fixed price of $12.00 per share.  The offer commenced on Wednesday, November 10,2004 and expired at 5:00 P.M., eastern standard time, on Friday, December 10,2004.  The Company purchased 1,040,421shares of its common stock and 1,600,000 shares of its Class A common stock for$32,045,000, including expenses, in connection with the tender offer.

 

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

### ** **

The following discussion is based upon andshould be read in conjunction with the consolidated financial statements andnotes thereto included elsewhere in this Annual Report on Form 10-K.

 

Dover Downs Gaming & Entertainment, Inc.is a diversified gaming and entertainment company whose operations consist ofDover Downs Slots – a 91,000 square foot video lottery (slots) casino complex;the Dover Downs Hotel and Conference Center – featuring luxury accommodationswith conference, banquet, fine dining, ballroom and concert hall facilities;and Dover Downs Raceway – a harness racing track with pari-mutuel wagering onlive and simulcast horse races.

 

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

 

•                  Proximityto major population bases,

•                  Competitionin the company’s market,

•                  Thequantity and types of slot machines available,

•                  Thequality of the physical property,

•                  Otheramenities offered on site,

•                  Customerservice levels, and

•                  Marketing programs.

 

The Company believes that it holds a strongposition in each of these areas.  Ourentertainment complex is located in Dover, the capital of the State ofDelaware. We draw patrons from several major metropolitan areas. Philadelphia,Baltimore and Washington, D.C. are all within a 2 hour drive. According to the2000 United States Census, approximately 32.8 million people live within 150miles of the complex.  There aresignificant barriers to entry related to the gaming business in Delaware, suchas the statutory limitation of gaming licenses to the three existing horseracing facilities.  The Company’sproperty, designed and developed with the assistance of Caesars, is similar toproperties found in the country’s largest gaming markets.  The Company offers the only luxury hotel inthe Delaware gaming market, providing a strong marketing tool, especially tohigher-end players.  The Company alsoutilizes its recently improved slot marketing system to allow for the mostefficient marketing programs and the highest levels of customer service.

 

Because all of our operations are located atone facility, we face the risk of increased competition from the legalizationof new or additional gaming venues.  TheCompany has therefore focused on creating the region’s premier gamingdestination and building and rewarding customer loyalty through innovativemarketing efforts and unparalleled customer service.

 

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**Results of Operations**

 

Gaming revenues represent (i) the net winfrom video lottery (slot) machine wins and losses and (ii) commissions frompari-mutuel wagering.  Other operatingrevenues consist of hotel rooms revenue, food and beverage sales and othermiscellaneous income.

 

For the video lottery operations, thedifference between the amount wagered by bettors and the amount paid out tobettors is referred to as the win. The win is included in the amount recordedin the Company’s financial statements as gaming revenue. The Delaware StateLottery Office sweeps the win from the video lottery operations, collects theState’s share of the win and the amount due to the vendors under contract withthe State who provide the video lottery (slot) machines and associated computersystems, collects the amount allocable to purses for harness horse racing andremits the remainder to the Company as its commission for acting as a LicensedAgent. Gaming expenses include the amounts collected by the State (i) for theState’s share of the win, (ii) for remittance to the providers of the videolottery (slot) machines and associated computer systems, and (iii) for harnesshorse racing purses. The Company recognizes revenues from pari-mutuelcommissions earned from live harness horse racing and importing of simulcastsignals from other race tracks when the race occurs. Revenues from hotel rooms,food and beverage sales and other miscellaneous income are recognized at thetime the service is provided.

 

The retail value of hotel rooms, food,beverage and other items that are provided to customers without charge has beenincluded in gross revenues and a corresponding amount has been deducted aspromotional allowances. The estimated direct cost of providing these items hasbeen charged to the casino through interdepartmental allocations and isincluded in gaming expenses in the consolidated statement of earnings.

 

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

 

Gaming revenues increased by $18,899,000, or10.8%, to $193,922,000 in 2004, entirely the result of increased play in ourcasino.  During the first quarter of2004, we added 500 new video lottery (slot) machines which increased ouraverage number of machines from 2,000 in 2003 to 2,432 in 2004.  Additionally, we have redirected ourmarketing efforts to attract more profitable casino customers by providingadditional complimentary and discounted rooms in our hotel.  We believe that our marketing efforts havebeen effective at attracting customers to our casino and consequentlyincreasing slot win.

 

Other operating revenues increased by$1,319,000, or 4.1%, to $33,795,000 in 2004, primarily due to higher occupancylevels at the Dover Downs Hotel and Conference Center and increased food,beverage and concert sales, offset by the fact that other operating revenues in2003 included proceeds of $1,300,000 related to the settlement of a businessinterruption insurance claim.

 

Other operating revenues for 2004 and 2003included $19,973,000 and $18,667,000, respectively, related to promotionalitems provided to customers without charge. The increase in promotional allowances is primarily due to the Company’sexpanded marketing efforts to attract more casino customers to the hotel byproviding additional complimentary and discounted hotel rooms.

 

The Company currently has a point loyaltyprogram for its video lottery customers which allows them to earn points basedon the volume of their video lottery activity. Prior to December 2004, the points could be redeemed for variousservices and merchandise throughout the gaming facility; however, they were notredeemable for cash or casino play. Effective December 2004, the Company changed its policy relating toits point loyalty program to allow points earned by customers to be redeemedfor cash under certain circumstances.  Asa result, the Company recorded a non-recurring charge in the fourth quarter of2004 to record the net impact of the program change.  The estimated amount of points redeemable forcash was recorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise was recorded as gaming expense.  The total estimated liability at December 31,2004 was $2,678,000.  All reward pointsearned by customers are now expensed in the period earned.

 

Gaming expenses increased by $14,302,000, or10.3%, reflecting the higher gaming revenues. Amounts retained by the State ofDelaware and the amount collected by the State for payment to the vendors undercontract with the State who provide the video lottery (slot) machines andassociated computer systems increased by $7,096,000 and $1,475,000,respectively.  Amounts allocated from thevideo lottery operation for harness horse racing purses

 

15

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increased from $20,143,000 in 2003 to $22,269,000 in 2004.  Collectively, these statutory costs increasedas a percentage of gaming revenues in 2004 as compared to 2003 in part due to a1.25% surcharge imposed by the State on the Company’s share of the videolottery (slot) proceeds that took effect in June of 2003.  The remaining $3,605,000 increase in gamingexpenses relates primarily to higher payroll and benefits, primarily as aresult of our casino expansion, and increased marketing costs.

 

Other operating expenses increased by$3,114,000, or 31.5%.  Concert promotionexpenses, relating to a large outdoor concert promoted by the Company in thethird quarter of 2004, represented the largest increase in other operatingexpenses.  Costs associated with theincrease in other operating revenues, as well as payroll and related costs inthe food and beverage department and increased food costs, resulting from theaddition of higher quality menu items, were the other significant increases inother operating expenses.

 

General and administrative expenses increasedby $286,000 to $4,603,000 from $4,317,000 in 2003 primarily the result ofhigher payroll and related costs, legal costs, and audit and consultingexpenses related to the Company’s compliance with the Sarbanes-Oxley Act of2002.

 

Depreciation expense increased by $504,000,primarily due to the construction of 11,000additional square feet of gaming space to accommodate the installation of 500video lottery (slot) machines within our existing casino complex during thefirst quarter of 2004 and the purchase of a new customer management and slotdata system that was placed into service in April 2004.

 

Interest expense decreased by $80,000,primarily due to the decrease in outstanding borrowings under our creditfacility for the first 11 months of 2004, partially offset by an increase inthe Company’s average interest rate from 2.07% during 2003 to 2.33% during2004.

 

The Company’s effective income tax rates were40.6% and 40.7% for the years ended December 31, 2004 and 2003,respectively.

 

Net earnings were $16,381,000 in 2004 ascompared to $17,237,000 in 2003, a decrease of $856,000, or 5.0%.

 

Net earnings for 2004 included a net,non-recurring charge of $2,250,000 ($1,338,000 after income tax benefit)relating to the change in the Company’s point loyalty program.  Additionally, net earnings for 2003 includedproceeds of $1,300,000 ($771,000 after income taxes) relating to the settlementof a business interruption insurance claim. The Company believes that excluding the impact of these items willenhance comparative analysis of its results. The following table reconciles and compares results reported inaccordance with Generally Accepted Accounting Principles (GAAP) for 2004 and2003 with results excluding the impact of the change in our point loyaltyprogram in 2004 and receipt of insurance proceeds in 2003: 

 

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

 

Excluding the net, non-recurring charge forthe 2004 change in our point loyalty program and 2003 receipt of insuranceproceeds from the settlement of a business interruption claim, pro forma netearnings in 2004 increased $1,253,000, or 7.6%, to $17,719,000 compared to 2003pro forma net earnings of $16,466,000.

 

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

 

Gaming revenue decreased by $18,700,000, or9.7%, to $175,023,000, primarily the result of the enactment in November 2002of the Delaware Clean Indoor Air Act (the “Act”) and to a lesser extent fromsevere weather in February 2003 and Hurricane Isabel in September 2003.  From January 2002 through November 2002,slot win grew each month at an average rate of 12.7%.  On November 27, 2002, the Delaware CleanIndoor Air Act became effective.  The Actprohibits smoking inside the Company’scasino, hotel and conference center, restaurants, harness track indoorgrandstands and simulcasting facilities, provided that smoking is permitted inup to 25% of the rooms in the hotel. Prior to the effective date of the Act, we derived significant revenuesfrom designated smoking areas.

 

16

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During the first year of the smoking ban, theCompany’s slot win declined approximately 11.3% compared to the previousyear.  In December 2003, slot winincreased for the first time in 2003 versus the same month in 2002; byapproximately 7%.

 

In an effort toincrease the revenues from its three video lottery agents, the State passedlegislation in June 2003 which extended the operating hours for videolottery agents and permitted the Lottery Director to authorize 500 additionalvideo lottery (slot) machines at each licensed facility.  During the first quarter of 2004, the Companyconstructed 11,000 additional square feet of gaming space and installed 500machines within its existing casino complex. This brings the Company’s total number of video lottery (slot) machinesto 2,500 (the maximum number allowed by the Lottery Director) at December 31,2004.

 

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

 

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

 

Gaming expenses decreased by $10,394,000, or7.0%, reflecting the lower gaming revenues. Amounts retained by the State ofDelaware and the amount collected by the State of Delaware for payment to thevendors under contract with the State who provide the video lottery (slot)machines and associated computer systems decreased by $7,291,000, or 10.9%, and$184,000, or 2.0%, respectively.  Amountsallocated from the video lottery operation for harness horse racing pursesdecreased from $22,307,000 in 2002 to $20,143,000 in 2003.  These decreases were offset by a $2,326,000increase in the cost of advertising and promotions in 2003. All other gamingexpenses decreased $3,081,000 compared with 2002.

 

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

 

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

 

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

 

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

 

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

 

Net earnings were $17,237,000 in 2003compared to $21,442,000 in 2002.  Thedecrease of $4,205,000, or 19.6%, was primarily due to lower gaming revenuesresulting from the enactment of the Delaware Clean Indoor Air Act and inclementweather and increased depreciation expense from the opening of the Dover DownsHotel and Conference Center in April 2002, offset by increases in otheroperating revenues, lower general and administrative

 

17

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expenses and the receipt of $1,300,000 ($771,000 after income taxes)relating to the settlement of a business interruption insurance claim.

 

**Liquidity and Capital Resources**

 

Net cash provided by operating activities was$27,807,000 for the year ended December 31, 2004 compared to $24,178,000for the year ended December 31, 2003. The increase was primarily due to the increase in net earnings beforedepreciation and amortization and non-recurring charges (which did not requirethe use of cash) from $23,555,000 in 2003 to $25,551,000 in 2004, and thetiming of payments to vendors.

 

Net cash used in investing activitiesremained consistent at $6,329,000 for the year ended December 31, 2004compared to $6,383,000 for the year ended December 31, 2003.  The 2004 additions primarily consisted of theconstruction of 11,000 additional squarefeet of gaming space to accommodate the installation of 500 newly authorizedvideo lottery (slot) machines within our existing casino complex and thepurchase of a new customer management and slot data system.

 

Net cash used in financing activities was$17,928,000 for the year ended December 31, 2004 compared to $16,493,000for the year ended December 31, 2003. The increase in net cash used in financing activities in 2004 wasprimarily due to the repurchase of 2,691,321 shares of the Company’soutstanding common stock and Class A common stock for $32,555,000 during 2004as compared to 169,945 shares for $1,523,000 during 2003.  The Company increased its dividend in thesecond quarter of 2004 and paid $6,098,000 and $5,305,000 in cash dividendsduring 2004 and 2003, respectively. These increases were partially offset by higher net borrowings under ourcredit facility in 2004 in order to finance the aforementioned stockrepurchases.

 

On January 26, 2005, the Company’s Boardof Directors declared a quarterly cash dividend on both classes of common stockof $.06 per share.  The dividend ispayable on March 10, 2005 to stockholders of record at the close ofbusiness on February 10, 2005.

 

On October 23, 2002, the Company’s Boardof Directors authorized the repurchase of up to 2,000,000 shares of the Company’soutstanding common stock.  The purchasesmay be made in the open market or in privately negotiated transactions asconditions warrant.  The repurchaseauthorization does not obligate the Company to acquire any specific number ofshares and may be suspended at any time. During 2004, Gaming & Entertainment purchased and retired 50,900shares of its outstanding common stock pursuant to this plan at an averagepurchase price of $9.95 per share, not including nominal brokeragecommissions.  During 2003, the Companypurchased and retired 169,945 shares of its outstanding common stock at anaverage purchase price of $8.90 per share, not including nominal brokeragecommissions.

 

On November 5, 2004, the Company’s Boardof Directors authorized the Company to commence a tender offer to purchase upto 1,040,421 shares of its common stock and up to 1,607,506 shares of its ClassA common stock at a fixed price of $12.00 per share.  The offer commenced on Wednesday, November 10,2004 and expired at 5:00 P.M., eastern standard time, on Friday, December 10,2004.  The Company purchased 1,040,421shares of its common stock and 1,600,000 shares of its Class A common stock for$32,045,000, including expenses, in connection with the tender offer.

 

Based on current business conditions, theCompany expects to make capital expenditures of approximately $5,500,000 during2005. These expenditures primarily relate to casino renovations, harness tracklighting and the continued conversion of video lottery (slot) machines toticket-in, ticket-out (cashless) technology. Additionally, the Company expects to contribute approximately $500,000to its pension plans in 2005.

 

Since our video lottery (slot) machine casinoopened in 1995, we have been party to a management agreement with Caesars,under which Caesars was our agent to supervise, manage and operate our videolottery (slot) machine casino. Effective December 28, 2004, thatmanagement agreement expired and we opted not to renew the agreement.  Therefore, beginning in 2005 we will nolonger be required to pay to Caesars a management fee.  Caesars’ performance-based fees were$4,448,000 for the year ended December 31, 2004.

 

18

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We have a $57,500,000 unsecured revolvingline of credit agreement, as amended effective November 5, 2004.  At December 31, 2004, $51,950,000 wasoutstanding under the facility.  Based oncurrent business trends, we believe that our cash flows from operations and thefunds available pursuant to our revolving credit facility will be sufficient tomeet our short and long-term cash needs. Any significant expansion of our gaming facility that we may decide toundertake, any significant acquisitions, or any material adverse change in ouroperations could cause the need for additional financing.  The Company expects that its net cash flowsfrom operating activities and funds available from its credit facility will besufficient to provide for its working capital needs and capital spendingrequirements at least through the next twelve months, as well as any cashdividends the Company’s Board of Directors may declare.  We expect cash flows from operatingactivities and funds available from our credit facility to also provide forlong-term liquidity.

 

The introduction or expansion of gaming inand around our market area could have a material adverse effect on our cashflows and results of operations.  SeePart I, Item 1 – Business included elsewhere in this Annual Report on Form 10-Kfor further discussion.

 

#### **ContractualObligations**

 

At December 31, 2004, the Company hadthe following contractual obligations:

 
| ** **              | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-------------------------|------------|------------|------------|----------------------------|------------|
| ** **              | ** ** | **Total**  | ** ** | **2005**                   | ** ** | **2006 – 2007** | ** ** | **2008 – 2009** | ** ** | **Thereafter** | ** ** |
| Notes  payable to banks |       | $          | 51,950,000 |                       | $          | — |   | $ | 51,950,000 |   | $ | — |   | $ | — |   |
| Purchase  obligation    |       | 1,195,000  |       | 1,195,000                  |       | — |   | — |   | — |   |
|                    |       | $          | 53,145,000 |                       | $          | 1,195,000 |   | $ | 51,950,000 |   | $ | — |   | $ | — |   |

 

We have a $57,500,000 unsecured revolvingline of credit agreement.  At December 31,2004, $51,950,000 was outstanding under the facility.

 

At December 31, 2004, we have a purchaseobligation related to the installation of astate-of-the-art customer management and slot data system.  Installation was completed in the first quarter of 2004, though payments for the systemextend into 2005.

 

**Related Party Transactions**

 

See NOTE 10 – Related Party Transactions ofthe consolidated financial statements included elsewhere in this Annual Reporton Form 10-K for a full description of related party transactions.

 

#### **Critical AccountingPolicies**

 

The accounting policies described below arethose the Company considers critical in preparing its consolidated financialstatements and/or include significant estimates made by management usinginformation available at the time the estimates are made. However, as describedbelow, these estimates could change materially if different information orassumptions were used.

 

*Points Program*

 

The Company currently has a point loyaltyprogram for its video lottery customers which allows them to earn points basedon the volume of their video lottery activity. Prior to December 2004, the points could be redeemed for variousservices and merchandise throughout the gaming facility; however, they were notredeemable for cash or casino play. Effective December 2004, the Company changed its policy relating toits point loyalty program to allow points earned by customers to be redeemedfor cash under certain circumstances.  Asa result, the Company recorded a non-recurring charge in the fourth quarter of2004 to record the net impact of the program change.  All points earned by customers are nowexpensed in the period they are earned. The estimated amount of points redeemable for cash is recorded as areduction of revenue and the estimated amount of points redeemable for servicesand merchandise is recorded as gaming expense. In estimating the amount of the liability, which was $2,678,000 at December 31,2004, the Company estimates a redemption rate, a cost of rewards to be offeredand the

 

19

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mix of cash, goods and services for which reward points will beredeemed.  We use historical data toestimate those amounts.

 

*Accrued Pension Cost*

 

The benefits provided by the Company’sdefined-benefit pension plans are based on years of service and employee’sremuneration over their employment with the Company.  The Company establishes accrued pension costsin accordance with the provisions of Financial Accounting Standards BoardStatement No. 87, *Employers’ Accounting for Pensions.*Accrued pension costs are developed using actuarial principles and assumptionswhich consider a number of factors, including estimates for the discount rate,assumed rate of compensation increase, and expected long-term rate of return onassets.  Changes in these estimates wouldimpact the amounts that the Company records in its consolidated financialstatements.

 

*Property and Equipment*

 

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

 

**Recent Accounting Pronouncements**

 

See NOTE 3—Summary of Significant AccountingPolicies****of the consolidated financialstatements included elsewhere in this Annual Report on Form 10-K for a fulldescription of recent accounting pronouncements including the respectiveexpected dates of adoption and effects on results of operations and financialcondition.

 

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

 

In addition to historical information, thisAnnual Report on Form 10-K includes forward-looking statements within themeaning 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, capitalrequirements and other matters. The Private Securities Litigation Reform Act of1995 provides a safe harbor for forward-looking statements. To comply with theterms of the safe harbor, we note that a variety of factors could cause ouractual results and experience to differ substantially from the anticipatedresults or other expectations expressed in our forward-looking statements. Whenwords and expressions such as: “believes,” “expects,” “anticipates,” “estimates,”“plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,”“seeks,” “may,” “could,” “should,” “might,” “likely,” “enable” or similar wordsor expressions are used in this document, as well as statements containingphrases such as “in our view,” “there can be no assurance,” “although noassurance can be given” or “there is no way to anticipate with certainty,”forward-looking statements are being made.

 

Various risks and uncertainties may affectthe operation, performance, development and results of our business and couldcause future outcomes to differ materially from those set forth in ourforward-looking statements, including the following factors:

 

•                  successof or changes in our growth strategies;

 

•                  ourdevelopment and potential acquisition of new facilities;

 

•                  anticipatedtrends in the gaming industry;

 

•                  patrondemographics;

 

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

 

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•                  ourability to finance future business requirements;

 

•                  ourability to effectively compete in the marketplace;

 

•                  theavailability of adequate levels of insurance;

•                  ourability to successfully integrate acquired companies and businesses;

 

•                  managementretention and development;

 

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

 

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

 

•                  military or other government actions;and

 

•                  nationalor local catastrophic events.

 

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

 

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

 

We compete inlocal and regional markets with horse tracks, off-track betting parlors, staterun lotteries, casinos and other gaming facilities.  We cannot be certain that we will maintainour market share or compete more effectively with our competitors.  The introduction or expansion of gaming inneighboring jurisdictions, particularly Maryland, Virginia, Washington, D.C.,Pennsylvania or New Jersey, or the legalization of additional gaming venues inDelaware, could have a material adverse effect on our cash flows and results ofoperations.  From time to time legislation is proposed foradoption in these jurisdictions which if enacted, would further expand stategambling and wagering opportunities, including video lottery (slot) machines atracetracks. Enactment of such legislation could increase our competition andcould adversely affect our business, financial condition and overallprofitability.  For example, in2005, the Maryland Senate passed a bill providing for various gaming venues forthe third straight year. The Maryland House responded by passing its own billwhich differs as to permissible venues, numbers of machines authorized, taxstructure and siting approvals. No consensus has yet been reached on compromiselegislation capable of passing both the House and the Senate. Approximately 70% of our customers come fromMaryland, Pennsylvania, Virginia and the District of Columbia.  In July 2004, Pennsylvania adoptedlegislation which authorizes up to 61,000 slot machines at various existing andproposed venues throughout the state.  Itis difficult for us to predict the effect that such legislation will have onus, but we estimate that one or more facilities in Pennsylvania are likely tobegin operations during 2006. Pennsylvania will have one of the highest effective tax rates on slotmachine gaming in the country and will charge an up front $50,000,000 licensefee to the horse racing and casino venues that are granted a gaminglicense.  Management has estimated thatslot win from Pennsylvania patrons represents approximately 7% of our totalslot win.

 

*All Of Our Facilities Are In One Location*

 

Our facilities are located adjacent to oneanother at a single location in Dover, Delaware. Any prolonged disruption ofoperations at these facilities due to destruction of or material damage to thefacilities or other reasons could adversely affect our financial condition andresults of operations. We maintain property and business interruption insuranceto protect against such types of disruption, but there can be no assurance thatthe proceeds of

 

21

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such insurance would be adequate to repair or rebuild our facilities insuch event or to compensate us for lost profit during the period of any suchdisruption.

 

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

 

The Delaware State Lottery Office and theDelaware Harness Racing Commission regulate our gaming operations. Our licensefrom the Commission must be renewed on an annual basis. To keep our license forvideo lottery (slot) machine gaming, we must remain licensed for harness horseracing by the Commission and conduct at least 80 live race days each racingseason, subject to the availability of harness race horses. The Commission hasbroad discretion to reject any application for a license or suspend or revoke alicense once it is issued. The Lottery Director has broad discretion to revoke,suspend or modify the terms of a video lottery license. Any modification ortermination of existing licensing regulations or any revocation, suspension ormodification of our licenses could adversely affect our business, financialcondition and overall profitability.

 

*Our Gaming Activities Are Subject ToExtensive Government Regulation And Any Additional Government Regulation OrTaxation Of Gaming Activities Could Substantially Reduce Our Revenue Or Profit*

 

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

 

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

 

We are subject to various federal, state andlocal laws and regulations in addition to gaming regulations. These laws andregulations include, but are not limited to, restrictions and conditionsconcerning alcoholic beverages, environmental matters, employees, currencytransactions, taxation, zoning and building codes, and marketing andadvertising. Such laws and regulations are always subject to change, can beinterpreted differently in the future, and new laws and regulations may beenacted which could adversely affect the tax, regulatory, operational or otheraspects of the gaming industry and our company. Furthermore, noncompliance withone or more of these laws and regulation could result in the imposition ofsubstantial penalties against us.

 

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

 

We do not own or lease the video lottery(slot) machines or computer systems used by the State in connection with itsvideo lottery gaming operations.  TheLottery Director enters into contracts directly with the providers of the videolottery (slot) machines and computer systems. The State purchases or leases allequipment and the Lottery Director licenses all technology providers. Ouroperations could be disrupted if a licensed technology provider violates itsagreement with the State or ceases to be licensed for any reason. Such an eventwould be outside of our control and could adversely affect our gaming revenues.

 

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**Item 7A.****                          QuantitativeAnd Qualitative Disclosure About Market Risk**

 

The Company does not utilize financialinstruments for trading purposes and holds no derivative financial instrumentswhich could expose it to market risk. Our exposure to market risks related to fluctuations in interest ratesis limited to our variable rate borrowings of $51,950,000 at December 31,2004 under our revolving credit facility. A change in interest rates of one percent on the balance outstanding at December 31,2004 would cause a change in total annual interest costs of $520,000. Thecarrying values of these borrowings approximate their fair values at December 31,2004.

 

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

 

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

 

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

 

None.

 

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

 

*Evaluation of Disclosure Controls andProcedures*

 

We have established disclosure controls andprocedures to ensure that material information relating to the Company,including its consolidated subsidiaries, is made known to the officers whocertify the Company’s financial reports and to other members of seniormanagement and the Board of Directors.

 

Based on their evaluation as of December 31,2004, the Chief Executive Officer and Chief Financial Officer of the Companyhave concluded that the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934) are effective to ensure that the information required to be disclosed bythe Company in the reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in SEC rules and forms.

 

*Management’s Report on Internal Control OverFinancial Reporting*

 

Our management is responsible forestablishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rules 13a-15(f).  Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we conducted an evaluation of the effectiveness of ourinternal control over financial reporting based on the framework in *Internal Control – Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on ourevaluation under the framework in *Internal Control –Integrated Framework,*our management concluded that our internalcontrol over financial reporting was effective as of December 31,2004.  Our management’s assessment of theeffectiveness of our internal control over financial reporting as of December 31,2004 has been audited by KPMG LLP, an independent registered public accountingfirm, as stated in their report which is included herein.

 

*Report of Independent Registered PublicAccounting Firm*

 

The Board of Directors and Stockholders

Dover Downs Gaming & Entertainment, Inc.:

 

We have audited management’s assessment,included in the accompanying *Management’s Report onInternal Control Over Financial Reporting,*that Dover Downs Gaming& Entertainment, Inc. (the Company) maintained effective internal controlover financial reporting as of December 31, 2004, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway

 

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Commission (COSO).  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

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

 

In our opinion, management’s assessment thatDover Downs Gaming & Entertainment, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2004, is fairlystated, in all material respects, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  Also, in our opinion, Dover Downs Gaming& Entertainment, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2004, basedon criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Dover Downs Gaming & Entertainment, Inc. andsubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of earnings and comprehensive earnings and cash flowsfor each of the years in the three-year period ended December 31, 2004,and our report dated March 8, 2005 expressed an unqualified opinion onthose consolidated financial statements.

 
|                                                    | KPMG LLP |
|---------------------------------------------------------|----------|
|                                                    |
| Philadelphia, Pennsylvania                              |
| March 8, 2005                                      |
|                                                    |
| *Changes in Internal Control Over Financial  Reporting* |

 

There were no changes in our internal controlover financial reporting during the fourth quarter of fiscal year 2004 thathave materially affected, or that are reasonably likely to materially affectour internal controls over financial reporting.

 

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**Item 9B.****                          OtherInformation**

 

None.

 

**Part III**

** **

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

 

Except as presented below, biographicalinformation relating to the Company’s directors and executive officers,information regarding the Company’s audit committee financial experts andinformation on Section 16(a) Beneficial Ownership ReportingCompliance called for by this Item 10 are incorporated by reference to theGaming & Entertainment Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 27,2005.

 

The Company has adopted a Code of BusinessConduct applicable to the Chief Executive Officer, Chief Financial Officer,Chief Operating Officer, Controller and other employees performing similarfunctions as designated by the Company’s Chief Executive Officer.  A copy of the Code of Business Conduct isavailable on the Company’s website at http://www.doverdowns.com. TheCompany will post on its website any amendments to, or waivers from, its Codeof Business Conduct as required by law.

 

Executive Officers of the Registrant.  As of December 31, 2004, the executiveofficers of the registrant were:

 
| **Name**             | ** ** | **Position**                                                       | ** ** | **Age** | ** ** | **Term of Office** | ** ** |
|----------------------|------------|--------------------------------------------------------------------|------------|---------|------------|--------------------|------------|
|                 |       |                                                               |       |    |       |               |       |
| Denis  McGlynn       |       | President and  Chief Executive Officer                             |       | 59      |       | 11/79 to date      |       |
|                 |       |                                                               |       |    |       |               |       |
| Edward J.  Sutor     |       | Executive Vice President  and Chief Operating Officer              |       | 55      |       | 3/99 to date       |       |
|                 |       |                                                               |       |    |       |               |       |
| Timothy R.  Horne    |       | Sr. Vice President-Finance, Treasurer  and Chief Financial Officer |       | 38      |       | 11/96 to date      |       |
|                 |       |                                                               |       |    |       |               |       |
| Klaus M.  Belohoubek |       | Sr. Vice President-General Counsel  and Secretary                  |       | 45      |       | 7/99 to date       |       |

 

Our Chairman of the Board, Henry B. Tippie,is a non-employee director and, therefore, not an executive officer of theCompany.  Mr. Tippie also serves as Chairmanof the Board to DVD as a non-employee director and has served DVD in thatcapacity, or as Vice Chairman of the Board, for over 8 years.

 

Denis McGlynn also serves as President andChief Executive Officer to DVD, a position he has held for 24 years.

 

Edward J. Sutor previously served asExecutive Vice President to DVD, a position he held from 1999 to 2002.  From 1983 until 1999, Mr. Sutor servedas Senior Vice President of Finance at Caesars Atlantic City.

 

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

 

Klaus M. Belohoubek also serves as Sr. VicePresident-General Counsel and Secretary to DVD. He has held that position since 1999 and has represented DVD in variouslegal capacities since 1990.  Mr. Belohoubekalso has served as Vice President-General Counsel and Secretary to RollinsTruck Leasing Corp.

 

25

----

 

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

 

The information called forby this Item 11 is incorporated by reference to the Gaming &Entertainment Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 27, 2005.

 

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

 

The information calledfor by this Item 12 is incorporated by reference to the Gaming &Entertainment Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 27, 2005.

 

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

 

The information calledfor by this Item 13 is incorporated by reference to the Gaming &Entertainment Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 27, 2005.

 

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

 

The information calledfor by this Item 14 is incorporated by reference to the Gaming &Entertainment Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 27, 2005.

 

**Part IV**

** **

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

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

 

26

----

 
| 10.1   |   | Employee Benefits Agreement, dated as of January 15,  2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 10.2 to the Form 10  filed on January 16, 2002, which was declared effective on March 7,  2002).           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2   |   | Transition Support Services Agreement,  dated as of January 15, 2002, by and between Dover Motorsports, Inc.  (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit 10.3  to the Form 10 filed on January 16, 2002, which was declared  effective on March 7, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3   |   | Tax Sharing Agreement, dated as of January 15,  2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 10.4 to the Form 10  filed on January 16, 2002, which was declared effective on March 7,  2002).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4   |   | Real Property Agreement dated as of January 15,  2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 10.5 to the Form 10  filed on January 16, 2002, which was declared effective on March 7,  2002).                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5   |   | Project Consulting and Management Agreement  between Dover Downs, Inc. and Caesars World Gaming Development  Corporation dated May 10, 1995 (incorporated herein by reference to the  Registration Statement of Dover Downs Entertainment, Inc., Number 333-8147,  on Form S-1 dated July 15, 1996, which was declared effective on October 3,  1996).               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6   |   | First Amendment to Project Consulting and  Management Agreement between Dover Downs, Inc. and Caesars World Gaming  Development Corporation dated October 25, 1996 (incorporated herein by  reference to the Form 10-K of Dover Downs Entertainment, Inc. (Commission  file number 1-11929) dated February 27, 2001).                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7   |   | Second Amendment to Project Consulting and  Management Agreement between Dover Downs, Inc. and Caesars World Gaming  Development Corporation dated December 2, 2000 (incorporated herein by  reference to the Form 10-K of Dover Downs Entertainment, Inc.  (Commission file number 1-11929) dated February 27, 2001).                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8   |   | Agreement between Dover Downs, Inc.  and Delaware Standardbred Owners Association, Inc. dated October 22,  2003 (incorporated herein by reference to Exhibit 10.9 to the Form 10-K  filed on March 9, 2004).                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Credit Agreement among  Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust  Company, dated as of January 15, 2002 (incorporated herein by reference  to Exhibit 10.10 to the Form 10 filed on January 16, 2002,  which was declared effective on March 7, 2002).                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10  |   | 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).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11  |   | 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).                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12  |   | 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).                                                                                         |

 

27

----

 
| 10.13  |   | 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). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.14  |   | 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.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.15  |   | Non-Compete Agreement between Dover Downs  Gaming & Entertainment, Inc. and Patrick J. Bagley dated June 16,  2004 (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q  filed on August 6, 2004).                                                                |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.16  |   | Employment and Non-Compete Agreement  between Dover Downs Gaming & Entertainment, Inc. and Klaus M.  Belohoubek dated June 16, 2004 (incorporated herein by reference to Exhibit 10.2  to the Form 10-Q filed on August 6, 2004).                                               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.17  |   | Employment and Non-Compete Agreement  between Dover Downs Gaming & Entertainment, Inc. and Timothy R.  Horne dated June 16, 2004 (incorporated herein by reference to Exhibit 10.3  to the Form 10-Q filed on August 6, 2004).                                                  |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.18  |   | Non-Compete Agreement between Dover Downs  Gaming & Entertainment, Inc. and Melvin L. Joseph dated June 16,  2004 (incorporated herein by reference to Exhibit 10.4 to the Form 10-Q  filed on August 6, 2004).                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.19  |   | Employment and Non-Compete Agreement  between Dover Downs Gaming & Entertainment, Inc. and Denis  McGlynn dated June 16, 2004 (incorporated herein by reference to Exhibit 10.5  to the Form 10-Q filed on August 6, 2004).                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.20  |   | Employment and Non-Compete Agreement  between Dover Downs Gaming & Entertainment, Inc. and Edward J.  Sutor dated June 16, 2004 (incorporated herein by reference to Exhibit 10.6  to the Form 10-Q filed on August 6, 2004).                                                   |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.21  |   | 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).                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.22  |   | Dover Downs Gaming & Entertainment, Inc.  2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by  reference to Exhibit A to the Company’s Proxy Statement filed on March 29,  2004).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.23  |   | Form of Incentive Stock Option  Agreement Used with Dover Downs Gaming & Entertainment, Inc.  2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by  reference to Exhibit 10.1 to the Form 10-Q filed on November 3,  2004).                               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.24  |   | Form of Restricted Stock Grant  Agreement Used with Dover Downs Gaming & Entertainment, Inc.  2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by  reference to Exhibit 10.2 to the Form 10-Q filed on November 3,  2004).                               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 21.1   |   | List of Subsidiaries of Dover Downs Gaming &  Entertainment, Inc.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification of Chief Financial Officer  pursuant to Rule 13a-14(a)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification of Chief Financial Officer  Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                             |

 

28

----

 
| 99.1   |   | Information Statement dated as of March 7,  2002 (incorporated herein by reference to Exhibit 99.1 to the Form 10  filed on March 7, 2002).                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                          |
| 99.2   |   | Audit Committee Charter  of Dover Downs Gaming & Entertainment, Inc. (incorporated  herein by reference to Exhibit B to the Company’s Proxy Statement filed  on March 29, 2004). |

 

29

----

 

**Signatures**

 

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

 
| DATED: | March 10, 2005 |                                                               | Dover Downs Gaming & Entertainment, Inc. |   |
|--------|---------------------|--------------------------------------------------------------------|--------------------------------------------------------|--------|
|   | Registrant          |                                                               |
|   |                |
|   | BY:                 | /s/ Denis McGlynn                                                  |                                                   |
|   |                | Denis McGlynn  President and Chief Executive Officer  and Director |
|        |                     |                                                                    |                                                        |        |  |  |

 

 

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

 
| /s/ Timothy R. Horne          |   | Sr. Vice President-Finance,  Treasurer and Chief Financial Officer | March 10,  2005 |
|-------------------------------|--------|--------------------------------------------------------------------|----------------------|
| Timothy R. Horne              |   |                                                               |
|                          |   |                                                               |                 |
| /s/ Henry B. Tippie           |   | Chairman of the Board                                              | March 10,  2005 |
| Henry B. Tippie               |   |                                                               |                 |
|                          |   |                                                               |                 |
| /s/ Kenneth K. Chalmers       |   | Director and Chairman  of the Audit Committee                      | March 10,  2005 |
| Kenneth K. Chalmers           |   |                                                               |
|                          |   |                                                               |                 |
| /s/ R. Randall Rollins        |   | Director                                                           | March 10,  2005 |
| R. Randall Rollins            |   |                                                               |                 |
|                          |   |                                                               |                 |
| /s/ Patrick J. Bagley         |   | Director                                                           | March 10,  2005 |
| Patrick J. Bagley             |   |                                                               |                 |
|                          |   |                                                               |                 |
| /s/ John W. Rollins, Jr. |   | Director                                                           | March 10,  2005 |
| John W. Rollins, Jr.     |   |                                                               |                 |
|                          |   |                                                               |                 |
| /s/ Melvin L. Joseph          |   | Director                                                           | March 10,  2005 |
| Melvin L. Joseph              |   |                                                               |                 |
|                          |   |                                                               |                 |
| /s/ Jeffrey W. Rollins        |   | Director                                                           | March 10,  2005 |
| Jeffrey W. Rollins            |   |                                                               |                 |

 

30

----

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Statement of Management Responsibility                                                                                    | 32     |
|---------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                      |   |
| Report of Independent Registered Public Accounting  Firm                                                                  | 33     |
|                                                                                                                      |   |
| Consolidated Statement of Earnings and  Comprehensive Earnings for the years ended December 31, 2004, 2003 and  2002 | 34     |
|                                                                                                                      |   |
| Consolidated Balance Sheet at December 31, 2004 and 2003                                                             | 35     |
|                                                                                                                      |   |
| Consolidated Statement of Cash Flows for the  years ended December 31, 2004, 2003 and 2002                           | 36     |
|                                                                                                                      |   |
| Notes to the Consolidated Financial  Statements                                                                           | 37     |

** **

31

----

 

**STATEMENT OF MANAGEMENT RESPONSIBILITY**

** **

Dover Downs Gaming & Entertainment, Inc.and subsidiaries (the “Company’s”) management is responsible for thepreparation, integrity and objectivity of the consolidated financial statementsand other financial information included in the Company’s 2004 Annual Report onForm 10-K. The consolidated financial statements have been prepared inconformity with U.S. generally accepted accounting principles and reflect theeffects of certain estimates and judgments made by management.

 

The Company’s management maintains aneffective system of internal controls designed to provide reasonable assurancethat assets are safeguarded and transactions are properly recorded and executedin accordance with management’s authorization. The system is regularlymonitored by direct management review and by internal auditors who conduct anextensive program of audits throughout the Company.  The Director of Internal Audit reportsdirectly to the Audit Committee of the Board of Directors.  We have confidence in our financial reporting,the underlying system of internal controls, and our people, who are objectivein their responsibilities and operate under the Company’s Code of BusinessConduct and the highest level of ethical standards.  These standards are a key element of theCompany’s control system.

 

The Company conducted an evaluation of theeffectiveness of its internal control over financial reporting based on theframework in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on the Company’sevaluation under the framework in *Internal Control -Integrated Framework*, management of the Company has assessed theCompany’s internal control over financial reporting to be effective as of December 31,2004. There have not been any changes in the Company’s internal control overfinancial reporting identified in the fourth quarter of 2004 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

The Audit Committee of the Board ofDirectors, which is composed entirely of independent directors, has direct andprivate access to and meets regularly with management, the internal auditorsand the independent auditors to review accounting, reporting, auditing andinternal control matters.

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

 

32

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board ofDirectors and StockholdersDover Downs Gaming & Entertainment, Inc.:

 

We have audited the accompanying consolidatedbalance sheets of Dover Downs Gaming & Entertainment, Inc. and**subsidiaries (the Company) as of December 31, 2004 and2003, and the related consolidated statements of earnings and comprehensiveearnings and cash flows for each of the years in the three-year period ended December 31,2004. These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

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

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Dover Downs Gaming & Entertainment, Inc.and subsidiaries as of December 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Dover Downs Gaming & Entertainment, Inc.’sinternal control over financial reporting as of December 31, 2004, basedon criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 8,2005 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

 

KPMG LLP

 

Philadelphia, PennsylvaniaMarch 8, 2005

 

33

----

 

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

 

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

 
| ** **                               | ** ** | **Years ended December 31,** | ** **  |
|------------------------------------------|------------|-----------------------------------|-------------|
| ** **                               | ** ** | **2004**                          | ** **  | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                |       |                              |        |   |   |   |   |
| Gaming                                   |       | $                                 | 193,922,000 |   | $ | 175,023,000 |   | $ | 193,723,000 |   |
| Other  operating                         |       | 33,795,000                        |        | 32,476,000 |   | 26,083,000 |   |
| Gross  revenues                          |       | 227,717,000                       |        | 207,499,000 |   | 219,806,000 |   |
| Less –  promotional allowances      |       | 19,973,000                        |        | 18,667,000 |   | 13,331,000 |   |
| –  non-recurring gaming charge      |       | 448,000                           |        | — |   | — |   |
|                                     |       | 207,296,000                       |        | 188,832,000 |   | 206,475,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Expenses:                                |       |                              |        |   |   |   |   |
| Gaming                                   |       | 152,725,000                       |        | 138,423,000 |   | 148,817,000 |   |
| Non-recurring  gaming charge             |       | 1,802,000                         |        | — |   | — |   |
| Other  operating                         |       | 13,013,000                        |        | 9,899,000 |   | 10,351,000 |   |
| General and  administrative              |       | 4,603,000                         |        | 4,317,000 |   | 5,061,000 |   |
| Depreciation                             |       | 6,791,000                         |        | 6,287,000 |   | 5,176,000 |   |
|                                     |       | 178,934,000                       |        | 158,926,000 |   | 169,405,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Operating  earnings                      |       | 28,362,000                        |        | 29,906,000 |   | 37,070,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Interest  expense                        |       | 762,000                           |        | 842,000 |   | 903,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Earnings  before income taxes            |       | 27,600,000                        |        | 29,064,000 |   | 36,167,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Income taxes                             |       | 11,219,000                        |        | 11,827,000 |   | 14,725,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Net earnings                             |       | 16,381,000                        |        | 17,237,000 |   | 21,442,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Change in  minimum pension liability     |       | —                            |        | 127,000 |   | (127,000 | ) |
|                                     |       |                              |        |   |   |   |   |
| Comprehensive  earnings                  |       | $                                 | 16,381,000  |   | $ | 17,364,000 |   | $ | 21,315,000 |   |
|                                     |       |                              |        |   |   |   |   |
| Net earnings  per common share (Note 3): |       |                              |        |   |   |   |   |
| Basic                                    |       | $                                 | 0.62        |   | $ | 0.65 |   | $ | 0.80 |   |
| Diluted                                  |       | $                                 | 0.62        |   | $ | 0.65 |   | $ | 0.80 |   |

 

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

 

34

----

 

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

 

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                                                                      | ** ** | **December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                                      | ** ** | **2004**              | ** **  | **2003** | ** ** |
| **ASSETS**                                                                                                                                                      |       |                  |        |   |   |
| Current  assets:                                                                                                                                                |       |                  |        |   |   |
| Cash                                                                                                                                                            |       | $                     | 17,688,000  |   | $ | 14,138,000 |   |
| Accounts  receivable                                                                                                                                            |       | 2,919,000             |        | 1,914,000 |   |
| Due from  State of Delaware                                                                                                                                     |       | 10,080,000            |        | 8,670,000 |   |
| Inventories                                                                                                                                                     |       | 2,147,000             |        | 1,801,000 |   |
| Prepaid  expenses and other                                                                                                                                     |       | 2,220,000             |        | 2,414,000 |   |
| Receivable  from Dover Motorsports, Inc.                                                                                                                   |       | 2,000                 |        | — |   |
| Deferred  income taxes                                                                                                                                          |       | 2,168,000             |        | 878,000 |   |
| Total  current assets                                                                                                                                           |       | 37,224,000            |        | 29,815,000 |   |
|                                                                                                                                                            |       |                  |        |   |   |
| Property and  equipment, net                                                                                                                                    |       | 123,076,000           |        | 122,344,000 |   |
| Total assets                                                                                                                                                    |       | $                     | 160,300,000 |   | $ | 152,159,000 |   |
|                                                                                                                                                            |       |                  |        |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |                  |        |   |   |
| Current  liabilities:                                                                                                                                           |       |                  |        |   |   |
| Accounts  payable                                                                                                                                               |       | $                     | 6,801,000   |   | $ | 6,516,000 |   |
| Purses due  horsemen                                                                                                                                            |       | 9,082,000             |        | 7,957,000 |   |
| Accrued  liabilities                                                                                                                                            |       | 11,990,000            |        | 6,015,000 |   |
| Payable to  Dover Motorsports, Inc.                                                                                                                        |       | —                |        | 96,000 |   |
| Income taxes  payable                                                                                                                                           |       | 651,000               |        | 53,000 |   |
| Deferred  revenue                                                                                                                                               |       | 195,000               |        | 261,000 |   |
| Total  current liabilities                                                                                                                                      |       | 28,719,000            |        | 20,898,000 |   |
|                                                                                                                                                            |       |                  |        |   |   |
| Notes  payable to banks                                                                                                                                         |       | 51,950,000            |        | 31,225,000 |   |
| Deferred  income taxes                                                                                                                                          |       | 6,861,000             |        | 5,061,000 |   |
|                                                                                                                                                            |       |                  |        |   |   |
| Commitments  and contingencies (see Notes to the Consolidated Financial Statements)                                                                             |       |                  |        |   |   |
|                                                                                                                                                            |       |                  |        |   |   |
| Stockholders’  equity:                                                                                                                                     |       |                  |        |   |   |
| Preferred  stock, $.10 par value; 1,000,000 shares authorized; issued and outstanding:  none                                                                    |       | —                |        | — |   |
| Common  stock, $.10 par value; 74,000,000 shares authorized; issued and outstanding: December 31,  2004-9,363,791 and 2003-10,333,112 shares               |       | 936,000               |        | 1,033,000 |   |
| Class A  common stock, $.10 par value; 50,000,000 shares authorized; issued and  outstanding: December 31, 2004-14,475,059 and 2003-16,145,059 shares |       | 1,448,000             |        | 1,615,000 |   |
| Additional  paid-in capital                                                                                                                                     |       | 35,764,000            |        | 67,454,000 |   |
| Retained  earnings                                                                                                                                              |       | 35,156,000            |        | 24,873,000 |   |
| Deferred  compensation                                                                                                                                          |       | (534,000              | )           | — |   |
| Total  stockholders’ equity                                                                                                                                |       | 72,770,000            |        | 94,975,000 |   |
| Total  liabilities and stockholders’ equity                                                                                                                |       | $                     | 160,300,000 |   | $ | 152,159,000 |   |

 

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

 

35

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

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating  activities:                                                               |       |                              |       |   |   |   |   |
| Net earnings                                                                         |       | $                                 | 16,381,000 |   | $ | 17,237,000 |   | $ | 21,442,000 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation                                                                         |       | 6,791,000                         |       | 6,287,000 |   | 5,176,000 |   |
| Amortization  of credit facility origination fees                                    |       | 62,000                            |       | 31,000 |   | 60,000 |   |
| Amortization  of deferred compensation                                               |       | 67,000                            |       | — |   | — |   |
| Deferred  income taxes                                                               |       | 165,000                           |       | 1,116,000 |   | 2,642,000 |   |
| Changes in  assets and liabilities:                                                  |       |                              |       |   |   |   |   |
| Accounts  receivable                                                                 |       | (1,005,000                        | )          | 1,077,000 |   | (415,000 | ) |
| Due from  State of Delaware                                                          |       | (1,410,000                        | )          | 954,000 |   | (1,480,000 | ) |
| Inventories                                                                          |       | (346,000                          | )          | (647,000 | ) | (288,000 | ) |
| Prepaid  expenses and other                                                          |       | 132,000                           |       | (1,068,000 | ) | 136,000 |   |
| Receivable  from/payable to Dover Motorsports, Inc.                             |       | (98,000                           | )          | 371,000 |   | (793,000 | ) |
| Accounts  payable                                                                    |       | (909,000                          | )          | (575,000 | ) | (3,870,000 | ) |
| Purses due  horsemen                                                                 |       | 1,125,000                         |       | (1,709,000 | ) | 2,097,000 |   |
| Accrued  liabilities                                                                 |       | 5,975,000                         |       | 62,000 |   | 1,001,000 |   |
| Income taxes  payable/prepaid income taxes                                           |       | 943,000                           |       | 912,000 |   | (1,975,000 | ) |
| Deferred  revenue                                                                    |       | (66,000                           | )          | 130,000 |   | 99,000 |   |
| Net cash  provided by operating activities                                           |       | 27,807,000                        |       | 24,178,000 |   | 23,832,000 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Investing  activities:                                                               |       |                              |       |   |   |   |   |
| Capital  expenditures                                                                |       | (6,329,000                        | )          | (6,383,000 | ) | (20,652,000 | ) |
| Net cash  used in investing activities                                               |       | (6,329,000                        | )          | (6,383,000 | ) | (20,652,000 | ) |
|                                                                                 |       |                              |       |   |   |   |   |
| Financing  activities:                                                               |       |                              |       |   |   |   |   |
| Borrowings  from revolving debt                                                      |       | 226,905,000                       |       | 158,480,000 |   | 171,178,000 |   |
| Repayments  of revolving debt                                                        |       | (206,180,000                      | )          | (168,145,000 | ) | (130,288,000 | ) |
| Repayment of  debt to Dover Motorsports, Inc.                                   |       | —                            |       | — |   | (45,000,000 | ) |
| Credit  facility origination fees                                                    |       | —                            |       | — |   | (137,000 | ) |
| Dividends  paid                                                                      |       | (6,098,000                        | )          | (5,305,000 | ) | (3,333,000 | ) |
| Repurchase  of common stock                                                          |       | (32,555,000                       | )          | (1,523,000 | ) | — |   |
| Proceeds  from stock options exercised                                               |       | —                            |       | — |   | 73,000 |   |
| Change in  payable to/receivable from Dover Motorsports, Inc.                   |       | —                            |       | — |   | 1,730,000 |   |
| Net cash  used in financing activities                                               |       | (17,928,000                       | )          | (16,493,000 | ) | (5,777,000 | ) |
|                                                                                 |       |                              |       |   |   |   |   |
| Net increase  (decrease) in cash                                                     |       | 3,550,000                         |       | 1,302,000 |   | (2,597,000 | ) |
| Cash,  beginning of year                                                             |       | 14,138,000                        |       | 12,836,000 |   | 15,433,000 |   |
| Cash, end of  year                                                                   |       | $                                 | 17,688,000 |   | $ | 14,138,000 |   | $ | 12,836,000 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Supplemental  information:                                                           |       |                              |       |   |   |   |   |
| Interest  paid                                                                       |       | $                                 | 650,000    |   | $ | 980,000 |   | $ | 630,000 |   |
| Income taxes  paid                                                                   |       | $                                 | 10,112,000 |   | $ | 10,325,000 |   | $ | 14,081,000 |   |

 

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

 

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

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1—Business Operations**

 

References in thesefootnotes to “the Company,” “Gaming & Entertainment,” “we,” “us,” and “our”mean Dover Downs Gaming & Entertainment, Inc. and its whollyowned subsidiaries.

 

Dover Downs Gaming & Entertainment, Inc.is a diversified gaming and entertainment company whose operations consist ofDover Downs Slots – a 91,000 square foot video lottery (slots) casino complex;the Dover Downs Hotel and Conference Center – featuring luxury accommodationswith conference, banquet, fine dining, ballroom and concert hall facilities;and Dover Downs Raceway – a harness racing track with pari-mutuel wagering onlive and simulcast horse races.

 

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

 

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

 

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

 

The Company’s license from the DelawareHarness Racing Commission (the “Commission”) to hold harness race meetings onour premises and to offer pari-mutuel wagering on live and simulcast horseraces must be renewed on an annual basis. In order to maintain its license toconduct video lottery operations, the Company is required to maintain its harnesshorse racing license.  The Company hasreceived an annual license from the Commission for the past 36 consecutiveyears and management believes that its relationship with the Commission remainsgood.

 

Our entertainment complex is located inDover, the capital of the State of Delaware. Approximately 70% of our customers come from Maryland, Pennsylvania,Virginia and the District of Columbia. In July 2004,Pennsylvania adopted legislation which authorizes up to 61,000 slot machines atvarious existing and proposed venues throughout the state.  It is difficult for us to predict the effectthat such legislation will have on us, but we estimate that one or morefacilities in Pennsylvania are likely to begin operations in 2006. Managementhas estimated that slot win from Pennsylvania patrons represents approximately7% of our total slot win.

 

Due to the nature of the Company’s businessactivities, it is subject to various federal, state and local regulations.

 

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**NOTE 2—Dover Motorsports, Inc. Spin-offOf Its Gaming Business**

 

Dover Motorsports, Inc. (“DVD”),formerly Dover Downs Entertainment, Inc., completed its tax-free spin-offof Dover Downs, Inc., its gaming business, effective March 31,2002.  To accomplish the spin-off, DVDcontributed 100 percent of the issued and outstanding common stock of DoverDowns, Inc. to the Company, and then distributed all of the capital stockof the Company to DVD stockholders. Holders of DVD common stock or Class Acommon stock received 0.7 shares of Gaming & Entertainment commonstock or Class A common stock for each share of DVD common stock or Class Acommon stock owned at the close of business on March 18, 2002, the recorddate for the spin-off. Each share of common stock or Class A common stockdistributed was accompanied by one stock purchase right. Based on an InternalRevenue Service Private Letter Ruling, the spin-off is tax-free to DVD and itsstockholders, except for cash received for any fractional shares.

 

Immediately following the spin-off, DVD ownedno shares of the Company, and Gaming & Entertainment became anindependent public company.  A total of9,998,976 shares of Gaming & Entertainment common stock and 16,638,359shares of Gaming & Entertainment Class A common stock weredistributed in connection with the spin-off. Also as part of the spin-off, a $9.5 million payable to DVD wascancelled.

 

In conjunction with the spin-off, the Companyand DVD entered into various agreements that addressed the allocation of assetsand liabilities between the two companies and that define the companies’relationship after the separation.  Theseare the Agreement Regarding Distribution and Plan of Reorganization, the RealProperty Agreement, the Employee Benefits Agreement, the Transition SupportServices Agreement and the Tax Sharing Agreement.

 

The Agreement Regarding Distribution and Planof Reorganization set forth the principal corporate transactions required toeffect the separation of the gaming business from the motorsports business, andthe continuation of the gaming business following such separation, includingthe allocation between the Company and DVD of certain assets and liabilities,and the distribution of shares of the Company’s common stock and Class Acommon stock.  As a result of thespin-off, all assets and liabilities relating to the gaming business wereassumed and are owned by the Company or its subsidiaries, and all assets andliabilities relating to the motorsports business were assumed and are owned byDVD or its subsidiaries.

 

The Real Property Agreement governs certainreal property transfers, leases and easements affecting the Company’s Dover,Delaware facility.

 

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

 

The Transition Support Services Agreementprovides for each of the Company and DVD to provide each other with certainadministrative and operational services. The party receiving the services is required to pay for them within 30business days after receipt of an invoice at rates agreed upon by the Companyand DVD.  The agreement may be terminatedin whole or in part 90 days after the request of the party receiving theservices or 180 days after the request of the party providing the services.

 

The Tax Sharing Agreement provides for, amongother things, the treatment of income tax matters for periods beginning beforeand including the date of the spin-off and any taxes resulting fromtransactions effected in connection with the spin-off. With respect to anyperiod ending on or before the spin-off or any tax period in which the spin-offoccurs, DVD:

 

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

 

38

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

 

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

 

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

 

Refer to NOTE 10—Related Party Transactionsfor further discussion.

 

**NOTE 3—Summary of Significant AccountingPolicies**

 

*Basis of consolidation and presentation—*Theconsolidated financial statements include the accounts of Gaming &Entertainment and its wholly owned subsidiaries.  Intercompany transactions and balances havebeen eliminated. The consolidated financial statements for periods prior to theeffective date of the spin-off have been prepared on the historical cost basisand present the Company’s results of operations and cash flows directly relatedto DVD’s gaming operations.

 

The consolidated financial statementsincluded herein may not necessarily be indicative of the results of operations,financial position and cash flows of Gaming & Entertainment in thefuture or had it operated as a separate, independent company for periods priorto the effective date of the spin-off. The consolidated financial statementsincluded herein for periods prior to the effective date of the spin-off on March 31,2002 do not reflect any changes in the financing and operations of Gaming &Entertainment that occurred as a result of the spin-off.

 

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

 

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

 

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

 

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

 

*Interest capitalization—*Interestis capitalized in connection with the construction of major facilities. Thecapitalized interest is amortized over the estimated useful life of the assetto which it relates.  During the yearended December 31, 2004, the Company incurred $779,000 of interest cost,of which $17,000 was capitalized.  Duringthe year ended December 31, 2003, the Company incurred $842,000 ofinterest cost, none of which was capitalized. During the year ended December 31, 2002, the Company incurred$1,254,000 of interest cost, of which $351,000 was capitalized.

 

*Income taxes—*Deferredincome taxes are provided in accordance with the provisions of FinancialAccounting Standards Board (“FASB”) Statement No. 109, *Accounting for Income Taxes*, on all differences between thetax bases of assets and liabilities and their reported amounts in theconsolidated financial statements based upon enacted statutory tax rates ineffect at the balance sheet date.

 

*Point loyalty program—*TheCompany currently has a point loyalty program for its video lottery customerswhich allows them to earn points based on the volume of their video lotteryactivity.  Prior to December 2004,the points could be redeemed for various services and merchandise throughoutthe gaming facility; however, they were

 

39

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not redeemable for cash or casino play.   Effective December 2004, the Companychanged its policy relating to its point loyalty program to allow points earnedby customers to be redeemed for cash under certain circumstances.  As a result, the Company recorded anon-recurring charge in the fourth quarter of 2004 to record the net impact ofthe program change.  All points earned bycustomers are now expensed in the period they are earned.  The estimated amount of points redeemable forcash is recorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise is recorded as gaming expense. Inestimating the amount of the liability, which was $2,678,000 at December 31,2004, the Company estimates a redemption rate, a cost of rewards to be offeredand the mix of cash, goods and services for which reward points will beredeemed.  We use historical data toestimate those amounts.

 

*Revenue and expense recognition—*Gamingrevenues represent (i) the net win from video lottery (slot) machine winsand losses and (ii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotelrooms revenue, food and beverage sales and other miscellaneous income.

 

For the video lottery operations, whichaccount for more than 80% of gross revenues for all periods presented, thedifference between the amount wagered by bettors and the amount paid out tobettors is referred to as the win. The win is included in the amount recordedin the Company’s consolidated financial statements as gaming revenue. TheDelaware State Lottery Office sweeps the win from the video lottery operations,collects the State’s share of the win and the amount due to the vendors undercontract with the State who provide the video lottery (slot) machines andassociated computer systems, collects the amount allocable to purses forharness horse racing and remits the remainder to the Company as its commissionfor acting as a Licensed Agent. Gaming expenses include the amounts collectedby the State (i) for the State’s share of the win, (ii) forremittance to the providers of the video lottery (slot) machines and associatedcomputer systems, and (iii) for harness horse racing purses. The Companyrecognizes revenues from pari-mutuel commissions earned from live harness horseracing and importing of simulcast signals from other race tracks when the raceoccurs. Revenues from hotel rooms, food and beverage sales and othermiscellaneous income are recognized at the time the service is provided.

 

The retail value of hotel rooms, food,beverage and other items that are provided to customers without charge has beenincluded in gross revenues, and a corresponding amount has been deducted aspromotional allowances. The estimated direct cost of providing these items hasbeen charged to the casino through interdepartmental allocations and isincluded in gaming expenses in the consolidated statement of earnings.

 

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

 

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

 

| ** **                     | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic EPS                      |       | 26,339,000                        |       | 26,511,000 |   | 26,643,000 |   |
| Effect of  dilutive securities |       | 75,000                            |       | 26,000 |   | 82,000 |   |
| Diluted EPS                    |       | 26,414,000                        |       | 26,537,000 |   | 26,725,000 |   |

 

Dilutive securities include stock options andunvested restricted stock awards.

 

For the years ended December 31, 2004,2003 and 2002, options to purchase an average of 280,180, 667,960 and 243,639shares of common stock, respectively, were outstanding, but were not includedin the computation of diluted EPS because the options’ exercise prices weregreater than the average market price of the common stock during the period.

 

Earnings per shareamounts and weighted average shares outstanding for periods prior to April 1,2002, the day after the effective date of the spin-off from DVD, are presentedon a pro forma basis to reflect such spin-off.

 

The pro forma average outstanding commonshares and Class A common shares were derived from DVD’s common shares andClass A common shares outstanding for the periods presented using thedistribution ratio of 0.7 shares of Gaming & Entertainment commonstock and Class A common stock for each share of DVD common stock

 

40

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and Class A common stock, respectively.  Outstanding stock options of Gaming &Entertainment were calculated assuming the stock options related to eachindividual who became a Gaming & Entertainment employee or both a DVDand a Gaming & Entertainment employee subsequent to the spin-off wereoutstanding Gaming & Entertainment options during each periodpresented.

 

*Accounting for stock-based compensation—*The Company has a stock incentive plan whichprovides for the grant of stock options and/or restricted stock to officers andkey employees.  The Companyaccounts for stock options in accordance with FASB Statement No. 123, *Accounting for Stock-Based Compensation,*as amended by FASBStatement No. 148,*Accounting forStock-Based Compensation – Transition and Disclosure – an amendment of FASBStatement No. 123*. Statement No. 123 defines a fair-value based method of accountingfor stock-based compensation plans; however, it allows the continued use of theintrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations. The Company has elected to continue to use theintrinsic value method and based on this method did not record any stock-basedcompensation expense related to its stock options during the years ended December 31,2004, 2003 and 2002.  The Company’srestricted stock vests based on continued employment with the Company.  Restricted stock awards result incompensation expense as discussed in NOTE 9—Stockholders’ Equity.

 

The following table illustrates the effect onnet earnings and net earnings per common share if the Company had applied thefair-value recognition provisions of Statement No. 123 to stock-basedemployee compensation related to its stock options and awards:

 
| ** **                                                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  earnings, as reported                                                                                                                    |       | $                                 | 16,381,000 |   | $ | 17,237,000 |   | $ | 21,442,000 |   |
| Add:  Stock-based employee compensation expense included in reported net earnings,  net of related tax effects                                |       | 67,000                            |       | — |   | — |   |
| Deduct:  Total stock-based employee compensation expense determined under fair-value  based method for all awards, net of related tax effects |       | (641,000                          | )          | (608,000 | ) | (285,000 | ) |
| Pro forma  net earnings                                                                                                                       |       | $                                 | 15,807,000 |   | $ | 16,629,000 |   | $ | 21,157,000 |   |
|                                                                                                                                          |       |                              |       |   |   |   |   |
| Net earnings  per common share:                                                                                                               |       |                              |       |   |   |   |   |
| Basic – as  reported                                                                                                                     |       | $                                 | 0.62       |   | $ | 0.65 |   | $ | 0.80 |   |
| Basic – pro  forma                                                                                                                       |       | $                                 | 0.60       |   | $ | 0.63 |   | $ | 0.79 |   |
|                                                                                                                                          |       |                              |       |   |   |   |   |
| Diluted – as  reported                                                                                                                   |       | $                                 | 0.62       |   | $ | 0.65 |   | $ | 0.80 |   |
| Diluted –  pro forma                                                                                                                     |       | $                                 | 0.60       |   | $ | 0.63 |   | $ | 0.79 |   |

 

For disclosure purposes, the Companydetermined compensation expense for its stock options based upon the fair valueat the grant date using the Black-Scholes option-pricing model with thefollowing assumptions:

 

| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate   |       | n/a      |       | 3.73     | %          | 4.68     | %          |
| Volatility                |       | n/a      |       | 45       | %          | 45       | %          |
| Expected  dividend yield  |       | n/a      |       | 2.10     | %          | 1.10     | %          |
| Expected  life (in years) |       | n/a      |       | 7.50     |       | 6.25     |       |

 

The weighted-average fair value of optionsgranted during the years ended December 31, 2003 and 2002 was $4.02 and$4.33, respectively.   No stock optionswere granted during the year ended December 31, 2004.  The fair value of restricted stock awardsgranted during the year ended December 31, 2004 was $11.62 per share.

 

*Use of estimates—*Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

41

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*Fair value of financial instruments—*Thecarrying amount reported in the balance sheet for current assets and currentliabilities approximates their fair value because of the short maturity ofthese instruments.  The carrying value oflong-term debt at December 31, 2004 and 2003 approximates its fair valuebased on the interest rates available on similar borrowings.

 

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

 

*Recent accounting pronouncements—*InDecember 2004, the FASB issued Statement No. 123 (Revised 2004) *Share-Based Payment*. Statement No. 123R addresses all forms of share-based paymentawards, including shares issued under employee stock purchase plans, stockoptions, restricted stock and stock appreciation rights.  It will require companies to recognize in thestatement of earnings the grant-date fair value of stock options and otherequity-based compensation issued to employees, but expresses no preference fora type of valuation model. The statement eliminates the intrinsic value-basedmethod prescribed by APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations, that theCompany currently uses.  The Company isrequired to adopt Statement No. 123R beginning in the third quarter of2005. The Company has not yet determined the impact of applying the variousprovisions of the statement; however, adoption of the statement is expected toincrease the amount the Company records as compensation expense in 2005.

 

**NOTE 4—Property and Equipment**

 

Property and equipmentconsists of the following as of December 31:

 

| ** **                         | ** ** | **2004**    | ** **      | **2003**    | ** ** |
|------------------------------------|------------|-------------|-----------------|-------------|------------|
| Land                               |       | $           |  1,842,000 |        | $          |  1,842,000 |   |
| Casino  facility                   |       | 32,014,000  |            | 28,132,000  |       |
| Hotel  facility                    |       | 65,602,000  |            | 65,974,000  |       |
| Harness  racing facilities         |       | 7,977,000   |            | 7,930,000   |       |
| General  facilities                |       | 14,856,000  |            | 14,224,000  |       |
| Furniture, fixtures  and equipment |       | 34,304,000  |            | 28,973,000  |       |
| Construction  in progress          |       | 499,000     |            | 3,068,000   |       |
|                               |       | 157,094,000 |            | 150,143,000 |       |
| Less  accumulated depreciation     |       | (34,018,000 | )               | (27,799,000 | )          |
|                               |       | $           | 123,076,000     |        | $          | 122,344,000 |   |

 

Depreciation expense was $6,791,000,$6,287,000 and $5,176,000 for the years ended December 31, 2004, 2003 and2002, respectively.

 

At December 31, 2004, we have a$1,195,000 purchase obligation related to the installation of a state-of-the-art customer managementand slot data system. Installation wascompleted in the first quarter of 2004, though payments for the system extendinto 2005. Capital expenditures and the change in accounts payable in theCompany’s consolidated statement of cash flows for the year ended December 31,2004 have been adjusted accordingly.

 

**NOTE 5—Accrued Liabilities**

 

Accrued liabilities consist of the followingas of December 31:

 

| ** **                                | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------|------------|-----------|------------|-----------|------------|
| Point  loyalty program                    |       | $         | 2,678,000  |      | $          | — |   |
| Payroll and  related items                |       | 1,874,000 |       | 1,455,000 |       |
| Win due to  Delaware State Lottery Office |       | 3,559,000 |       | 1,810,000 |       |
| Pension                                   |       | 1,603,000 |       | 931,000   |       |
| Other                                     |       | 2,276,000 |       | 1,819,000 |       |
|                                      |       | $         | 11,990,000 |      | $          | 6,015,000 |   |

#### ** **

42

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#### **NOTE6—Indebtedness**

#### ** **

The Company has a $57,500,000 credit facility,as amended effective November 5, 2004, that expires on October 31,2007.  Interest is based, at the Company’soption, upon (i) LIBOR plus 0.75% or (ii) the base rate (the greaterof the prime rate or the federal funds rate plus 0.5%) minus 1%.  The terms of the credit facility contain,among others, minimum net worth, interest coverage and maximum leveragecovenant requirements.  Material adversechanges in the Company’s results of operations could impact its ability tomaintain financial ratios necessary to satisfy these requirements. The facilityis for seasonal funding needs, capital improvements and other general corporatepurposes.  At December 31, 2004, theCompany was in compliance with all terms of the facility and there was$51,950,000 outstanding at a weighted average interest rate of 3.25%.  At December 31, 2004, $5,550,000 wasavailable pursuant to the facility.

 

**NOTE 7—Income Taxes**

** **

The current and deferred income taxprovisions are as follows:

 

| ** **          | ** ** | **Years ended December 31,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:            |       |                              |       |   |   |   |   |
| Federal             |       | $                                 | 8,691,000  |   | $ | 8,450,000 |   | $ | 9,491,000 |   |
| State               |       | 2,363,000                         |       | 2,261,000 |   | 2,592,000 |   |
|                |       | 11,054,000                        |       | 10,711,000 |   | 12,083,000 |   |
| Deferred:           |       |                              |       |   |   |   |   |
| Federal             |       | 127,000                           |       | 849,000 |   | 2,066,000 |   |
| State               |       | 38,000                            |       | 267,000 |   | 576,000 |   |
|                |       | 165,000                           |       | 1,116,000 |   | 2,642,000 |   |
| Total income  taxes |       | $                                 | 11,219,000 |   | $ | 11,827,000 |   | $ | 14,725,000 |   |

 

Deferred income taxes relate to the temporarydifferences between financial accounting income and taxable income and areprimarily attributable to differences between the book and tax basis ofproperty and equipment.  During the yearended December 31, 2004, current deferred income tax assets increasedprimarily due to the change in how the Company accounts for its point loyaltyprogram.  All reward points earned bycustomers are now expensed in the period earned in determining financialaccounting income; however, they continue to be expensed when redeemed indetermining taxable income.

 

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

 

| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Federal tax  at statutory rate       |       | 35.0                              | %          | 35.0 | % | 35.0 | % |
| State taxes,  net of federal benefit |       | 5.7                               | %          | 5.7 | % | 5.7 | % |
| Other                                |       | (0.1                              | )%         | — | % | — | % |
| Effective  income tax rate           |       | 40.6                              | %          | 40.7 | % | 40.7 | % |

 

Prior to the spin-off, the Company wasincluded as part of DVD’s consolidated federal income tax return; however, theincome tax expense presented in the consolidated financial statements has beencomputed on a separate return basis.  TheCompany and DVD have entered into a Tax Sharing Agreement to reflect eachcompany’s rights and obligations relating to payments and refunds of taxes thatare attributable to periods beginning before and including the date of thespin-off described in NOTE 2—Dover Motorsports, Inc. Spin-off Of ItsGaming Business. The agreement provides for payments between the companies toreflect tax liabilities that may arise before, after and because of thespin-off.  During the third quarter of2002, pursuant to the Tax Sharing Agreement, the Company paid DVD $2.7 millionfor its portion of DVD’s 2002 consolidated federal income tax liability.  Since the spin-off of the Company from DVDwas effective on March 31, 2002, DVD’s 2002 federal income tax returnincluded the operations of the Company for the first quarter of the year.

 

43

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

 

**NOTE 8—Pension Plans**

 

The Company maintains a non-contributory, taxqualified defined benefit pension plan. All of Gaming & Entertainment’sfull time employees are eligible to participate in the pension plan.  Benefits provided by the Gaming &Entertainment pension plan are based on years of service and employees’remuneration over their term of employment. Pension costs are funded in accordance with the provisions of theInternal Revenue Code. The Company also maintains a non-qualified,non-contributory defined benefit pension plan for certain employees to restore pensionbenefits reduced by federal income tax regulations. The cost associated withthe plan is determined using the same actuarial methods and assumptions asthose used for the Company’s qualified pension plan.

 

The following table sets forth the plans’funded status and amounts recognized in the Company’s consolidated balancesheet as of December 31:

 

| ** **                                        | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|
| Change in  benefit obligation:                    |       |       |       |       |       |
| Benefit  obligation at beginning of period        |       | $          | 4,305,000  |       | $          | 3,415,000 |   |
| Service cost                                      |       | 895,000    |       | 714,000    |       |
| Interest  cost                                    |       | 258,000    |       | 206,000    |       |
| Actuarial  gain                                   |       | (151,000   | )          | (30,000    | )          |
| Benefit  obligation at end of period              |       | 5,307,000  |       | 4,305,000  |       |
|                                              |       |       |       |       |       |
| Change in  plan assets:                           |       |       |       |       |       |
| Fair value  of plan assets at beginning of period |       | 2,297,000  |       | 1,081,000  |       |
| Actual gain  on plan assets                       |       | 150,000    |       | 241,000    |       |
| Employer  contribution                            |       | 300,000    |       | 975,000    |       |
| Fair value  of plan assets at end of period       |       | 2,747,000  |       | 2,297,000  |       |
|                                              |       |       |       |       |       |
| Unfunded  status                                  |       | (2,560,000 | )          | (2,008,000 | )          |
| Unrecognized  net loss                            |       | 889,000    |       | 1,000,000  |       |
| Unrecognized  prior service cost                  |       | 68,000     |       | 77,000     |       |
| Net amount  recognized                            |       | $          | (1,603,000 | )          | $          | (931,000 | ) |

 

The liabilities recognized in the Company’sconsolidated balance sheet as of December 31, 2004 and 2003 were$1,603,000 and $931,000, respectively.

 

The projected benefit obligation, accumulated benefitobligation and fair value of plan assets for pension plans with accumulatedbenefit obligations in excess of plan assets were $5,307,000, $4,048,000 and$2,747,000 respectively, as of December 31, 2004, and $4,305,000,$3,069,000 and $2,297,000, respectively, as of December 31, 2003.

 

The Company plans to contribute approximately $500,000to its pension plans in 2005.

 

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

 

| 2005      |   | $ | 71,000    |   |
|-----------|--------|---|-----------|--------|
| 2006      |   | $ | 89,000    |   |
| 2007      |   | $ | 114,000   |   |
| 2008      |   | $ | 137,000   |   |
| 2009      |   | $ | 166,000   |   |
| 2010-2014 |   | $ | 1,773,000 |   |

 

44

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

 

The components of net periodic pension costare as follows:

 

| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                        |       | $                                 | 895,000    |   | $ | 714,000 |   | $ | 429,000 |   |
| Interest  cost                      |       | 258,000                           |       | 206,000 |   | 132,000 |   |
| Expected  return on plan assets     |       | (225,000                          | )          | (146,000 | ) | (63,000 | ) |
| Recognized  net actuarial loss      |       | 35,000                            |       | 51,000 |   | 28,000 |   |
| Amortization  of prior service cost |       | 9,000                             |       | 9,000 |   | 6,000 |   |
|                                |       | $                                 | 972,000    |   | $ | 834,000 |   | $ | 532,000 |   |

 

The principal assumptions used to determine the netperiodic pension cost for the years ended December 31, 2004, 2003 and2002, and the actuarial value of the projected benefit obligation at December 31,2004 and 2003 (the measurement dates) for the Company’s pension plans are asfollows:

 
| ** **                                        | ** ** | **Net Periodic Pension Cost** | ** ** | **Projected Benefit Obligation** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2004**                      | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted-average  discount rate                   |       | 6.25                          | %          | 6.5                              | %          | 7.0 | % | 6.25 | % | 6.25 | % |
| Weighted-average  rate of compensation increase   |       | 5.0                           | %          | 5.0                              | %          | 5.0 | % | 5.0 | % | 5.0 | % |
| Expected  long-term rate of return on plan assets |       | 9.0                           | %          | 9.0                              | %          | 9.0 | % | n/a |   | n/a |   |

 

For 2004, the Company assumed a long-term rate ofreturn on plan assets of 9.0%. In developing the 9.0% expected long-term rateof return assumption, the Company reviewed asset class return expectations andlong-term inflation assumptions and considered its post spin-off and DVD’s prespin-off historical compounded return, which was consistent with our long-termrate of return assumption.

 

The Company’s pension plan asset allocation at December 31,2004 and 2003, and target allocation for 2005 are as follows: 

 

| ** **                         | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** | **Target  Allocation** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|
| **Asset Category**                 | ** ** | **2004**                                            | ** ** | **2003**               | ** ** | **2005** | ** ** |
| Equity  securities                 |       | 76                                                  | %          | 72                     | %          | 70 | % |
| Debt  securities                   |       | 23                                                  | %          | 19                     | %          | 20 | % |
| Other (money  market mutual funds) |       | 1                                                   | %          | 9                      | %          | 10 | % |
| Total                              |       | 100                                                 | %          | 100                    | %          | 100 | % |

 

The Company’s investment goals are tomaximize returns subject to specific risk management policies.  Its risk management policies permitinvestments in mutual funds, and prohibit direct investments in debt and equitysecurities and derivative financial instruments.  The Company addresses diversification by theuse of mutual fund investments whose underlying investments are in domestic andinternational equity and fixed income securities.  These mutual funds are readily marketable andcan be sold to fund benefit payment obligations as they become payable.

 

Pursuant to the terms of the EmployeeBenefits Agreement, DVD arranged for the transfer of the assets and liabilitiesassociated with the 401(k) plan sponsored by DVD with respect to employees whoare now Gaming & Entertainment employees to Gaming &Entertainment. Effective January 1, 2003, the Company maintains its owndefined contribution 401(k) plan which permits participation by substantiallyall employees. Prior to January 1, 2003, the Company participated in DVD’s401(k) plan.

 

45

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**NOTE 9—Stockholders’ Equity**

 

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

 
| ** **                                                           | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **DVD  Equity  Investment** | ** ** | **Deferred  Compensation** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Balance  at Dec. 31, 2001**                                   |       | $                 | —     |                            | $          | —                           |       | $                      | —     |                                        | $          | —                      |       | $                          | —     |   | $ | 102,653 |   | $ | — |   |
| ** **                                                           |       |              |       |                            |       |                             |       |                   |       |                                        |       |                        |       |                       |       |
| Net earnings  from January 1, 2002 through March 31, 2002  |       | —            |       | —                          |       | —                           |       | —                 |       | —                                      |       | 5,168                       |       | —                     |       |
| Cancellation  of payable to DVD                                      |       | —            |       | —                          |       | —                           |       | —                 |       | —                                      |       | 9,520                       |       | —                     |       |
| Spin-off  transaction                                                |       | 1,000             |       | 1,664                           |       | 114,677                          |       | —                 |       | —                                      |       | (117,341                    | )          | —                     |       |
| DVD debt  paid down on April 1, 2002                            |       | —            |       | —                          |       | (45,000                          | )          | —                 |       | —                                      |       | —                      |       | —                     |       |
| Net earnings  from April 1, 2002 through December 31, 2002 |       | —            |       | —                          |       | —                           |       | 16,274                 |       | —                                      |       | —                      |       | —                     |       |
| Proceeds  from stock options exercised                               |       | 1                 |       | —                          |       | 72                               |       | —                 |       | —                                      |       | —                      |       | —                     |       |
| Dividends  paid, $.125 per share                                     |       | —            |       | —                          |       | —                           |       | (3,333                 | )          | —                                      |       | —                      |       | —                     |       |
| Transfer of  pension liability from DVD                              |       | —            |       | —                          |       | (789                             | )          | —                 |       | —                                      |       | —                      |       | —                     |       |
| Change in  minimum pension liability, net of income taxes of $88     |       | —            |       | —                          |       | —                           |       | —                 |       | (127                                        | )          | —                      |       | —                     |       |
| Conversion  of Class A common stock to common stock             |       | 49                |       | (49                             | )          | —                           |       | —                 |       | —                                      |       | —                      |       | —                     |       |
| **Balance  at Dec. 31, 2002**                                   |       | 1,050             |       | 1,615                           |       | 68,960                           |       | 12,941                 |       | (127                                        | )          | —                      |       | —                     |       |
| Net earnings                                                         |       | —            |       | —                          |       | —                           |       | 17,237                 |       | —                                      |       | —                      |       | —                     |       |
| Dividends  paid, $.20 per share                                      |       | —            |       | —                          |       | —                           |       | (5,305                 | )          | —                                      |       | —                      |       | —                     |       |
| Change in minimum  pension liability, net of income taxes of $88     |       | —            |       | —                          |       | —                           |       | —                 |       | 127                                         |       | —                      |       | —                     |       |
| Repurchase  and retirement of common stock                           |       | (17               | )          | —                          |       | (1,506                           | )          | —                 |       | —                                      |       | —                      |       | —                     |       |
| **Balance  at Dec. 31, 2003**                                   |       | 1,033             |       | 1,615                           |       | 67,454                           |       | 24,873                 |       | —                                      |       | —                      |       | —                     |       |
| Net earnings                                                         |       | —            |       | —                          |       | —                           |       | 16,381                 |       | —                                      |       | —                      |       | —                     |       |
| Dividends  paid, $.22 per share                                      |       | —            |       | —                          |       | —                           |       | (6,098                 | )          | —                                      |       | —                      |       | —                     |       |
| Issuance of  restricted stock awards                                 |       | 5                 |       | —                          |       | 596                              |       | —                 |       | —                                      |       | —                      |       | (601                       | )          |
| Amortization  of deferred compensation                               |       | —            |       | —                          |       | —                           |       | —                 |       | —                                      |       | —                      |       | 67                         |       |
| Conversion  of Class A common stock to common stock             |       | 7                 |       | (7                              | )          | —                           |       | —                 |       | —                                      |       | —                      |       | —                     |       |
| Repurchase  and retirement of common stock                           |       | (109              | )          | (160                            | )          | (32,286                          | )          | —                 |       | —                                      |       | —                      |       | —                     |       |
| **Balance  at Dec. 31, 2004**                                   |       | $                 | 936        |                            | $          | 1,448                            |       | $                      | 35,764     |                                        | $          | 35,156                      |       | $                          | —     |   | $ | — |   | $ | 534 |   |

 

Gaming & Entertainment has125,000,000 shares of authorized capital stock which consists of 74,000,000shares of common stock, par value $.10 per share; 50,000,000 shares of Class Acommon stock, par value $.10 per share; and 1,000,000 shares of preferredstock, par value $.10 per share.

 

The holders of common stock are entitled toone vote per share and the holders of our Class A common stock areentitled to 10 votes per share.  There isno cumulative voting.  Shares of Class Acommon stock are convertible at any time into our shares of common stock on aone-for-one basis at the option of the stockholder. Subject to rights of anypreferred stockholder, holders of our common stock and Class A commonstock are entitled to receive on a

 

46

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pro rata basis such dividends, if any, as may be declared from time totime by the Board of Directors out of funds legally available for that purpose.At the discretion of the Company’s Board of Directors, it may pay to theholders of common stock a cash dividend greater than the dividend, if any, paidto the holders of Class A common stock.

 

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

 

The Company adopted a stockholder rights planin 2002 prior to the effective date of the spin-off from DVD. The rights areattached to and trade in tandem with our common stock and Class A commonstock. Each right entitles the registered holder to purchase from the Companyone 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 tradeseparately from our common stock upon the occurrence of certain events such asthe unsolicited acquisition by a third party of beneficial ownership of 10% ormore of our outstanding combined common stock and Class A common stock orthe announcement by a third party of the intent to commence a tender orexchange offer for 10% or more of our outstanding combined common stock and Class Acommon stock. After the rights have detached, the holders of such rights wouldgenerally have the ability to purchase such number of either shares of ourcommon stock or stock of an acquirer of the Company having a market value equalto twice the exercise price of the right being exercised, thereby causingsubstantial dilution to a person or group of persons attempting to acquirecontrol of the Company. The rights may serve as a significant deterrent tounsolicited attempts to acquire control of Gaming & Entertainment,including transactions involving a premium to the market price of ourstock.  The rights expire on January 1,2012, unless earlier redeemed.

 

On January 26, 2005,the Company’s Board of Directors declared a quarterly cash dividend on bothclasses of common stock of $.06 per share. The dividend is payable on March 10, 2005 to stockholders of recordat the close of business on February 10, 2005.

 

On October 23, 2002, the Company’s Boardof Directors authorized the repurchase of up to 2,000,000 shares of the Company’soutstanding common stock.  The purchasesmay be made in the open market or in privately negotiated transactions asconditions warrant.  The repurchaseauthorization does not obligate the Company to acquire any specific number ofshares and may be suspended at any time. During the year ended December 31, 2004, Gaming &Entertainment purchased and retired 50,900 shares of its outstanding commonstock at an average purchase price of $9.95 per share, not including nominalbrokerage commissions.  During the yearended December 31, 2003, the Company purchased and retired 169,945 sharesof its outstanding common stock at an average purchase price of $8.90 pershare, not including nominal brokerage commissions.  At December 31, 2004, the Company hadremaining repurchase authority of 1,779,155 shares.

 

On November 5, 2004, the Company’s Boardof Directors authorized the Company to commence a tender offer to purchase upto 1,040,421 shares of its common stock and up to 1,607,506 shares of its Class Acommon stock at a fixed price of $12.00 per share.  The offer commenced on Wednesday, November 10,2004 and expired at 5:00 P.M., eastern standard time, on Friday, December 10,2004. The Company purchased 1,040,421 shares of its common stock and 1,600,000shares of its Class A common stock for $32,045,000, including expenses, inconnection with the tender offer.

 

The Company hasa stock incentive plan which provides for the grant of up to 1,500,000 sharesof stock to our officers and key employees through stock options and/or awardsvalued in whole or in part by reference to our common stock, such as restrictedstock awards.  Under the plan, optiongrants must have an exercise price of not less than 100% of the fair marketvalue of the underlying shares of common stock at the date of the grant.  The stock options have

 

47

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eight-year terms and generally vest equallyover a period of six years from the date of grant.  The restricted stock vests an aggregate oftwenty percent each year beginning on the second anniversary date of thegrant.  During the year ended December 31,2004, the Company granted 52,000 shares of restricted stock to certain officersand key employees at a fair-market value of $11.62 per share on the grant dateand no shares were forfeited.  Theaggregate market value of the restricted stock at the date of issuance has beenrecorded as deferred compensation, a separate component of stockholders’equity, and is being amortized on a straight-line basis over the six-yearservice period.

 

Option activity was as follows: 

 

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Number of  options:               |       |                  |       |   |   |   |   |
| Outstanding  at beginning of year |       | 862,360               |       | 612,160 |   | — |   |
| Spin-off  issuances               |       | —                |       | — |   | 393,446 |   |
| Granted                           |       | —                |       | 309,000 |   | 277,000 |   |
| Exercised                         |       | —                |       | — |   | (10,781 | ) |
| Expired                           |       | (105,270              | )          | (58,800 | ) | (47,505 | ) |
| Outstanding  at end of year       |       | 757,090               |       | 862,360 |   | 612,160 |   |
| Exercisable  at end of year       |       | 267,535               |       | 254,116 |   | 173,091 |   |
| Weighted  average exercise price: |       |                  |       |   |   |   |   |
| Options  granted                  |       | $                     | —     |   | $ | 9.52 |   | $ | 12.05 |   |
| Options  exercised                |       | $                     | —     |   | $ | — |   | $ | 6.74 |   |
| Options  outstanding              |       | $                     | 10.32      |   | $ | 10.02 |   | $ | 10.27 |   |
| Options  exercisable              |       | $                     | 10.45      |   | $ | 9.24 |   | $ | 8.35 |   |

 

As of December 31,2004, 2003 and 2002, there were 680,129, 626,859 and 877,059 shares,respectively, available under the stock incentive plan for granting options orstock awards.

 

The following tablesummarizes information about the stock options outstanding under the Company’soption plan as of December 31, 2004:

 

| **Range of Exercise Prices**        | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| $  6.74-$  9.94 |       | 479,383                 |       | $                                      | 9.40       |                                                | 4.84 yrs   |                    | 147,512    |                                   | $          | 9.38 |   |
| $11.16-$13.31                       |       | 277,707                 |       | $                                      | 11.92      |                                                | 4.65 yrs   |                    | 120,023    |                                   | $          | 11.77 |   |
| $  6.74-$13.31            |       | 757,090                 |       | $                                      | 10.32      |                                                | 4.77 yrs   |                    | 267,535    |                                   | $          | 10.45 |   |

 

**NOTE 10—Related Party Transactions**

 

During the years ended December 31,2004, 2003 and 2002, Gaming & Entertainment allocated costs of$1,241,000, $1,969,000 and $495,000, respectively, to DVD for certainadministrative and operating services. Additionally, DVD allocated costs of $116,000 to Gaming &Entertainment for the year ended December 31, 2004.  The allocations were based on an analysis ofeach company’s share of the costs.  Inconnection with DVD’s 2004 and 2003 NASCAR event weekends at DoverInternational Speedway, Gaming & Entertainment provided certaincatering services for which DVD was invoiced $933,000 and $443,000,respectively.  Additionally, DVD invoicedGaming & Entertainment $238,000 and $206,000, respectively, fortickets purchased to the 2004 and 2003 events and other services related to theDover events. As of December 31, 2004 and 2003, Gaming &Entertainment’s consolidated balance sheet includes a $2,000 receivable fromand $96,000 payable to DVD, respectively, for the aforementioned items.  The Company received payment for the $2,000receivable in the first quarter of 2005. The net costs incurred by each company for these services are notnecessarily indicative of the costs that would have been incurred if thecompanies had been unrelated entities and/or had otherwise independentlymanaged these functions; however, management believes that these costs arereasonable.

 

For the year ended December 31, 2003,DVD reported a net operating loss for federal income tax purposes.  The loss was carried back to 2001, a periodprior to the spin-off, which generated an alternative minimum tax creditcarryforward, a portion of which is required to be paid to DVD under the TaxSharing Agreement; therefore, during the

 

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

 

During the third quarter of 2002, pursuant tothe Tax Sharing Agreement, the Company paid DVD $2.7 million for its portion ofDVD’s consolidated federal income tax liability for 2002.  Since the spin-off of the Company from DVDwas effective on March 31, 2002, DVD’s 2002 federal income tax returnincluded the operations of the Company for the first quarter of the year.

 

The Company’s use of DVD’s 5/8-mile harnessracing track is pursuant to an easement granted to the Company by DVD whichdoes not require the payment of any rent. Under the terms of the easement, theCompany has exclusive use of the harness track during the period beginning November 1of each year and ending April 30 of the following year, together with setup and tear down rights for the two weeks before and after such period.  The harness track is located on propertyowned by DVD and is on the inside of DVD’s motorsports superspeedway.  The Company’s indoor grandstands are used byDVD at no charge in connection with its motorsports events. DVD also leases itsprincipal executive office space from the Company.  Various easements and agreements relative toaccess, utilities and parking have also been entered into between DVD and theCompany relative to their respective Dover, Delaware facilities.

 

In conjunction with the Company’s spin-offfrom DVD, the two companies entered into various agreements that addressed theallocation of assets and liabilities between the companies and that define thecompanies’ relationship after the separation. These are the Agreement Regarding Distribution and Plan ofReorganization, the Real Property Agreement, the Employee Benefits Agreement,the Transition Support Services Agreement and the Tax Sharing Agreement.  The companies have several common directorsand officers.  Refer to NOTE 2—DoverMotorsports, Inc. Spin-off Of Its Gaming Business for further discussion.

 

**NOTE 11—Commitments and Contingencies**

 

In May 1995, Dover Downs, Inc., asubsidiary of the Company, entered into a long-term management agreement withCaesars World Gaming Development Corporation (“Caesars”) to act as our agent tomanage our video lottery casino for which Caesars was paid a management feebased on the operating results of the casino. Effective December 28, 2004, that management agreement expired andthe Company opted not to renew the agreement. These performance-based fees were $4,448,000, $5,042,000 and $7,440,000for the years ended December 31, 2004, 2003 and 2002.

 

The Company is a party to ordinary routinelitigation incidental to its business. Management does not believe that the resolution of any of these mattersis likely to have a serious adverse effect on our results of operations,financial condition or cash flows.

 

The Company hasemployment, severance and noncompete agreements with certain of its officersand directors under which certain change of control, severance and noncompetepayments and benefits might become payable in the event of a change in controlof the Company, defined to include a tender offer or the closing of a merger orsimilar corporate transactions.  In theevent of such a change in control of the Company and the subsequent terminationof employment of all employees covered under these agreements, the maximumcontingent liability would be approximately $4,962,000.

 

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**NOTE 12—Quarterly Results (unaudited)**

 
| ** **                             | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31 (a)** | ** ** |
|----------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|--------------------------|------------|
| **Year  Ended December 31, 2004** |       |              |       |             |       |                  |       |                     |       |
| Net revenues                           |       | $                 | 50,560,000 |             | $          | 50,527,000            |       | $                        | 54,945,000 |   | $ | 51,264,000 |   |
| Operating  earnings                    |       | $                 | 7,629,000  |             | $          | 7,686,000             |       | $                        | 8,581,000  |   | $ | 4,466,000 |   |
| Net earnings                           |       | $                 | 4,434,000  |             | $          | 4,458,000             |       | $                        | 4,982,000  |   | $ | 2,507,000 |   |
| Net earnings  per share-basic          |       | $                 | 0.17       |             | $          | 0.17                  |       | $                        | 0.19       |   | $ | 0.10 |   |
| Net earnings  per share-diluted        |       | $                 | 0.17       |             | $          | 0.17                  |       | $                        | 0.19       |   | $ | 0.10 |   |
|                                   |       |              |       |             |       |                  |       |                     |       |
| **Year  Ended December 31, 2003** |       |              |       |             |       |                  |       |                     |       |
| Net revenues                           |       | $                 | 44,199,000 |             | $          | 48,042,000            |       | $                        | 50,299,000 |   | $ | 46,292,000 |   |
| Operating  earnings                    |       | $                 | 6,968,000  |             | $          | 7,643,000             |       | $                        | 8,256,000  |   | $ | 7,039,000 |   |
| Net earnings                           |       | $                 | 4,007,000  |             | $          | 4,385,000             |       | $                        | 4,782,000  |   | $ | 4,063,000 |   |
| Net earnings  per share-basic          |       | $                 | 0.15       |             | $          | 0.17                  |       | $                        | 0.18       |   | $ | 0.15 |   |
| Net earnings  per share-diluted        |       | $                 | 0.15       |             | $          | 0.17                  |       | $                        | 0.18       |   | $ | 0.15 |   |

 

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(a)     Included in the Company’s2004 fourth quarter results is a net, non-recurring charge of $2,250,000($1,338,000 after income tax benefit) relating to the change in the Company’spoint loyalty program.

 

Included in the Company’s 2003 fourth quarterresults are proceeds of $1,300,000 ($771,000 after income taxes) relating tothe settlement of a business interruption insurance claim.

 

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

 

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