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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the Fiscal Year Ended December 31, 2009**

 

**TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Commission File No. 333-71094**

 

**HERBSTGAMING, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Nevada**                                | ** ** | **88-0446145**                          |
|-------------------------------------------|------------|-----------------------------------------|
| (State of incorporation)                  |       | (I.R.S. Employer Identification Number) |
|                                      |       |                                    |
| **3440 West Russell Road, Las Vegas, NV** | ** ** | **89118**                               |
| (Address of principal executive offices)  |       | (Zip Code)                              |

 

Registrant’s telephone number:**(702)889-7695**

 

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

 

| **Not Applicable**    | ** ** | **Not Applicable**                          |
|-----------------------|------------|---------------------------------------------|
| (Title of each class) |       | (Name of each exchange on which registered) |

 

Securities registered pursuant to Section 12(g) of theAct: **Not Applicable**

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes o  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.  Applicable o  NotApplicable x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company (asdefined in Rule 12b-2 of the Act):

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

 

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

 

Theaggregate market value of the shares of voting and non-voting common equityheld by non-affiliates of the registrant as of June 30, 2009 was $0.

 

**Applicable Only to Registrants Involved in Bankruptcy ProceedingsDuring the Preceding Five Years:**

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.  Yes o  No oNot Applicable x

 

Indicatethe number of shares outstanding of each of the Registrant’s classes of commonstock, as of December 31, 2009.

 

CommonStock, no par value, 300 outstanding shares.

 

**Documents Incorporated by Reference**

None.

 

 

 

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**TABLE OF CONTENTS**

 
| PART I   |                                                                                                                |   |
|---------------|---------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                |   |
| Item  1.      | Business                                                                                                            |   |
| Item 1A.      | Risk Factors                                                                                                        |   |
| Item 2.       | Properties                                                                                                          |   |
| Item 3.       | Legal Proceedings                                                                                                   |   |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                |   |
|          |                                                                                                                |   |
| PART II  |                                                                                                                |   |
|          |                                                                                                                |   |
| Item 5.       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   |
| Item 6.       | Selected  Financial Data                                                                                            |   |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   |
| Item 8.       | Financial  Statements and Supplementary Data                                                                        |   |
| Item 9.       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |   |
| Item 9A.      | Controls and  Procedures                                                                                            |   |
| Item 9B.      | Other Information                                                                                                   |   |
|          |                                                                                                                |   |
| PART III |                                                                                                                |   |
|          |                                                                                                                |   |
| Item 10.      | Directors  and Executive Officers of the Registrant                                                                 |   |
| Item 11.      | Executive  Compensation                                                                                             |   |
| Item 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |   |
| Item 13.      | Certain  Relationships and Related Transactions                                                                     |   |
| Item 14.      | Principal  Accountant Fees and Services                                                                             |   |
|          |                                                                                                                |   |
| PART IV  |                                                                                                                |   |
|          |                                                                                                                |   |
| Item 15.      | Exhibits  and Financial Statement Schedules                                                                         |   |

 

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**PART I**

 

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

 

**General**

 

Weare a diversified gaming company that focuses on two business lines: slot routeoperations and casino operations.  Our slot route operations involve theexclusive installation and operation of slot machines in certain strategic,high traffic, non-casino locations, such as grocery stores, drug stores,convenience stores, bars and restaurants. We currently have approximately 6,200 slot machines in our slot routebusiness and are one of the largest slot machine operators in Nevada.  Asof December 31, 2009, our casino operations in Nevada consisted of 12casinos.  Five of these casinos focus on local gaming patrons in SouthernNevada, and include the ownership and operation of Terrible’s Hotel &Casino in Las Vegas, Nevada and four other small casinos in Southern Nevadaoperated under the Terrible’s name. We also operate the following four casinosin Northern Nevada, all of which were acquired by the Company in January 2007:Terrible’s Rail City Casino in Sparks, Nevada (“Rail City”); the Sands RegencyCasino Hotel in downtown Reno, Nevada (“Sands”); Terrible’s Gold Ranch Casinoand RV Resort in Verdi, Nevada (“Gold Ranch”) and Terrible’s Dayton DepotCasino (“Dayton Casino” and together with Rail City, Sands and Gold Ranch, the “SandsRegent Casinos”) in Dayton, Nevada.  Inaddition, we operate the following three casinos in Primm, Nevada, all of whichwere acquired by the Company in April 2007: Buffalo Bill’s Hotel andCasino (“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley”) andWhiskey Pete’s Hotel and Casino (“Whiskey Pete’s”, and together with BuffaloBill’s and Primm Valley, the “Primm Casinos”). As of December 31, 2009, these casinos in Nevada contained anaggregate of approximately 6,300 slot machines and 119 table games.  Ourcasino operations outside of Nevada consist of Terrible’s St. Jo FrontierCasino in St. Joseph, Missouri (“St. Jo”), Terrible’s Mark TwainCasino in LaGrange, Missouri (“Mark Twain”), and Terrible’s Lakeside CasinoResort in Osceola, Iowa (“Lakeside Iowa”). As of December 31, 2009, these three properties contained anaggregate of approximately 2,200 slot machines and 45 table games.

 

HerbstGaming, Inc. was incorporated in Nevada on January 21, 1997.  Itcommenced business operations as a holding company of subsidiaries conductingslot route and casino operations on August 23, 2001.

 

Ourprincipal executive offices are located at 3440 West Russell Road, Las Vegas,Nevada 89118 and our telephone number is (702) 889-7695.

 

HerbstGaming, Inc. has elected to be taxed as an S corporation.

 

Asused in this Form 10-K, the terms the “Company,” “we,” “us,” “our” and “HerbstGaming” refer to Herbst Gaming, Inc. and its subsidiaries, unless thecontext indicates otherwise.

 

**Available Information**

 

OurInternet address is*www.herbstgaming.com*. We make available free of charge on or through our Internet website our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Securities Exchange Act of1934, as amended, or the Exchange Act, as soon as reasonably practicable afterwe electronically file such material with, or furnish it to, the Securities andExchange Commission (“SEC”).

 

**Chapter 11 Reorganization**

 

OnMarch 22, 2009 (the “Petition Date”), Herbst Gaming, Inc. (“Herbst”or the “Company”) and certain of its subsidiaries (the “Subsidiary Guarantors”,and together with the Company, the “Debtors”) filed voluntary petitions forrelief (the “Chapter 11 Cases”) under Chapter 11 of the United StatesBankruptcy Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”), in the UnitedStates Bankruptcy Court for the District of Nevada, Northern Division (the “BankruptcyCourt”) under case numbers 09-50746-gwz through 09-50763-gwz.  From theperiod commencing on the Petition Date up to and including the Effective Date(as defined below), the Debtors operated their businesses and managed theirproperties as debtors-in-possession subject to the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code.** **Pursuantto an order of the Bankruptcy Court, the Chapter 11 Cases are being jointlyadministered.

 

OnJuly 22, 2009, the Debtors filed with the Bankruptcy Court an amendedjoint plan of reorganization.  On January 22, 2010, the BankruptcyCourt issued an Amended Order Confirming Debtors’ First Amended Joint Plan ofReorganization (the “Order”), confirming the amended joint plan ofreorganization, as modified by the Findings of Fact and Conclusions of Law inSupport of Order Confirming Debtors’ First Amended Joint Plan of Reorganization(the “Findings of Fact “) entered contemporaneously with the Order (the amendedjoint plan of reorganization as modified by the Findings of Fact, the “Plan”).  The Plan became effective on February 5,2010 (the “Effective Date”), but will not be fully implemented until theSubstantial Consummation Date (as defined below).  Since the Effective Date, the Debtors havebeen operating as reorganized debtors pursuant to the terms and provisions ofthe Plan and, except as otherwise specifically provided for in the Plan, outsidethe jurisdiction of the Bankruptcy Court. Upon the Substantial Consummation Date, the Plan provides for thefollowing restructuring (the “Restructuring”) of the Debtors to occur:

 

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·    Conversion ofall allowed claims under the Company’s $860.0 million senior credit facility(the “amended Credit Agreement”) into debt and equity of the Debtors, throughownership of a new holding company (“Reorganized Herbst Gaming”).

 

·    Termination ofall outstanding obligations under our 8 1/8% senior subordinated notes due 2012 (the “8 1/8% Notes”) and our 7% senior subordinated notes due2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”).

 

·    Cancellation of100% of the existing equity in the Company.

 

Followingthe Substantial Consummation Date, Reorganized Herbst Gaming will hold all ofthe equity interests in the Reorganized Debtors (as defined below) and theCompany will be dissolved.

 

ThePlan generally will be fully implemented on the third business day followingthe satisfaction or waiver of all conditions to substantial consummation of thePlan (the “Substantial Consummation Date”), which are described in theparagraph below.  However, pursuant to the Plan certain payments were madeon or shortly after the Effective Date, including payment of allowed priorityclaims, certain allowed secured claims and allowed general unsecured claims, insome cases with interest from the Petition Date, as described in the Plan andthe Second Amended Disclosure Statement to Accompany the Plan filed with theBankruptcy Court on August 7, 2009.

 

Additionally,under the Plan, between the Effective Date and the Substantial ConsummationDate the Company will make adequate protection payments to the lenders underthe amended Credit Agreement (the “Lenders”) in the amount of the Debtors’ cashand cash equivalents in excess of $100 million (measured initially as of theend of the third full calendar month following the Effective Date, and then asof the end of every third full calendar month thereafter, and paid 30 daysthereafter).

 

ThePlan will not be fully implemented until the Substantial ConsummationDate.  The Substantial Consummation Date will not occur until theRestructuring and the individuals proposed as officers, directors and keyemployees of Reorganized Herbst Gaming and the Subsidiary Guarantors, as theywill be reorganized pursuant to the Plan (collectively, the “ReorganizedDebtors”) have received all requisite governmental and regulatoryapprovals.  The Company has been advisedby the representatives of the Lenders that the applications of ReorganizedHerbst Gaming, as well as the equity holders of Reorganized Herbst Gaming andtheir principals, have been filed with the gaming authorities in Nevada,Missouri and Iowa, and that the applications of directors, officers and keyemployees required to submit to licensing are expected to be filed in thosejurisdictions in the near future.  TheCompany has been advised by the representatives of the Lenders that the licensingprocess is expected to take nine to 12 months.

 

TheSubstantial Consummation Date is also subject to the satisfaction or waiver ofthe following conditions: (i) none of the Debtors and Lenders are inmaterial breach of the Plan; and (ii) the Bankruptcy Court has authorizedthe assumption and rejection of certain contracts of the Debtors.  The Company currently expects that theSubstantial Consummation Date will occur in the fourth quarter of 2010,although the Company cannot assure you that all conditions to the SubstantialConsummation Date will be satisfied by that date or at all, or that the Companywill be successful in implementing the Restructuring in the form contemplatedby the Plan or at all.  The Plan providesthat the Substantial Consummation Date must occur no later than February 5,2011, the first anniversary of the Effective Date, unless extended by mutualagreement of the Debtors and Requisite Lenders (as defined below).  In the event that the SubstantialConfirmation Date does not occur by that date, or such later date as may beagreed to by the Debtors and the Requisite Lenders, the confirmation of thePlan would be vacated and all claims (except for allowed priority claims,certain allowed secured claims unrelated to the Lenders or the SubordinatedNotes, and allowed general unsecured claims) would be restored as though theEffective Date had never occurred.

 

OnJanuary 28, 2010, the Indenture Trustee, as defined in the Findings ofFact, filed a notice of appeal from the Order. On January 29, 2010, the Debtors elected to have the Appeal heardby the U.S. District Court for the District of Nevada (the “District Court”)and not the U.S. Bankruptcy Appellate Panel for the Ninth Circuit Court ofAppeals.  The appellate briefs are due tobe filed with the District Court commencing April 3, 2010 with the finalreply brief due by May 4, 2010.  TheIndenture Trustee has not sought a stay of the Order.

 

OnNovember 16, 2009, the Indenture Trustee filed its First Amended Complaintfor Declaratory Judgment (the “Amended Complaint”) against the Debtors and theAdministrative Agent under the amended Credit Agreement seeking, among other relief,a judgment of the Bankruptcy Court determining that the Subordinated Notesentitled to pari passu treatment with the obligations due under the amendedCredit Agreement.  The Debtors and theAdministrative Agent filed motions to dismiss the Amended Complaint.  On February 23, 2010, the BankruptcyCourt dismissed the Amended Complaint without prejudice to seek leave tore-file the Amended Complaint in the event the Order is set aside in theAppeal.

 

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TheDebtors and Lenders holding, in the aggregate, approximately 61% of all of theoutstanding claims under the amended Credit Agreement are parties to an amendedand restated lockup agreement (the “Lockup Agreement”).  Pursuant to theLockup Agreement, the parties thereto are contractually obligated to usecommercially reasonable efforts to successfully consummate the Restructuringand achieve the expeditious consummation of the Plan.  The LockupAgreement will automatically terminate, pursuant to its terms, if theSubstantial Consummation Date does not occur on or before February 5,2011, the first anniversary of the Effective Date, unless such terminationevent is waived by Lenders party to the Lockup Agreement holding at leasttwo-thirds in amount of the total claims held by all Lenders party to theLockup Agreement (the “Requisite Lenders”) within five days of the occurrenceof the termination event.  In the event that the Substantial ConsummationDate does not occur by that date, and the Requisite Lenders do not waive therelated termination event and the Lockup Agreement is terminated, the Lenderswould no longer be obligated to support the Restructuring.

 

ThePlan provides that, from the Effective Date through the SubstantialConsummation Date, the Debtors will continue to be managed by the currentofficers and directors.

 

**Narrative Description of Business**

 

Ourbusiness focuses on attracting and fostering repeat business from local gamingpatrons in both our route and casino operations.  Local patrons aretypically sophisticated gaming customers who seek convenient locations, highpayouts and a pleasant atmosphere.

 

*Route Operations*

 

Ourroute operations involve the exclusive installation and operation of slotmachines in chain store and street account locations.  At December 31,2009, we operated approximately 6,200 slot machines throughout the state ofNevada.  We define chain stores as grocery stores, drug stores,merchandise stores and convenience stores, each with more than five locations. Our chain store contracts are primarily with large, national retailerssuch as Albertsons, Vons, Safeway, CVS and Smith’s, as well as Terrible Herbstgas stations and convenience stores.  Street accounts include local bars,restaurants and non-chain convenience stores.  Nevada law limits slotroute operations to certain types of non-casino locations including bars,taverns, convenience stores, grocery stores and drug stores.  Mostlocations are limited to offering no more than 15 slot machines.

 

Wegenerally enter into two types of route contracts: space lease arrangements andrevenue-sharing arrangements.  Under space lease arrangements, which weprincipally enter into with chain stores, we pay a fixed monthly fee for eachlocation in which we place slot machines.  Under revenue-sharingarrangements, which we typically enter into with street accounts, we pay thelocation owner a percentage of the revenues generated by our slot machineslocated at that particular street account.  In order to enter into arevenue-sharing arrangement, the location owner must hold a gaminglicense.  Both space lease and revenue-sharing arrangements typicallyinvolve long-term contracts that provide us with the exclusive right to installour slot machines at particular locations.  In the case of chain stores,our contracts give us the exclusive right to install slot machines at storesopened in the future.

 

*Casino Operations*

 

Ourcasino operations consist of 12 casinos in Northern and Southern Nevada. We also own three casinos in Missouri and Iowa.  All of our casinoproperties focus on local customers, with an emphasis on slot play.  Thefollowing table summarizes our casino assets as of December 31, 2009:

 

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| ** **                                                                    | ** ** | ** **           | ** ** | **Number of**       | ** ** | ** **             |
|-------------------------------------------------------------------------------|------------|----------------------|------------|--------------------------|------------|------------------------|
| **Property**                                                                  | ** ** | **Location**         | ** ** | **Slot********Machines** | ** ** | **Table********Games** | ** ** | **Hotel********Rooms** | ** ** | **Additional** |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| **Herbst Gaming Casino Properties**  (as of December 31, 2009) |       |                 |       |                     |       |                   |   |   |   |   |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| **Southern  Nevada**                                                          | ** ** | ** **           | ** ** | ** **               | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Hotel & Casino                                      |       | Las  Vegas, NV       |       | 960                      |       | 9                      |   | 329 |   | Race  and sports book  196 seat bingo facility |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Town Casino                                                  |       | Pahrump,  NV         |       | 334                      |       | 6                      |   | — |   | Race  and sports book;  120 seat bingo facility |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Lakeside Casino & RV Park                           |       | Pahrump,  NV         |       | 194                      |       | —                 |   | 159 RV spaces |   | Race  and sports book;  192-seat bingo facility;  7 acre lake |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Casino & Bowl                                       |       | Henderson,  NV       |       | 134                      |       | —                 |   | — |   | 16-lane  bowling alley |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Searchlight Casino                                           |       | Searchlight,  NV     |       | 75                       |       | —                 |   | — |   | — |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Buffalo  Bill’s                                                          |       | Primm,  NV           |       | 1,025                    |       | 34                     |   | 1,242 |   | 31,280  sq. ft. conference space, including the 6,800 seat “Star of the Desert”  arena; rollercoaster |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Whiskey  Pete’s                                                          |       | Primm,  NV           |       | 747                      |       | 16                     |   | 779 |   | 8,000  sq. ft. convention space, including a 700 seat showroom |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Primm  Valley Resort and Casino                                               |       | Primm,  NV           |       | 934                      |       | 34                     |   | 625 |   | 21,000  sq.ft conference space |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| **Northern  Nevada**                                                          |       |                 |       |                     |       |                   |   |   |   |   |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Rail City                                                    |       | Sparks,  NV          |       | 875                      |       | 5                      |   | — |   | Sports  book/Keno |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Sands  Regency                                                                |       | Reno,  NV            |       | 539                      |       | 15                     |   | 833 |   | Sports  book; 12,000 sq. ft. conference space/Bingo |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Gold Ranch                                                   |       | Verdi,  NV           |       | 235                      |       | —                 |   | 105 RV spaces |   | Sports  book; California lottery station |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Dayton Depot Casino                                          |       | Dayton,  NV          |       | 247                      |       | —                 |   | — |   | Sports  book |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| **Midwest**                                                                   |       |                 |       |                     |       |                   |   |   |   |   |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Lakeside Casino Resort                                       |       | Osceola,  IA         |       | 1,010                    |       | 20                     |   | 60 Hotel Rooms and 47 RV spaces |   | 10,000  sq. ft. conference space; convenience store and gas station; 121 acres  (88 acres un-developed; 15 acre lake) |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  Mark Twain Casino                                            |       | LaGrange,  MO        |       | 650                      |       | 14                     |   | — |   | — |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| Terrible’s  St. Jo Frontier Casino                                  |       | St. Joseph,  MO |       | 543                      |       | 11                     |   | — |   | 2,400  sq. ft. conference space; 40 acres (32 acres undeveloped) |
|                                                                          |       |                 |       |                     |       |                   |   |   |   |   |
| **Total**                                                                     |       |                 |       | 8,592                    |       | 171                    |   | 3,869 rooms |   | 329  RV spaces |

 

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*Southern Nevada Casinos*

 

Terrible’s Hotel & Casino

 

Terrible’sHotel & Casino in Las Vegas, Nevada (“Terrible’s”) offers a buffet anda 24-hour café.  There are currently 329 rooms with standardamenities.  Terrible’s is conveniently located approximately one mile eastof the Las Vegas Strip, which we believe appeals to locals who wish to avoidthe congestion of the Strip.  Terrible’s favorable location has made itpopular with Strip casino employees.  Although we are not a touristdestination, we receive a certain amount of tourist traffic through our casinodue to our location near the airport, the Strip and the Las Vegas ConventionCenter.

 

Terrible’s Searchlight Casino

 

Terrible’sSearchlight Casino is located in Searchlight, Nevada and offers 75 slotmachines, a full-service truck stop and 24-hour café.

 

Terrible’s Town Casino

 

Terrible’sTown Casino in Pahrump, Nevada, which is approximately 60 miles from Las Vegas,offers approximately 334 slot machines, six table games, a race and sportsbook, a 120-seat bingo facility and a restaurant with buffet.

 

Terrible’s Lakeside Casino & RV Park

 

Terrible’sLakeside Casino & RV Park is located in Pahrump, Nevada and offers 194slot machines, a race and sports book, a 192 seat bingo facility, 159 RV spacesand a restaurant with buffet.

 

Terrible’s Town Casino & Bowl

 

Terrible’sTown Casino & Bowl is located in Henderson, Nevada and offersapproximately 134 slot machines, a 16-lane bowling alley and 24-hour café.

 

*Primm Casinos*

 

Weown the business and lease the real property on which Buffalo Bill’s Hotel andCasino, Whiskey Pete’s Hotel and Casino and Primm Valley Resort and Casino arelocated in Primm, Nevada.  The Primm Casinos are subject to a realproperty lease that has an initial fifty-year term, which expires in 2043, withone twenty-five-year extension option ending in 2068.  Also, the PrimmCasinos collectively own and manage three gas station/convenience stores, aStarbucks Coffee outlet and one California Lottery lotto store.  The Primm Casinos also manage a 36-hole TomFazio golf course with a full-service restaurant.

 

Buffalo Bill’s Hotel and Casino

 

BuffaloBill’s offers 1,025 slot machines and 34 table games. In addition to a 1,242room hotel, Buffalo Bill’s has a full service restaurant and buffet as well asa “Tony Roma’s” restaurant. The western themed property also has extensiveentertainment amenities including the 6,800 seat “Star of the Desert” arenathat hosts big name entertainers throughout the year.  Buffalo Bill’s hasa world class roller coaster as well as water park log rides, a movie theaterand a midway style arcade.

 

Whiskey Pete’s Hotel and Casino

 

WhiskeyPete’s offers 747 slot machines and 16 table games, a sports book and two fullservice bars.  Additionally Whiskey Pete’s has a 779 room hotel , a fullservice coffee shop, a weekend buffet, a McDonald’s restaurant, an 8,000 squarefeet special events and concert venue with 700 seats and a swimming pool.

 

Primm Valley Resort and Casino

 

PrimmValley offers 934 slot machines, 34 table games, a sports book and keno. Additionally Primm Valley has a 625 room hotel and 21,000 square feet ofconvention space.  Primm Valley has afull service coffee shop and buffet as well as the GP Steakhouse.  The resort has a swimming pool, and a fullservice spa is currently under construction. The Primm Valley Resort is connected to the “Fashion Outlets of LasVegas,” a retail complex owned by a third party that houses over 100 designeroutlet stores, including a Neiman Marcus “Last Call,” a Williams Sonoma Outletstore, and Coach, Tommy Bahama, Banana Republic and Versace factory outletstores.

 

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*Northern Nevada / Sands Regent Casinos*

 

Terrible’s Rail CityCasino

 

Terrible’sRail City Casino in Sparks, Nevada has approximately 30,000 square feet ofgaming space housing 875 slots, five table games, including keno, a sports bookoperated by an independent party, a 24-hour family-style restaurant and an alehouse and brew pub.  Rail City’s customerbase comes primarily from Northern Nevada and a majority of its customersreside in close proximity to the casino.

 

Sands Regency Casino Hotel

 

SandsRegency Casino Hotel in Downtown Reno, Nevada has approximately 29,000 squarefeet of gaming space and a full selection of gaming alternatives, including 539slot machines and 15 table games, as well as keno, bingo, live poker and asports book operated by an independent party. Additionally, the Sands resort complex has 833 hotel rooms, including 29suites, a health spa, and a large outdoor swimming pool.  Dining options at the Sands include CabanaCafé, a coffee house/deli-style restaurant, The Buffet at the Sands, and Fuzio’s,an Italian restaurant.  The property alsohas a Mel’s, the Original, diner style restaurant, and an Arby’s restaurant,both of which are operated by third parties. The facility also includes an entertainment cabaret, three cocktaillounges, a comedy club operated by a third party and approximately 12,000square feet of convention and meeting space. Third parties lease space from the Sands and operate a wedding chapel, abicycle and ski rental shop, and a beauty shop. The Sands facility contains multiple parking areas, including a parkinggarage, with total combined capacity for approximately 1,100 vehicles.  A substantial portion of the Sands’ business,particularly our hotel customer base, is arranged through travel groups, bothair and motor coach wholesalers, which offer economy rates, and are primarilyfrom Western Canada, the Pacific Northwest and Northern California.

 

Terrible’s Gold RanchCasino and RV Resort

 

Terrible’sGold Ranch Casino and RV Resort in Verdi, Nevada offers approximately 235 slotmachines in an 8,370 square foot casino, a sports book operated by a thirdparty, a family-style restaurant, a Jack-in-the-Box restaurant leased to andoperated by a third-party, a bar, a 105-space RV park, a California lotterystation, a gas station and a convenience store. Gold Ranch’s guests include both tourists and local residents, withlocal residents generating over half of the property’s casino patronage.  Gold Ranch attempts to attract localresidents through mid-week promotions geared toward enhancing local play mainlythrough lottery, casino, and restaurant programs.  Tourist programs emphasize the RV Park,casino and restaurant cross-promotions. Gold Ranch attempts to attract as much traffic as possible off Interstate80, the major Nevada/California thoroughfare.  We lease the real propertyon which Gold Ranch is located.  The realproperty lease has a twenty-year term with four five-year extension optionsending in 2042.  We possess the option topurchase the real property on which the Gold Ranch business assets are located.

 

Terrible’s Dayton DepotCasino

 

Terrible’sDayton Depot Casino is located in Dayton, Nevada.  We own the buildingthat houses the Dayton Casino and the 4.5 acres of real property on which theDayton Casino is located, as well as a building and 0.5 acres of real propertydirectly across the street which housed a small tavern that is not currentlyoperating.  Dayton Casino hasapproximately 16,000 square feet of casino space, a family-style restaurant,247 slot machines and a sports book operated by a third party.

 

*Casinos**Outside Nevada*

 

Terrible’s LakesideCasino Resort

 

LakesideIowa, a riverboat casino located on West Lake in Osceola, Iowa, offers 1,010slot machines and 20 table games.  LakesideIowa offers a 60 room, all-suite hotel, modular conference and meetingfacilities that can seat up to 900 people and that are used for meetings,banquets and concerts, a fitness center, an outdoor pool and a gift shop. In addition, Lakeside Iowa offers a 280-seat restaurant/buffet and loungelocated in the main lobby, two bars located in the casino, a convenience storeand gas station that are located adjacent to the casino and 47 RV spaces withutility hookups.  Lakeside Iowa owns 121 acres of land, 88 acres of whichare undeveloped.

 

Terrible’s Mark TwainCasino

 

MarkTwain, located in a man-made basin adjacent to the Mississippi River inLaGrange, Missouri, offers 650 slot machines and 14 table games.  Mark Twain offers a 157-seat restaurant/barand an additional bar in the casino.  The casino has a locally populartheme based on Mark Twain, who grew up in and wrote about nearby Hannibal,Missouri.

 

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Terrible’s St. Jo Frontier Casino

 

St. Jo,located in a man-made basin adjacent to the Missouri River in St. Joseph,Missouri, offers 543 slot machines and 11 table games.  St. Jo offers a bar, a buffet and over2,400 total square feet of modular conference and meeting space.  Thecasino and its amenities have a locally popular Pony Express western theme thatplays off St. Joseph’s heritage as the founding location and headquartersof the Pony Express.  St. Jo owns 40 acres of land, 32 acres of whichare undeveloped.

 

**Financial Information**

 

Theprimary source of our revenue and income is from our route and casinooperations, although we view the restaurants, bars and services on our premisesto be important adjuncts to our casino operations.  The following tablesets forth the contribution to total net revenues on a dollar and percentagebasis of our major activities for the years ended December 31, 2007, 2008and 2009.

 
| ** **                      | ** ** | **Years Ended December 31,**           | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **2007(1)**                                           | ** ** | **2008(1)** | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **Amount**                                            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Revenues:                       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Route operations(2)             |       | $                                                     | 276,946    |   | 35.3 | % | $ | 243,635 |   | 31.6 | % | $ | 200,637 |   | 30.0 | % |
| Casino operations(2)            |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Nevada                          |       | 331,517                                               |       | 42.2 |   | 337,006 |   | 43.7 |   | 312,149 |   | 46.7 |   |
| Other states                    |       | 141,731                                               |       | 18.0 |   | 137,188 |   | 17.8 |   | 139,280 |   | 20.8 |   |
| Other                           |       | 98,987                                                |       | 12.6 |   | 116,609 |   | 15.2 |   | 86,285 |   | 12.9 |   |
| Total revenues                  |       | $                                                     | 849,181    |   |   |   | $ | 834,438 |   |   |   | $ | 738,351 |   |   |   |
| Less promotional  allowances(2) |       | (64,241                                               | )          | (8.2 | ) | (63,349 | ) | (8.2 | ) | (69,788 | ) | (10.4 | ) |
| Total net revenues              |       | $                                                     | 784,940    |   | 100.0 | % | $ | 771,089 |   | 100.0 | % | $ | 668,563 |   | 100.0 | % |

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(1)    Calendaryear 2007 reflects a partial year of, operations of the Sands Regent Casinos,which were acquired in January 2007, and the Primm Casinos, which wereacquired in April 2007.  As a result, the results of operations forcalendar year 2007 may not be comparable to the results of operations in2008 and 2009.

 

(2)    Routeand casino revenues are the net difference between gaming wins and losses. Promotional allowances consist primarily of food and beverages furnishedgratuitously to customers.  The retail value of such services is includedin the respective revenue classifications and is then deducted as promotionalallowances.  See Note 2, Description of Business and Summary ofSignificant Accounting Policies” to the accompanying Notes to consolidatedfinancial statements in “Item 8.  Financial Statements and SupplementaryData”.

 

See“Item 8.  Financial Statements and Supplementary Data” for additionalfinancial information about us.

 

**Marketing**

 

*Nevada Market*

 

Sincewe believe that a vast majority of our patrons at our casinos in SouthernNevada are locals, our marketing efforts are primarily focused on the localpopulation of Clark County and Nye County, Nevada.  These marketing efforts seek to capitalize onthe strong recognition and high level of quality and value associated with theTerrible Herbst trade name and its cowboy logo, which are used in 87 gasolinestations and convenience stores in Southern Nevada and 12 gasoline stations andconvenience stores in California, Arizona and Utah.  The Terrible Herbst brand is prominentlydisplayed in our route and casino operations.  We license the TerribleHerbst trade name from Terrible Herbst, Inc., a related party, through2011.  Subject to mutual consent, wemay extend the term of the license agreement for five successive five-yearperiods.  The Plan provides that thislicense agreement will be assigned to Reorganized Herbst Gaming.  As the Terrible Herbst brand is important toour operations in Southern Nevada, any loss of this license could adverselyaffect our business.  See “Item 13.  CertainRelationships and Related Transactions” for a further discussion of thislicense agreement.

 

Wehave a state of the art player’s club loyalty program, “the one card”, thatcombines the loyalty programs at all of our Nevada casinos.  Under the one card program customers arerewarded with points for playing at all of our casino locations in Nevada, whichpoints may be redeemed for cash as well as free or discounted rooms, foodor other goods or services provided at any such location.

 

Thecustomer base of the Sands Regent Casinos ranges from locals living in NorthernNevada, in the case of Rail City, to customers from Western Canada, the PacificNorthwest and Northern California, in the case of the Sands.  Themarketing efforts for 

 

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theSands Regent Casinos are primarily focused on attracting locals andvalue-minded out-of-market visitors through aggressive promotions and customerloyalty programs.

 

Thecustomer base of the Primm Casinos consists primarily of value orientedtourists living in the inland empire of Southern California such as SanBernardino, Victorville and Barstow. The marketing efforts of the Primm Casinosprior to our acquisition were primarily focused on attracting value-mindedout-of-market visitors through aggressive promotions and special events. While continuing this focus, we have been expanding the marketing of thesecasinos into the Southern Nevada locals market.  The Primm Casinos alsomanage a 36-hole golf course and a new spa and exercise facility at the PrimmValley Casino that opened in December 2009.

 

*Midwest Market*

 

Eachof Lakeside Iowa, Mark Twain and St. Jo has a highly recognizable brandname within its respective community.  In addition, each of Lakeside Iowa,Mark Twain and St. Jo operates a slot club that rewards customers withpoints for every coin-in.  Points are redeemable for free play as well aspoints that may be used for food, valet or retail items.  Each of thethree casinos also hosts blackjack and slot tournaments as well as otherspecial events on the casino premises that seek to recognize and cultivateregular casino patrons.

 

**Business Strategy**

 

Ourbusiness strategy for the route business primarily focuses on attracting andfostering repeat business from local gaming patrons. Local patrons aretypically sophisticated gaming customers who seek convenient locations, highpayouts and a pleasant atmosphere.  Because local gaming consumersrepresent high potential repeat business, generating customer satisfaction andloyalty is a critical component of our strategy.  With respect to thecasino businesses, our business strategy focuses on the value oriented, highrepeat patron from both local and drive in tourist gaming markets.

 

*Route Operations*

 

Webelieve that route patrons choose to play slot machines near their homes. We attract and retain these players by installing state-of-the-art slotmachines with popular games, offering a high level of customer service andproviding an attractive, comfortable atmosphere at our route locations. We actively manage our route locations as if they were casinos.  Forexample, we extend patrons’ slot play by offering free snacks and beverages atsome of our route locations.  We place our gaming machines in locationswhere they will receive maximum customer traffic, generally near a store’sentrance.  In addition, we utilize a game tracking system and othertechnology to monitor the play of our patrons.  Upon reviewing andanalyzing our customer play, we adjust the types of games available.

 

Wealso maximize profitability through cost-saving technologies.  Forexample, our multi-denominational, multi-game machines, which allow patrons totailor their gaming experience to their preferences, may be upgraded byexchanging a computer chip instead of replacing the entire machine.  Othertechnologies also allow patron jackpot payments on site and help to reduce theneed for slot route technicians to drive to locations to fill slot machineswith coins or to pay jackpots.

 

*Casino Operations*

 

Ourcasino operations strategy is to offer high quality gaming, hotel and diningexperiences at affordable prices.  Our primary target market consists ofvalue oriented local middle market gaming patrons who gamble frequently. We believe that we attract our targeted customers and that they return to ourcasinos because of our high value orientation, as well as convenient locations,great food, ample parking and high slot machine payout rates.  Becauselocals demand variety and quality in their slot and video poker machine play,our locals casino properties offer the latest in slot and video pokertechnology.  Although perceived value initially attracts a customer to ourcasino properties, actual value generates customer satisfaction andloyalty.  For our drive-in tourist market casinos many of the samestrategies apply as this market is heavily focused on repeat business and highvalue.  We experience little, if any, non-drive-in touristpatronage.  As part of our commitment to providing a quality entertainmentexperience for our patrons, we are dedicated to ensuring a high level ofcustomer satisfaction and loyalty by providing attentive customer service in afriendly, casual atmosphere.  We recognize that consistent quality and acomfortable atmosphere stem from the collective care and friendliness of eachemployee.

 

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**Competition**

 

*Nevada Market*

 

Ourslot route operations are subject to substantial direct competition for ourrevenue-sharing and fixed space lease locations from one large route operatorand numerous small operators, located principally in Las Vegas, Nevada. The principal method of competition for slot route operators includes theeconomic terms of the revenue-sharing or space lease arrangement, the servicesprovided and the reputation of the route operator.  Price competition forrevenue-sharing or space lease arrangements is intense and we believe that pricecompetition among slot route operators will continue.  We are one of thelargest route operators with approximately 6,200 slot machines situated inlocations outside of our casinos as of December 31, 2009.

 

Withrespect to our casino operations in Las Vegas, Terrible’s Hotel &Casino competes for local gaming customers with other locals-orientedcasino-hotels in Las Vegas.  We do not believe that we are in directcompetition with many of the resort-casino properties on the Las Vegas Strip,which focus primarily on attracting tourist players.  Instead, we believethat our principal competitors in our casino operations are the two other localcasinos located within a one mile radius.  We compete with theseproperties on the basis of the desirability of location, payout rates,personalized approach, casino promotions, comfort and value of restaurants andhotel rooms and the variety and value of entertainment.  The constructionof new casinos or the expansion of existing casinos near our casinos could havea negative impact on our casino operations.

 

Ourcasino operations in Pahrump, Henderson, and Searchlight, Nevada facecompetition from other casinos located in the vicinity of these properties.

 

Competitionamong casinos in the markets in which the Sands Regent Casinos are located,particularly the Reno/Sparks market, is intense. The expansion and maturationof Native American gaming in Northern California, the Pacific Northwest, andBritish Columbia has had an adverse impact on total gaming revenues of the greaterReno area.  Native American casinos inNorthern California offer most of the amenities that casinos in Reno offer,including big name entertainment and hotel rooms. In addition, Thunder Valley,on the Interstate-80 corridor in California, has grown to be one of the country’sbusiest and most profitable casinos and is currently expanding its hotel andcasino. More Native American casinos and expansions to other existing casinosare planned in Northern California and many are partnering with existing gamingcompanies that have financial resources to promote their facilities.  Manyof our direct competitors in the Reno market have greater financial and otherresources than we do.

 

ThePrimm Casinos face competition from Native American gaming in Southern California,other casinos outside of Las Vegas, such as casinos located in Laughlin andMesquite, Nevada, as well as value oriented casinos located in the Las Vegasmarket.

 

*Midwest Market*

 

Eachof Lakeside Iowa, Mark Twain and St. Jo competes for local gamingcustomers with other casinos in their respective markets.

 

LakesideIowa is located along Interstate 35, approximately 40 miles southwest of DesMoines, Iowa.  The primary competitors of Lakeside Iowa are the PrairieMeadows racino, the Riverside Casino and Golf Resort and the Meskwaki BingoCasino Hotel.  The Prairie Meadows racino is located approximately 60miles from Lakeside Iowa east of Des Moines.  Riverside Casino and GolfResort is located in Riverside, Iowa, approximately 175 miles from Osceola.  The Meskwaki Bingo Casino Hotel is located inTama, Iowa and is approximately 110 miles from Lakeside Iowa.

 

MarkTwain is the only casino in northeast Missouri and is approximately 15 milesfrom Quincy, Illinois and approximately 25 miles from Hannibal, Missouri. Theclosest casino to Mark Twain is the Catfish Bend Casino, located in Burlington,Iowa, which is approximately 75 miles from LaGrange.

 

St. Jois approximately 50 miles north of Kansas City, Missouri. St. Jo primarilytargets residents of St. Joseph, Missouri and is the only casino inSt. Joseph.  However, St. Jo competes indirectly with fourriverboats in Kansas City, Missouri and to a lesser extent with several NativeAmerican casinos, the closest of which is approximately 45 miles fromSt. Joseph.

 

Certainstates have recently legalized, and other states are considering legalizing,casino gaming in certain areas.  In addition, states such as Illinois andKansas have awarded additional gaming licenses or are expanding permittedgaming.  In addition, Iowa is consideringawarding additional gaming licenses in the State.  The award of one or more additional licensesin Iowa or in other locations close to Lakeside Iowa, Mark Twain or St. Jowould be expected to adversely affect our results of operations and financialcondition.

 

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**Seasonality**

 

Wedo not believe that our business as a whole is seasonal to any significantdegree.  However, our casinos in the Midwest and in Northern Nevada doexperience some business interruption during the winter months.  For example, in December 2009 as well asin the first two months of 2010, our Midwest casinos experienced a decline inrevenue related to severe weather conditions.

 

**Environmental Laws**

 

Compliancewith federal, state and local laws enacted for the protection of theenvironment to date had no material effect upon our capital expenditures,earnings or competitive position and we do not anticipate any material adverseeffects in the future based on the nature of our operations.

 

**Employees**

 

Asof December 31, 2009, we employed 5,654 employees.  None of ourcurrent employees is covered by a collective bargaining agreement.  Webelieve that our relationship with our employees is good.

 

**Regulation and Licensing**

 

*Nevada*

 

Theownership and operation of casino gaming facilities and slot routes in Nevadaare subject to the Nevada Gaming Control Act and the regulations promulgatedthereunder, or the Nevada Act, and various local regulations.

 

Ourgaming operations are subject to the licensing and regulatory control of theNevada Gaming Commission, the Nevada State Gaming Control Board, the ClarkCounty Liquor and Gaming Licensing Board, and the Cities of Las Vegas, Reno,Henderson and other local regulatory authorities (the “Nevada GamingAuthorities”).

 

Thelaws, regulations and supervisory procedures of the Nevada Gaming Authoritiesare based upon declarations of public policy which are concerned with, amongother things:

 

·                  the preventionof unsavory or unsuitable persons from having a direct or indirect involvementwith gaming at any time or in any capacity;

 

·                  theestablishment and maintenance of responsible accounting practices andprocedures;

 

·                  the maintenanceof effective controls over the financial practices of licensees, including theestablishment of minimum procedures for internal fiscal affairs and thesafeguarding of assets and revenues, providing reliable record keeping andrequiring the filing of periodic reports with the Nevada Gaming Authorities;

 

·                  the preventionof cheating and fraudulent practices; and

 

·                  providing asource of state and local revenues through taxation and licensing fees.

 

Changesin these laws, regulations and procedures could have an adverse effect on ourgaming operations.

 

Corporationsand other entities that operate casinos or slot routes in Nevada are requiredto be licensed by the Nevada Gaming Authorities.  A gaming license forsuch activities requires the periodic payment of fees and taxes and is nottransferable.  Herbst Gaming is registered by the Nevada Gaming Commissionas a publicly traded corporation (a “registered corporation”).  As aregistered corporation, we are required periodically to submit detailedfinancial and operating reports to the Nevada Gaming Commission and furnish anyother information that the Nevada Gaming Commission may require. Herbst Gaming has been found suitable by the Nevada Gaming Commission to ownthe stock or the membership interests of various licensed corporations andlimited liability companies that own and operate casinos or slot machineoperating routes licensed by the Nevada Gaming Commission (all of which arecollectively  referred to as the “Gaming Subsidiaries”).  No personmay become a stockholder  or member of, or receive any percentage ofthe profits from,  any of the Gaming Subsidiaries without first obtaininglicenses and approvals from the Nevada Gaming Authorities.  Herbst Gamingand all of its Gaming Subsidiaries have obtained from the Nevada GamingAuthorities the various registrations, approvals, permits and licenses requiredin order to engage in the various gaming businesses that each respectivelyoperates in Nevada.

 

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TheNevada Gaming Authorities may investigate any individual who has amaterial relationship to, or material involvement with, Herbst Gaming or any ofthe Gaming Subsidiaries in order to determine whether such individual issuitable or should be licensed as a business associate of a gaminglicensee. Officers, directors and certain key employees of Herbst Gamingor any of the Gaming Subsidiaries must file applications with the Nevada GamingAuthorities and are required to be licensed by the Nevada GamingAuthorities.  The Nevada Gaming Authorities may deny an applicationfor licensing for any cause that they deem reasonable.  A finding ofsuitability is comparable to licensing, and both require submission of detailedpersonal and financial information followed by a thorough investigation. Changes in licensed positions must be reported to the Nevada Gaming Authoritiesand, in addition to their authority to deny an application for a finding ofsuitability or licensure, the Nevada Gaming Authorities have jurisdiction todisapprove any change in corporate position.

 

Ifthe Nevada Gaming Authorities were to find an officer, director or key employeeunsuitable for licensing or unsuitable to continue having a relationship withus, we would have to sever all relationships with that person.  Inaddition, the Nevada Gaming Commission may require us to terminate theemployment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are notsubject to judicial review in Nevada.

 

HerbstGaming and the Gaming Subsidiaries are required to submit detailed financialand operating reports to the Nevada Gaming Commission. Substantially allmaterial loans, leases, sales of securities and similar financing transactionsby Herbst Gaming and its Gaming Subsidiaries must be reported, to and/orapproved by, the Nevada Gaming Commission.

 

Ifit were determined that Herbst Gaming or any of its Gaming Subsidiariesviolated the Nevada gaming laws, our gaming licenses and registrations with theNevada Gaming Commission could be limited, conditioned, suspended or revoked,subject to compliance with certain statutory and regulatory procedures. In addition, Herbst Gaming, the Gaming Subsidiaries and the persons involvedcould be subject to substantial fines for each separate violation of the Nevadalaws at the discretion of the Nevada Gaming Commission. Further, the NevadaGaming Commission could appoint a supervisor to operate our gaming propertiesand, under certain circumstances, earnings generated during the supervisor’sappointment (except for the reasonable rental value of our gaming properties)could be forfeited to the State of Nevada. Limitation, conditioning orsuspension of any gaming license or the appointment of a supervisor could (andrevocation of any gaming license would) materially adversely affect ouroperations.

 

Anybeneficial holder of Herbst Gaming’s voting or non-voting securities,regardless of the number of shares owned, may be required to file anapplication, be investigated and have his or her suitability as a beneficialholder of Herbst Gaming’s voting or non-voting securities determined if theNevada Gaming Commission has reason to believe that such ownership would beinconsistent with the declared policies of the State of Nevada.  If such beneficial holder who must be foundsuitable is a corporation, partnership or trust, it must submit detailedbusiness and financial information including a list of its beneficialowners.  The applicant must pay all costs of investigation incurred by theNevada Gaming Authorities in connection with conducting such investigation.

 

TheNevada Act requires any person who acquires more than 5% of a registeredcorporation’s voting securities to report the acquisition to the Nevada GamingCommission.  The Nevada Act requires beneficial owners of more than 10% ofa registered corporation’s voting securities apply to the Nevada GamingCommission for a finding of suitability within 30 days after the Chairman ofthe Nevada State Gaming Control Board mails the written notice requiring suchfiling.  However, an “institutionalinvestor,” as defined in the Nevada Act, that beneficially owns more than 10%,but not more than 11%, of a registered corporation’s voting securities as aresult of a stock repurchase by the registered corporation may not be requiredto file such an application.  Further, aninstitutional investor that acquires more than 10%, but not more than 25%, of aregistered corporation’s voting securities may apply to the Nevada GamingCommission for a waiver of a finding of suitability if that institutionalinvestor holds the voting securities for investment purposes only.  Aninstitutional investor that has obtained a waiver may hold more than 25%, butnot more than 29%, of a registered corporation’s voting securities and maintainits waiver if the additional ownership results from a stock repurchase by theregistered corporation.  An institutionalinvestor will not be deemed to hold voting securities for investment purposesunless the voting securities were acquired and are held in the ordinary courseof business as an institutional investor and not for the purpose of causing,directly or indirectly, the election of a majority of the members of the boardof directors of the registered corporation, any change in the corporatecharter, bylaws, management, policies or operations of the registeredcorporation, or any of its gaming affiliates or any other action which theNevada Gaming Commission finds to be inconsistent with holding the registeredcorporation’s voting securities for investment purposes only.  Activitieswhich are not deemed to be inconsistent with holding voting securities forinvestment purposes only include:

 

·                  voting on allmatters voted on by stockholders;

 

·                  makingfinancial and other inquiries of management of the type normally made bysecurities analysts for informational purposes and not to cause a change in itsmanagement, policies or operations; and

 

·                  otheractivities as the Nevada Gaming Commission may determine to be consistentwith such investment intent.

 

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Anyperson who fails or refuses to apply for a finding of suitability or a licensewithin 30 days after being ordered to do so by the Nevada Gaming Commission orby the Chairman of the Nevada State Gaming Control Board, may be foundunsuitable.  The same restrictions apply to a record owner if the recordowner, after request, fails to identify the beneficial owner.  Anystockholder found unsuitable and who holds, directly or indirectly, anybeneficial ownership of the common stock of a registered corporation beyond theperiod of time as may be prescribed by the Nevada Gaming Commissionmay be guilty of a criminal offense.  Herbst Gaming and theGaming Subsidiaries may become subject to disciplinary action if, afterreceipt of notice that a person is unsuitable to be a stockholder or to haveany other relationship with Herbst Gaming or the Gaming Subsidiaries, HerbstGaming:

 

·                  pays thatperson any dividend or interest upon voting securities;

 

·                  allows thatperson to exercise, directly or indirectly, any voting right conferred throughsecurities held by that person;

 

·                  paysremuneration in any form to that person for services rendered orotherwise; or

 

·                  fails to pursueall lawful efforts to require the unsuitable person to relinquish his votingsecurities for cash at fair market value.

 

Additionally,the Clark County Liquor and Gaming Licensing Board has taken the position thatit has the authority to approve all persons owning or controlling the stock ofany corporation controlling a gaming license.

 

HerbstGaming may be required to disclose to the Nevada State Gaming Control Board andthe Nevada Gaming Commission the identities of all holders of its debtsecurities.  The Nevada Gaming Commission may, in its discretion, requirethe holder of any debt or similar security of a registered corporation to fileapplications, be investigated and be found suitable to own the debt or othersecurity of a registered corporation.  If the Nevada Gaming Commissiondetermines that a person is unsuitable to own the security, then pursuant toNevada law, the registered corporation can be sanctioned, including the loss ofits approvals, if without the prior approval of the Nevada Gaming Commission,it:

 

·                  pays to theunsuitable person any dividend, interest, or any distribution whatsoever;

 

·                  recognizes anyvoting right by the unsuitable person in connection with debt securities;

 

·                  pays theunsuitable person remuneration in any form; or

 

·                  makes any paymentto the unsuitable person by way of principal, redemption, conversion, exchange,liquidation or similar transaction.

 

HerbstGaming is required to maintain a current stock ledger in Nevada, whichmay be examined by the Nevada Gaming Authorities at any time.  If anysecurities are held in trust by an agent or by a nominee, the record holdermay be required to disclose the identity of the beneficial holder to theNevada Gaming Authorities.  A failure to make such disclosure may begrounds for finding the record holder unsuitable.  We are also required torender maximum assistance in determining the identity of the beneficialowner.  The Nevada Gaming Commission has the power to require oursecurities to bear a legend indicating that the securities are subject to theNevada Act.

 

HerbstGaming may not make a public offering of securities without the prior approvalof the Nevada Gaming Commission if the proceeds from the offering are intendedto be used to construct, acquire or finance gaming facilities in Nevada, or toretire or extend obligations incurred for those purposes or similartransactions.  Furthermore, any such approval, if granted, does notconstitute a finding, recommendation or approval by the Nevada GamingCommission or the Nevada State Gaming Control Board as to the accuracy oradequacy of the prospectus or the investment merits of the securitiesoffered.  Any representation to the contrary is unlawful.

 

Changesin the control of Herbst Gaming through merger, consolidation, stock or assetacquisitions, management or consulting agreements, or any act or conduct by aperson whereby that person obtains control (including foreclosure on thepledged shares), may not occur without the prior approval of the NevadaGaming Commission.  Entities seeking to acquire control or ownership of aregistered corporation must satisfy the Nevada State Gaming Control Board andNevada Gaming Commission in a variety of stringent standards prior to assumingcontrol of such registered corporation.  The Nevada Gaming Commissionmay also require the stockholders, officers, directors and other personshaving a material relationship or involvement with the entity proposing toacquire control, to be investigated and licensed as part of the approvalprocess relating to the transaction.

 

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TheNevada legislature has declared that some corporate acquisitions opposed bymanagement, repurchases of voting securities and corporate defensive tacticsaffecting Nevada corporate gaming licensees and registered corporations thatare affiliated with those operations may be injurious to stable and productivecorporate gaming.  The Nevada Commissionhas established regulations to ameliorate the potentially adverse effects ofthese business practices upon Nevada’s gaming industry and to further Nevada’spolicy to: (1) assure the financial stability of corporate gaminglicensees and their affiliates; (2) preserve the beneficial aspects ofconducting business in the corporate form; and (3) promote a neutralenvironment for the orderly governance of corporate affairs.  Approvals are, in certain circumstances,required from the Nevada Commission before the registered corporation can makeexceptional repurchases of voting securities above the current market price andbefore a corporate acquisition opposed by management can be consummated.  The Nevada Act also requires prior approvalof a plan of recapitalization proposed by the registered corporation’s board ofdirectors in response to a tender offer made directly to the registeredcorporation’s stockholders for the purposes of acquiring control of theregistered corporation.

 

Licensefees and taxes, computed in various ways depending on the type of gaming oractivity involved, are payable to the State of Nevada and to the counties andcities in which the Nevada licensee’s respective operations areconducted.  Depending upon the particular fee or tax involved, these feesand taxes are payable either monthly, quarterly or annually and are based uponeither:

 

·                  a percentage ofthe gross revenues received;

 

·                  the number ofgaming devices operated; or

 

·                  the number oftable games operated.

 

Anyperson who is licensed, required to be licensed, registered, required to beregistered or is under common control with such persons, or Licensees, and whois or who proposes to become involved in a gaming venture outside of Nevada, isrequired to deposit with the Nevada State Gaming Control Board, and thereaftermaintain, a revolving fund in the amount of $10,000 to pay the expenses ofinvestigation by the Nevada State Gaming Control Board of the Licensees’participation in foreign gaming.  The revolving fund is subject toincrease or decrease in the discretion of the Nevada Gaming Commission. Thereafter, Licensees are also required to comply with certain reportingrequirements imposed by the Nevada gaming laws.  Licensees are alsosubject to disciplinary action by the Nevada Gaming Commission if theyknowingly violate any laws of the foreign jurisdiction pertaining to a foreigngaming operation, fail to conduct the foreign gaming operation in accordancewith the standards of honesty and integrity required of Nevada gaming operations,engage in activities or enter into associations that are harmful to the Stateof Nevada or its ability to collect gaming taxes and fees, or employ, contractwith or associate with a person in the foreign operation who has been denied alicense or a finding of suitability in Nevada on the ground of personalunsuitability.

 

*Missouri*

 

OnNovember 3, 1992, a statewide referendum authorized gaming in the State ofMissouri on the Missouri and the Mississippi Rivers.  On April 29,1993, Missouri enacted revised legislation (as amended, the “Missouri GamingLaw”) which amended the existing legislation.  In a decision handed downon January 25, 1994, the Missouri Supreme Court held that games of chancewere prohibited under the Missouri constitution.  In a statewide electionheld on November 8, 1994, Missouri voters approved the adoption of anamendment to the Missouri Constitution which permits the legislature to allowgames of chance to be conducted on excursion boats and floating facilities onthe Mississippi River and the Missouri River.  As a result of theamendment, games of chance are also permitted, subject to Missouri GamingLaw.  Pursuant to the Missouri Gaming Law, there are twelve operatingriverboat gaming facility sites in Missouri: one in Caruthersville; one inBoonville; four in the St. Louis area; four in the Kansas City area; one inLaGrange; and one in St. Joseph.

 

Opponentsof gaming in Missouri have brought several legal challenges to gaming in thepast and may possibly bring similar challenges in the future.  On November 25,1997, the Missouri Supreme Court overturned a state lower court and held that aportion of the Missouri Gaming Law that authorized excursion gaming facilitiesin “artificial basins” up to 1,000 feet from the Mississippi or Missouri riverswas unconstitutional.  This ruling created uncertainty as to the legalstatus of several excursion gaming riverboat facilities in the state.  On November 3,1998, a statewide referendum was held, whereby the voters amended theconstitution to allow “artificial basins” for existing facilities, effectivelyoverturning the above Missouri Supreme Court decision.  There can be noassurances that any future challenges, if brought, would not further interferewith gaming operations in Missouri, including the operations of St. Jo andMark Twain.

 

Underthe Missouri Gaming Law, the ownership and operation of riverboat gamingfacilities in Missouri are subject to extensive state and localregulation.  Herbst Gaming, HGI—St. Jo, Inc., the subsidiary ofHerbst Gaming that owns St. Jo and the current licensee and HGI—Mark Twain, Inc.,the subsidiary of Herbst Gaming that owns Mark Twain and the current licensee,any 

 

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subsidiaries,and some of their officers and employees are and will be subject to specificregulations, including ongoing licensing requirements.  As part ofthe application and licensing process for a gaming license, the applicant mustsubmit detailed financial, operating and other reports to the Missouri GamingCommission.  Each applicant has an ongoing duty to update the informationprovided to the Missouri Gaming Commission in the application, usually withinseven days of a material change in the information on file with the MissouriGaming Commission.  Each of St. Jo and Mark Twain has frequentlyupdated its application materials since it was initially licensed.  Inaddition to the information required of the applicant, directors, officers,affiliated business entities and other defined “key persons” (which includeindividuals and companies designated by the Missouri Gaming Commission) mustsubmit Personal Disclosure Forms, which include detailed financial information,and are subject to thorough investigations.  In addition, some officersand directors of Herbst Gaming, as well as Herbst Gaming itself, have submittedPersonal Disclosure Forms and applications to the Missouri Gaming Commission. All gaming employees must obtain an occupational license issued by the MissouriGaming Commission.  Suppliers are also subject to licensing requirementsof the Missouri Gaming Commission.  Aninstitutional investor holding an interest of 20% or less in Herbst Gaming foronly passive investment purposes, may be exempted from these licensurerequirements by the Missouri Gaming Commission.

 

EffectiveMay 30, 2008, certain amendments were made to Missouri’s gamingregulations that provide for the division of Missouri gaming licenses into Class Aand Class B Licenses. Herbst Gaming now holds a Class A License whichallows Herbst Gaming to operate the HGI-St. Jo and HGI-Mark Twain businessentities. HGI-St. Jo and HGI-Mark Twain now hold Class B Licenses allowingthem to operate the respective riverboat gaming operations in Missouri. Basedon these amended regulations, HGI-St. Jo as operator of Terrible’s FrontierCasino facility and HGI-Mark Twain as operator of the Mark Twain Casinofacility became Class B license holders. Herbst Gaming, as the holding and parent company of HGI-St. Jo andHGI-Mark Twain, holds a Class A license.

 

Boththe holding company Class A license and the operating Class Blicenses remain issued through application to the Missouri Gaming Commission,which continues to require, among other things:

 

·                  suitabilityinvestigations into an applicant’s character, financial responsibility,experience and qualifications;

 

·                  suitabilityinvestigations into each designated key person or affiliated business entity’scharacter, financial responsibility, experience and qualifications;

 

·                  disclosure ofrequired financial (see above) and other personal information on each keyperson or designated affiliated business entity;

 

·                  disclosure ofdetailed information about the applicant’s history, business, affiliations, officers,directors and owners;

 

·                  an affirmativeaction plan for the hiring and training of minorities and women; and

 

·                  an economicdevelopment or impact report.

 

Licensefees cover all related costs of the Missouri Gaming Commission investigationand are a minimum of $50,000 for the initial application and $25,000 annuallythereafter.  Each of Herbst Gaming, HGI—St. Jo and HGI—Mark Twain hasundergone a full licensing investigation and hearing in connection with itslicensing.

 

TheMissouri Gaming Law and implementing regulations impose restrictions on the useof and do not permit the transfer of the gaming licenses as well as limitationson transactions engaged in by licensees.  The licenses issued by theMissouri Gaming Commission may not be transferred nor pledged ascollateral.  The Missouri Gaming Law regulations bar a licensee fromtaking any of the following actions without prior notice to, and approval by,the Missouri Gaming Commission:

 

·                  any transfer orissuance of an ownership interest in a gaming licensee that is not a publiclyheld company;

 

·                  any transfer orissuance of an ownership interest of five percent or more of the issued andoutstanding ownership interest of Herbst Gaming which is publicly traded and isa holding company;

 

·                  any privateincurrence of debt by the licensee or any holding company of $1,000,000 ormore;

 

·                  any publicissuance of debt by a licensee or its holding company; and

 

·                  defined “significantrelated party transactions.”

 

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Inaddition, the licensee must notify the Missouri Gaming Commission of othertransactions that include the transfer of five percent or more of an ownershipinterest in the licensee or holding company if publicly held and anytransaction of at least $1,000,000.

 

Therestrictions on transfer of ownership apply to Herbst Gaming as well as thedirect licensees, HGI—St. Jo and HGI—Mark Twain.  Gaming equipment maynot be pledged.  Corporate stock of some licensees may not be pledgedexcept in narrow circumstances and subject to regulatory conditions.

 

Missouristatutes and administrative rules contain detailed requirements andconditions concerning the operation of a licensed excursion gaming boatfacility, including but not limited to the following:

 

·                  a charge of twodollars per gaming customer per excursion that licensees must either collectfrom each customer or pay itself to the Missouri Gaming Commission;

 

·                  minimumpayouts;

 

·                  the payment ofa 21% tax on adjusted gross receipts;

 

·                  prohibitions againstproviding credit to gaming customers;

 

·                  the use ofcredit cards and cashing of checks by customers;

 

·                  providingsecurity on the excursion gambling boat, including a requirement that eachlicensee reimburse the Missouri Gaming Commission for all costs of any MissouriGaming Commission staff, including Missouri Highway Patrol Officers, necessaryto protect the public on the licensee’s riverboat;

 

·                  the receipt ofliquor licenses from the Missouri Gaming Commission and local jurisdictions;and

 

·                  the adoption ofminimum control standards for the conduct of gaming and the operation of thefacility approved by the Missouri Gaming Commission.

 

TheMissouri Gaming Commission has the power, as well as broad discretion inexercising this power, to revoke or suspend gaming or occupational licenses andimpose other penalties for violations of the Missouri Gaming Law and the rules andregulations promulgated thereunder, including without limitation, forfeiture ofall gaming equipment used for improper gaming and fines of up to three times alicensee’s highest daily gross receipts during the preceding twelve months.

 

Althoughthe Missouri Gaming Law provides no limit on the amount of riverboat space thatmay be used for gaming, the Missouri Gaming Commission is empowered toimpose space limitations through the adoption of rules and regulations.

 

Previously,the Missouri Gaming Law imposed as to each customer a $500 loss limit pertwo-hour period established by each licensee with the approval of the MissouriGaming Commission.  However, by vote ofMissouri registered voters on November 8, 2008, the Missouri Gaming Lawwas amended to provide that the Missouri Gaming Commission shall not establishany regulations or policies that limit the amount of wagers, losses or buy-inamounts.

 

Inaddition, the Missouri Gaming Commission is empowered to determine on a cityand county-specific basis where “dockside” or permanently-docked gaming isappropriate and may be permitted.  The Missouri Gaming Commission hasauthorized all twelve licensed sites to operate all or a portion of theirfacilities on a continuously docked basis.

 

OnFebruary 23, 2000, the Missouri Gaming Commission granted Mark TwainCasino, L.L.C., from which Herbst Gaming purchased the Mark Twain, theauthority to permanently dock the excursion gambling riverboat facility knownas the “Mark Twain Casino.” On February 15, 1996, the Missouri GamingCommission granted St. Joseph Riverboat Partners, from which Herbst Gamingpurchased St. Jo, the authority to permanently dock the excursion gamblingriverboat facility known as the “Biloxi Bell, II.”

 

*Iowa*

 

In1989, the State of Iowa legalized riverboat gaming on the Mississippi River andother waterways located in Iowa.  Under Iowa law, a license to conductgaming may be issued in a county only if the county electorate hasapproved gaming.  The electorate of 

 

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ClarkeCounty, Iowa, approved gaming on February 28, 1995 by referendum. Gaming conducted by the Lakeside Casino Resort was approved by referendum on November 18,1997.  In addition, a referendum must be held every eight years in each ofthe counties where gambling games are conducted and the proposition to continueto allow gambling games in such counties must be approved by a majority of thecounty electorate voting on the proposition.  Such a referendum took placeon November 5, 2002 with approximately 80% of the electorate voting on theproposition favoring continued gaming on riverboats in Clarke County.  Thenext referendum is scheduled for 2010.  If any reauthorization referendumis defeated, Iowa law provides that any previously issued gaming license willremain valid and subject to renewal for a total of nine years from the date oforiginal issuance of the license, subject to earlier non-renewal or revocationunder Iowa law and regulations applicable to all licenses.

 

Inaddition, Iowa law authorizes the granting of licenses to non-profitcorporations that, in turn, are permitted to enter into operating agreementswith qualified persons who also actually conduct riverboat gamingoperations.  Such operators must likewise be approved and licensed by theIowa Racing and Gaming Commission (the “Iowa Gaming Commission”).

 

InJuly 1997, Clarke County Development Corporation, a non-profit corporationorganized for the purpose of facilitating riverboat gaming in Osceola, Iowa,entered into an operator’s contract, since amended, for Lakeside Iowa for aterm of up to 50 years.  Under the operator’s contract, as amended, ClarkeCounty Development Corporation is to be paid a monthly fee equal to 1.5% of theadjusted gross gaming revenue of Lakeside Iowa.  Further, pursuant to adock site agreement executed in August 1997 (which also has a term of upto 50 years), Lakeside Iowa is required to pay a monthly fee to the City ofOsceola and the Water Works Board of Trustees equal to 1.25% of the adjustedgross gaming revenue of Lakeside Iowa and an annual fee, to be paid in equalmonthly installments, equal to approximately $160,000, with such amount toincrease each year by 1% until termination of the lease.  In September 2004,we entered into an agreement whereby upon the later of our obtaining approvalfrom the Iowa Gaming Commission or our closing the transactions contemplatedwith Southern Iowa Gaming Company, Southern Iowa will immediately pay $3.2million to the City of Osceola.  Beginning eight years from the date ofsuch payment and continuing for so long as the operator’s contract, as amended,remains in effect, we will pay the City of Osceola an additional 1% of annualadjusted gross receipts from Lakeside Iowa.  We may, however, offset up to50% of this 1% annual payment with any expenditures we have made for capitalimprovements (excluding gaming devices and improvements to the gaming facility,casino floor, development of a truck stop and general repairs and maintenance).

 

Iowalaw permits gaming licensees to offer unlimited stakes gaming on games approvedby the Iowa Gaming Commission on a 24-hour basis.  Dockside casino gamingis authorized by the Iowa Gaming Commission and the Iowa Legislature, subjectto certain limitations not applicable to Lakeside Iowa, eliminated the requirementthat gaming licensees cruise, effective May 6, 2004.  The legal agefor gaming is 21.

 

TheCompany’s Iowa excursion gambling boat license was approved for renewal at a March 4,2010 meeting of the Iowa Gaming Commission.  This license is not transferableand will need to be renewed annually and prior to the commencement of eachsubsequent annual renewal period.

 

Theownership and operation of gaming facilities in Iowa are subject to extensivestate laws, regulations of the Iowa Gaming Commission and various county andmunicipal ordinances (collectively, the “Iowa Gaming Laws”), concerning theresponsibility, financial stability and character of gaming operators andpersons financially interested or involved in gaming operations.  IowaGaming Laws seek to:  (1) prevent unsavory or unsuitable persons fromhaving direct or indirect involvement with gaming at any time or in anycapacity; (2) establish and maintain responsible accounting practices andprocedures; (3) maintain effective control over the financial practices oflicensees (including the establishment of minimum procedures for internalfiscal affairs, the safeguarding of assets and revenues, the provision ofreliable record keeping and the filing of periodic reports with the Iowa GamingCommission); (4) prevent cheating and fraudulent practices; and (5) providea source of state and local revenues through taxation and licensing fees. Changes in Iowa Gaming Laws could have a material adverse effect on the Iowagaming operations.

 

Gaminglicenses granted to individuals must be renewed every year, and licensingauthorities have broad discretion with regard to such renewals.  Licensesare not transferable.  The Iowa gaming operations must submit detailedfinancial and operating reports to the Iowa Gaming Commission.  Certaincontracts of licensees in excess of $100,000, that exceed three years in termor that involve related parties must be submitted to and approved by the IowaGaming Commission.

 

Officers,directors, managers and employees of the Iowa gaming operations are required tobe licensed by the Iowa Gaming Commission.  Employees associated withgaming must obtain a license and these licenses are subject to immediatesuspension under specific circumstances.  In addition, anyone having amaterial relationship or involvement with the Iowa gaming operationsmay be required to be found suitable or to be licensed, in which casethose persons would be required to pay the costs and fees of the Iowa GamingCommission in connection with the investigation.  The Iowa GamingCommission may deny an application for a license for any cause deemedreasonable.  In addition to its authority to deny an application forlicense, the Iowa Gaming Commission has jurisdiction to disapprove a change in positionby officers or key employees and the power to require the Iowa gamingoperations to 

 

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suspendor dismiss officers, directors or other key employees or sever relationshipswith other persons who refuse to file appropriate applications or whom the IowaGaming Commission finds unsuitable to act in such capacities.

 

The Iowa Gaming Commissionmay revoke a gaming license if the licensee:

 

·                  has beensuspended from operating a gaming operation in another jurisdiction by a boardor commission of that jurisdiction;

 

·                  has failed todemonstrate financial responsibility sufficient to meet adequately therequirements of the gaming enterprise;

 

·                  is not the trueowner of the enterprise;

 

·                  has failed todisclose ownership of other persons in the enterprise;

 

·                  is acorporation 10% of the stock of which is subject to a contract or option topurchase at any time during the period for which the license was issued, unlessthe contract or option was disclosed to the Iowa Gaming Commission and the IowaGaming Commission approved the sale or transfer during the period of thelicense;

 

·                  knowingly makesa false statement of a material fact to the Iowa Gaming Commission;

 

·                  fails to meet amonetary obligation in connection with an excursion gaming boat;

 

·                  pleads guiltyto, or is convicted of, a felony;

 

·                  loans to anyperson, money or other thing of value for the purpose of permitting that personto wager on any game of chance;

 

·                  is delinquentin the payment of property taxes or other taxes or fees or a payment of anyother contractual obligation or debt due or owed to a city or county; or

 

·                  assigns, grantsor turns over to another person the operation of a licensed excursion boat(this provision does not prohibit assignment of a management contract approvedby the Iowa Gaming Commission) or permits another person to have a share of themoney received for admission to the excursion boat.

 

Ifit were determined that the Iowa Gaming Laws were violated by a licensee, thegaming licenses held by a licensee could be limited, made conditional,suspended or revoked.  In addition, the licensee and the persons involvedcould be subject to substantial fines for each separate violation of the IowaGaming Laws in the discretion of the Iowa Gaming Commission.  Limitations,conditioning or suspension of any gaming license could (and revocation of anygaming license would) have a material adverse effect on operations.

 

TheIowa Gaming Commission may also require any individual who has a materialrelationship with the Iowa gaming operations to be investigated and licensed orfound suitable.  The Iowa Gaming Commission, prior to the acquisition,must approve any person who acquires 5% or more of a licensee’s equitysecurities in the event that approval by the Iowa Gaming Commission is nototherwise contemplated by the operative acquisition document.  Theapplicant stockholder is required to pay all costs of this investigation.

 

Gamingtaxes approximating 22% of the adjusted gross receipts above $3,000,000 will bepayable by each licensee on its operations to the State of Iowa.  Inaddition, there was a prepaid assessment due on June 1, 2005 and anotherprepaid assessment paid on June 1, 2006, in an aggregate amount equal to2.152% of each licensee’s estimated adjusted gross receipts for fiscal year2004.  These assessments will be offset by future state gaming taxes paidby each licensee with a credit for 20% of the assessments paid allowed eachyear beginning July 1, 2010 for five consecutive years.  The state ofIowa is also reimbursed by the licensees for all costs associated withmonitoring and enforcement by the Iowa Gaming Commission and the IowaDepartment of Criminal Investigation.

 

**Item 1A.  Risk Factors.**

 

Thefollowing risk factors, among others, could cause our financial performance todiffer significantly from the goals, plans, objectives, intentions andexpectations expressed in this report.  If any of the following risks anduncertainties or other risks and uncertainties not currently known to us or notcurrently considered to be material actually occur, our business, financialcondition or 

 

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operatingresults could be harmed substantially. Please refer to our discussion under “Liquidity and CapitalResources—Cash Flows; Restructuring” for a more detailed discussion of theRestructuring and the Chapter 11 Cases.

 

*We are undergoing a restructuring under Chapter 11 ofthe Bankruptcy Code and are operating as reorganized debtors.  Although the Bankruptcy Court has confirmedthe Plan, it is uncertain whether we will consummate the Plan or otherwiseemerge from bankruptcy or achieve a viable operation.*

 

Weare currently operating as reorganized debtors under Chapter 11 of theBankruptcy Code, and our continuation as a going concern is contingent upon,among other things, our ability to consummate the Plan, gain gaming authorityapprovals required to effectuate the Plan, comply with terms of future loanagreements, return to profitability, generate sufficient cash flows fromoperations, and obtain financing sources to meet future obligations.  Further, we may lose valuable contracts toour competitors in the process of the Restructuring.

 

*Although  the Plan has beenconfirmed by the Bankruptcy Court and has an Effective Date of February 5,2010 it will not be implemented until the Substantial Consummation Date.  We cannot assure you that the conditions tothe Substantial Consummation Date will be met or that the Plan will beconsummated*.

 

Ifthe Plan is not consummated, it is unclear whether we will be able toreorganize our business and what, if any, distributions holders of theremaining claims against or equity interests in the Company ultimately wouldreceive with respect to their claims or equity interests.  If an alternative plan of reorganization cannot be agreed upon, it is possible that we would have to liquidate our assets,in which case it is possible that holders of claims would receive substantiallyless favorable treatment than they would receive under the Plan.  On January 28, 2010, the Indenture Trustee filedthe Appeal from the Order confirming the Plan. While the Indenture Trustee has not sought a stay of the Order, wecannot assure you that the Indenture Trustee will not seek such a stay or thata stay, if sought, will not be granted during the pendency of the Appeal andprior to the Substantial Consummation Date. We cannot assure you that the Order will not be overturned and the Planset aside.

 

*Prolonged continuation of the Chapter 11 Casesmay harm our business.*

 

Ifthe Chapter 11 Cases continue for a prolonged amount of time, the proceedingscould adversely affect our business and operations.  The Plan was confirmed with an Effective Dateof February 5, 2010.  The Plan willnot be fully implemented until the Substantial Consummation Date.  So long as the Chapter 11 Casescontinue, our senior management will be required to spend a significant amountof time and effort dealing with our reorganization instead of focusingexclusively on business operations. Prolonged continuation of the Chapter 11 Cases will also make itmore difficult to attract and retain management and other key personnelnecessary to the success and growth of our business.  In addition, the longer the Chapter 11Cases continue, the more likely it is that our customers, suppliers and agents willlose confidence in our ability to successfully reorganize our business and seekto establish alternative commercial relationships.  Furthermore, so long as the Chapter 11Cases continue, we will be required to incur substantial costs for professionalfees and other expenses associated with the Chapter 11 Cases.  Prolonged continuation of the Chapter 11Cases may also require us to seek additional financing.  It may not be possible for us to obtainadditional financing during or after the Chapter 11 Cases on commerciallyfavorable terms or at all.  If we were torequire additional financing during the Chapter 11 Cases and were unableto obtain the financing on favorable terms or at all, our chances of successfullyreorganizing our business may be seriously jeopardized.

 

*The volatility and disruption of the capital andcredit markets and adverse changes in the global economy may negatively impactour ability to access financing.*

 

Dueto the continuing uncertainty in the capital and credit markets and the globalrecession, our access to capital upon the emergence from the bankruptcyproceedings may not be available on terms feasible to the Company if at all.

 

*Our operations, and the gaming industry as a whole,have been adversely affected by the recession. The gaming operations and casinos owned by the Company may be furtheradversely impacted if general economic conditions do not improve, which couldlead to an adverse impact on the operations of the Company*.

 

Theresults of operations of our route and casino businesses have been negativelyimpacted by the global financial recession, subprime mortgage crisis, volatilegasoline and energy prices, and the general economic downturn, including adecrease in consumer confidence levels. The gaming industry is currently experiencing reduced demand.  The demand for gaming is highly sensitive toconsumers’ disposable incomes, and a general decline in economic conditions,including businesses downsizing their workforces, may lead to our potentialcustomers having less discretionary income with which to wager.  Many of our customers have also experiencedsignificant reductions in their savings as a result of recent investmentlosses.  These developments have led, andare likely to continue to lead, to a reduction in our revenues and havematerially adversely affected our operating results, as there are fewercustomers and 

 

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ourcustomers spend less than they historically have.  Gaming industry revenues are sensitive togeneral economic conditions and are influenced by consumer confidence in theeconomy and other factors.  An extended period of reduced discretionaryspending could significantly harm our operations and we may not be able tolower our costs rapidly enough, or at all, to offset a decrease inrevenues.  The State of Nevada, one ofour ** **primarymarkets, has experienced a significant economic downturn.  According to the U.S. Bureau of LaborStatistics, Nevada had the second highest unemployment rate in the country in2009 at 11.8% compared to the national average of 9.3%.** **Other studies have shown Nevadaranked at number one in foreclosure rates in the country for the third quarterof 2009.

 

*Ouroperations may be adversely impacted by increases in energy prices.*

 

Ourproperties use significant amounts of electricity, natural gas and other formsof energy.  While no shortages of energy have been experienced, thesubstantial increases in the cost of electricity, natural gas and gasoline inthe United States in general, and in Southern and Northern California, Southernand Northern Nevada, south central Iowa and northeast and northwest Missouri inparticular, may negatively affect our operating results.  Inaddition, further energy price increases in such areas could result in adecline in disposable income of potential customers and a correspondingdecrease in visitation and spending at our route and casino operations, which couldnegatively impact revenues.

 

*Anyincrease in the price of gasoline may have an adverse impact on the results ofour operations.*

 

Mostof our customers drive in to our locations. There is very little, if any, non-drive-in patronage for our facilities.  As such, an increase in gasoline prices mayhave an adverse impact on our operations as it would increase the cost incurredby our customers to drive to our locations. Though gasoline prices were somewhat more stable during 2009, there canbe no guarantee that prices will not rise again, thereby adversely affectingour customer’s discretionary income and therefore our revenue.

 

*The success of our route operations is dependent on ourability to renew our contracts.*

 

Weconduct our route operations under contracts with third parties.  Bothcontracts with chain and street customers are renewable at the option of theowner of the respective chain store or street account.  As our routecontracts expire, we are required to compete for renewals.  Although wehave historically been able to renew our contracts, if we are unable to renew amaterial portion of our route contracts because our competitors offer morefavorable terms or for any other reason, including the greater financialstability of our competitors, our business, financial condition and results ofoperations would be adversely affected.  We cannot assure you that ourcurrent chain or street contracts will be renewed.

 

*We may experience a loss of market share.*

 

Thegaming industry is highly competitive.  Our slot route operations aresubject to substantial direct competition for our revenue-sharing and fixedspace lease locations from one large route operator and numerous smalloperators, located principally in Las Vegas, Nevada.  With respect to ourcasino operations in Nevada, we compete for local gaming customers with otherlocals-oriented casino-hotels and other casinos located in the vicinity ofthese properties.  Our casino operations in the Midwest face competitorsthat include land-based casinos, dockside casinos, riverboat casinos, casinoslocated on Native American reservations and racing and pari-mutueloperations.  If our competitors operate more successfully, if existingroute operations or properties are enhanced or expanded, or if additionalcompetitors are established in and around the locations in which we conductbusiness, we may lose market share.  In particular, the expansion ofroute operations or casino gaming in or near any geographic area from which weattract or expect to attract a significant number of our customers could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

*Changes to applicable tax laws could have a materialadverse effect on our financial condition.*

 

Wepay substantial taxes and fees in connection with our operations as a gamingcompany.  From time to time, federal, state and local legislators andother government officials have proposed and adopted changes in tax laws, or inthe administration of those laws affecting the gaming industry.  It is notpossible to determine the likelihood of changes in tax laws or in theadministration of those laws.  If adopted, changes to applicable tax lawscould have a material adverse effect on our business, financial condition andresults of operations.  Due to the continued pressures on the statelegislatures to address shortfalls in their budgets associated with the currentrecession, there may be more support to look to increased taxation that couldaffect all our gaming properties.  Anyincrease in taxes would adversely impact the Company’s future profitability.

 

*We face extensive regulation from gaming and othergovernment authorities.*

 

Asowners and operators of gaming facilities, we are subject to extensive stateand local regulations in Nevada, Iowa and Missouri.  State and localgovernment authorities in such jurisdictions, including the Nevada GamingCommission, the Iowa Racing 

 

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andGaming Commission and the Missouri Gaming Commission, require us and oursubsidiaries to obtain gaming licenses and require our officers, key employees andbusiness entity affiliates to demonstrate suitability to hold gaming licenses,and such state and local government authorities may limit, condition,suspend or revoke a license for any cause deemed reasonable by the respectivelicensing agency.  They may also levy substantial fines against us orour subsidiaries or the individuals involved in violating any gaming laws orregulations.  The violation of any such state and local regulations couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

InNevada, the Nevada Gaming Commission could request that a state court appoint asupervisor to operate any non-restricted gaming establishment operated by us ifthe licenses held by us are revoked, suspended or otherwise lapse.  Insuch extraordinary circumstances, earnings generated by gaming operationsduring a supervisor’s appointment (except for reasonable rental value) could beforfeited to the State of Nevada.  The occurrence of any of these eventscould have a material adverse effect on our business, financial condition andresults of operations.

 

Anyfuture public offering of debt or equity securities by Herbst Gaming willrequire review of and prior approval by the Nevada Gaming Commission, the IowaRacing and Gaming Commission and the Missouri Gaming Commission.  TheMissouri Gaming Commission also requires notice of the intended incurrence ofany private debt exceeding $1,000,000 and reserves the right to elect to haveprior review and approval.

 

Weare subject to a variety of other rules and regulations, including zoning,environmental, construction and land-use laws, regulations and permits thatgovern the serving of alcoholic beverages.  Any changes to these lawscould have a material adverse effect on our business, financial condition andresults of operations.

 

Fromtime to time, legislators and special interest groups have proposed legislationthat would expand, restrict or prevent gaming operations in the jurisdictionsin which we operate.  Any such change to the regulatory environment or theadoption of new federal, state or local government legislation could have amaterial adverse effect on our business.

 

Fora more complete summary of regulations that affect our business, see “Item1.  Business—Regulation and Licensing.”

 

*We depend upon our key employees and certain members of ourmanagement.*

 

Oursuccess is substantially dependent upon the efforts and skills of Troy D.Herbst, our Chief Executive Officer, Secretary and Treasurer, Ferenc Szony, ourPresident, Mary E. Higgins, our Chief Financial Officer, and David R. Ross, ourChief Operating Officer - Gaming.  We have entered into employmentagreements with Mr. Herbst, Mr. Szony, and Ms. Higgins through2010.  These agreements automatically renew for successive one-yearperiods unless sooner terminated or unless either party to the respectiveagreements notifies the other in writing at least 60 days prior to the date therespective agreement is scheduled to expire.  We have also entered into anemployment agreement with Mr. Ross with a term through the earlier of theSubstantial Consummation Date or December 31, 2010.  If we were to lose the services rendered bythese employees, our operations could be adversely affected.  In addition,we compete with other potential employers for employees, and we may notsucceed in hiring and retaining the executives and other employees that weneed.  An inability to hire quality employees could have a materialadverse effect on our business, financial condition and results of operations.

 

*Ourexecutive officers and members of our board of directors own 100% of thecompany and conflicts of interests could arise.*

 

Edward,Timothy and Troy Herbst own all of the outstanding stock of HerbstGaming.  This concentration of ownership gives them the power to controlthe outcome of all matters requiring stockholder approval, including theelection of all directors, and will give them the power to hinder or delay achange of control of the Company.  In addition, Edward, Timothy and TroyHerbst are all officers and directors of Terrible Herbst, Inc., a companyowned by parties related to us.  We currently engage in transactions withTerrible Herbst, Inc. and plan to continue to do so in the future. These related-party transactions could lead to potential conflicts ofinterest.  See “Item 13.  Certain Relationships and RelatedTransactions.”

 

*The business of the Sands Regent Casinos and the PrimmCasinos may be adversely impacted by expanded Native American gaming operationsin California and the Pacific Northwest, which could lead to an adverse impacton the operations of the Company.*

 

Thelargest sources of customers for the Sands Regent Casinos are California andthe Pacific Northwest, including a large number who drive to Reno from the SanFrancisco and Sacramento metropolitan areas, and the largest source ofcustomers for the Primm Casinos are from Southern California, including a largenumber who drive to Las Vegas from the San Bernardino and Barstow metropolitanareas.  The expansion of Native American casinos in California, Oregon andWashington continues to have an impact on casino revenues in Nevada in general,and such impact may be significant on the markets in which the Sands RegentCasinos and the Primm Casinos operate.

 

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*Some Native American casinos have a lower minimum agerequirement for gambling, which may increase their market share at the expenseof our market share.*

 

Some Native Americancasinos in Southern California and Iowa allow customers at least 18 years oldto gamble, whereas our gambling establishments require our customers to be atleast 21 years old.  This could lead to areduced market for us as those Native American casinos would have an earlieropportunity to create loyal customers. If our competitors are able to retain these customers after they turn21, thereby causing them to continue gambling at those establishments ratherthan try our establishments, we may experience reduced market share.

 

*Adverse winter weather conditions in the Midwest, theSierra Nevada Mountains and Reno-Lake Tahoe area could have a material adverseeffect on the results of operations and financial condition of our casinos,which could lead to an adverse impact on the results of operation and financialcondition of the Company.*

 

Adversewinter weather conditions, particularly snowfall, can deter customers of ourNorthern Nevada and Midwest Casinos from traveling or make it difficult for themto frequent its facilities.  If these locations were to experienceprolonged adverse winter weather conditions, the results of operations andfinancial condition of these casinos could also be materially adverselyaffected, thereby adversely affecting the results of operations and financialcondition of the Company.  Although ourfacilities experienced mild weather conditions for most of 2009, the MidwestCasinos experienced severe weather conditions in December 2009 and January 2010,which negatively impacted the results of operations at those facilities.

 

*Environmentallegislations or regulations, if enacted, could lead to an adverse impact on theresults of operation and financial condition of the Company if suchlegislations or regulations result in a smaller drive-in tourist market.*

 

Global climate changeissues have received an increased focus on the federal and state governmentlevels which could potentially lead to additional rules and regulationsthat impact how our drive-in tourist market is able to come to ourfacilities.  The ultimate impact on our business would be dependentupon the specific rules and regulations adopted and we cannot predict theeffects of any such legislation at this time. However, if such legislations or regulations result in increased coststo motor vehicle drivers, then we may as a result see fewer drive-in tourists,and possibly a lower volume of gasoline sales, which could adversely impact ouroperations and financial condition.

 

*The business of the Primm Casinos may be adverselyimpacted if their use of water exceeds allowances permitted by federal andlocal governmental agencies or if such governmental agencies impose additionalrequirements in connection with such use of water, which in each case couldlead to an adverse impact on the operations of the Company.*

 

ThePrimm Casinos are not served by a municipal water system.  As a result,the water supply of such casinos is dependent on rights they have been grantedto water in various wells located on federal land in the vicinity of the PrimmCasinos and permits that allow the delivery of water to the PrimmCasinos.  These permits and rights are subject to the jurisdiction andongoing regulatory authority of the U.S. Bureau of Land Management, the Statesof Nevada and California and local governmental units.  While we believethat adequate water for the Primm Casinos is available, the future water needsof the Primm Casinos may exceed the permitted allowance.  In such anevent, future requests for additional water may not be approved or may beapproved with terms or conditions that are more onerous.  Any such denialor any such additional terms and conditions may have a material adverse effecton the results of operations of the Primm Casinos, thereby adversely affecting theresults of operations and financial condition of the Company.

 

*We may be unable to obtain slot machines or relatedtechnology from our third party supplier on a timely, cost-effective basis.*

 

Wecurrently primarily rely on International Game Technology, Inc. for oursupply of slot machines and related technology, which are only available from alimited number of suppliers.  We cannot assure you that we can obtain slotmachines or related technology on a cost-effective basis.  As a result, wemay be forced to incur significant unanticipated costs to securealternative third party suppliers or adjust our operations.

 

*Riverboats and dockside facilities are subject to risksrelating to weather or mechanical failure and must comply with applicableregulations.*

 

Weown and operate riverboat and dockside casino facilities, which are subject torisks in addition to those associated with land-based casinos, including lossof service due to casualty, mechanical failure, extended or extraordinarymaintenance, flood or other severe weather.  Reduced patronage and theloss of a dockside or riverboat casino from service for any period of timecould adversely affect our results of operations.  The riverboats are subject to inspectionevery year and were inspected in November 2009 in 

 

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Missouri.  The Company’s only cruising vessel is itsboat located in Lakeside, Iowa, and this boat had its turbines removed in late2008, as riverboats in Iowa are no longer required to cruise.

 

*Risks Related to Our Indebtedness*

 

*We have had, and expect to have upon emergence fromthe bankruptcy proceedings, significant indebtedness.*

 

Weare in default under the amended Credit Agreement and the indentures pursuantto which the Subordinated Notes were issued, and are operating as reorganizeddebtors pursuant to the Plan.  Pleaserefer to our discussion under “Liquidity and Capital Resources—Cash Flows;Restructuring” for a discussion of theRestructuring.  We havesignificant outstanding indebtedness.  As of December 31, 2009, ourliabilities subject to compromise totaled $1,230,756,000.  Also as of that date, we carried astockholders’ deficit of $388,245,000 and insufficient earnings to cover ourfixed charges.  For these purposes,earnings are defined as earnings before fixed charges and loss on earlyretirement of debt (other than capitalized interest), and fixed charges consistof contractual interest expensed and capitalized and the interest component ofrent expense.

 

Oursubstantial indebtedness has resulted in adverse consequences for our business,including the factors listed below.  Ifthe Plan is consummated, Reorganized Herbst Gaming and the other ReorganizedDebtors will continue to have significant indebtedness, which could:

 

·                  make it moredifficult to satisfy obligations with respect to the instruments governing ourthen outstanding indebtedness;

 

·                  increasevulnerability to general adverse economic and industry conditions;

 

·                  require theReorganized Debtors to dedicate a substantial portion of cash flow fromoperations to debt service, thereby reducing the availability of cash flow tofund working capital, capital expenditures and other general corporatepurposes;

 

·                  limitflexibility in planning for, or reacting to, competitive pressures and changesin the business and the industry in which the Reorganized Debtors operate;

 

·                  place theReorganized Debtors at a competitive disadvantage compared to our competitorsthat have less debt; and

 

·                  limit, alongwith the financial and other restrictive covenants in the indebtedness, amongother things, the Reorganized Debtors’ ability to borrow additional funds.

 

*Our indebtedness imposes restrictive covenants on us.*

 

TheCompany anticipates that debt to be issued pursuant to the Plan will havecovenants that impose operational and financial restrictions on ReorganizedHerbst Gaming and the other Reorganized Debtors.  The restrictions imposed and anticipatedunder these debt instruments include, among other obligations, limitation onthe ability to:

 

·                  incuradditional debt;

 

·                  make paymentson subordinated obligations;

 

·                  make dividendsor distribution and repurchase stock;

 

·                  makeinvestments;

 

·                  grant liens onour property to secure debt;

 

·                  enter intocertain transactions with affiliates;

 

·                  sell assets orenter into mergers or consolidations;

 

·                  sell equityinterests in subsidiaries;

 

·                  create dividendand other payment restrictions affecting subsidiaries;

 

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·                  change thenature of our lines of business;

 

·                  make capitalexpenditures; and

 

·                  designaterestricted and unrestricted subsidiaries.

 

Theamended Credit Agreement imposes, and we anticipate that the loan agreements tobe entered into in order to implement the Plan will impose, various customaryaffirmative covenants on us and our subsidiaries, including among others,reporting covenants, covenants to maintain insurance, comply with laws, maintainproperties and other covenants customary in senior credit financings of thistype.  In addition, the amended Credit Agreement requires us, and weanticipate that the loan agreements to be entered into in order to implementthe Plan will require, us to comply with various restrictive financialcovenants, including interest coverage and debt to operating cash flow ratios,and capital spending limits.  Pleaserefer to our discussion under “Liquidity and Capital Resources—Cash Flows;Restructuring” for a discussion of our defaultsunder the amended Credit Agreement and the indentures under which theSubordinated Notes were issued and the terms of the new loans contemplated bythe Restructuring.

 

**Item 2.    Properties.**

 

Ourprincipal properties consist of the following:

 

**Nevada**

 

*Company Headquarters and Warehouse.*

 

Welease a four-acre site in Las Vegas and, pursuant to that lease, own the 50,000square foot building where our executive offices and operational headquartersare located.  This facility houses our executive and administrativeoffices and is used for sub-assembly and warehouse space for our slot routeoperations.  The lease between The Herbst Family Limited Partnership II, aNevada limited partnership, and us ends on June 30, 2017, with options torenew the lease for five additional successive terms of ten years each.  Pursuant to the Plan, this lease is expectedto be modified effective as of the Substantial Consummation Date and assumed byand assigned to one of the Reorganized Debtors on the Substantial ConsummationDate.

 

*Office Space and Convenience Store.*

 

Welease a three-acre site and a 50,000 square foot building where our employmentcenter and purchasing department are located.  The lease between HerbstGrandchildren’s Trust, a trust governed under the laws of the State of Nevadaand a related party, and us ends on November 27, 2012, with options torenew the lease for five additional successive terms of ten years each.  Pursuant to the Plan, this lease is expectedto be modified effective as of the Substantial Consummation Date and assumed byand assigned to one of the Reorganized Debtors on the Substantial ConsummationDate.

 

*Terrible’s Searchlight Casino.*

 

Welease the space in which Terrible’s Searchlight Casino is located in Searchlight,Nevada.  The space is leased from Terrible Herbst, Inc. and the leaseends on June 30, 2022, with options to renew the lease for five additionalsuccessive terms of ten years each, contingent on Terrible Herbst, Inc.renewing its lease of the property from an unrelated third party.  Pursuant to the Plan, this lease is expectedto be modified and assigned to one of the Reorganized Debtors on theSubstantial Consummation Date.

 

*Terrible’s Hotel & Casino.*

 

Weown the ten-acre site in Las Vegas on which Terrible’s Hotel & Casinois located, consisting of a 45,000 square foot casino with 255 guest rooms.

 

*Terrible’s Town Casino.*

 

Terrible’sTown Casino in Pahrump, Nevada, which is approximately 60 miles from Las Vegas,comprises an approximately 30,000 square foot building on approximately threeacres.  We lease the land from The Herbst Family Limited Partnership, aNevada limited partnership and a related party.  The lease expires on June 30,2011.  We also have an option to further extend the lease for threeadditional successive terms of five years through 2026.  Pursuant to the Plan, this lease is expectedto be modified and assigned to one of the Reorganized Debtors on theSubstantial Consummation Date.

 

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*Terrible’s Lakeside Casino & RV Park.*

 

Weown the land in Pahrump, Nevada on which Terrible’s Lakeside Casino &RV Park, an approximately 8,000 square foot casino on 30 acres, is located.

 

*Terrible’s Town Casino & Bowl.*

 

Welease the land and building on which our Terrible’s Town Casino & Bowlis located in Henderson, Nevada from an unrelated third party.  The leaseends on February 9, 2014, with options to renew the lease for fiveadditional successive terms of ten years each.  We own a 0.8-acre lotadjacent to Terrible’s Town Casino & Bowl that we are holding forpossible future development.

 

*Terrible’s Gold Ranch Casino and RV Park.*

 

Welease the land on which Terrible’s Gold Ranch Casino and RV Resort is locatedin Sparks, Nevada from an unrelated third party.  The lease ends on January 1,2022, with an option to renew the lease for four additional successive terms offive years each.

 

*Sands Regency Casino Hotel.*

 

SandsRegency Casino Hotel in Downtown Reno, Nevada has approximately 853 rooms,29,000 square feet of gaming space and approximately 12,000 square feet ofconvention and meeting space. The buildings that house the Sands sit onapproximately 10.5 acres in downtown Reno. This land is owned by the Company.

 

*Terrible’s Dayton Depot Casino.*

 

Terrible’sDayton Depot Casino is located in Dayton, Nevada.  We own the buildingthat houses the Dayton Casino and the 4.5 acres of real property on which theDayton Casino is located, as well as a building and 0.5 acres of real propertydirectly across the street which housed a small tavern that is not currentlyoperating.

 

*Terrible’s Rail City Casino.*

 

Weown the land and building on which Terrible’s Rail City is located in Sparks,Nevada. The Rail City Casino is approximately 30,000 square feet and theproperty is approximately 7.5 acres.

 

*Buffalo Bill’s, Whiskey Pete’s and Primm Valley ResortHotels and Casinos.*

 

Welease (from an unrelated party) approximately 170 acres of land on whichBuffalo Bill’s, Whiskey Pete’s and Primm Valley are located in Primm,Nevada.  The lease ends on June 30, 2043, with an option to renew thelease for one additional twenty-five year term.

 

**Midwest**

 

*Lakeside Casino Resort.*

 

Weown the land in Osceola, Iowa on which certain facilities of Lakeside Iowa arelocated, including the all-suite hotel, convention facilities, RV park andconvenience store and own an additional 121 acres of land adjacent to or nearbythe casino.  We lease the use of West Lake and certain real estatesurrounding West Lake from the City of Osceola, Iowa.  This lease expireson May 19, 2014.  We have an option to extend this lease for sevenadditional successive terms of five years each.

 

*Mark Twain Casino.*

 

We own the land in LaGrange,Missouri on which certain facilities of Mark Twain are located, and own anadditional 14 acres of land adjacent to or nearby the casino.

 

*St. Jo Frontier Casino.*

 

Weown the land in St. Joseph, Missouri on which certain facilities ofSt. Jo are located, and own an additional 72 acres of land adjacent to ornearby the casino.

 

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**Item 3.    Legal Proceedings.**

 

OnFebruary 17, 2006, the Clark County Circuit Court entered judgment of ajury verdict delivered on January 14, 2006 against ETT for $4.1 million incompensatory damages and $10.1 million in punitive damages.  The juryverdict was delivered in connection with an action brought by the family of anindividual that alleged that ETT had negligently retained and negligentlysupervised a temporary employee who in 2001 stole a truck from ETT and, whiledrunk, hit and killed the individual.  The punitive damage award wassubsequently lowered to $4.1 million in a post-trial ruling.  The Companybelieves the award of compensatory and punitive damages against ETT, theliability of ETT, and the amount thereof, is not supportable in either law orin fact and plans to vigorously pursue all appropriate post-trial and otherremedies, including exercising its right to appeal.  The Company hasappealed this decision and oral arguments were heard by the Supreme Court ofthe State of Nevada on December 9, 2009.  Based on a review of thelegal opinions and facts available to the Company at this time, the Companybelieves it is adequately reserved for any potential liability related to thisincident.

 

TheCompany was party to an arbitration in 2008 in Las Vegas, Nevada involving thetermination of an employee.  The formeremployee alleged he was terminated without cause and was therefore due amountspursuant to his employment agreement.  OnMarch 10, 2009, the Company received an interim award from the arbitratorthat awarded the former employee $1.3 million as a result of thisarbitration.  The award is currentlyunder appeal; however, the Company fully recognized the award and approximately$0.2 million for attorneys fees in fiscal year 2008.

 

TheDebtors have filed the Chapter 11 Cases in the Bankruptcy Court under casenumbers 09-50746-gwz through 09-50763-gwz. On the Petition Date, the Debtors filed several emergency motions withthe Bankruptcy Court, including a motion to have the Chapter 11 Cases jointlyadministered.  On March 29, 2009,the Bankruptcy Court conducted hearings on the motion, including the motion forjoint administration.  The BankruptcyCourt granted the motions either on a final basis or an interim basis with acontinued hearing date regarding the interim orders on April 30, 2009. Thejoint administration motion was granted with the lead case being “Zante Inc”being case number 09-50746-gwz.  From theperiod commencing on the Petition Date up to and including the Effective Date,the Debtors operated their businesses and managed their properties asdebtors-in-possession subject to the jurisdiction of the Bankruptcy Court andin accordance with the applicable provisions of the Bankruptcy Code.  For convenience, XRoads Court ManagementServices has established a webpage for access to all pleadings filed inthe Chapter 11 Cases.  The web address ishttp://www.xroadscms.net/zante.  Pleaserefer to our discussion under “Liquidity and Capital Resources—Cash Flows;Restructuring” for a further discussion of the Chapter 11 Cases.  On July 22, 2009, the Debtors filed withthe Bankruptcy Court an amended joint plan of reorganization.  On July 22, 2009, the Debtors filed withthe Bankruptcy Court an amended joint plan of reorganization.  On January 22,2010, the Bankruptcy Court confirmed the Plan. The Plan became effective on February 5, 2010 (the “Effective Date”),but will not be fully implemented until the Substantial Consummation Date.  The Debtors are currently operating theirbusinesses and managing their properties as reorganized debtors in accordancewith the applicable provisions of the Bankruptcy Code and the Plan until theSubstantial Consummation Date; and except as otherwise specifically providedfor in the Plan, are operating outside the jurisdiction of the Bankruptcy Court.  On January 28, 2010, theIndenture Trustee filed the Appeal from the Order.  On January 29, 2010, the Debtors electedto have the Appeal heard by the District Court and not the U.S. BankruptcyAppellate Panel for the Ninth Circuit Court of Appeals.  The appellate briefs are due to be filed withthe District Court commencing April 3, 2010 with the final reply brief dueby May 4, 2010.  The IndentureTrustee has not sought a stay of the Order.

 

OnNovember 16, 2009, the Indenture Trustee filed its Amended Complaintagainst the Debtors and the Administrative Agent under the amended CreditAgreement seeking, among other relief, a judgment of the Bankruptcy Courtdetermining that the Subordinated Notes are entitled to pari passu treatmentwith the obligations due under the amended Credit Agreement.  The Debtors and the Administrative Agentfiled motions to dismiss the Amended Complaint. On February 23, 2010, the Bankruptcy Court dismissed the AmendedComplaint without prejudice to seek leave to re-file the Amended Complaint inthe event the Order is set aside in the Appeal.

 

TheCompany is a party to certain claims, legal actions, and complaints arising inthe ordinary course of business or asserted by way of defense or counterclaimin actions filed by the Company.  Management believes that its defensesare substantial in each of these matters and that the Company’s legal positioncan be successfully defended without material adverse effect on itsconsolidated financial statements.

 

**Item4.    Submission of Matters to a Vote of Security Holders.**

 

Notapplicable.

 

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**PART II**

 

**Item 5.    Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities .**

 

(a)          Market Information

 

Thereis no established public trading market for any class of our commonequity.  No class of our capital stock has been registered under theSecurities Act of 1933, as amended, or under Section 12 of the ExchangeAct.  All 300 shares of our outstanding common stock are beneficiallyowned by Edward, Timothy and Troy Herbst.

 

(b)         Holders

 

Edward,Timothy and Troy Herbst beneficially own collectively all of the outstandingshares of our common stock.

 

(c)          Dividends

 

Nodividends were paid in fiscal years 2008 and 2009.

 

Theamended Credit Agreement and the indentures governing the Subordinated Notesrestrict our ability to declare or make distributions on our capitalshares.  Prior to the filing of the Chapter 11 Cases, the onlydistributions that we made on our common stock were distributions permitted bythe instruments governing our outstanding indebtedness.  Since filing the Chapter 11 Cases, we havenot made any distributions on our common stock.  See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated FinancialStatements.”

 

**Item 6.    Selected Financial Data.**

 

In the tables below, we provide selected consolidated historicalfinancial data as of and for the periods indicated.  We prepared this information using auditedfinancial statements for the fiscal years ended December 31, 2009, December 31,2008, December 31, 2007, December 31, 2006, and December 31,2005.  In February 2005, weconsummated the acquisition of Lakeside Iowa, Mark Twain and St Jo, and as aresult the period beginning on January 1, 2005 may not be comparableto prior years.  Similarly, in January 2007 we consummated theacquisition of the Sands Regent Casinos and in April 2007 we consummatedthe acquisition of the Primm Casinos, and as a result the period beginning January 1,2007 may not be comparable to prior years.  When reading this selectedhistorical consolidated financial data, it is important to read it inconjunction with our consolidated financial statements and related notescontained in “Item 7—Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and “Item 8.  FinancialStatements and Supplementary Data — Notes to Consolidated Financial Statements”included in this Form 10-K.

 

Wehave elected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under those provisions, the owners of our companypay income taxes on our taxable income.  Accordingly, a provision forincome taxes is not included in our financial data.

 
| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in thousands)**                    | ** ** |
| Income statement data:                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                          |       | $                                          | 339,401    |   | $ | 347,041 |   | $ | 276,946 |   | $ | 243,635 |   | $ | 200,637 |   |
| Casino operations                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                    |       | 95,400                                     |       | 95,614 |   | 331,517 |   | 337,006 |   | 312,149 |   |
| Other states                              |       | 117,774                                    |       | 141,435 |   | 141,731 |   | 137,188 |   | 139,280 |   |
| Other operations                          |       | 4,923                                      |       | 10,676 |   | 98,987 |   | 116,609 |   | 86,285 |   |
| Total revenues                            |       | 557,498                                    |       | 594,766 |   | 849,181 |   | 834,438 |   | 738,351 |   |
| Promotional allowances—route         |       | (223                                       | )          | (86 | ) | (64 | ) | (90 | ) | (126 | ) |
| Promotional allowances—casino        |       | (21,434                                    | )          | (32,617 | ) | (64,177 | ) | (63,259 | ) | (69,662 | ) |
| Net revenues                              |       | 535,841                                    |       | 562,063 |   | 784,940 |   | 771,089 |   | 668,563 |   |
| Costs of revenues:                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                          |       | 258,114                                    |       | 271,463 |   | 244,086 |   | 215,653 |   | 182,734 |   |
| Casino operations                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                    |       | 59,125                                     |       | 64,349 |   | 245,507 |   | 262,338 |   | 242,957 |   |
| Other states                              |       | 79,239                                     |       | 87,852 |   | 89,745 |   | 88,835 |   | 85,105 |   |
| Depreciation and amortization             |       | 33,941                                     |       | 38,124 |   | 56,405 |   | 57,783 |   | 55,426 |   |
| General and administrative                |       | 15,217                                     |       | 13,324 |   | 22,983 |   | 21,485 |   | 18,913 |   |
| Other operations                          |       | —                                     |       | 6,491 |   | 80,184 |   | 94,522 |   | 67,333 |   |
| Restructuring costs                       |       | —                                     |       | — |   | — |   | 17,717 |   | 9,814 |   |
| Loss on impairment of assets              |       | 3,360                                      |       | — |   | 72,965 |   | 106,271 |   | 7,192 |   |
| Total costs and expenses                  |       | 448,996                                    |       | 481,603 |   | 811,875 |   | 864,604 |   | 669,474 |   |
| Income (loss) from operations             |       | 86,845                                     |       | 80,460 |   | (26,935 | ) | (93,515 | ) | (911 | ) |
| Interest income                           |       | 740                                        |       | 734 |   | 1,481 |   | 921 |   | 161 |   |
| Interest expense                          |       | (36,532                                    | )          | (39,134 | ) | (85,631 | ) | (116,832 | ) | (29,530 | ) |
| Change in value of derivative instruments |       | —                                     |       | — |   | (16,115 | ) | — |   | — |   |
| Loss on early retirement of debt(1)       |       | (221                                       | )          | — |   | — |   | — |   | — |   |
| Reorganization items                      |       | —                                     |       | — |   | — |   | — |   | (29,810 | ) |
|                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss)                         |       | $                                          | 50,832     |   | $ | 42,060 |   | $ | (127,200 | ) | $ | (209,426 | ) | $ | (60,090 | ) |

 

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| ** **                                           | ** ** | **Year Ended December 31,**       | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(in thousands, except ratios)** | ** ** |
| Other data:                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Route EBITDA(2)                                      |       | $                                                | 79,922     |   | $ | 75,492 |   | $ | 32,796 |   | $ | 27,892 |   | $ | 17,777 |   |
| Casino EBITDA(3)                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Nevada(3)                                            |       | $                                                | 20,281     |   | $ | 17,719 |   | $ | 43,551 |   | $ | 29,475 |   | $ | 16,823 |   |
| Other states(3)                                      |       | $                                                | 29,865     |   | $ | 34,512 |   | $ | 30,268 |   | $ | 30,287 |   | $ | 36,882 |   |
| Net cash provided by (used in) operating  activities |       | $                                                | 92,204     |   | $ | 81,493 |   | $ | 4,273 |   | $ | (2,498 | ) | $ | 49,993 |   |
| Net cash used in investing activities                |       | $                                                | (309,172   | ) | $ | (79,758 | ) | $ | (574,128 | ) | $ | (15,746 | ) | $ | (21,113 | ) |
| Net cash provided by (used in) financing  activities |       | $                                                | 152,645    |   | $ | (9,944 | ) | $ | 598,495 |   | $ | 29,952 |   | $ | (17,976 | ) |
| Capital expenditures                                 |       | $                                                | 43,893     |   | $ | 66,622 |   | $ | 32,418 |   | $ | 15,578 |   | $ | 15,645 |   |

 
| ** **                             | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2005**                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| **Balance sheet data:**                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents              |       | $                       | 73,849     |   | $ | 65,540 |   | $ | 94,282 |   | $ | 105,990 |   | $ | 116,894 |   |
| Total assets                           |       | $                       | 534,930    |   | $ | 568,450 |   | $ | 1,080,385 |   | $ | 934,248 |   | $ | 884,028 |   |
| Total debt(4)                          |       | $                       | 500,593    |   | $ | 522,618 |   | $ | 1,146,070 |   | $ | 1,176,330 |   | $ | 1,158,846 |   |
| Stockholders’ equity (deficiency) |       | $                       | 7,981      |   | $ | 18,771 |   | $ | (118,729 | ) | $ | (328,155 | ) | $ | (388,245 | ) |

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| (1)    |   | Consists  of a premium of $221,000 paid to call the balance of our 10 3⁄4% notes in  September 2005.                                                                                                                                                                                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |
| (2)    |   | Route  segment EBITDA consists of net income plus depreciation and amortization,  interest expense, net of capitalized interest, restructuring costs and  reorganization items and is calculated before allocation of overhead.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |
| (3)    |   | Casino  segment EBITDA consists of net income plus depreciation and amortization,  interest expense, net of capitalized interest, impairment charges, costs  associated with the retirement of assets, restructuring costs and reorganization  items.  Casino EBITDA for casinos in Nevada and other states are  calculated before allocation of overhead. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |
| (4)    |   | Total  debt consists of the current and long-term portions for all periods  presented.                                                                                                                                                                                                                                                                               |

 

Routeand Casino segment EBITDA are non-GAAP measures but are used by management tomeasure segment profits and losses in accordance with ASC Topic 280, “SegmentReporting” (“ASC Topic 280”).  Route andCasino segment EBITDA have certain limitations in that they do not take intoaccount the impact of certain expenses, including allocation of overhead.  The Company endeavors to compensate for thelimitations of the non-GAAP measures presented by providing the comparable GAAPmeasure with equal or greater prominence, financial statements prepared inaccordance with generally accepted accounting principles, and descriptions ofthe reconciling items, including quantifying such items, to derive the non-GAAPmeasures.  The following table reconcilesSegment EBITDA to net income (loss) (in thousands):

 
| ** **                                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Segment EBITDA(2)                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Slot route operations                                                                                             |       | $                                          | 80,262     |   | $ | 75,492 |   | $ | 32,796 |   | $ | 27,892 |   | $ | 17,777 |   |
| Casino operations                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                                                                                            |       | 23,747                                     |       | 17,719 |   | 43,551 |   | 29,475 |   | 16,823 |   |
| Other states                                                                                                      |       | 29,330                                     |       | 34,512 |   | 30,268 |   | 30,287 |   | 36,882 |   |
| Other and corporate(1)                                                                                            |       | (11,813                                    | )          | (8,405 | ) | (2,700 | ) | (16,194 | ) | (9,614 | ) |
| Depreciation and amortization                                                                                     |       | (33,941                                    | )          | (38,124 | ) | (56,405 | ) | (57,783 | ) | (55,426 | ) |
| Interest expense, net of capitalized interest  (capitalized interest of $0, $101, $873, $206 and $0 respectively) |       | (36,532                                    | )          | (39,134 | ) | (85,631 | ) | (116,832 | ) | (29,530 | ) |
| Loss on impairment of assets                                                                                      |       | —                                     |       | — |   | (72,965 | ) | (106,271 | ) | (7,192 | ) |
| Change in value of derivatives                                                                                    |       | —                                     |       | — |   | (16,114 | ) | — |   | — |   |
| Reorganization items                                                                                              |       | —                                     |       | — |   | — |   | — |   | (29,810 | ) |
| Loss on early retirement of debt                                                                                  |       | (221                                       | )          | — |   | — |   | — |   | — |   |
|                                                                                                              |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                                 |       | $                                          | 50,832     |   | $ | 42,060 |   | $ | (127,200 | ) | $ | (209,426 | ) | $ | (60,090 | ) |

 

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(1)   Representsnon-gaming revenues, general and administrative expenses, interest income andloss on lease.

 

(2)   Segment EBITDAis used by management to measure segment profits and losses and consists ofincome from segment operations plus depreciation and amortization and iscalculated before allocation of overhead.

 

**Item 7.    Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

Thefollowing discussion and analysis should be read in conjunction with “Item6.  Selected Financial Data” and with “Item 8.  FinancialStatements and Supplementary Data”.

 

**Overview**

 

Weare a diversified gaming company that focuses on two business lines: slot routeoperations and casino operations.  Our route operations involve theexclusive installation and operation of approximately 6,200 slot machines as ofDecember 31, 2009 in strategic, high traffic, non-casino locations, suchas grocery stores, drug stores, convenience stores, bars and restaurants. Our casino operations consist of sixteen casinos located in Nevada, Iowa andMissouri.  Other than the Sands and thePrimm Casinos, our casinos are operated under the “Terrible’s” brand

 

Wegenerally enter into two types of route contracts.  With chain storecustomers, such as Albertsons, Vons, Safeway, SavOn, Smith’s, and TerribleHerbst , we pay a fixed monthly fee for each location in which we place slotmachines.  With our street accounts, such as bars, restaurants andnon-chain convenience stores, we share in the revenues on a percentage basiswith the location owner.  Revenues from street accounts are recorded grossof amounts share.

 

Ourrevenues are primarily derived from gaming revenues, which include revenuesfrom slot machines and table games.  Gaming revenues are generally definedas gaming wins less gaming losses.  Our largest component of revenues isfrom our slot machines.  Promotional allowances consist primarily of foodand beverages furnished gratuitously to customers.  The retail value ofsuch services is included in the respective revenue classifications and is thendeducted as promotional allowances.  We calculate income from operationsas net revenues less total operating costs and expenses.  Income from operationsrepresents only those amounts that relate to our operations and excludesinterest income, interest expense and other non-operating income andexpenses.  Segment EBITDA consists of income from segment operations plusdepreciation and amortization, and is calculated before an allocation ofoverhead.

 

Wehave elected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under those provisions, the owners of our Companypay income taxes on our taxable income.  Accordingly, a provision forincome taxes is not included in our financial statements.

 

Full implementation ofthe Plan on the Substantial Consummation Date is subject to various regulatoryapprovals.  We cannot assure you that wewill be successful in consummating the Plan. Please refer to our discussion under “Liquidity and CapitalResources—Cash Flows; Restructuring” for a more detailed discussion of theChapter 11 Cases and the Restructuring.

 

**Year 2009 Compared to Year 2008**

 

*Route Operations*

 
| ** **                        | ** ** | **Year  ended  December 31, 2008** | ** ** | **Year  ended  December 31, 2009** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                        | ** ** | **$**                                                  | ** ** | **% of  revenue**                            | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**                   | ** ** |
|                              |       |                                                   |       |                                                   |       |   |   |   |   |
| Slot route revenue                |       | $                                                      | 243,635    |                                                   | 100.0      | % | $ | 200,637 |   | 100.0 | % |
| Promotional allowances            |       | (90                                                    | )          | 0.0                                                    |       | (126 | ) | 0.1 |   |
| Direct expenses                   |       | (215,653                                               | )          | 88.5                                                   |       | (182,734 | ) | 91.1 |   |
| EBITDA                            |       | 27,892                                                 |       | 11.5                                                   |       | 17,777 |   | 8.8 |   |
| Impairment of intangibles         |       | —                                                 |       | —                                                 |       | — |   | — |   |
| Depreciation and amortization     |       | (17,806                                                | )          | 7.3                                                    |       | (15,192 | ) | 7.6 |   |
| Income from slot route operations |       | $                                                      | 10,086     |                                                   | 4.2        | % | $ | 2,585 |   | 1.2 | % |

 

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Routeoperations accounted for 27% of total revenues during the year ended December 31,2009.  This was a decrease from 29%of total revenues for the year ended December 31, 2008.  Totalrevenues from route operations were $200.6 million for the year ended December 31,2009, a decrease of $43.0 million, or 18%, from $243.6 million for theyear ended December 31, 2008.  At December 31, 2009, we wereoperating approximately 6,200 slot machines, which was 500 less than theapproximately 6,700 we were operating as of December 31, 2008.  The decrease in machines reflects theclosures of some taverns and grocery and drug store chain clients and the eliminationof certain underperforming route locations. These factors, coupled with general economic weakness in Nevada,contributed to the decline in route revenue in 2009 compared to 2008.

 

Routeoperating costs were $182.7 million, or 91%, of route revenues for the yearended December 31, 2009.  This compares to $215.7 million, or89%, of route revenues for the same period in 2008.  The increase in the expenses as a percentageof route revenues is due to the fixed nature of many of the route costs. The decrease in the absolute amount of route operating expenses was primarilyassociated with the store closures discussed above and their respective spacelease payments, as well as lower revenues at our participation locations, whichare based on operating contracts that provide for a decrease in revenue sharecosts in proportion to revenue decline.

 

Asa result of the factors mentioned above, Route EBITDA was $17.8 million for theyear ended December 31, 2009, a decrease of $10.1 million, or 36%,from $27.9 million for the year ended December 31, 2008.

 

*CasinoOperations*

 
| ** **                           | ** ** | **Year  ended  December 31, 2008** | ** ** | **Year  ended  December 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**         | ** ** |
|                                 |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                       |       | $                                            | 474,194    |                                         | 100.0      | % | $ | 451,429 |   | 100.0 | % |
| Promotional allowances               |       | (63,259                                      | )          | 13.3                                         |       | (69,662 | ) | 15.4 |   |
| Direct expenses                      |       | (351,173                                     | )          | 74.1                                         |       | (328,062 | ) | 72.7 |   |
| EBITDA                               |       | 59,762                                       |       | 12.6                                         |       | 53,705 |   | 11.9 |   |
| Impairment of intangibles            |       | (106,271                                     | )          | 22.4                                         |       | (7,192 | ) | 1.6 |   |
| Depreciation and amortization        |       | (39,678                                      | )          | 8.4                                          |       | (39,912 | ) | 8.8 |   |
| Income (loss) from casino operations |       | $                                            | (86,187    | )                                            | (18.2      | ) | $ | 6,601 |   | 1.5 |   |

 

Casinooperations accounted for 61% of total revenues for the year ended December 31,2009 and 57% of total revenues for the year ended December 31, 2008. Total revenues derived from casino operations were $451.4 million for the yearended December 31, 2009, a decrease of $22.8 million, or 5%, from$474.2 million for the year ended December 31, 2008.  Revenuesat the Primm Casinos decreased by $12.9 million in 2009, while revenues at theother Nevada Casinos decreased by $11.9 million.  These revenue decreases in Nevada were offsetby revenue increases of $2.0 million in the Midwest Casinos.

 

Overallcasino expenses were $328.1 million for the year ended December 31, 2009,a decrease of $23.1 million, or 7%, from $351.2 million for the year ended December 31,2008.  Expenses at the Primm Casinos, theother Nevada Casinos and the Midwest Casinos decreased by $13.6 million, $5.8million and $3.7 million, respectively.

 

CasinoEBITDA was $53.7 million for the year ended December 31, 2009, a decreaseof $6.1 million, or 10%, from $59.8 million from the year ended December 31,2008.  EBITDA at the Primm Casinos andthe other Nevada Casinos decreased by $6.7 million and $5.9 million,respectively.  EBITDA at the MidwestCasinos increased by $6.5 million.

 

Thefollowing paragraphs describe the results from our casino operationsgeographically between casinos in Nevada and those in other states.

 

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*Casino Operations — Nevada*

 
| ** **                    | ** ** | **Year  ended  December 31, 2008** | ** ** | **Year  ended  December 31, 2009** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
|                          |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                |       | $                                            | 337,006    |                                         | 100.0      | % | $ | 312,149 |   | 100.0 | % |
| Promotional allowances        |       | (45,193                                      | )          | 13.4                                         |       | (52,369 | ) | 16.8 |   |
| Direct expenses               |       | (262,338                                     | )          | 77.8                                         |       | (242,957 | ) | 77.8 |   |
| EBITDA                        |       | 29,475                                       |       | 8.7                                          |       | 16,823 |   | 5.4 |   |
| Depreciation and amortization |       | (28,450                                      | )          | 8.4                                          |       | (29,361 | ) | 9.4 |   |
| Impairment of intangibles     |       | (87,071                                      | )          | 25.8                                         |       | (7,192 | ) | 2.3 |   |
| Income from casino operations |       | $                                            | (86,046    | )                                            | (25.5      | ) | $ | (19,730 | ) | (6.3 | ) |

 

Nevadacasino operations accounted for 42% of total Company revenues for the yearended December 31, 2009 and 40% of total revenues for the year ended December 31,2008.  Revenues derived from Nevada casino operations were$312.1 million for the year ended December 31, 2009 compared with$337.0 million for the year ended December 31, 2008.  The Primm Casinos and the other NevadaCasinos experienced significant economic pressures that impacted revenues atthese properties.

 

Nevadacasino promotional spending was up $7.2 million. This was primarilyattributable to an increase of $7.4 million in promotional spending related tothe Primm Casinos, which was offset by a decrease of $0.2 million attributableto the other Nevada properties.  Theincrease from the Primm Casinos was primarily in connection with an increasednumber of concert events and vacation getaway promotions.  These events and promotions accounted for anincrease of $1.4 million, $3.0 million and $2.5 million in promotional spendingassociated with food, rooms and concert tickets, respectively.  As a percentage of revenue, promotionalallowances were 16.8% for the year ended December 31, 2009 compared to13.4% for the year ended December 31, 2008.

 

Nevadacasino operating costs for the year ended December 31, 2009 were $243.0million, down $19.3 million from the year ended December 31,2008.  This was primarily associated with focused cost savings effortsdeployed in 2009, including decreases in payroll and related expenses resultingfrom a reduction in workforce, taxes and licenses expenses and variable costsof sales related to lower revenues.  As apercentage of revenue, casino operating costs were 78% for the year ended December 31,2009 and for the year ended December 31, 2008.

 

Depreciationand amortization expense was $29.4 million for the year ended December 31,2009, an increase of $0.9 million, or 3%, from $28.5 million for the year endedDecember 31, 2008.  This increase isattributable primarily to slot machine purchases, office furniture and computersoftware at the Primm Casinos.

 

Operatingresults at the Primm Casinos have continued to decline as economic pressureshave increased and competition has increased for Southern California andSouthern Nevada customers.  Interimimpairment testing performed in the second quarter of 2008 determined that thefair value of goodwill associated with the Primm Casinos was less than the bookvalue.  Accordingly, as of June 30, 2008,we recorded a non-cash charge of $30.7 million to reduce the balance of thisasset to zero.  Impairment testingperformed in the fourth quarter of 2008 determined that the fair value thisasset was zero as of December 31, 2008. Further, annual impairment testing performed in the fourth quarter of2009 determined that the fair value of our trademark associated with the PrimmCasinos was less than its book value. Accordingly, for the year ended December 31, 2009 we recorded anon-cash charge of $3.8 million to reduce the balance of this asset to its fairvalue.  As a result of revenue declinesrelated to our Primm properties, the Company tested these assets for recoverabilitypursuant to ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”),in 2009.  The test resulted in noimpairment; however, we will continue to monitor the performance of the Primmproperties, and, if necessary, continue to update our asset recoverability testunder ASC Topic 360.

 

Annualimpairment testing performed in the fourth quarter of 2008 determined that thefair value of goodwill associated with the Sands Regent Casinos was less thanits book value.  Accordingly, we recordeda non-cash charge of $48.9 million for the year ended December 31, 2008 toreduce the balance of this asset to zero. Further, annual impairment testing performed in the fourth quarter of2009 determined that the fair value of our trademarks associated with the SandsRegent Casinos were less than their book value. Accordingly, for the year ended December 31, 2009 we recorded anon-cash charge of $3.4 million to reduce the balance of these assets to theirfair value.

 

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Asa result of the factors mentioned above, Nevada casino EBITDA was$16.8 million for the year ended December 31, 2009 compared to$29.5 million for the year ended December 31, 2008.  EBITDA decreased at all of our Nevada Casinosin 2009 compared to 2008, decreasing by $6.7 million at the Primm Casinos, by$4.1 million at the Northern Nevada Casinos and by $1.8 million at the SouthernNevada Casinos.

 

*Casino Operations — Other states*

 
| ** **                    | ** ** | **Year  ended  December 31, 2008** | ** ** | **Year  ended  December 31, 2009** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
|                          |       |                                         |       |                                         |       |   |   |   |   |
| Other state casino revenue    |       | $                                            | 137,188    |                                         | 100.0      | % | $ | 139,280 |   | 100.0 | % |
| Promotional allowances        |       | (18,066                                      | )          | 13.2                                         |       | (17,293 | ) | 12.4 |   |
| Direct expenses               |       | (88,835                                      | )          | 64.8                                         |       | (85,105 | ) | 61.1 |   |
| EBITDA                        |       | 30,287                                       |       | 22.0                                         |       | 36,882 |   | 26.5 |   |
| Impairment of Intangibles     |       | (19,200                                      | )          | 14.0                                         |       | — |   | 0.0 |   |
| Depreciation and amortization |       | (11,228                                      | )          | 8.2                                          |       | (10,551 | ) | 7.6 |   |
| Income from casino operations |       | $                                            | (141       | )                                            | (0.2       | ) | $ | 26,331 |   | 18.9 |   |

 

Casinooperations in other states accounted for 19% of total company revenues for theyear ended December 31, 2009, which was up from 16% in 2008.  Totalrevenues derived from casino operations located in states other than Nevadawere $139.3 million, an increase of $2.1 million, compared to$137.2 million for the year ended December 31, 2008.  Therevenue increase occurred at both of our Missouri properties, primarily due tolower revenues in the second quarter of 2008 due to the impact of floods in theMidwest during that time.  In June 2008, Mark Twain was closed fortwo weeks and St Jo experienced a decrease in business related to thefloods.  The Company received a payment of $0.3 million under its businessrecovery insurance policy related to these floods in the third quarter of 2008,which partially offset the lower revenues in the second quarter in 2008.  Revenues at our Lakeside Iowa casino declinedin 2009 due to continued competitive pressures in the Iowa market as well asgeneral economic weakness in the region.

 

Promotionalallowances for the year ended December 31, 2009 were $17.3 million,compared to $18.1 million for the year ended December 31, 2008, adecrease of $0.8 million, or 4%. This was due primarily to a $0.6 million decrease in slot promotionalexpense at Lakeside Iowa, related to decreased revenue at that location.

 

Otherstates’ casino operating costs were $85.1 million, or 61% of revenues, for theyear ended December 31, 2009 compared to $88.8 million, or 65% ofrevenues, for the year ended December 31, 2008.  The decrease wasprimarily associated with focused cost savings efforts deployed in 2009 thatreduced the direct variable costs of revenue, as well as a decrease in payrolland related costs due to a reduction in workforce.

 

Otherstates’ casino EBITDA was $36.9 million for the year ended December 31,2009, an increase of $6.6 million, or 22%, compared to $30.3 million for theyear ended December 31, 2008.  Thiswas primarily due to the combination of higher revenues and focused costsavings efforts.

 

*Other Operations and G&A*

 
| ** **                              | ** ** | **Year  ended  December 31, 2008** | ** ** | **Year  ended  December 31, 2009** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**              | ** ** |
|                                    |       |                                    |       |                                    |       |   |   |   |   |
| Other operations — revenue         |       | $                                       | 116,609    |                                    | 14.0       | % | $ | 86,285 |   | 11.7 | % |
| Other operations — cost of revenue |       | (94,522                                 | )          | 11.3                                    | %          | (67,333 | ) | 9.1 | % |
| General and administrative              |       | (21,485                                 | )          | 2.6                                     | %          | (18,913 | ) | 2.6 | % |
| Depreciation and amortization           |       | (57,783                                 | )          | 6.9                                     | %          | (55,426 | ) | 7.5 | % |
| Restructuring costs                     |       | (17,717                                 | )          | 2.1                                     | %          | (9,814 | ) | 1.3 | % |
|                                         |            |                                         |            |                                         |            |  |  |  |  |  |  |

 

Revenuefrom other operations consists of revenue from sources such as gasoline andconvenience store sales, ATM fees, pay phone charges, rental income and othermiscellaneous items unrelated to route and casino operations. Our gas stationoperations 

 

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includea gas station and convenience store located in Osceola, Iowa; a gas station andconvenience store at the Gold Ranch property in Verdi, Nevada; and three gasstations at the Primm Casinos.  Revenues from other operations were$86.3 million for the year ended December 31, 2009 compared to$116.6 million for the year ended December 31, 2008, a decrease of$30.3 million.  This was primarilydue to decreases in gasoline prices and gasoline gallons sold in 2009.

 

Costsassociated with other revenues were $67.3 million, , or 78% of revenuesfrom other operations, for the year ended December 31, 2009, compared to$94.5 million, or 81% or revenues from other operations, for the yearended December 31, 2008, a decrease of $27.2 million.  The decreased costs were primarily related tothe decrease in gasoline costs.

 

G&Aexpenses decreased by $2.6 million, or 12%, from $21.5 million for the yearended December 31, 2008 to $18.9 million for the year ended December 31,2009.  This was primarily due to reducedcorporate level payroll and related costs resulting from a reduction inworkforce associated with focused cost savings initiatives deployed.  G&A expenses as a percentage of totalrevenue were comparable at 2.6% for the years ended December 31, 2009 and2008.

 

Depreciationand amortization expense was $55.4 million for the year ended December 31,2009, a decrease of $2.4 million, or 4%, from $57.8 million for the year ended December 31,2008.  This decrease was due to lower routeoperations depreciation related to software related fixed assets.

 

TheCompany’s restructuring costs, primarily advisory and legal fees, associatedwith the Restructuring and the Chapter 11 Cases incurred prior to the filing ofthe Chapter 11 Cases are included under Restructuring Costs.  Costs associated with the RestructuringProcess after the filing of the Chapter 11 Cases are included in ReorganizationItems.  Restructuring costs were $9.8million for the year ended December 31, 2009, a decrease of $7.9 million,or 45%, from $17.7 million for the year ended December 31, 2008.  Restructuring costs ceased to be accrued on March 21,2009, the date of the filing of the Chapter 11 Cases.

 

*Impairment Charges*

 

In2008 the Company recorded impairment charges to reduce the value of intangibleassets associated with the Primm Casinos, the Sands Regent Casinos and LakesideIowa and in 2009 the Company recorded impairment charges to reduce the value ofintangible assets associated with the Primm Casinos and the Sands RegentCasinos.  Annual impairment testingperformed in the fourth quarter of 2009 determined that the fair value ofgoodwill associated with the Primm Casinos was at book value, resulting in noimpairment charge related to this goodwill for 2009.  This compares with an impairment charge of$30.7 million in 2008, to bring balance of goodwill to zero based on interimimpairment testing performed in the second quarter of 2008.  Annual impairment testing performed in thefourth quarter of 2009 determined that the fair value of our trademarkassociated with the Primm Casinos was less than its book value.  Accordingly, for the year ended December 31,2009 we recorded an impairment charge of $3.8 million to reduce the balance ofthis trademark to its fair value.  Thiscompares with an impairment charge of $7.5 million in 2008 to bring the balanceof this trademark to its fair value based on impairment testing performed inthe fourth quarter of 2008.

 

Annualimpairment testing performed in the fourth quarter of 2009 determined that thefair value of goodwill associated with the Sands Regent Casinos was at bookvalue, resulting in no impairment charge related to goodwill for 2009, comparedto an impairment charge of $48.9 million in 2008 required to bring the balanceof this goodwill to zero based on impairment testing performed in the fourthquarter of 2008.  Annual impairmenttesting performed in the fourth quarter of 2009 determined that the fair valueof our trademarks associated with the Sands Regent Casinos was less than thebook value.  Accordingly, for the yearended December 31, 2009 we recorded impairment charges of $3.4 million toreduce the balance of these assets to their fair value.  This compares with no impairment chargesrelated to these trademarks in 2008, based on impairment testing performed inthe fourth quarter of 2008.

 

Annualimpairment testing performed in the fourth quarter of 2009 determined that thefair value of our Lakeside Iowa license rights was at book value.  Accordingly, there were no impairment chargesfor these assets for the year ended December 31, 2009.  The compares to impairment charges of $19.2million in 2008 to bring the balance of these license rights to fair valuebased on impairment testing performed in the fourth quarter of 2008.

 

*Promotional Allowances*

 

Promotionalallowances were $69.8 million, or 9.5% of total revenues, for the year ended December 31,2009, an increase of $6.5 million, or 10%, from $63.3 million, or7.6% of total revenues, for the year ended December 31, 2008.  Thiswas primarily attributable to an increase of $7.4 million in promotionalspending related to the Primm Casinos, which was offset by a decrease of $0.9million attributable to our other properties. The increase from the Primm Casinos were primarily in connection with anincreased 

 

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numberof concert events and vacation getaway promotions.  These events and promotions accounted for anincrease of $1.4 million, $3.0 million and $2.5 million in promotional spendingassociated with food, rooms and concert tickets, respectively.

 

*Loss from Operations*

 

Asa result of the factors discussed above, loss from operations was $0.9 millionfor the year ended December 31, 2009, compared to a loss of$93.5 million for the year ended December 31, 2008.

 

*Other Expenses*

 
| ** **                   | ** ** | **Year  ended  December 31, 2008** | ** ** | **Year  ended  December 31, 2009** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                   | ** ** | **(dollars in thousands)**         | ** ** |
| Interest expense             |       | $                                            | (116,832   | )                                            | $          | (29,530 | ) |
| Reorganization items         |       | —                                       |       | (29,810                                      | )          |
| Interest income              |       | 921                                          |       | 161                                          |       |
| Total other income (expense) |       | $                                            | (115,911   | )                                            | $          | (59,179 | ) |

 

Otherexpenses were $59.2 million for the year ended December 31, 2009, adecrease of $56.7 million from expenses of $115.9 million for the yearended December 31, 2008.  As a result of the filing of the Chapter 11Cases, the Company ceased accruing contractual interest expenses following March 21,2009, the Petition Date, and instead makes certain adequate protectionpayments.  As a result, interest expensedecreased by $87.3 million in 2009 compared to 2008.  Please refer to our discussion under “Liquidityand Capital Resources—Cash Flows; Restructuring” for a more detailed discussionof****such payments.  Additionally, upon the filing of the Chapter11 Cases, the Company began incurring reorganization item expenses.  For the year ended December 31, 2009,the Company’s reorganization item expenses comprised $12.4 million in legal,advisory and trustee fees incurred in connection with the Restructuring and theChapter 11 Cases and $17.4 million in adjustments to value the liabilitiessubject to compromise at the allowed claim amount in conjunction with the oralconfirmation of the Plan from the Bankruptcy Court on October 30, 2009,which oral confirmation was subsequently confirmed by the Order of theBankruptcy Court entered on January 22, 2010.

 

*Net Loss*

 

Asa result of the factors discussed above, net loss for the year ended December 31,2009 was $60.1 million compared to net loss of $209.4 million recorded foryear ended December 31, 2008.

 

**Year 2008 Compared to Year 2007**

 

*Route Operations*

 
| ** **                        | ** ** | **Year  ended  December 31, 2007** | ** ** | **Year  ended  December 31, 2008** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                        | ** ** | **$**                                                  | ** ** | **% of  revenue**                            | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**                   | ** ** |
|                              |       |                                                   |       |                                                   |       |   |   |   |   |
| Slot route revenue                |       | $                                                      | 276,946    |                                                   | 100.0      | % | $ | 243,635 |   | 100.0 | % |
| Promotional allowances            |       | (64                                                    | )          | 0.0                                                    |       | (90 | ) | 0.0 |   |
| Direct expenses                   |       | (244,086                                               | )          | 88.1                                                   |       | (215,653 | ) | 88.5 |   |
| EBITDA                            |       | 32,796                                                 |       | 11.9                                                   |       | 27,892 |   | 11.5 |   |
| Impairment of intangibles         |       | (3,165                                                 | )          | 1.1                                                    |       | — |   | — |   |
| Depreciation and amortization     |       | (21,979                                                | )          | 7.9                                                    |       | (17,806 | ) | 7.3 |   |
| Income from slot route operations |       | $                                                      | 7,652      |                                                   | 2.9        | % | $ | 10,086 |   | 4.2 | % |

 

Routeoperations accounted for 29% of total revenues during the year ended December 31,2008.  This was a decrease from 33%of total revenues for the year ended December 31, 2007.  Totalrevenues from route operations were $243.6 million for the year ended December 31,2008, a decrease of $33.3 million, or 12%, from $276.9 million for theyear ended December 31, 2007.  At December 31, 2008, we wereoperating approximately 6,700 slot machines, which was 500 less than theapproximately 7,200 we were operating as of December 31, 2007.  The decrease in machines reflects thesefactors, the elimination of certain underperforming route 

 

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locationsas well as closures of some grocery and drug store chain clients.  These factors, coupled with general economicweakness in Nevada contributed to the decline in route revenue in 2008 comparedto 2007.

 

Routeoperating costs were $215.7 million, or 89%, of route revenues for the yearended December 31, 2008.  This compares to $244.1 million, or88%, of route revenues for the same period in 2007.  This $28.4 million decrease in routeoperating expenses in 2008 was associated with a decrease of approximately$11.5 million in space lease expenses that were contractually agreed to in theprior year in connection with the enactment of a smoking ban in Nevada, as wellas a decrease in expenses associated with lower revenues at our participationlocations, which are based on operating contracts that provide for a decreasein revenue share costs in proportion to revenue decline.  Additional expense reductions resulted fromthe elimination of underperforming locations referenced above.  Route operating costs include a reserve for alitigation contingency recorded in 2008.

 

Asa result of the factors mentioned above, Route EBITDA was $27.9 million for theyear ended December 31, 2008, a decrease of $4.9 million, or 15%,from $32.8 million for the year ended December 31, 2007.

 

*CasinoOperations*

 
| ** **                           | ** ** | **Year  ended  December 31, 2007** | ** ** | **Year  ended  December 31, 2008** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**         | ** ** |
|                                 |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                       |       | $                                            | 473,248    |                                         | 100.0      | % | $ | 474,194 |   | 100.0 | % |
| Promotional allowances               |       | (64,177                                      | )          | 13.6                                         |       | (63,259 | ) | 13.3 |   |
| Direct expenses                      |       | (335,252                                     | )          | 70.8                                         |       | (351,173 | ) | 74.1 |   |
| EBITDA                               |       | 73,819                                       |       | 15.6                                         |       | 59,762 |   | 12.6 |   |
| Impairment of intangibles            |       | (69,800                                      | )          | 14.7                                         |       | (106,271 | ) | 22.4 |   |
| Depreciation and amortization        |       | (34,081                                      | )          | 7.2                                          |       | (39,678 | ) | 8.4 |   |
| Income (loss) from casino operations |       | $                                            | (30,062    | )                                            | (6.4       | ) | $ | (86,187 | ) | (18.2 | ) |

 

Casinooperations accounted for 57% of total revenues for the year ended December 31,2008 and 56% of total revenues for the year ended December 31, 2007. Total revenues derived from casino operations were $474.2 million for the yearended December 31, 2008, an increase of $0.9 million, or 0.1%, from$473.2 million for the year ended December 31, 2007.  Resultsfor 2008 include the Primm Casinos for the entire year, compared to nine monthsin 2007.  The Primm Casinos contributedan increase of $21.3 million in gross revenues for the full year of operationsin 2008 as compared to the partial year of operations in 2007.  This increase, however, was offset by a declineof $15.8 million in revenues, or 8.8%, from the other Nevada Casinos and adecline of $4.5 million, or 3%, in revenues from the Midwest casinos, in eachcase for the year ended December 31, 2008 as compared to the year ended December 31,2007.

 

Overallcasino expenses for the year ended December 31, 2008, as compared to the2007 fiscal year, increased primarily due to the inclusion of the Primm Casinosfor the full year.  Increased costs andexpenses of $26.8 million were directly associated with a full quarter ofoperations in 2008 that was not included in 2007 due to the fact that the PrimmCasinos were acquired by the Company in April 2007.  This increase was offset in part by adecrease in costs and expenses of $0.9 million, and $9.9 million, respectively,for the Midwest casinos and other Nevada casinos.

 

Asa result of the factors mentioned above, Casino EBITDA was $59.8 million forthe year ended December 31, 2008, a decrease of $14.0 million, or 19%,from $73.8 million from the year ended December 31, 2007.  The Primm Casinos EBITDA results from thecasino segment were mixed for the 2007 and 2008 years.  The addition of the Primm Casinos providedmuch of the year-over-year increase as the results are included in 2007 onlyfor nine months; however, EBITDA from the Primm Casinos in 2008 wassignificantly below the 2007 Primm Casinos results.  The other Nevada casinos produced lowerEBITDA results for the year ended December 31, 2008 as compared to theyear ended December 31, 2007.  TheMidwest casinos produced similar EBITDA results for the years ended December 31,2008 and December 31, 2007.

 

Weaddress the above mentioned EBITDA results more fully in the segmentdiscussions below.

 

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The following paragraphsdivide the results from our casino operations geographically between casinos inNevada and those in other states.

 

*Casino Operations — Nevada*

 
| ** **                    | ** ** | **Year  ended  December 31, 2007** | ** ** | **Year  ended  December 31, 2008** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
|                          |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                |       | $                                            | 331,517    |                                         | 100.0      | % | $ | 337,006 |   | 100.0 | % |
| Promotional allowances        |       | (42,459                                      | )          | 12.8                                         |       | (45,193 | ) | 13.4 |   |
| Direct expenses               |       | (245,507                                     | )          | 74.1                                         |       | (262,338 | ) | 77.8 |   |
| EBITDA                        |       | 43,551                                       |       | 13.1                                         |       | 29,475 |   | 8.7 |   |
| Depreciation and amortization |       | (22,765                                      | )          | 6.7                                          |       | (28,450 | ) | 8.4 |   |
| Impairment of intangibles     |       | (36,500                                      | )          | 11.0                                         |       | (87,071 | ) | 25.8 |   |
| Income from casino operations |       | $                                            | (15,714    | )                                            | (4.7       | ) | $ | (86,046 | ) | (25.5 | ) |

 

Nevadacasino operations accounted for 40% of total Company revenues for the yearended December 31, 2008 and 39% of total revenues for the year ended December 31,2007.  Revenues derived from Nevada casino operations were $337.0 millionfor the year ended December 31, 2008 compared with $331.5 million forthe year ended December 31, 2007. The net increase is primarily due to the inclusion of revenue from thePrimm Casinos for the full year in 2008. Revenues increased by $21.3 million for the Primm Casinos for the yearended December 31, 2008 as compared to the year ended December 31,2007, when the Primm Casinos’ results are included only for nine months.  However, revenues decreased by $15.8 millionfor the other Nevada casinos as economic pressures impacted revenues across thestate.

 

Nevadacasino promotional spending was up $2.7 million. This was primarily due tothe Primm Casinos’ full year activities, offset in part by decreases ofpromotional spending of $1.2 million for the other Nevada Casinos.  As a percentage of revenue, promotionalallowances were 13.4% for the year ended December 31, 2008 compared to12.8% for the year ended December 31, 2007.

 

Nevadacasino operating costs for the year ended December 31, 2008 were $262.3million, up $16.8 million from the year ended December 31,2007.  This was primarily due to the inclusion of the Primm Casinos as of April 10,2007 resulting in cost increases for the year ended December 31,2008.  The increases were associated withpayroll and related expenses, taxes and licenses expenses, utilities andvariable costs of sales related revenue increases.  The increase in Nevada casino operating costswas offset in part by reductions to variable costs of sales related to revenuedecreases, lower staffing levels and reduced gaming taxes for the other Nevadacasinos.

 

Depreciationand amortization expense was $28.5 million for the year ended December 31,2008, an increase of $5.7 million, or 25%, from $22.8 million for the yearended December 31, 2007.  Theincrease was primarily associated with the acquisition of the Primm Casinos in April 2007and reflects a final purchase price adjustment in the first quarter of 2008 tothe estimated depreciation and amortization expense associated with the PrimmCasinos.

 

Operatingresults at the Primm Casinos have continued to decline as economic pressureshave increased and competition has increased for Southern California andSouthern Nevada customers.  Annualimpairment testing performed in the fourth quarter of 2007 as well as interimtesting performed in the second quarter of 2008 determined that the fair valueof goodwill associated with the Primm Casinos was less than the bookvalue.  Accordingly, for the years ended December 31,2007 and 2008 we recorded non-cash charges of $36.5 million and $30.7 million,respectively, to reduce the balance of this asset to zero.  Further, annual impairment testing performedin the fourth quarter of 2008 determined that the fair value of our trademarkassociated with the Primm Casinos was less than its book value.  Accordingly, for the year ended December 31,2008 we recorded a non-cash charge of $7.5 million to reduce the balance ofthis asset to its fair value.  As aresult of revenue declines related to our Primm properties, the Company testedthese assets for recoverability pursuant to SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” in 2008.  The test resulted in no impairment; however,we will continue to monitor the performance of the Primm properties and, ifnecessary, continue to update our asset recoverability test under SFAS144.  The total impairment chargesassociated with the Primm Casinos were $38.2 million for 2008.

 

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Annualimpairment testing performed in the fourth quarter of 2008 determined that thefair value of goodwill associated with the Sands Regent Casinos was less than thebook value.  Accordingly, we recorded anon-cash charge of $48.9 million for the year ended December 31, 2008 toreduce the balance of this asset to zero.

 

Asa result of the factors mentioned above, Nevada casino EBITDA was$29.5 million for the year ended December 31, 2008 compared to$43.6 million for the year ended December 31, 2007.  This was mostly a result of EBITDA decreasesat the Primm and Sands Regency Casinos, which were impacted significantly bythe economic decline.

 

*Casino Operations — Other states*

 
| ** **                    | ** ** | **Year  ended  December 31, 2007** | ** ** | **Year  ended  December 31, 2008** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
|                          |       |                                         |       |                                         |       |   |   |   |   |
| Other state casino revenue    |       | $                                            | 141,731    |                                         | 100.0      | % | $ | 137,188 |   | 100.0 | % |
| Promotional allowances        |       | (21,718                                      | )          | 15.3                                         |       | (18,066 | ) | 13.2 |   |
| Direct expenses               |       | (89,745                                      | )          | 63.3                                         |       | (88,835 | ) | 64.8 |   |
| EBITDA                        |       | 30,268                                       |       | 21.4                                         |       | 30,287 |   | 22.0 |   |
| Impairment of Intangibles     |       | (33,300                                      | )          | 23.5                                         |       | (19,200 | ) | 14.0 |   |
| Depreciation and amortization |       | (11,316                                      | )          | 8.0                                          |       | (11,228 | ) | 8.2 |   |
| Income from casino operations |       | $                                            | (14,348    | )                                            | (10.1      | ) | $ | (141 | ) | (0.2 | ) |

 

Casinooperations in other states accounted for 16% of total company revenues for theyear ended December 31, 2008, which is down from 17% in 2007.  Totalrevenues derived from casino operations located in states other than Nevadawere $137.2 million, a decrease of $4.5 million, compared to$141.7 million for the year ended December 31, 2007.  Thedecline in revenue was exclusively at our Lakeside Iowa casino, which wasaffected by continued competitive pressures in the Iowa market as well asgeneral economic weakness in the region. Results at the two Missouri properties were not impacted by theseissues: 2008 results at the St. Jo casino were in line with 2007 and the MarkTwain casino had stronger revenue in 2008 than 2007 due primarily to a smokingban in Illinois that was enacted in 2008 (the Mark Twain casino’s closestcustomer market is Quincy, Illinois).

 

Promotionalallowances for the year ended December 31, 2008 were $18.1 millioncompared to $21.7 million for the year ended December 31, 2007, adecrease of $3.6 million or 17%. This was due primarily to a $4.2 million decrease in slot promotionalexpenses exclusively at the Lakeside Iowa casino due to decreased revenue atthat location.

 

Otherstate casino operating costs were $88.8 million, or 65% of revenues, for theyear ended December 31, 2008 compared to $89.7 million, or 63% ofrevenues, for the year ended December 31, 2007.  The net decrease inoperating costs was attributable to the reduction of variable costs of salesassociated with lower revenues, partially offset by an increase in health anddental insurance expenses.  The increasein health and dental insurance costs resulted from an error in the placement ofthe stop loss policy that was part of the self-insurance program at the threeriverboat casinos in the Midwest.  Theadditional exposure related to the placement of an incorrect stop loss policyresulted in additional expense in 2008 of approximately $2.8 million comparedto 2007.

 

Operatingresults at Lakeside Iowa have continued to decline as economic pressures havecontinued and competition has intensified in the Iowa market.  Annual impairment testing performed in thefourth quarter of 2007 and 2008, as well as interim testing performed in thesecond quarter of 2008, determined that the fair value of our Lakeside Iowalicense rights was less than the book value. According, for the year ended December 31, 2007 we recorded anon-cash charge of $33.3 million and for the year ended December 31, 2008we recorded non-cash charges totaling $19.2 million to reduce the balance ofthis asset to its fair value.

 

Otherstate casino EBITDA was $30.3 million for the year ended December 31,2008, which was consistent with EBITDA results for the year ended December 31,2007 that totaled $30.3 million.

 

*Other Operations and G&A*

 
| ** **                              | ** ** | **Year  ended  December 31, 2007** | ** ** | **Year  ended  December 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**              | ** ** |
|                                    |       |                                    |       |                                    |       |   |   |   |   |
| Other operations — revenue         |       | $                                       | 98,987     |                                    | 11.7       | % | $ | 116,609 |   | 14.0 | % |
| Other operations — cost of revenue |       | (80,184                                 | )          | 9.4                                     | %          | (94,522 | ) | 11.3 | % |
| General and administrative              |       | (22,983                                 | )          | 2.7                                     | %          | (21,485 | ) | 2.6 | % |
| Depreciation and amortization           |       | (56,405                                 | )          | 6.6                                     | %          | (57,783 | ) | 6.9 | % |
| Restructuring costs                     |       | —                                  |       |                                    |       | (17,717 | ) | 2.1 | % |
|                                         |            |                                         |            |                                         |            |  |  |  |  |  |  |

 

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Revenuefrom other operations consists of revenue from sources such as gasoline andconvenience store sales, ATM fees, pay phone charges, rental income and othermiscellaneous items unrelated to route and casino operations.  Our gas station operations include a gasstation and convenience store located in Osceola, Iowa; a gas station andconvenience store at the Gold Ranch property in Verdi, Nevada; and three gasstations we acquired with the Primm Casinos.  Revenues from otheroperations were $116.6 million for the year ended December 31, 2008compared to $99.0 million for the year ended December 31, 2007, anincrease of $17.6 million.  This wasprimarily due to a $22.3 million increase in gas station and convenience storerevenues at the Primm Casinos, reflecting a full year of operations.  This was offset in part by decreases of $3.0million and $2.1 million, respectively, in gas station and convenience storerevenues at the Lakeside Iowa and Gold Ranch Nevada properties.  The change is a result of volatility ingasoline prices.

 

Costsassociated with other revenues were $94.5 million for the year ended December 31,2008 and $80.2 million for the year ended December 31, 2007, anincrease of $14.3 million.  This wasassociated with a $19.7 million increase in gas station and convenience storecosts at the Primm Casinos based on a full year of operations.  This was offset in part by decreases of $3.1million and $2.2 million, respectively, in gas station and convenience storecosts at the Lakeside Iowa and Gold Ranch Nevada properties, which experienceddecreased costs associated with decreased revenues.

 

G&Aexpenses decreased by $1.5 million, or 6.5%, from $23.0 million for the yearended December 31, 2007 to $21.5 million for the year ended December 31,2008.  This was primarily associated withexpenses paid in 2007 in connection with the acquisition of the Primm Casinosof approximately $2.5 million.  G&Aexpenses in 2008 decreased due to reduced payroll and related costs.  G&A expenses as a percentage of totalrevenue were 2.6% for the year ended December 31, 2008 as compared to 2.7%for the year ended December 31, 2007.

 

Depreciationand amortization expense was $57.8 million for the year ended December 31,2008, an increase of $1.4 million, or 2.5%, from $56.4 million for the yearended December 31, 2007. Depreciation and amortization expense reflects a final purchase priceadjustment in the first quarter of 2008 to the estimated depreciation andamortization expense associated with the Primm Casinos and the Sands RegentCasinos.

 

Duringthe year ended December 31, 2008, the Company also incurred costsassociated with the restructuring process described in “Liquidity and CapitalResources.”  These costs were $17.7million for the year ended December 31, 2008 and were primarily related tolegal and advisory fees.

 

*Impairment Charges*

 

Asdiscussed above, the Company recorded impairment charges in 2007 and 2008 toreduce the value of intangible assets associated with the Primm Casinos, theSands Regent Casinos and Lakeside Iowa. Annual impairment testing performed in the fourth quarter of 2007 aswell as interim testing performed in the second quarter of 2008 determined thatthe fair value of goodwill associated with the Primm Casinos was less than thebook value.  Accordingly, for the yearsended December 31, 2007 and 2008 we recorded non-cash charges of $36.5million and $30.7 million, respectively, to reduce the balance of this asset tozero.  Further, annual impairment testingperformed in the fourth quarter of 2008 determined that the fair value of ourtrademark associated with the Primm Casinos was less than its book value.  Accordingly, for the year ended December 31,2008 we recorded a non-cash charge of $7.5 million to reduce the balance ofthis asset to its fair value.

 

Annualimpairment testing performed in the fourth quarter of 2008 determined that thefair value of goodwill associated with the Sands Regent Casinos was less thanthe book value.  Accordingly, we recordeda non-cash charge of $48.9 million for the year ended December 31, 2008 toreduce the balance of this asset to zero.

 

Annualimpairment testing performed in the fourth quarter of 2007 and 2008, as well asinterim testing performed in the second quarter of 2008, determined that thefair value of our Lakeside Iowa license rights was less than the bookvalue.  According, for the year ended December 31,2007 we recorded a non-cash charge of $33.3 million and for the year ended December 31,2008 we recorded non-cash charges totaling $19.2 million to reduce the balanceof this asset to its fair value.

 

*Promotional Allowances*

 

Promotionalallowances were $63.3 million, or 7.6% of total revenues, for the year ended December 31,2008, a decrease of $0.9 million, or 1.4%, from $64.2 million, or7.5% of total revenues, for the year ended December 31, 2007.  Thiswas primarily due 

 

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tolower promotional spending of $3.7 million, $0.3 million, and $0.9 million, atthe Lakeside Iowa Casino, Northern Nevada casinos and Southern Nevada casinos,respectively.  The decreases were offsetin part by increased promotional spending at the Primm Casinos of $3.9 million.

 

*Loss from Operations*

 

Asa result of the factors discussed above, loss from operations was$93.5 million for the year ended December 31, 2008, an increase of$62.4 million from loss of $26.9 million for the year ended December 31,2007.  The loss for the year ended December 31,2008 included a $30.7 million impairment charge to goodwill at the PrimmCasinos, an $7.5 million impairment charge to the Primm trademark, a $48.9million impairment charge to the goodwill at the Sands Regent Casinos, a $19.2million impairment charge to the gaming license at the Lakeside Iowa propertyand $17.7 million in costs (primarily legal and advisory fees) associated withthe Company’s restructuring process.

 

*Other Expenses*

 
| ** **                    | ** ** | **Year  ended  December 31, 2007** | ** ** | **Year  ended  December 31, 2008** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
| Interest Expense              |       | $                                            | (85,631    | )                                            | $          | (116,832 | ) |
| Change in value of derivative |       | (16,115                                      | )          | —                                       |       |
| Interest Income               |       | 1,481                                        |       | 921                                          |       |
| Total Other income (expense)  |       | $                                            | (100,265   | )                                            | $          | (115,911 | ) |

 

Otherexpense was $115.9 million for the year ended December 31, 2008, anincrease of $15.6 million from expenses of $100.3 million for theyear ended December 31, 2007.  This increase was primarily a resultof interest costs increasing from $85.6 million for the year ended December 31,2007 to $116.8 million for the year ended December 31, 2008 due to higheraverage outstanding debt balances for 2008 as well as a higher averageborrowing rate on floating rate debt. The Company’s debt increased from $1.1 billion at December 31, 2007to $1.2 billion at December 31, 2008.

 

*Net Loss*

 

Asa result of the factors discussed above, net loss for the year ended December 31,2008 was $209.4 million compared to net loss of $127.2 million recordedfor year ended December 31, 2007.

 

**Liquidity and Capital Resources**

 

*Cash Flows; Restructuring*

 

Weare currently operating as reorganized debtors under Chapter 11 of theBankruptcy Code and pursuant to the Plan, which became effective on EffectiveDate.  The Plan will not be fullyimplemented until the Substantial Consummation Date.  Upon the Substantial Consummation Date, thePlan provides for the following restructuring (the “Restructuring”) of theDebtors to occur:

 

·      Conversion ofall allowed claims under the Company’s $860.0 million senior credit facility(the “amended Credit Agreement”) into debt and equity of the Debtors, throughownership of a new holding company (“Reorganized Herbst Gaming”).

 

·      Termination ofall outstanding obligations under our 8 1/8% senior subordinated notes due 2012 (the “8 1/8% Notes”) and our 7% senior subordinated notes due2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”).

 

·      Cancellationof 100% of the existing equity in the Company

 

ThePlan generally will be fully implemented on the third business day followingthe satisfaction or waiver of all conditions to substantial consummation of thePlan (the “Substantial Consummation Date”), which are described in theparagraph below.  However, pursuant to the Plan certain payments were madeon or shortly after the Effective Date, including payment of allowed priorityclaims, certain allowed secured claims and allowed general unsecured claims, insome cases with interest from the Petition Date, as described in the Plan andthe Second Amended Disclosure Statement to Accompany the Plan filed with theBankruptcy Court on August 7, 2009.

 

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ThePlan will not be fully implemented until the Substantial ConsummationDate.  The Substantial Consummation Date will not occur until theRestructuring and the individuals proposed as officers, directors and keyemployees of the Reorganized Debtors have received all requisite governmentaland regulatory approvals.  The Companyhas been advised by the representatives of the Lenders that the applications ofReorganized Herbst Gaming, as well as the equity holders of Reorganized HerbstGaming and their principals, have been filed with the gaming authorities inNevada, Missouri and Iowa, and that the applications of directors, officers andkey employees required to submit to licensing are expected to be filed in thosejurisdictions in the near future.  TheCompany has been advised by the representatives of the Lenders that the licensingprocess is expected to take nine to 12 months.

 

TheSubstantial Consummation Date is also subject to the satisfaction or waiver ofthe following conditions: (i) none of the Debtors and Lenders are inmaterial breach of the Plan; and (ii) the Bankruptcy Court has authorizedthe assumption and rejection of certain contracts of the Debtors.  The Company currently expects that theSubstantial Consummation Date will occur in the fourth quarter of 2010,although the Company cannot assure you that all conditions to the SubstantialConsummation Date will be satisfied by that date or at all, or that the Companywill be successful in implementing the Restructuring in the form contemplatedby the Plan or at all.  The Plan providesthat the Substantial Consummation Date must occur no later than February 5,2011, the first anniversary of the Effective Date, unless extended by mutualagreement of the Debtors and Requisite Lenders. In the event that the Substantial Confirmation Date does not occur bythat date, or such later date as may be agreed to by the Debtors and theRequisite Lenders, the confirmation of the Plan would be vacated and all claims(except for allowed priority claims, certain allowed secured claims unrelatedto the Lenders or the Subordinated Notes, and allowed general unsecured claims)would be restored as though the Effective Date had never occurred.

 

ThePlan provides that, from the Effective Date through the SubstantialConsummation Date, the Debtors will continue to be managed by the currentofficers and directors.

 

Dueto the occurrence and continuation of events of default, the amountsoutstanding under the amended Credit Agreement and the indentures pursuant towhich the Subordinated Notes were issued are immediately due and payable,subject to an automatic stay of any action to collect, assert or recover aclaim against the Company under applicable bankruptcy law.  Based on thefiling of the Chapter 11 Cases, the entire balance outstanding under theamended Credit Agreement and all of the amounts outstanding under theindentures pursuant to which the Subordinated Notes were issued are included inliabilities subject to compromise at December 31, 2009.  The Companyclassifies liabilities subject to compromise as a long-term liability.

 

The current outstanding balance under the amended Credit Agreement is$858 million.  The Plan provides, in part, that the Lenders will receive100% of the equity of Reorganized Herbst Gaming, and that Reorganized HerbstGaming and the Reorganized Debtors will borrow $350 million pursuant to a newsenior secured bank loan.

 

Priorto the filing of the Chapter 11 Cases, interest accrued on borrowings under theamended Credit Agreement was based on a floating rate.  This floating ratewas based upon a variable interest rate (a base rate or LIBOR, at our option)plus a leverage grid-based spread.  Our average floating rate on debtincurred under the amended Credit Agreement was 12.5% as of December 31, 2009. However, based on the filing of the Chapter 11 Cases, after the Petition Datethe Company did not make payments under the amended Credit Agreement, otherthan certain adequate protection payments, as provided in the Final OrderApproving the Amended and Restated Stipulation Authorizing Use of CashCollateral by Debtors and Granting Adequate Protection, which was entered bythe Bankruptcy Court on May 21, 2009 and remained in effect until theEffective Date (the “Cash Collateral Order”).

 

TheCash Collateral Order provided for adequate protection payments to be made tothe Lenders during the period commencing on the Petition Date and ending on theEffective Date in the amount of the Debtors’ cash and cash equivalents inexcess of $100 million (measured as of the last day of each fiscal quarter andto be paid on the 30th day thereafter) reduced by certain unpaid restructuringcosts, as well as costs and expenses of the professionals retained by theadministrative agent.  Based on the Company’s cash and cash equivalents asof December 31, 2009 and taking into account the required Effective Datepayments described in Note 1 of Notes to Consolidated Financial Statements, theCompany made an adequate protection payment of $1.1 million on February 5,2010.  Additionally, under the Plan,between the Effective Date and the Substantial Consummation Date the Companywill make adequate protection payments to the Lenders in the amount of theDebtors’ cash and cash equivalents in excess of $100 million (measuredinitially as of the end of the third full calendar month following theEffective Date, and then as of the end of every third full calendar monththereafter, and paid 30 days thereafter). For 2009, the Company made adequate protection payments of $18.0million.

 

Weexpect to fund our existing operations and capital needs during theRestructuring from operating cash flow and cash on hand, although that may beinsufficient.  In 2009, we monitored carefully our capital expenditures,and delayed incurring capital expenditures where possible in order to conservecash.  We cannot assure you that our cash flow will be adequate to meetour anticipated working capital requirements and capital expenditures forexisting operations.

 

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*Operating Activities*

 

Duringthe year ended December 31, 2009, operating activities provided$50.0 million in cash flows on a net loss of $60.1 million.  Based on the filing of the Chapter 11 Cases,the Company does not make payments under the amended Credit Agreement.  Instead, the Company made certain adequateprotection payments of $18.0 million in 2009 pursuant to the Cash CollateralOrder, which remained in effect until the Effective Date.

 

*Investing Activities and Capital Expenditures*

 

Forthe year ended December 31, 2009, net cash used for investing activitieswas $21.1 million, primarily related to capital expenditures.  These capital expenditures includedapproximately $5.3 million in slot machine and slot related equipment purchases,approximately $2.7 million spent on the construction of a full service spa atPrimm Valley, approximately $0.9 million in costs associated with repairsat Buffalo Bills for construction issues cited by Clark County buildinginspectors and approximately $5.0 million spent on other items related tostandard maintenance of our properties. In 2009, the Company decreased capital expenditures from historicallevels in order to preserve short-term liquidity in light of the bankruptcyproceedings and the global recession.

 

Capitalexpenditures for 2010 are anticipated to be approximately $28.3 million.  This amount reflects a return to a morenormalized level compared to the reduction in capital projects for 2009.  However, to the extent that our results ofoperations do not improve, we may elect to delay some of the capitalexpenditures in order to preserve short-term liquidity.

 

*Financing Activities*

 

Cashflows used by financing activities were $18.0 million during the year ended December 31,2009.  From the Petition Date to the Effective Date the Company wassubject to the Cash Collateral Order that called for periodic sweeps of itscash in excess of $100 million to be paid to the Lenders.  In 2009, $18.0 million was paid as adequateprotection payments pursuant to the Cash Collateral Order.

 

AtDecember 31, 2009, our liabilities subject to compromise includedapproximately $160.0 million of outstanding principal amount of our 8 1/8% Notes and $170.0 million of outstandingprincipal amount of our 7% Notes.  After giving effect to indebtednessunder our Subordinated Notes and borrowings under our amended Credit Agreement,our total liabilities subject to compromise were approximately$1.2 billion at December 31, 2009.

 

Pleaserefer to “Liquidity and Capital Resources—Cash Flows; Restructuring” for a discussionof the Plan and treatment of our liabilities subject to compromise.

 

*Contractual Obligations*

 

Thefollowing table summarizes our contractual obligations as of December 31,2009.

 
| ** **                                                        | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5  years** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                   | ** ** |
| Contractual obligations:                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Long term debt included in liabilities subject to  compromise (1) |       | $                                         | 1,158,846  |   | $ | 1,158,846 |   | $ | — |   | $ | — |   | $ | — |   |
| Estimated interest payments (2)                                   |       | 128,505                                   |       | 128,505 |   | — |   | — |   | — |   |
| Operating leases                                                  |       | 389,092                                   |       | 63,630 |   | 87,920 |   | 47,352 |   | 190,190 |   |
| Total contractual cash obligations                                |       | $                                         | 1,676,443  |   | $ | 1,350,981 |   | $ | 87,920 |   | $ | 47,352 |   | $ | 190,190 |   |

----

(1)            Please refer to “Liquidity and Capital Resources —Cash Flows; Restructuring” for a description of the treatment in the Plan ofliabilities subject to compromise.

(2)            Estimated interest for variable rate debt is basedon rates at December 31, 2009 and assumes contractual interest for a oneyear period on long-term debt that, as of December 31, 2009, wasclassified as liabilities subject to compromise for which interest is no longeraccrued or paid.  This table does notgive effect to the adequate protection payments pursuant to the Cash CollateralOrder or the Plan.

 

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*Critical Accounting Policies*

 

Thepreparation of our financial statements requires our management to adoptaccounting policies and make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities.  We prepare our financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America.  Our business and industry is highly regulated. The majority of our revenue is counted in the form of cash, chips andtokens and therefore is not subject to any significant or complex estimationprocedures.

 

Wehave determined that the following accounting policies and related estimatesare critical to the preparation of our consolidated financial statements:

 

*Long-Lived Assets*

 

Wehave a significant investment in long-lived property and equipment and leaseacquisition costs.  Significant accounting policies that affect thereported amounts for these assets include the determination of the assets’estimated useful life, evaluation of the assets’ recoverability and thelikelihood of technological obsolescence.  We estimate useful lives forproperty and equipment based on historical experience and estimates of products’commercial lives.  Significant incremental costs associated with theacquisition of location leases are capitalized and amortized using thestraight-line method over the term of the related leases, which range from 1 to20 years.  Should the actual useful life of an asset differ from theestimated useful life, future operating results could be positively ornegatively affected.  We review useful lives, obsolescence, and assesscommercial viability of these assets periodically.

 

Weassess the recoverability of long-lived assets when circumstances indicate thatthe carrying amount of an asset may not be fully recoverable.  Ifundiscounted expected cash flows to be generated by a long-lived asset or assetgroup are less than its carrying amount, we record an impairment to write downthe long-lived asset or asset group to its estimated fair value.  Fairvalue is determined based on undiscounted expected future cash flows.  Anadverse change to the estimate of these undiscounted future cash flows couldnecessitate an impairment charge that could adversely affect operating results.

 

*Goodwill and Intangible Assets*

 

Wehave a significant investment in goodwill and other intangible assets on ourconsolidated balance sheet as of December 31, 2009.  The purchaseprice of an acquisition is allocated to the underlying assets acquired andliabilities assumed based upon their estimated fair values at the date ofacquisition.  The estimated fair values of the assets acquired pursuant tothe acquisitions of Lakeside Iowa, the Sands Regent Casinos and the PrimmCasinos, a substantial portion of which consisted of intangible assetscomprised of license rights, were determined by management after consideringvarious information including an independent appraisal.  To the extentthat the purchase price exceeds the fair value of the net identifiable tangibleand intangible assets acquired, such excess is allocated to goodwill.

 

Wereview the investment in goodwill and license rights for impairment annually,and between annual tests if events occur or circumstances change that would,more likely than not, reduce the fair value below the amount reflected in thebalance sheet.  These evaluations of goodwill and license rights requirethe use of estimates about future operating results of each reporting unit todetermine their estimated fair value.  Changes in forecasted operationscan materially affect these estimates.  Once impairment of goodwill orother intangible assets has been recorded, it cannot be reversed.  Anadverse change to the estimate of these future cash flows could necessitate animpairment charge that could adversely affect operating results.

 

Basedon impairment testing in the fourth quarter of 2009, the Company recordednon-cash charges totaling $7.2 million related to impairment of certainindefinite lived intangible assets. Annual impairment testing performed in the fourth quarter of 2009determined that the fair value of goodwill associated with the Primm Casinoswas at book value, resulting in no impairment charge related to this goodwillfor 2009.  Annual impairment testingperformed in the fourth quarter of 2009 determined that the fair value of ourtrademark associated with the Primm Casinos was less than its book value.  Accordingly, for the year ended December 31,2009 we recorded an impairment charge of $3.8 million to reduce the balance ofthis trademark to its fair value.

 

Annualimpairment testing performed in the fourth quarter of 2009 determined that thefair value of goodwill associated with the Sands Regent Casinos was at bookvalue, resulting in no impairment charge related to goodwill for 2009.  Annual impairment testing performed in thefourth quarter of 2009 determined that the fair value of our trademarksassociated with the Sands Regent Casinos was less than the book value.  Accordingly, for the year ended December 31,2009 we recorded impairment charges of $3.4 million to reduce the balance ofthese trademarks to their fair value.

 

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Annualimpairment testing performed in the fourth quarter of 2009 determined that thefair value of our Lakeside Iowa license rights was at book value.  Accordingly, there were no impairment chargesfor these assets for the year ended December 31, 2009.

 

**Recently Issued Accounting Standards**

 

On July 1, 2009, *The FASB Accounting Standards Codification**and the Hierarchy of Generally AcceptedAccounting Principles — A Replacement of FASB Statement No. 162*,(the “Codification”) (previously “SFAS 168”) became effective*.* Accordingly, the Financial AccountingStandards Board Accounting Standards Codification (the “ASC”) became the sourceof authoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with accounting principles generally accepted in the United States (“GAAP”).The implementation of the Codification did not initially have an impact on ourconsolidated financial statements, as it did not modify any existingauthoritative GAAP.

 

Subsequent to theadoption of the Codification, any change to the source of authoritative GAAPwill be communicated through an Accounting Standards Update (“ASU”). ASUs willbe published by the FASB for all authoritative GAAP promulgated by the FASB,regardless of the form in which such guidance may have been issued prior torelease of the Codification. Prior to inclusion in an ASU, the standard-settingorganizations and regulatory agencies continue to issue proposed changes to theaccounting standards in previous form (e.g., FASB Statements of FinancialAccounting Standards, Emerging Issues Task Force (“EITF”) Abstracts, FASB StaffPositions, SEC Staff Accounting Bulletins, etc.).

 

*VariableInterest Entities.*In September 2009, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 167, *Amendmentsto FASB Interpretation No. 46(R) *(“SFAS 167”). SFAS 167 isa revision to FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (which is currently promulgated in asubsection of ASC Topic 810, “Consolidation”). The amendments include: (1) theelimination of the exemption for qualifying special purpose entities, (2) anew approach for determining who should consolidate a variable-interest entity,and (3) changes to when it is necessary to reassess who should consolidatea variable-interest entity. SFAS 167 is effective for the first annualreporting period beginning after November 15, 2009 and for interim periodswithin that first annual reporting period. We do not believe that the adoptionof SFAS 167 will have a material impact on our consolidated financialstatements.

 

**Statement on Forward-Looking Information**

 

Wemake statements in this report that relate to matters that are not historicalfacts that we refer to as “forward-looking statements” regarding, among otherthings, our business strategy, our prospects and our financial position. These statements may be identified by the use of forward-lookingterminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,”“should” or “anticipates” or the negative or other variation of these orsimilar words, or by discussions of strategy or risks and uncertainties. Forward-looking statements in this report include, among other things,statements concerning:

 

·                  projections offuture results of operations or financial condition;

 

·                  expectationsfor our route operations and our casino properties;

 

·                  expectations ofthe continued availability of capital resources; and

 

·                  expectationsregarding our restructuring efforts.

 

Anyforward-looking statement made by us necessarily is based upon a number ofestimates and assumptions that, while considered reasonable by us, isinherently subject to significant business, economic and competitiveuncertainties and contingencies, many of which are beyond our control, and aresubject to change.  Actual results of our operations may varymaterially from any forward-looking statement made by or on our behalf. Forward-looking statements should not be regarded as a representation by us orany other person that the forward-looking statements will be achieved. Undue reliance should not be placed on any forward-looking statements. Some of the contingencies and uncertainties to which any forward-lookingstatement contained herein is subject include, but are not limited to, thefollowing:

 

·                  Although thePlan has been confirmed, it will not be fully implemented until the SubstantialConsummation Date.  Implementation of thePlan is subject to a number of conditions, including no stay being entered inthe Appeal, the Appeal not being successful, as well as obtaining certainregulatory approvals.  It is uncertainwhether we will emerge from bankruptcy. Even if successful, the consummation of the Plan may adversely affectour business, including our relationships with our customers andsuppliers.  We may lose valuablecontracts in the process of carrying out the Plan.

 

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·                  The recession,and in particular the economic downturn in Southern Nevada and SouthernCalifornia (two of our primary markets), has adversely affected our businessand is expected to continue to do so.

 

·                  Our businessrelies heavily on certain markets that have been impacted by significanteconomic downturns.  Prolonged economicdownturns in these markets could have further material adverse effects on ourresults.

 

·                  If the economicdownturn does not improve, there will continue to be an adverse impact on theCompany’s operations and therefore the Company’s liquidity.

 

·                  Our substantialindebtedness contemplated by the Plan could adversely affect our financialhealth and prevent us from fulfilling our obligations under the debtinstruments to be used upon the Substantial Consummation Date.

 

·                  We will requirea significant amount of cash to service our indebtedness.  Our ability togenerate cash depends on many factors beyond our control.

 

·                  The success ofour route operations is dependent on our ability to renew our contracts.

 

·                  Ourindebtedness imposes restrictive covenants on us.

 

·                  Wemay experience a loss of market share due to intense competition.

 

·                  We faceextensive regulation from gaming and other government authorities.

 

·                  Changes toapplicable tax laws could have a material adverse effect on our financialcondition.

 

·                  We depend uponour key employees and certain members of our management.

 

·                  Until theSubstantial Consummation Date, certain of our executive officers and members ofour board of directors own 100% of the Company, which could lead to conflictsof interest.

 

Foradditional contingencies and uncertainties, see “Item 1.  Business-RiskFactors.”

 

**Industry and Market Data**

 

Thisreport includes market and industry data that we obtained from our ownresearch, studies conducted by third party sources that we believe to bereliable and industry and general publications published by third parties and,in some cases, management estimates based on industry and otherknowledge.  We have not independently verified any of the data from thirdparty sources, and we make no representation as to the accuracy of suchinformation.  While we believe internal company estimates are reliable andmarket definitions are appropriate, they have not been verified by anyindependent sources, and we make no representations as to the accuracy of suchestimates.

 

**Item7A. ********Quantitative and Qualitative Disclosures About Market Risk.**

 

Weare exposed to market risk, primarily related to interest rate exposure of ourdebt obligations that bear interest based on floating rates.  We do nothave any cash or cash equivalents as of December 31, 2009 that are subjectto market risk based on changes in interest rates.  We are exposed tomarket risk due to floating or variable interest rates on our indebtednessunder our amended Credit Agreement.  However, as of the Petition Date, weceased to accrue contractual interest under the amended Credit Agreement.  The interest on the secured credit facilityto be entered into on the Substantial Consummation Date is expected to be basedon a floating rate (a base rate or LIBOR), plus a leverage grid-based variableamount.  It is expected thatinterest on the new loans contemplated by the Plan will also be based on afloating rate (a base rate or LIBOR) plus a stated amount.

 

Thecarrying value of our cash, trade, notes and loans receivable and tradepayables approximates fair value primarily because of the short maturities ofthese instruments.  The fair value of our liabilities subject tocompromise is estimated based on the quoted market prices for the same orsimilar issues or on the current rates offered to us for debt of the sameremaining maturities.  Based on the borrowing rates currently available tous for debt with similar terms and average maturities, the estimated fair valueof current debt outstanding is approximately $431 million as of December 31,2009.

 

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

 
| **Report of Independent Registered Public Accounting  Firm**                                                                  | 47         |
|-------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** |
| **Consolidated Financial Statements**                                                                                         | ** ** |
| ** **                                                                                                                    | ** ** |
| Consolidated  Balance Sheets As of December 31, 2008 and 2009                                                            | 48         |
|                                                                                                                          |       |
| Consolidated  Statements of Operations For the years ended December 31, 2007, 2008 and  2009                             | 49         |
|                                                                                                                          |       |
| Consolidated  Statements of Stockholders’ Equity (Deficiency) For the years ended  December 31, 2007, 2008 and 2009 | 50         |
|                                                                                                                          |       |
| Consolidated  Statements of Cash Flows For the years ended December 31, 2007, 2008 and  2009                             | 51         |
|                                                                                                                          |       |
| **Notes to Consolidated Financial Statements**                                                                                | 52         |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of

HerbstGaming, Inc. and Subsidiaries

LasVegas, Nevada

 

Wehave audited the accompanying consolidated balance sheets of Herbst Gaming, Inc.and subsidiaries (Debtor-in-Possession) (the “Company”) as of December 31,2009 and 2008, and the related consolidated statements of operations,stockholders’ equity (deficit), and cash flows for each of the three years inthe period ended December 31, 2009. These consolidated financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on the consolidated financial statements based on ouraudits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement.  The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Herbst Gaming, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2009, in conformity with accounting principles generallyaccepted in the United States of America.

 

As discussed in Note 1 to the consolidated financialstatements, the Company filed for reorganization under Chapter 11 of the U.S.Bankruptcy Code on March 22, 2009.  The accompanying consolidatedfinancial statements do not purport to reflect or provide for the consequencesof the bankruptcy proceedings.  In particular, such financial statementsdo not purport to show (1) as to assets, their realizable value on aliquidation basis or their availability to satisfy liabilities; (2) as toprepetition liabilities, the amounts that may be allowed for claims orcontingencies, or the status and priority thereof; (3) as to stockholderaccounts, the effect of any changes that may be made in the capitalization ofthe Company; or (4) as to operations, the effect of any changes that maybe made in its business.

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a goingconcern.  As discussed in Note 1to the financial statements, the Company’s recurring losses from operations,stockholders’ capital deficiency, and voluntary petition for bankruptcy underChapter 11 of the U.S.Bankruptcy Code filed on March 22, 2009, raise substantial doubtabout its ability to continue as a going concern.  Management’s plansconcerning these matters are also discussed in Note 1 to the consolidatedfinancial statements.  The consolidated financial statements do notinclude adjustments that might result from the outcome of this uncertainty.

 

/s/ DELOITTE & TOUCHE LLP

 

Las Vegas, NevadaMarch 31, 2010

 

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**HerbstGaming, Inc.**

**(Debtor and Debtor-in-Possession as of March 22, 2009)**

**ConsolidatedBalance Sheets**

**(in thousands)**

 
| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **2008**             | ** ** | **2009** | ** ** |
| **Assets**                                                                               | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current assets                                                                           |       |                 |       |   |   |
| Cash and cash equivalents                                                                |       | $                    | 105,990    |   | $ | 116,894 |   |
| Accounts receivable, net                                                                 |       | 4,470                |       | 2,599 |   |
| Notes and loans receivable                                                               |       | 436                  |       | 955 |   |
| Prepaid expenses                                                                         |       | 16,566               |       | 14,405 |   |
| Inventory                                                                                |       | 4,219                |       | 4,396 |   |
| Total current assets                                                                     |       | 131,681              |       | 139,249 |   |
| Property and equipment, net                                                              |       | 547,002              |       | 517,063 |   |
| Lease acquisition costs, net                                                             |       | 15,068               |       | 14,746 |   |
| Due from related parties                                                                 |       | 1,450                |       | 868 |   |
| Other assets, net                                                                        |       | 24,124               |       | 6,373 |   |
| Intangibles, net                                                                         |       | 211,668              |       | 202,474 |   |
| Goodwill                                                                                 |       | 3,255                |       | 3,255 |   |
|                                                                                     |       |                 |       |   |   |
| Total assets                                                                             |       | $                    | 934,248    |   | $ | 884,028 |   |
|                                                                                     |       |                 |       |   |   |
| **Liabilities and stockholders’  deficit**                                          | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current liabilities                                                                      |       |                 |       |   |   |
| Current portion of long-term debt                                                        |       | $                    | 1,176,330  |   | $ | — |   |
| Accounts payable                                                                         |       | 14,179               |       | 18,474 |   |
| Accrued interest                                                                         |       | 41,672               |       | — |   |
| Accrued expenses                                                                         |       | 28,086               |       | 20,415 |   |
| Total current liabilities                                                                |       | 1,260,267            |       | 38,889 |   |
| Long-term debt, less current portion                                                     |       | —               |       | — |   |
| Other liabilities                                                                        |       | 2,136                |       | 2,628 |   |
| Liabilities subject to compromise                                                        |       | —               |       | 1,230,756 |   |
| Commitments and contingencies (Note 13)                                                  |       |                 |       |   |   |
| Stockholders’ deficit                                                               |       |                 |       |   |   |
| Common stock (no par value; 2,500 shares  authorized; 300 shares issued and outstanding) |       | 2,368                |       | 2,368 |   |
| Additional paid-in-capital                                                               |       | 1,631                |       | 1,631 |   |
| Accumulated deficit                                                                      |       | (332,154             | )          | (392,244 | ) |
| Total stockholders’ deficit                                                         |       | (328,155             | )          | (388,245 | ) |
|                                                                                     |       |                 |       |   |   |
| Total liabilities and stockholders’ deficit                                         |       | $                    | 934,248    |   | $ | 884,028 |   |

 

See notes to consolidated financial statements.

 

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**Herbst Gaming, Inc.**

**(Debtor and Debtor-in-Possession as of March 22, 2009)**

**ConsolidatedStatements of Operations**

**(in thousands)**

** **
| ** **                                                                                                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2007**                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues                                                                                                                                                                    |       |                                       |       |   |   |   |   |
| Route operations                                                                                                                                                            |       | $                                          | 276,946    |   | $ | 243,635 |   | $ | 200,637 |   |
| Casino operations                                                                                                                                                           |       | 473,248                                    |       | 474,194 |   | 451,429 |   |
| Other — non gaming                                                                                                                                                     |       | 98,987                                     |       | 116,609 |   | 86,285 |   |
|                                                                                                                                                                        |       |                                       |       |   |   |   |   |
| Total revenues                                                                                                                                                              |       | 849,181                                    |       | 834,438 |   | 738,351 |   |
| Less promotional allowances                                                                                                                                                 |       | (64,241                                    | )          | (63,349 | ) | (69,788 | ) |
|                                                                                                                                                                        |       |                                       |       |   |   |   |   |
| Net revenues                                                                                                                                                                |       | 784,940                                    |       | 771,089 |   | 668,563 |   |
| Costs and expenses                                                                                                                                                          |       |                                       |       |   |   |   |   |
| Route operations                                                                                                                                                            |       | 244,086                                    |       | 215,653 |   | 182,734 |   |
| Casino operations                                                                                                                                                           |       | 335,252                                    |       | 351,173 |   | 328,062 |   |
| Depreciation and amortization                                                                                                                                               |       | 56,405                                     |       | 57,783 |   | 55,426 |   |
| General and administrative                                                                                                                                                  |       | 22,983                                     |       | 21,485 |   | 18,913 |   |
| Other — non-gaming                                                                                                                                                     |       | 80,184                                     |       | 94,522 |   | 67,333 |   |
| Restructuring costs                                                                                                                                                         |       |                                       |       | 17,717 |   | 9,814 |   |
| Loss on impairment of assets                                                                                                                                                |       | 72,965                                     |       | 106,271 |   | 7,192 |   |
|                                                                                                                                                                        |       |                                       |       |   |   |   |   |
| Total costs and expenses                                                                                                                                                    |       | 811,875                                    |       | 864,604 |   | 669,474 |   |
|                                                                                                                                                                        |       |                                       |       |   |   |   |   |
| Loss from operations                                                                                                                                                        |       | (26,935                                    | )          | (93,515 | ) | (911 | ) |
| Other income (expense)                                                                                                                                                      |       |                                       |       |   |   |   |   |
| Interest income                                                                                                                                                             |       | 1,481                                      |       | 921 |   | 161 |   |
| Interest expense, (net of capitalized interest of  $206, $0, and $0, respectively) (contractual interest in 2009 would have been  $133,555 if incurred for the entire year) |       | (85,631                                    | )          | (116,832 | ) | (29,530 | ) |
| Reorganization items                                                                                                                                                        |       | —                                     |       | — |   | (29,810 | ) |
| Change in value of derivative instruments                                                                                                                                   |       | (16,115                                    | )          | — |   | — |   |
| Total other expense, net                                                                                                                                                    |       | (100,265                                   | )          | (115,911 | ) | (59,179 | ) |
|                                                                                                                                                                        |       |                                       |       |   |   |   |   |
| Net loss                                                                                                                                                                    |       | $                                          | (127,200   | ) | $ | (209,426 | ) | $ | (60,090 | ) |

 

See notes to consolidated financial statements.

 

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**Herbst Gaming, Inc.**

**(Debtor and Debtor-in-Possession as of March 22, 2009)**

**ConsolidatedStatements of Stockholders’ Equity (Deficit)**

**(in thousands)**

 
| ** **                       | ** ** | ** ** | ** ** | ** **     | ** ** | **Retained**     | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Additional** | ** ** | **Earnings**     | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **(accumulated** | ** ** | ** ** | ** ** |
| **Balance**                      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **deficit)**     | ** ** | **Total**  | ** ** |
| Balance, January 1, 2007    |       | $          | 2,368      |           | $          | 1,631            |       | $          | 14,772     |   | $ | 18,771 |   |
| Net loss                         |       |       |       |           |       | (127,200         | )          | (127,200   | )          |
| Stockholders’ distributions |       |       |       |           |       | (10,300          | )          | (10,300    | )          |
| Balance December 31, 2007   |       | $          | 2,368      |           | $          | 1,631            |       | $          | (122,728   | ) | $ | (118,729 | ) |
| Net loss                         |       |       |       |           |       | (209,426         | )          | (209,426   | )          |
| Balance December 31, 2008   |       | $          | 2,368      |           | $          | 1,631            |       | $          | (332,154   | ) | $ | (328,155 | ) |
| Net loss                         |       |       |       |           |       | (60,090          | )          | (60,090    | )          |
| Balance December 31, 2009   |       | $          | 2,368      |           | $          | 1,631            |       | $          | (392,244   | ) | $ | (388,245 | ) |

 

See notes to consolidated financial statements.

 

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**Herbst Gaming, Inc.**

**(Debtor and Debtor-in-Possession as of March 22, 2009)**

**ConsolidatedStatements of Cash Flows**

**(in thousands)**

 
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
| Cash flows from operating activities                                                 |       |                                       |       |   |   |   |   |
| Net loss                                                                             |       | $                                          | (127,200   | ) | $ | (209,426 | ) | $ | (60,090 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 56,405                                     |       | 57,783 |   | 55,426 |   |
| Amortization of debt issuance costs                                                  |       | 3,188                                      |       | 4,116 |   | 900 |   |
| Debt discount amortization                                                           |       | 144                                        |       | 143 |   | 32 |   |
| Gain (loss) on sale of property and equipment                                        |       | 105                                        |       | (44 | ) | 39 |   |
| Loss on impairment of assets                                                         |       | 72,965                                     |       | 106,271 |   | 7,192 |   |
| Decrease (increase) in operating assets:                                             |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                  |       | 3,790                                      |       | 2,661 |   | 1,764 |   |
| Prepaid expenses                                                                     |       | (4,169                                     | )          | 568 |   | 2,161 |   |
| Inventory                                                                            |       | (239                                       | )          | 776 |   | (177 | ) |
| Due from related parties                                                             |       | (606                                       | )          | 223 |   | (152 | ) |
| Other assets                                                                         |       | (538                                       | )          | 10 |   | (1,161 | ) |
| Increase (decrease) in operating liabilities:                                        |       |                                       |       |   |   |   |   |
| Accounts payable                                                                     |       | (1,074                                     | )          | (2,823 | ) | 1,946 |   |
| Accrued interest                                                                     |       | 927                                        |       | 37,110 |   | 20,493 |   |
| Accrued expenses                                                                     |       | 1,067                                      |       | (298 | ) | (2,491 | ) |
| Other liabilities                                                                    |       | (492                                       | )          | 432 |   | 454 |   |
| Non-cash reorganization items                                                        |       | —                                     |       | — |   | 23,657 |   |
| Net cash provided (used) by operating activities                                     |       | $                                          | 4,273      |   | $ | (2,498 | ) | $ | 49,993 |   |
|                                                                                 |       |                                       |       |   |   |   |   |
| Cash flows from investing activities                                                 |       |                                       |       |   |   |   |   |
| Net cash paid for Sands Regent Casinos, net of  cash acquired                        |       | $                                          | (147,878   | ) | $ | — |   | $ | — |   |
| Net cash paid for Primm Casinos, net of cash  acquired                               |       | (393,682                                   | )          | — |   | — |   |
| Additions to notes and loans receivable                                              |       | (1,153                                     | )          | (911 | ) | (1,522 | ) |
| Collection on notes and loans receivable                                             |       | 1,937                                      |       | 927 |   | 1,093 |   |
| Proceeds from sale of property and equipment                                         |       | 248                                        |       | 622 |   | 213 |   |
| Purchases of property and equipment                                                  |       | (32,418                                    | )          | (15,578 | ) | (15,645 | ) |
| Lease acquisition costs                                                              |       | (1,180                                     | )          | (806 | ) | (5,252 | ) |
| Net cash used in investing activities                                                |       | $                                          | (574,128   | ) | $ | (15,746 | ) | $ | (21,113 | ) |
| ** **                                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from financing activities                                                 |       |                                       |       |   |   |   |   |
| Proceeds from long term debt                                                         |       | $                                          | 853,000    |   | $ | 35,859 |   | $ | — |   |
| Payments on long term debt                                                           |       | (229,692                                   | )          | (5,742 | ) | — |   |
| Loan origination fees                                                                |       | (14,513                                    | )          | (165 | ) | — |   |
| Reorganization items                                                                 |       | —                                     |       | — |   | (17,976 | ) |
| Stockholders’ distributions                                                     |       | (10,300                                    | )          | — |   | — |   |
| Net cash provided (used in) by financing  activities                                 |       | 598,495                                    |       | 29,952 |   | (17,976 | ) |
| Net increase in cash and cash equivalents                                            |       | 28,642                                     |       | 11,708 |   | 10,904 |   |
| Cash and cash equivalents                                                            |       |                                       |       |   |   |   |   |
| Beginning of year                                                                    |       | 65,640                                     |       | 94,282 |   | 105,990 |   |
| End of year                                                                          |       | $                                          | 94,282     |   | $ | 105,990 |   | $ | 116,894 |   |
| Supplemental cash flow information:                                                  |       |                                       |       |   |   |   |   |
| Cash paid during the period for interest                                             |       | $                                          | 81,579     |   | $ | 75,463 |   | $ | 8,102 |   |
| Supplemental schedule of non cash investing  and financing activities:          |       |                                       |       |   |   |   |   |
| Purchase of property and equipment financed  through accounts payable                |       | $                                          | 1,028      |   | $ | 338 |   | $ | 1,003 |   |

 

See notes to consolidated financial statements.

 

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**Herbst Gaming, Inc.**

**(Debtor and Debtor-in-Possession as of March 22, 2009)**

**Notes toconsolidated financial statements**

 

**1.****                                     ****Chapter11 Reorganization and Going Concern**

 

OnMarch 22, 2009 (the “Petition Date”), Herbst Gaming, Inc. (“Herbst”or the “Company”) and certain of its subsidiaries (the “Subsidiary Guarantors”,and together with the Company, the “Debtors”) filed voluntary petitions forrelief (the “Chapter 11 Cases”) under Chapter 11 of the United StatesBankruptcy Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”), in the UnitedStates Bankruptcy Court for the District of Nevada, Northern Division (the “BankruptcyCourt”) under case numbers 09-50746-gwz through 09-50763-gwz.  From theperiod commencing on the Petition Date up to and including the Effective Date(as defined below), the Debtors operated their businesses and managed theirproperties as debtors-in-possession subject to the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Code.** **Pursuant to an orderof the Bankruptcy Court, the Chapter 11 Cases are being jointly administered.

 

OnJuly 22, 2009, the Debtors filed with the Bankruptcy Court an amendedjoint plan of reorganization.  On January 22, 2010, the BankruptcyCourt issued an Amended Order Confirming Debtors’ First Amended Joint Plan ofReorganization (the “Order”), confirming the amended joint plan ofreorganization, as modified by the Findings of Fact and Conclusions of Law inSupport of Order Confirming Debtors’ First Amended Joint Plan of Reorganization(the “Findings of Fact “) entered contemporaneously with the Order (the amendedjoint plan of reorganization as modified by the Findings of Fact, the “Plan”).  The Plan became effective on February 5,2010 (the “Effective Date”), but will not be fully implemented until theSubstantial Consummation Date (as defined below).  Since the Effective Date, the Debtors havebeen operating as reorganized entities pursuant to the terms and provisions ofthe Plan and, except as otherwise specifically provided for in the Plan,outside the jurisdiction of the Bankruptcy Court.  Upon the Substantial Consummation Date, thePlan provides for the following restructuring (the “Restructuring”) of theDebtors to occur:

 

·            Conversion ofall allowed claims under the Company’s $860.0 million senior credit facility(the “amended Credit Agreement”) into debt and equity of the Debtors, throughownership of a new holding company (“Reorganized Herbst Gaming”).

 

·            Termination ofall outstanding obligations under our 8 1/8% senior subordinated notes due 2012 (the “8 1/8% Notes”) and our 7% senior subordinated notes due2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”).

 

·            Cancellation of100% of the existing equity in the Company.

 

Followingthe Substantial Consummation Date, Reorganized Herbst Gaming will hold all ofthe equity interests in the Reorganized Debtors (as defined below) and theCompany will be dissolved.

 

ThePlan generally will be fully implemented on the third business day followingthe satisfaction or waiver of all conditions to substantial consummation of thePlan (the “Substantial Consummation Date”), which are described in theparagraph below.  However, pursuant to the Plan certain payments were madeon or shortly after the Effective Date, including payment of allowed priorityclaims, certain allowed secured claims and allowed general unsecured claims, insome cases with interest from the Petition Date, as described in the Plan andthe Second Amended Disclosure Statement to Accompany the Plan filed with theBankruptcy Court on August 7, 2009.

 

Additionally,under the Plan, between the Effective Date and the Substantial ConsummationDate the Company will make adequate protection payments to the lenders underthe amended Credit Agreement (the “Lenders”) in the amount of the Debtors’ cashand cash equivalents in excess of $100 million (measured initially as of theend of the third full calendar month following the Effective Date, and then asof the end of every third full calendar month thereafter, and paid 30 daysthereafter).

 

ThePlan will not be fully implemented until the Substantial ConsummationDate.  The Substantial Consummation Date will not occur until theRestructuring and the individuals proposed as officers, directors and keyemployees of Reorganized Herbst Gaming and the Subsidiary Guarantors, as theywill be reorganized (the “Reorganized Debtors”) have received all requisitegovernmental and regulatory approvals.  TheCompany has been advised by the representatives of the Lenders that theapplications of Reorganized Herbst Gaming, as well as the equity holders ofReorganized Herbst Gaming and their principals, have been filed with the gamingauthorities in Nevada, Missouri and Iowa, and that the applications of directors,officers and key employees required to submit to licensing are expected to befiled in those jurisdictions in the near future.  The Company has beenadvised by the representatives of the Lenders that the licensing process isexpected to take nine to 12 months.

 

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TheSubstantial Consummation Date is also subject to the satisfaction or waiver ofthe following conditions: (i) none of the Debtors and Lenders are inmaterial breach of the Plan; and (ii) the Bankruptcy Court has authorizedthe assumption and rejection of certain contracts of the Debtors.  The Company currently expects that theSubstantial Consummation Date will occur in the fourth quarter of 2010,although the Company cannot assure you that all conditions to the SubstantialConsummation Date will be satisfied by that date or at all, or that the Companywill be successful in implementing the Restructuring in the form contemplatedby the Plan or at all.  The Plan providesthat the Substantial Consummation Date must occur no later than February 5,2011, the first anniversary of the Effective Date, unless extended by mutualagreement of the Debtors and Requisite Lenders (as defined below).  In the event that the SubstantialConfirmation Date does not occur by that date, or such later date as may beagreed to by the Debtors and the Requisite Lenders, the confirmation of thePlan would be vacated and all claims (except for allowed priority claims,certain allowed secured claims unrelated to the Lenders or the SubordinatedNotes, and allowed general unsecured claims) would be restored as though theEffective Date had never occurred.

 

OnJanuary 28, 2010, the Indenture Trustee, as defined in the Findings ofFact, filed a notice of appeal from the Order. On January 29, 2010, the Debtors elected to have the Appeal heardby the U.S. District Court for the District of Nevada (the “District Court”)and not the U.S. Bankruptcy Appellate Panel for the Ninth Circuit Court ofAppeals.  The appellate briefs are due tobe filed with the District Court commencing April 3, 2010 with the finalreply brief due by May 4, 2010.  TheIndenture Trustee has not sought a stay of the Order.

 

OnNovember 16, 2009, the Indenture Trustee filed its First Amended Complaintfor Declaratory Judgment (the “Amended Complaint”) against the Debtors and theAdministrative Agent under the amended Credit Agreement seeking, among otherrelief, a judgment of the Bankruptcy Court determining that the SubordinatedNotes entitled to pari passu treatment with the obligations due under theamended Credit Agreement.  The Debtorsand the Administrative Agent filed motions to dismiss the AmendedComplaint.  On February 23, 2010,the Bankruptcy Court dismissed the Amended Complaint without prejudice to seekleave to re-file the Amended Complaint in the Order is set aside in the Appeal.

 

Whilethe Indenture Trustee has not sought a stay of the Order, we cannot assure youthat the Indenture Trustee will not seek such a stay or that a stay, of sought,will not be granted during the pendency of the Appeal and  prior to the Substantial ConsummationDate.  We cannot assure you that the Order will not beoverturned and the Plan set aside.

 

TheDebtors and Lenders holding, in the aggregate, approximately 61% of all of theoutstanding claims under the amended Credit Agreement are parties to an amendedand restated lockup agreement (the “Lockup Agreement”).  Pursuant to theLockup Agreement, the parties thereto are contractually obligated to usecommercially reasonable efforts to successfully consummate the Restructuringand achieve the expeditious consummation of the Plan.  The LockupAgreement will automatically terminate, pursuant to its terms, if theSubstantial Consummation Date does not occur on or before February 5,2011, the first anniversary of the Effective Date, unless such terminationevent is waived by Lenders party to the Lockup Agreement holding at leasttwo-thirds in amount of the total claims held by all Lenders party to theLockup Agreement (the “Requisite Lenders”) within five days of the occurrenceof the termination event.  In the event that the Substantial ConsummationDate does not occur by that date, and the Requisite Lenders do not waive therelated termination event and the Lockup Agreement is terminated, the Lenderswould no longer be obligated to support the Restructuring.

 

ThePlan provides that, from the Effective Date through the SubstantialConsummation Date, the Debtors will continue to be managed by the currentofficers and directors.

 

Thecontinuation of the Company as a going concern is contingent upon, among otherthings, the Debtors’ ability to (i) obtain substantial consummation of thePlan or another plan of reorganization under the Bankruptcy Code; (ii) returnto profitability; (iii) generate sufficient cash flow from operations; and(iv) obtain financing sources to meet our future obligations.  Thesematters create uncertainty relating to our ability to continue as a goingconcern.  The accompanying consolidated financial statements do notreflect any adjustments relating to the recoverability and classification ofassets or liabilities that might result from the outcome of theseuncertainties.  In addition, the Restructuring could materially changeamounts reported in our consolidated financial statements, which do not giveeffect to any adjustments of the carrying value of assets and liabilities thatmay be necessary as a consequence of reorganization under Chapter 11 of theBankruptcy Code.

 

Additionally,the Restructuring is subject to various regulatory approvals.  We cannot assure you that we will besuccessful in consummating the Plan.

 

Due to theoccurrence and continuation of events of default, the amounts outstanding underthe amended Credit Agreement and the indentures pursuant to which theSubordinated Notes were issued are immediately due and payable, subject to anautomatic stay of any action to collect, assert or recover a claim against theCompany under applicable bankruptcy law.  Based on the filing of theChapter 11 Cases, the entire balance outstanding under the amended CreditAgreement and all of the amounts outstanding under 

 

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the indentures pursuant to which the Subordinated Notes were issued areincluded in liabilities subject to compromise at December 31, 2009. The Company classifies liabilities subject to compromise as a long-termliability.

 

The currentoutstanding balance under the amended Credit Agreement is $858 million. The Plan provides, in part, that the Lenders will receive 100% of the equity ofReorganized Herbst Gaming, and that Reorganized Herbst Gaming and theReorganized Debtors will borrow $350 million pursuant to a new senior securedbank loan.

 

Priorto the filing of the Chapter 11 Cases, interest accrued on borrowings under theamended Credit Agreement was based on a floating rate.  This floating ratewas based upon a variable interest rate (a base rate or LIBOR, at our option)plus a leverage grid-based spread.  Our average floating rate on debt incurredunder the amended Credit Agreement was 12.5% as of December 31,2009.  However, based on the filing of the Chapter 11 Cases, after thePetition Date the Company did not make payments under the amended CreditAgreement, other than certain adequate protection payments, as provided in theFinal Order Approving the Amended and Restated Stipulation Authorizing Use ofCash Collateral by Debtors and Granting Adequate Protection, which was enteredby the Bankruptcy Court on May 21, 2009 and remained in effect until the EffectiveDate (the “Cash Collateral Order”).

 

The Cash Collateral Orderprovided for adequate protection payments to be made to the Lenders during theperiod commencing on the Petition Date and ending on the Effective Date in theamount of the Debtors’ cash and cash equivalents in excess of $100 million(measured as of the last day of each fiscal quarter and to be paid on the 30thday thereafter) reduced by certain unpaid restructuring costs, as well as costsand expenses of the professionals retained by the administrative agent. Based on the Company’s cash and cash equivalents as of December 31, 2009and taking into account the required Effective Date payments described in Note1 of Notes to Consolidated Financial Statements, the Company made an adequate protectionpayment of $1.1 million on February 5, 2010.  Additionally, under the Plan, between theEffective Date and the Substantial Consummation Date the Company will makeadequate protection payments to Lenders in the amount of the Debtors’ cash andcash equivalents in excess of $100 million (measured initially as of the end ofthe third full calendar month following the Effective Date, and then as of theend of every third full calendar month thereafter, and paid 30 daysthereafter).  For 2009, the Company madeadequate protection payments of $18.0 million.

 

**2.****                                     ****Description of Business and Summary of Significant Accounting Policies**

 

***Description of Business andPrinciples of Consolidation***—The accompanying condensedconsolidated financial statements of Herbst Gaming, Inc. include theaccounts of Herbst and its subsidiaries: E-T-T, Inc. and subsidiaries (“ETT”),Market Gaming, Inc. (“MGI”), E-T-T Enterprises L.L.C. (“E-T-T Enterprises”),Flamingo Paradise Gaming, LLC (“FPG”), HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HGI-SJ”),HGI-Mark Twain (“HGI-MT”), The Sands Regent and subsidiaries (“The Sands Regent”)and The Primadonna Company LLC (“Primadonna”).  The financial statementsof ETT are consolidated and include the following wholly-owned subsidiaries:Cardivan Company, Corral Coin, Inc. and Corral Country Coin, Inc. The financial statements of The Sands Regent are consolidated and include thefollowing direct and indirect wholly-owned subsidiaries: Zante, Inc., LastChance, Inc., California Prospectors, Ltd. (which is a wholly ownedsubsidiary of Last Chance, Inc.), Plantation Investments, Inc. andDayton Gaming, Inc.

 

Allsignificant intercompany balances and transactions between and among HerbstGaming, ETT, MGI, E-T-T Enterprises, FPG, HGI-L, HGI-SJ, HGI-MT, The SandsRegent and Primadonna have been eliminated in the condensed consolidatedfinancial statements.  ETT and MGI conduct business in the gaming industryand generate revenue principally from gaming machine route operations andcasino operations.  Gaming machine route operations involve theinstallation, operation and service of gaming machines owned by the Companythat are located in licensed, leased or subleased space in retail stores(supermarkets, convenience stores, etc.), bars and restaurants throughout theState of Nevada.  The Company owns and operates Terrible’s Town Casino &Bowl in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevadaand Terrible’s Town Casino and Terrible’s Lakeside Casino & RV Park,both of which are located in Pahrump, Nevada.  The operations of thesubsidiaries of the Company are as follows:

 

·                  E-T-TEnterprises develops and leases real estate to ETT.

 

·                  FPG owns andoperates Terrible’s Casino in Las Vegas, Nevada, which began operations in December 2000.

 

·                  HGI-L owns andoperates Lakeside Iowa, as well as a hotel, gas station and convenience store,all located in Osceola, Iowa, which were acquired in February 2005.

 

·                  HGI-SJ owns andoperates St. Jo in St. Joseph, Missouri, which was acquired in February 2005.

 

·                  HGI-MT owns andoperates Mark Twain in La Grange, Missouri, which was acquired in February 2005.

 

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·                  The SandsRegent and its direct and indirect wholly-owned subsidiaries, which wereacquired on January 3, 2007, own and operate the Sands Regent Casinos.

 

·                  Primadonna,which was acquired on April 10, 2007, owns and operates the Primm Casinos,a California lottery station located on the Nevada/California border, threegasoline stations and the Primm Travel Center (such properties, together withthe Primm Casinos, the “Primm Properties”), all of which are located in Primm,Nevada.

 

Wehave elected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under those provisions, the owners of the Companypay income taxes on its taxable income.  Accordingly, a provision forincome taxes is not included in our financial statements.

 

Thegaming industry in the States of Nevada, Iowa, and Missouri is subject toextensive state and local government regulation. The Company’s gamingoperations are subject to the licensing and regulatory control of the NevadaGaming Commission, the Nevada Gaming Control Board, the Iowa Race and GamingCommission, the Missouri Gaming Commission as well as local jurisdictions.

 

***Subsequent Events***—The Companyhas evaluated subsequent events through March 31, 2010, the filing date of thisForm 10-K.

 

***Use of Estimates***—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the period. Significant estimates incorporated into the Company’sconsolidated financial statements include the estimated useful lives fordepreciable and amortizable assets, the estimated allowance for doubtfulaccounts receivable and the estimated cash flows in assessing therecoverability of long-lived assets as well as estimated fair values of certainassets related to write downs and impairments, contingencies and litigation,and claims and assessments. Actual results could differ from those estimates.

 

***Cash and Cash Equivalents***—Cash and cashequivalents include highly liquid investments with a maturity at the date ofpurchase of three months or less. The carrying value of these investmentsapproximates their fair value due to their short maturities.

 

***Fair Valu******e ofFinancial Instruments***—On January 1,2008, we adopted ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC820”).  ASC 820 does not determine oraffect the circumstances under which fair value measurements are used, butdefines fair value, expands disclosure requirements around fair value andspecifies a hierarchy of valuation techniques based on whether the inputs tothose valuation techniques are observable or unobservable.  Observable inputs reflect market dataobtained from independent sources, while unobservable inputs reflect theCompany’s market assumptions.  These twotypes of inputs create the following fair value hierarchy:

 

·                                          Level 1:       Quoted prices for identical instruments in activemarkets.

 

·                                          Level 2:       Quoted prices for similar instruments in activemarkets; quoted prices for identical or similar instruments in markets that arenot active; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets.

 

·                                          Level 3:       Valuations derived from valuation techniques inwhich one or more significant inputs or significant value drivers areunobservable.

 

This hierarchy requiresus to use observable market data, when available, and to minimize the use ofunobservable inputs when determining fair value.  For some products or in certain marketconditions, observable inputs may not be available.

 

We adopted previouslyissued FASB Staff Position No. 157-4, Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”),which has been subsequently classified in ASC Topic 820, Section 65,Transition Related to FASB Staff Position No. 157-4, and providesadditional guidance for estimating fair value in accordance with ASC Topic 820,when the volume and level of activity for the asset or liability havesignificantly decreased. This standard also includes guidance on how toidentify circumstances that indicate that a transaction is not orderly andemphasizes that even if there has been a significant decrease in the volume andlevel of activity for the asset or liability and regardless of the valuationtechniques used, the objective of a fair value measurement remains the same.FSP FAS 157-4 was effective for the period ended December 31, 2009 and, asapplied prospectively, did not have a material impact on our consolidatedfinancial statements.

 

The fair values ofcertain of the Company’s financial instruments, including cash and cashequivalents, accounts receivable, and other current liabilities, approximatetheir recorded carrying amount because of their short term nature.  See Note 8, Long-Term 

 

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Debt, for furtherdiscussions of the valuations of certain of our financial instruments.  In addition, see below for a discussion ofFASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures aboutFair Value of Financial Instruments.

 

***Restructuring Costs***—Restructuring costs are comprised of expensesrelated to the evaluation of financial and strategic alternatives and includespecial legal and other advisor fees associated with the Company’sreorganization efforts prior to the Petition Date, including preparation forthe bankruptcy filing.

 

***Reorganization Costs***—Reorganization costs are comprised ofexpenses incurred after the Petition Date. Reorganization costs include legal, advisory and trusteefees incurred in connection with the Restructuring and the Chapter 11Cases.  Included in these expenses areadjustments to value the liabilities subject to compromise at the allowed claimamount in conjunction with the oral confirmation of the Plan from theBankruptcy Court on October 30, 2009.

 

***Accounts Receivable***—Receivablesconsist primarily of amounts due from customers as a result of normal businessoperations. The Company periodically performs credit evaluations of itscustomers. The Company reviews accounts receivable balances in order todetermine an allowance for potential credit losses based on our collectionsexperience and the age of the receivables. At December 31, 2008 and 2009,the allowance for potential credit losses was $840,000 and $808,000,respectively.

 

***Notes and Loans Receivable***—In order tosecure various route locations, the Company has provided certain incentives tothe location operators in the form of loans. The loans, made for build-outs,tenant improvements, and initial operating expenses, are generally secured bythe personal guarantees of the operators and the locations’ assets. Themajority of the loans are non-interest bearing and are expected to be repaidwithin one year from the locations’ share of net gaming win.

 

TheCompany regularly evaluates the collectability of the loans by individuallyevaluating each location’s operating results and cash flows. Managementprovides for the carrying value of loans that are determined to beuncollectible. At December 31, 2008 and 2009, no allowance for potentialcredit losses was deemed necessary.

 

***Inventory***—Inventoriesare stated at the lower of cost or market value. Cost is determined using thefirst-in, first-out method.  Inventories include parts, food, liquor,retail items and gasoline.

 

***Property and Equipment***—Property andequipment are stated at cost and depreciated using the straight-line methodover the estimated useful lives of the assets. Leasehold improvements areamortized using the straight-line method over the shorter of the lease term orestimated useful life of the asset. Useful lives are as follows:

 
| Building                           |   | 40 years          |   |
|------------------------------------|--------|-------------------|--------|
| Gaming equipment                   |   | 5 years           |   |
| Furniture, fixtures, and equipment |   | 5 — 10 years |   |
| Leasehold improvements             |   | 1 — 20 years |   |

 

***Lease Acquisition Costs***— Significantincremental costs associated with the acquisition of location leases arecapitalized and amortized using the straight-line method over the term of therelated leases. Lease acquisition costs are stated at cost less accumulatedamortization of $41,284,000 and $41,359,000 at December 31, 2008 and 2009,respectively.

 

***Debt Issuance Costs***— Debt issuancecosts incurred in connection with the issuance of long-term debt arecapitalized and amortized to interest expense using the effective interestmethod over the terms of the related debt agreements.  On October 30, 2009, the BankruptcyCourt orally confirmed the Plan and as such, debt issuance costs, net ofaccumulated amortization of loan fees, were fully expensed to reorganizationitems in the consolidated statement of operations in the fourth quarter of2009.

 

***Self-Insurance Reserves***—We areself-insured up to certain stop loss amounts for employee health care coverageand workers’ compensation costs. Insurance claims and reserves include accruals of estimated settlementsfor known claims, as well as accruals of estimates for claims incurred but notyet reported.  In estimating these accruals,we consider historical loss experience and make judgments about the expectedlevels of costs per claim.  We believeour estimates of future liability are reasonable based upon our methodology;however, changes in health care costs, accident frequency and severity andother factors could materially affect the estimate for these liabilities.  Self-insurance reserves are included inaccrued expenses on our consolidated balance sheets.

 

***Long-Lived Assets***— In accordancewith the provisions of ASC Topic 360, the Company evaluates the potentialimpairment of long-lived assets when events or changes in circumstancesindicate that the carrying amount of a long-lived asset may not be recoverable.If it is determined that the carrying value of long-lived assets may not berecoverable based upon the relevant facts and circumstances, the Companyestimates the future undiscounted cash flows expected to result from the use ofthe asset and its eventual 

 

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disposition.If the sum of the expected undiscounted future cash flows is less than thecarrying value of the asset, the Company will recognize an impairment loss forthe difference between the carrying value of the asset and its fair value. As aresult of revenue declines related to our Primm properties, the Company testedthese assets for recoverability pursuant to ASC Topic 360 in 2009. The testresulted in no impairment; however, we will continue to monitor the performanceof the Primm properties and, if necessary, continue to update our assetrecoverability test under ASC Topic 360. The Company believes that no impairment of long-lived assets occurredfor the years ended December 31, 2007, 2008 and 2009.

 

***Goodwill and Intangible Assets***— We evaluateour goodwill and indefinite-lived intangible assets in accordance with theapplications of ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC Topic 350”)*.*Goodwill and indefinite-lived intangible assets are notsubject to amortization, but they are subject to an annual impairment test inthe fourth quarter of each year and between annual test dates in certaincircumstances. See Note 5, Goodwill and Other Intangible Assets**for a discussion of impairment charges related to ourgoodwill and other intangible assets.

 

***Revenue and Promotional Allowances***—In accordancewith industry practice, the Company recognizes as gaming revenues the net winfrom route operations, which is the difference between gaming wins and losses.The Company recognizes total net win from gaming devices as revenues fromgaming routes that operate under revenue-sharing arrangements. Revenue-sharingpayments to route locations are recorded as costs of route operations. Revenuesfrom casino operations are gaming wins less losses. Revenues from retail salesare presented net of sales tax. Revenues from casino operations include theretail value of food and beverage and goods and services provided to customerson a complimentary basis. Such amounts are then deducted as promotionalallowances. The estimated cost of providing these promotional allowances is asfollows:

 
| ** **        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2007**                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(dollars in thousands)**       | ** ** |
| Room              |       | $                                          | 8,094      |   | $ | 8,958 |   | $ | 11,779 |   |
| Food and Beverage |       | 21,507                                     |       | 22,827 |   | 14,781 |   |
| Other             |       | 20,150                                     |       | 14,198 |   | 22,160 |   |
| Total             |       | $                                          | 49,751     |   | $ | 45,983 |   | $ | 48,720 |   |

 

Thesecosts are reclassified out of the respective department into the casinodepartment.

 

Liabilitiesin respect of the Company’s player’s club program are recognized as points areearned and are included in the “Other liabilities” line of the Company’sbalance sheet.  Expenses in respect of the Company’s player’s club programare included in the “Promotional allowances” line of the Company’s statement ofoperations.

 

***Location Rent Expense***— Fixed rentalpayments (including scheduled increases) are recorded on a straight-line basisover the agreement term. Renewal agreements are considered new agreements andare accounted for as described above over the new agreement term.

 

***Income Taxes***—Herbst Gaming,E-T-T and MGI have elected to be taxed under the provisions of Subchapter S ofthe Internal Revenue Code. Under those provisions, the owners are liable forincome tax on the taxable income of the Company as it affects the owners’individual income tax returns. Therefore, a provision for income taxes has notbeen included in the accompanying consolidated financial statements.

 

***Concentrations of Credit Risk***—The Companymaintains cash balances at certain financial institutions located in SouthernNevada. The balances are insured by the Federal Deposit Insurance Corporation (“FDIC”)up to $250,000. At times, cash balances may be in excess of FDIC limits. As of December 31,2009, the Company does not consider itself to have any significantconcentrations of credit risk.

 

***Recently Issued and Adopted Accounting Standards***— On July 1, 2009, *The FASB Accounting Standards Codification**and the Hierarchy ofGenerally Accepted Accounting Principles — A Replacement of FASB Statement No. 162*, (the “Codification”) (previously “SFAS168”) became effective*.*Accordingly, the Financial Accounting Standards Board Accounting StandardsCodification (the “ASC”) became the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with accountingprinciples generally accepted in the United States (“GAAP”). The implementationof the Codification did not initially have an impact on our consolidatedfinancial statements, as it did not modify any existing authoritative GAAP.

 

Subsequent to theadoption of the Codification, any change to the source of authoritative GAAPwill be communicated through an Accounting Standards Update (“ASU”). ASUs willbe published by the FASB for all authoritative GAAP promulgated by the FASB,regardless of the form in which such guidance may have been issued prior torelease of the Codification. Prior to inclusion in an ASU, the standard-settingorganizations and regulatory agencies continue to issue proposed changes to theaccounting standards 

 

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in previous form (e.g.,FASB Statements of Financial Accounting Standards, Emerging Issues Task Force (“EITF”)Abstracts, FASB Staff Positions, SEC Staff Accounting Bulletins, etc.).

 

*VariableInterest Entities.*In September 2009, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 167, *Amendmentsto FASB Interpretation No. 46(R) *(“SFAS 167”). SFAS 167 isa revision to FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (which is currently promulgated in asubsection of ASC Topic 810, “Consolidation”). The amendments include: (1) theelimination of the exemption for qualifying special purpose entities, (2) anew approach for determining who should consolidate a variable-interest entity,and (3) changes to when it is necessary to reassess who should consolidatea variable-interest entity. SFAS 167 is effective for the first annualreporting period beginning after November 15, 2009 and for interim periodswithin that first annual reporting period. We do not believe that the adoptionof SFAS 167 will have a material impact on our consolidated financialstatements.

 

**3.****                                     ****Property and Equipment**

 

Propertyand equipment consist of the following (in thousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**              | ** ** | **2009** | ** ** |
| Building                           |       | $                     | 449,435    |   | $ | 451,363 |   |
| Gaming equipment                   |       | 145,797               |       | 148,740 |   |
| Furniture, fixtures, and equipment |       | 88,733                |       | 93,930 |   |
| Leasehold improvements             |       | 2,071                 |       | 2,043 |   |
| Land                               |       | 36,930                |       | 36,930 |   |
| Barge                              |       | 17,171                |       | 16,935 |   |
| Construction-in-progress           |       | 2,711                 |       | 6,425 |   |
|                               |       | 742,848               |       | 756,366 |   |
| Less accumulated depreciation      |       | (195,846              | )          | (239,303 | ) |
|                               |       | $                     | 547,002    |   | $ | 517,063 |   |

 

**4.****                                     ****Lease Acquisition Costs**

 
| ** **              | ** ** | **December 31, 2008**      | ** ** | **December 31, 2009** | ** ** |
|-------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Gross**                            | ** ** | ** **                      | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Carrying**                         | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **              | ** ** | **Amount**                           | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **              | ** ** | **(dollars in thousands)** | ** ** |
| Lease Acquisition Costs |       | $                                    | 56,352     |                            | $          | 41,284 |   | $ | 62,659 |   | $ | 47,913 |   |
|                         |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

Theaggregate amortization expense for the years ended December 31, 2007, 2008and 2009 was $9,577,731, $7,170,354, and $6,808,930 respectively.

 

Expectedannual amortization for the years ending December 31 is:

 
| 2010 |   | $         | 6,657,000 |   |
|------|--------|-----------|-----------|--------|
| 2011 |   | 2,480,000 |      |
| 2012 |   | 1,994,000 |      |
| 2013 |   | 1,826,000 |      |
| 2014 |   | 1,679,000 |      |

 

**5.****                                     ****Goodwill and Other Intangible Assets**

 

ASCTopic 350 requires the Company to test goodwill and other indefinite-lived intangibleassets on an annual basis and between annual tests if events occur orcircumstances change that would, more likely than not, reduce the fair valuebelow the amount reflected in the balance sheet.  The annual test, whichis performed by the Company in the fourth quarter of each year, requires thatthe Company compare the carrying amount of the indefinitely-lived intangibleassets reflected on the balance sheet to the fair value of the intangibleassets.

 

TheCompany determines the fair value of the indefinite-lived intangible assetsother than goodwill utilizing the direct value method.  Fair valuemeasurements of these intangible assets include significant assumptionsrelating to variables that are based on past 

 

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experiencesand judgments about future performance.  These variables include, but arenot limited to: (1) the forecasted earnings growth rate of each market, (2) risk-adjusteddiscount rate and (3) expected growth rates in perpetuity to estimatedterminal values.

 

Annualimpairment testing performed in the fourth quarter of 2008 as well as interimtesting performed in the second quarter of 2008 determined that the fair valueof our Lakeside Iowa license rights was less than the book value. Accordingly, for the year ended December 31, 2008 we recorded non-cashcharges totaling $19.2 million to reduce the balance of these assets to thefair value.  The Company considered the continued and unexpecteddeterioration of earnings following the 2007 annual impairment test toconstitute a triggering event that required an additional fair valuemeasurement in the second quarter of 2008.

 

Annualimpairment testing performed in the fourth quarters of 2008 and 2009 determinedthat the fair value of our trademark associated with the Primm Casinos was lessthan its book value.  Accordingly, for the years ended December 31,2008 and 2009, we recorded non-cash charges of $7.5 million and $3.8 million,respectively, to reduce the balance of this asset to its fair value.

 

Annualimpairment testing performed in the fourth quarter of 2009 determined that thefair value of our trademarks associated with the Sands Regent Casinos was lessthan their book value.  Accordingly, for the year ended December 31,2009, we recorded a non-cash charge of $3.4 million to reduce the balance ofthis asset to its fair value.

 

ASCTopic 350 also requires the Company to test goodwill at its reporting unitswithin its market segment on a annual basis and between annual tests if eventsoccur or circumstances change that would, more likely than not, reduce the fairvalue of goodwill below the amount reflected in the balance sheet.  TheCompany performs its annual impairment test in the fourth quarter of each yearby comparing the fair value with the amount reflected in the balance sheet.

 

TheCompany determines the fair value of the goodwill utilizing the residual valuemethod.  Fair value measurements of these assets include significantassumptions relating to variables that are based on past experiences andjudgments about future performance.  These variables include, but are notlimited to: (1) the forecasted earnings growth rate of each market, (2) risk-adjusteddiscount rate and (3) expected growth rates in perpetuity to estimatedterminal values.

 

Interimimpairment testing performed in the second quarter of 2008 determined that thefair value of goodwill associated with the Primm Casinos was less than the bookvalue.  Accordingly, as of June 30, 2008 we recorded a non-cash charge of$30.7 million to reduce the balance of this asset to zero.

 

Annualimpairment testing performed in the fourth quarter of 2008 determined that thefair value of goodwill associated with the Sands Regent Casinos was less thanthe book value.  Accordingly, we recorded a non-cash charge of $48.9million for the year ended December 31, 2008 to reduce the balance of thisasset to zero, as of December 31, 2008.

 

Theaforementioned impairment charges are included in the table below.

 

Intangibleassets consist of the following (dollars in thousands):

 
| ** **                                     | ** ** | **December 31, 2008**      | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Gross**                            | ** ** | **Gross**                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Carrying**                         | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                     | ** ** | **Amount**                           | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Amortized intangible assets                    |       |                                 |       |                            |       |   |   |   |   |
| Customer Loyalty Programs                      |       | $                                    | 24,350     |                            | 5,669      |   | $ | 24,350 |   | $ | 7,235 |   |
| Non-Competition Agreement                      |       | 2,180                                |       | 1,383                           |       | 2,180 |   | 1,820 |   |
| Total                                          |       | 26,530                               |       | 7,052                           |       | 26,530 |   | 9,055 |   |
|                                           |       |                                 |       |                            |       |   |   |   |   |
| Unamortized intangible assets                  |       |                                 |       |                            |       |   |   |   |   |
| Gaming License Rights                          |       | 196,800                              |       |                            |       | 196,800 |   |   |   |
| Beginning accumulated impairment-Gaming Rights |       | (33,300                              | )          |                            |       | (52,500 | ) |   |   |
| Impairment charges-Gaming Rights               |       | (19,200                              | )          |                            |       | — |   |   |   |
| Patent applications                            |       | 240                                  |       |                            |       | 240 |   |   |   |
| Trademark                                      |       | 55,150                               |       |                            |       | 55,150 |   |   |   |
| Beginning accumulated impairment-Trademark     |       | —                               |       |                            |       | (7,500 | ) |   |   |
| Impairment charges-Trademark                   |       | (7,500                               | )          |                            |       | (7,191 | ) |   |   |
| Total                                          |       | $                                    | 192,190    |                            |       |   | $ | 184,999 |   |   |   |
|                                                |            |                                      |            |                                 |            |  |  |  |  |  |  |  |

 

Thechanges in the carrying amount of goodwill for the year ended December 31,2009 are as follows:

 

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| Gross  carrying amount of goodwill as of January 1, 2009  |   | $        | 119,326 |   |
|----------------------------------------------------------------|--------|----------|---------|--------|
| Accumulated impairment to goodwill as of  January 1, 2009 |   | (116,071 | )       |
| Net carrying amount as of January 1, 2009                 |   | 3,255    |    |
|                                                           |   |     |    |
| Balance as of December 31, 2009                           |   | $        | 3,255   |   |

 

Licenserights are intangible assets acquired from the purchase of gaming entities thatoperate in gaming jurisdictions where competition is limited, such as stateswhere only a certain number of operators are allowed by law.  Intangiblelicense rights are not currently subject to amortization as we have determinedthey have an indefinite useful life.

 

Customerloyalty program assets are being ratably amortized over an average life of 9.7years.

 

Non-competitionagreements were entered with certain previous owners and management and areamortized over five years, which is the contractual life of the agreement.

 

Expectedannual amortization for the years ending December 31 (in thousands) is:

 
| 2010 |   | $     | 1,740  |   |
|------|--------|-------|--------|--------|
| 2011 |   | 1,632 |   |
| 2012 |   | 1,506 |   |
| 2013 |   | 1,506 |   |
| 2014 |   | 1,506 |   |

 

Forthe year ended December 31, 2009, amortization expense of intangibles was(in thousands) $2,002.

 

**6.****                                     ****OtherAssets**

 

Otherassets consist of the following (dollars in thousands):

 
| ** **                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2008**              | ** ** | **2009** | ** ** |
| Debt issuance costs, net of accumulated  amortization of $11,450 and $0, respectively |       | $                     | 17,848     |   | $ | — |   |
| Other assets                                                                          |       | 6,276                 |       | 6,373 |   |
| Total                                                                                 |       | $                     | 24,124     |   | $ | 6,373 |   |

 

**7.****                                     ****Accrued Expenses**

 

Accrued expenses consist ofthe following (dollars in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2008**              | ** ** | **2009** | ** ** |
| Progressive jackpot liabilities |       | $                     | 1,695      |   | $ | 2,071 |   |
| Accrued payroll and related     |       | 12,998                |       | 10,069 |   |
| Slot club point liability       |       | 3,495                 |       | 3,182 |   |
| Other accrued                   |       | 9,898                 |       | 5,093 |   |
| Total                           |       | $                     | 28,086     |   | $ | 20,415 |   |

 

**8.****                                     ****Long-Term Debt**

 

The Company is in default under the amended Credit Agreement and theindentures pursuant to which the Subordinated Notes were issued.  The current outstanding balance under theamended Credit Agreement is $858 million.  The Plan provides, in part,that the Lenders will receive 100% of the equity of Reorganized Herbst Gaming,and that Reorganized Herbst Gaming will borrow $350 million pursuant to a newsenior secured bank loan.

 

Interestaccrued on borrowings under the amended Credit Agreement was based on afloating rate until the Petition Date.  This floating rate was based upona variable interest rate (a base rate or LIBOR, at our option) plus a leveragegrid-based spread.  Our average floating rate on debt incurred under theamended Credit Agreement was 12.5% at December 31, 2009.  However,based on the 

 

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filingof the Chapter 11 Cases, after the Petition Date the Company did not makepayments under the amended Credit Agreement, other than certain adequateprotection payments, as provided in the Final Order Approving the Amended andRestated Stipulation Authorizing Use of Cash Collateral by Debtors and GrantingAdequate Protection, which was entered by the Bankruptcy Court on May 21,2009 and remained in effect until the Effective Date (the “Cash CollateralOrder”).

 

TheCash Collateral Order provided for adequate protection payments to be made tothe Lenders during the period commencing on the Petition Date and ending on theEffective Date in the amount of the Debtors’ cash and cash equivalents inexcess of $100 million (measured as of the last day of each fiscal quarter andto be paid on the 30th day thereafter) reduced by certain unpaid restructuringcosts, as well as costs and expenses of the professionals retained by theadministrative agent.  Based on the Company’s cash and cash equivalents asof December 31, 2009 and taking into account the required Effective Datepayments described in Note 1 of Notes to Unaudited Condensed ConsolidatedFinancial Statements, the Company made an adequate protection payment of $1.1million on February 5, 2010. Additionally, under the Plan, between the Effective Date and theSubstantial Consummation Date the Company will make adequate protectionpayments to the lenders under the amended Credit Agreement (the “Lenders”) inthe amount of the Debtors’ cash and cash equivalents in excess of $100 million(measured initially as of the end of the third full calendar month followingthe Effective Date, and then as of the end of every third full calendar monththereafter, and paid 30 days thereafter). For 2009, the Company made adequate protection payments of $18.0million.

 

Pursuantto the Plan, all outstanding obligations under the Subordinated Notes will beterminated on the Substantial Consummation Date.

 

Long-term debt consists ofthe following (dollars in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **2008**              | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                  |       |   |   |
| Revolving credit facility secured by assets of the Company. The loans  bear interest at a floating rate based on a spread determined by the  Company’s leverage ratio over the base rate or the one-, two-, three- or  six-month Eurodollar Rate. The average rate at December 31, 2009 was  12.5%. The revolving credit facility matured on June 10, 2009.                                                                                                                                                                                          |       | $                     | 98,859     |   | $ | 96,760 |   |
| Term loan secured by substantially all of the assets of the Company.  The term loan bears interest an a floating rate based on a spread  determined by the Company’s leverage ratio over the base  rate or the one-, two-, three- or six-month Eurodollar Rate. The  term loan requires $938 principal payments due quarterly, with the  balance payable at maturity. The average rate at 12/31/09 was 12.5%. The  term loan matures on January 31, 2011.                                                                                       |       | 368,438               |       | 360,617 |   |
| Term loan secured by substantially all of the assets of the Company.  The term loan bears interest an a floating rate based on a spread  determined by the Company’s leverage ratio over the base  rate or the one-, two-, three- or six-month Eurodollar Rate. The  term loan requires $938 principal payments due quarterly, with the  balance payable at maturity. The average rate at December 31, 2009  was 12.5%. The term loan matures on January 31, 2011.                                                                         |       | 59,400                |       | 58,139 |   |
| Delay draw term loan secured by substantially all of the assets of  the Company. The delay draw term loan bears interest at a floating rate  based on a spread determined by the Company’s leverage ratio over the  base rate or the one-, two-, three- or six-month Eurodollar Rate. The  delay draw term loan requires $812 in principal payments due quarterly  for the first five years of such term loan, with the balance payable at  maturity. The average rate at 12/31/09 was 12.5%. The delay draw term  loan matures on December 2, 2011. |       | 320,125               |       | 313,330 |   |
| 8 1/8 % senior subordinated notes due June 1,  2012 with interest paid semi-annually on June 1  and December 1, including original issue discount of $1,065                                                                                                                                                                                                                                                                                                                                                                                                    |       | 159,508               |       | 160,000 |   |
| 7% senior subordinated notes due November 1, 2014 with interest  paid semi-annually on May 15 and November 15                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 170,000               |       | 170,000 |   |
| Notes payable to automobile finance companies secured by vehicles,  payable in monthly installments of $10, including interest ranging from  0% to 7.99%                                                                                                                                                                                                                                                                                                                                                                                                                           |       | —                |       | — |   |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 1,176,330             |       | 1,158,846 |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | (1,176,330            | )          | (1,158,846 | ) |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | $                     | —     |   | $ | — |   |

 

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*8**1**/**8**%Senior Subordinated Notes*

 

OnJune 11, 2004, the Company issued (through a private placement) $160.0million in 8 1/8% seniorsubordinated notes due June 1, 2012. As stated above, the Company is currently in default under these notesand the Plan provides that the obligations thereunder will be cancelled.

 

Theproceeds from the 8 1/8% Notes, alongwith the amended Credit Agreement, were used to retire 97% of then-outstanding10 3/4% notes for$242.1 million and to pay a $15.0 million dividend to shareholders. Fees of$4.3 million associated with the 81/8% Notes and $3.5 millionassociated with the amended Credit Agreement are included in Other assets at December 31,2009 and are being amortized over the life of the indebtedness; however, as aresult of the Bankruptcy Court’s oral confirmation of the Plan on October 30,2009, the unamortized portion of these fees was fully expensed toreorganization items in the fourth quarter of 2009.  In connection with the retirement of 97% ofthe 10 3/4% notes in2004, the Company recorded a loss on the early retirement of debt of $38.0million. The loss consisted of $31.3 million in debt prepayment premiums and$6.7 million in unamortized loan fees.

 

The8 1/8% Notes matureon June 1, 2012. Interest is payable in cash at a rate of 8 1/8% per annum on June 1and December 1 of each year, beginning on December 1, 2005. Theindenture under which the 8 1/8 % Notes were issued contains various limitations and restrictionsincluding (i) change in control provisions, (ii) limitations onindebtedness and (iii) limitations on certain payments such as dividends.

 

InAugust 2005, the Company filed a Form S-4 registration statement withthe SEC for the purpose of effecting the exchange of the 8 1/8% Notes for identical notesregistered for resale under the federal securities laws. This registrationstatement became effective in November 2005 and the exchange offer wasconsummated in December 2005.

 

Seeabove discussion of defaults under the 8 1/8% Notes.  Under the Plan, the Company’s obligationsunder the indenture governing the 8 1/8% Notes will be terminated.

 

*7% Senior Subordinated Notes*

 

OnNovember 22, 2004, the Company issued (through a private placement) $170.0million in 7% senior subordinated notes due November 15, 2014.  As stated above, the Company is currently indefault under these notes.

 

Theproceeds from the 7% Notes, along with borrowings under the amended creditfacility were used to finance the Grace Acquisition in February 2005. Fees of $6.2 million associated with the 7% Notes and the amended CreditAgreement are included in other assets at December 31, 2009 and are beingamortized over the life of the indebtedness; however, as a result of theBankruptcy Court’s oral confirmation of the Plan on October 30, 2009, theunamortized portion of these fees was fully expensed to reorganization items inthe fourth quarter of 2009.

 

The7% Notes mature on November 15, 2014. Interest is payable in cash at arate of 7% per annum on May 15 and November 15 of each year,beginning on May 15, 2005. The indenture under which the 7% Notes wereissued contains various limitations and restrictions including (i) changein control provisions, (ii) limitations on indebtedness and (iii) limitationson certain payments such as dividends.

 

TheCompany’s senior notes are guaranteed by E-T-T, Inc., Cardivan Company,Corral Coin, Inc., Corral Country Coin, Inc., Corral Coin, Inc.,E-T-T Enterprises L.L.C., Market Gaming, Inc., and Flamingo ParadiseGaming, LLC, HGI-Lakeside, HGI-St Jo and HGI-Mark Twain, The Sands Regent andThe Primadonna Company LLC (100 percent-owned subsidiaries of Herbst Gaming, Inc.)and Zante, Inc., Last Chance, Inc., California Prospectors, Ltd.(which is a wholly owned subsidiary of Last Chance, Inc.), PlantationInvestments, Inc. and Dayton Gaming , Inc.  (100 percent-owned subsidiaries of The SandsRegent) (collectively, the “Subsidiary Guarantors”). Condensed consolidatingfinancial information with respect to the Subsidiary Guarantors is not providedbecause the Company has no independent assets or operations, the SubsidiaryGuarantees are full and unconditional and joint and several, and there are noother material subsidiaries of the Company other than the SubsidiaryGuarantors.  There are no significant restrictions on the ability of theCompany’s Subsidiary Guarantors to transfer funds to the Company in the form ofcash dividends, loans or advances.

 

Seeabove discussion of defaults under the 7% Notes.  Under the Plan, the Company’s obligationsunder the indenture governing the 7% Notes will be terminated.

 

*Credit Facilities*

 

OnJanuary 3, 2007, the Company entered into a second amended and restatedcredit agreement with Bank of America, N.A. (“Bank of America”), asAdministrative Agent, Swing Line Lender and L/C Issuer, Lehman Commercial Paper, Inc.and Wachovia

 

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Bank,National Association, as Syndication Agents, U.S. Bank, National Association,as Documentation Agent and Lehman Brothers Inc. and Wachovia Capital Markets,LLC, as Joint Lead Arrangers and Joint Book Runners as amended by Amendment No. 1dated August 14, 2007, Amendment No. 2 dated December 14, 2007,Amendment No. 3 dated April 24, 2008, Amendment No. 4 dated May 15,2008 and Amendment No. 5 dated November 10, 2008.

 

Theamended Credit Agreement was an amendment and restatement of our previousamended and restated Credit Agreement dated as of October 8, 2004.

 

TheCompany borrowed $375 million in term loans under the amended Credit Agreementon January 3, 2007 to finance the Sands Regent Acquisition.  TheCompany also borrowed $325 million in delay draw term loans drew on therevolving credit facility in an amount of $75 million to finance the PrimmAcquisition.

 

Seeabove discussion of current defaults and effects of the Plan on the amendedCredit Agreement.

 

Long-termdebt is expected to mature as follows (dollars in thousands):

 
| ** ** | ** ** | **December 31,  2009** | ** ** |
|------------|------------|-----------------------------|------------|
| 2010       |       | $                           | 1,158,846  |   |
| 2011       |       | —                      |       |
| 2012       |       | —                      |       |
| 2013       |       | —                      |       |
| 2014       |       | —                      |       |
| Thereafter |       | —                      |       |
| Total      |       | $                           | 1,158,846  |   |

 

The following tableprovides the fair value measurement information about our long-term debt at December 31,2009.  For additional information regarding ASC Topic 820 and the fairvalue hierarchy, see Note 2,**Description of Business and Summary ofSignificant Accounting Policies.

 
| ** **                               | ** ** | **Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** | **Fair Value********Hierarchy** | ** ** |
|------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **(In  thousands)**       | ** ** | ** **                      | ** ** |
| Bank  Credit Facility                    |       | $                         | 828,846    |                            | $          | 429,159                              |       | Level 2 |   |
| 81/8% Senior Subordinated Notes Due 2012 |       | 160,000                   |       | 1,600                           |       | Level 1                              |       |
| 7%  Senior Subordinated Notes Due 2014   |       | 170,000                   |       | 340                             |       | Level 1                              |       |
|                                     |       |                      |       |                            |       |                                 |       |
| Total  long-term debt                    |       | $                         | 1,158,846  |                            | $          | 431,099                              |       |   |   |

 

The estimated fair valueof our bank credit facility is based on bid prices on or about December 31,2009.  The estimated fair values of our senior subordinated notes arebased on quoted market prices as of December 31, 2009.

 

**9.****                                     ****ReorganizationItems**

 

Reorganizationitems represent expenses incurred as a result of the Chapter 11 proceedings andare presented separately in the unaudited Condensed Consolidated Statements ofOperations.

 
| ** **                                       | ** ** | **As of********December 31,  2009** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**                       | ** ** |
| Trustee  Fees                                    |       | $                                        | 433        |   |
| Professional  Fees                               |       | 11,969                                   |       |
| Deferred  loan fees and original issue discounts |       | 17,408                                   |       |
| Total  reorganization items                      |       | $                                        | 29,810     |   |

 

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**10.****                              ****LiabilitiesSubject to Compromise**

 

Liabilitiessubject to compromise refer to both secured and unsecured obligations that willbe accounted for under a plan of reorganization.  Generally, actions toenforce or otherwise effect payment of pre-Chapter 11 liabilities arestayed.  ASC Topic 852-10-45 requires pre-petition liabilities that aresubject to compromise to be reported at the amounts expected to be allowed,even if they may be settled for lesser amounts.  These liabilitiesrepresent the estimated amount expected to be allowed on known or potentialclaims to be resolved through the Chapter 11 process, and remain subject tofuture adjustments arising from negotiated settlements, actions of the applicablebankruptcy court, rejection of executory contracts and unexpired leases, thedetermination as to the value of collateral securing the claims, proofs ofclaim, or other events.  Liabilities subject to compromise also includecertain items that may be assumed under the plan of reorganization, and assuch, may be subsequently reclassified to liabilities not subject tocompromise.  The Company has included the amounts due under the amendedCredit Agreement and indentures pursuant to which the Subordinated Notes wereissued as liabilities subject to compromise.  Although the Plan has beenconfirmed, the Plan will not be fully implemented until the SubstantialConsummation Date.  The SubstantialConsummation Date will not occur until certain conditions, including certainapprovals of gaming authorities in Nevada, Iowa and Missouri, have beenobtained.  See Note 1 of Notes toConsolidated Financial Statements.  Wecannot assure you that all conditions to the Substantial Consummation Date willbe satisfied or that we will be successful in fully implementing the Plan orany other plan of reorganization.

 
| ** **                               | ** ** | **As  of********December 31, 2009** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **(in  thousands)**                      | ** ** |
| Secured  Debt                            |       | $                                        | 828,846    |   |
| Accrued  Interest on Secured Debt        |       | 29,103                                   |       |
| Subordinated  Notes                      |       | 330,000                                  |       |
| Accrued  Interest on Subordinated Notes  |       | 33,062                                   |       |
| Accounts  payable                        |       | 4,565                                    |       |
| Accrued  expenses                        |       | 5,180                                    |       |
| Total  liabilities subject to compromise |       | $                                        | 1,230,756  |   |

 

**11.****                         ****AssetRetirement Obligation**

 

TheCompany has adopted ASC Topic 410, “Accounting for Asset RetirementObligations,” which requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it was incurred if areasonable estimate of fair value could be made. The associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset and depreciated over the estimated useful life of the relatedassets.  The Company recognized this obligation in association with alease for real property in Primm, Nevada, which was a liability assumed underthe Primm Acquisition in April 2007. The Company recorded a liability of$0.5 million in 2007 related to expected costs to return leased land to itsoriginal state at the end of the lease agreement (using a 6.7% discount rateand a 3.0% inflation rate). The information below reconciles the value of theasset retirement obligation for the periods presented.

 
| **December 31,**        | ** ** | **2008** | ** ** | **2009** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of period |       | $        | 524        |     | $          | 559 |   |
| Liabilities incurred         |       | —   |       | —   |       |
| Accretion expense            |       | 35       |       | 37       |       |
| Balance, end of period       |       | $        | 559        |     | $          | 596 |   |

 

**12.****                              ****Related-Party Transactions**

 

*General.*

 

EdwardHerbst, Timothy Herbst and Troy Herbst are brothers and are officers anddirectors of Herbst Gaming, Inc. and its wholly-owned subsidiaries. In addition, they are officers and directors of Terrible Herbst, Inc. andBerry-Hinckley Industries.  There is no cross ownership between HerbstGaming, Inc. and either Terrible Herbst, Inc. or Berry-HinckleyIndustries.  Terrible Herbst, Inc. is owned solely by Jerry andMaryanna Herbst, the parents of the Herbst brothers.  Sean Higgins, theCompany’s General Counsel, is also the general counsel of Berry-HinckleyIndustries.  The Plan provides for themodification of certain related party agreements.  

 

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Exceptas described below and in the Plan, all terms and provisions in the Company’srelated party agreements shall continue to be valid and enforceable under theRestructuring.  We cannot assure you thatthe Plan will be consummated.

 

*Slot route contract with Terrible Herbst, Inc. *The Companyrents space for certain slot machine route operations in convenience storesowned by Terrible Herbst, Inc. (“Terrible Herbst”), a corporation in whichthe owners of the Company are officers and which is owned by the parent of theCompany’s owners.  Rent expense of $6,954,000, $7,114,000 and $7,185,000was incurred under this agreement for the years ended December 31, 2007,2008 and 2009, respectively, for the exclusive placement of slot machines inTerrible Herbst convenience store locations.  This contract was extendedin 2009 and now expires in December of 2014.  This agreement is expected to be modifiedeffective as of the Substantial Consummation Date and to be assumed under thePlan on the Substantial Consummation Date.

 

*Other arrangements with Terrible Herbst, Inc. *We have also entered into aservicing arrangement with Terrible Herbst pursuant to which we provideaccounting and administrative services related to the collection of dailydeposits from Terrible Herbst convenience stores.  We also providepersonnel to Terrible Herbst to count, maintain and safeguard large amounts ofcoin and currency.  Terrible Herbst reimburses our expenses in providingthese services.  Under this servicing arrangement, we were paidapproximately $246,000 for services rendered for the year ended December 31,2007, $246,000 in 2008, and $270,100 in 2009. This agreement is currently on a month-to-month basis.  This agreement is expected to be modifiedeffective as of the Substantial Consummation Date and to be assumed under thePlan on the Substantial Consummation Date.

 

Wehave entered into a master ATM agreement with Terrible Herbst pursuant to whichwe are granted the exclusive right to install and maintain ATMs in TerribleHerbst convenience store locations.  Thisagreement expires in December, 2010, subject to automatic renewal forconsecutive and repetitive terms of one year, unless we or Terrible Herbstnotify the other of non-renewal. ** **This agreement is expected to bemodified effective as of the Substantial Consummation Date and to be assumedunder the Plan on the Substantial Consummation Date.

 

TheCompany has entered into a nonexclusive trademark license agreement withTerrible Herbst for the use of the Terrible Herbst brand name and its cowboylogo which extends through 2011.  At the option of the Company, theagreement provides for the ability to renew the agreement for five additional successiveterms of five years each.  Pursuant to this trademark license agreement,the Company paid approximately $1,557,000, $1,649,000 and $1,760,000 toTerrible Herbst in the years ended December 31, 2007, 2008 and 2009,respectively.  This agreement is expectedto be modified effective as of the Substantial Consummation Date and to beassumed under the Plan on the Substantial Consummation Date.

 

TheCompany entered into a shared services agreement with Terrible Herbst and Berry-Hinckley Industries in January 2008whereby (i) Terrible Herbst and Berry-Hinckley Industries reimburse theCompany for services performed by certain employees of the Company for TerribleHerbst and Berry-Hinckley Industries asrequested from time to time, consisting primarily of the day-to-day functionsof Terrible Herbst, and Berry-HinckleyIndustries and (ii) effective as of January 1, 2009, pursuantto an amended and restated shared services agreement entered into on January 16,2009, the Company reimburses Terrible Herbst for services performed by certainemployees of Terrible Herbst for the Company as requested from time to time,consisting primarily of maintaining the price books for certain of the Company’sservice station locations and providing management oversight of the servicestation operations at the Primm Properties. Under this agreement, the Company received approximately $583,000 and$455,300 for services rendered during the year ended December 31, 2008 and2009, respectively, from Terrible Herbst, and the Company received $102,000 and$125,000 for the same periods for services from Berry-Hinckley Industries.  In 2009, payment for services rendered by theCompany’s employees was reduced by amounts due for services rendered for theCompany’s by Terrible Herbst’s employees. The contract expired on December 31, 2009 and is currently on amonth-to-month basis.  This agreement isexpected to be modified effective as of the Substantial Consummation Date andto be assumed under the Plan on the Substantial Consummation Date.

 

TheCompany entered into an advertising purchasing agreement with Terrible Herbstin January 2009 pursuant to which the Company purchases advertising timeon Terrible Herbst’s network of gas pump and interior television screens for$30,000 per month during the twelve months commencing January 1,2009.  This agreement has expired and iscurrently on a month-to-month basis. This agreement is expected to be modified effective as of theSubstantial Consummation Date and to be assumed under the Plan on the SubstantialConsummation Date.

 

*Lease agreements.*

 

Pursuantto a lease agreement that expires in 2067, including renewal periods, we leasethe real property on which our corporate headquarters is located from TheHerbst Family Limited Partnership II, or Herbst FLP II.  Thegeneral partners of Herbst FLP II are Jerry and Maryanna Herbst.  Ineach of 2007, 2008 and 2009 we paid $172,992 under this lease.  Pursuant to the Plan, this lease is expectedto be modified effective as of the Substantial Consummation Date and to beassumed and assigned to one of the Reorganized Debtors on the SubstantialConsummation Date.

 

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Pursuantto a lease agreement that expires in 2026, including renewal periods, we leasethe real property on which Terrible’s Town Casino in Pahrump is located fromThe Herbst Family Limited Partnership.  The lease requires monthly rentalpayments of $15,000.  In 2007 2008, and 2009 we paid $180,000 under thislease.  Pursuant to the Plan, this leaseis expected to be modified and assigned.

 

Welease land and office space in certain of our facilities to Terrible Herbstunder various lease agreements with terms ranging from month-to-month to 20years.  Monthly rental income is $63,500.  In 2007, 2008, and 2009 wereceived rental income of $348,000 under these leases.  Pursuant to the Plan, this lease is expected tobe modified and assigned.

 

Welease the real property on which Terrible’s Searchlight Casino in Searchlightis located from Terrible Herbst for $15,000 per month, pursuant to a leaseagreement entered into on June 30, 2002 that expires in 2022, with optionsto renew the lease for five additional successive terms of ten years each,contingent on Terrible Herbst renewing its lease of the real property. Terrible Herbst leases that real property from an unrelated third party,pursuant to a lease agreement entered into on June 30, 2002 that expiresin 2042, including renewal periods.  In each of 2007, 2008 and 2009, wepaid $180,000 under this lease.  Pursuantto the Plan, this lease is expected to be modified and assigned.

 

Welease a warehouse located in Las Vegas, Nevada for our employment center andpurchasing departments from the Herbst’s Grandchildren’s Trust.  The leasebegan in November 2002 and requires payments of $46,500 per month through November 2012. This expense was $560,500, $555,500 and $569,300 for 2007, 2008 and 2009,respectively.  Pursuant to the Plan, thislease is expected to be modified effective as of the Substantial ConsummationDate and to be assumed and assigned to one of the Reorganized Debtors on theSubstantial Consummation Date.

 

Future rental income underrelated-party agreements is as follows (dollars in thousands):

 
| 2010       |   | $     | 348    |   |
|------------|--------|-------|--------|--------|
| 2011       |   | 348   |   |
| 2012       |   | 348   |   |
| 2013       |   | 348   |   |
| 2014       |   | 348   |   |
| Thereafter |   | 1,040 |   |
| Total      |   | $     | 2,780  |   |

 

*Related-party transactions.*

 

Mr. Higginsis our General Counsel, the general counsel of Terrible Herbst and the brotherof Mary E. Higgins, our chief financial officer.  Mr. Higginsreceived compensation for services rendered to us in 2007, 2008 and 2009 of$658,700, $638,500 and $824,900 respectively.

 

In2003, we entered into a slot route contract to install, operate and serviceslot machines at a tavern owned by HIGCO, Inc., a company owned andoperated by Mr. Higgins and two of his brothers, G. Michael Higginsand Kevin J. Higgins.  Pursuant to this revenue-sharing contract, HIGCO, Inc.paid us $147,500 in 2007, $182,500 in 2008 and $186,800 in 2009.

 

In2004, ETT entered into a slot route contract with SamCon, Inc., a companyowned and operated by Mr. Higgins, to install, operate and service slotmachines at a new location.  Terms of this revenue-sharing contract aresimilar to the terms of the contract we entered into with HIGCO in 2003. Pursuant to this revenue-sharing contract, SamCon, Inc. paid ETT $0 in2007, $72,700 in 2008 and $87,600 in 2009.

 

In2005, ETT entered into a slot route contract to install, operate and serviceslot machines at a tavern owned by Prescott’s Bar LLC, a company owned andoperated by Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, one ofthe owners of the Company.  Pursuant to this revenue-sharing contract,Prescott’s paid ETT $105,700 in 2007, $94,900 in 2008 and $90,700 in 2009.

 

InNovember 2009, ETT entered into a slot route contract with Balboa Pizza, acompany partially owned by Mr. David Ross, the Company’s Chief OperatingOfficer-Gaming, to install, operate and service slot machines at a newlocation.  Terms of this revenue-sharing contract are similar to the termsthe Company has with other taverns.  Pursuant to this revenue-sharingcontract, Balboa Pizza paid ETT $3,100 in 2009.

 

Thebalance sheet item “due from related parties” includes receivables of $390,000and $552,000 at December 31, 2008 and 2009, respectively, from TerribleHerbst, which arise in the normal course of business.  The balances are non-interest bearing andpayable on demand.

 

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Thebalance sheet item “due from related parties” includes receivables of $127,700and $150,900 at December 31, 2008 and 2009, respectively, fromBerry-Hinckley Industries, which arise in the normal course of business.  The balances are non-interest bearing andpayable on demand.

 

Thebalance sheet item “due from related parties” also includes balances fromemployees.  These amounts were $899,000 and $165,500 for 2008 and 2009,respectively. The balances are charged interest at varying rates and haveoriginal terms ranging from due on demand to nine years.

 

**13.****                              ****Commitments and Contingencies**

 

AtDecember 31, 2009, the Company has non-cancelable location licenseagreements for space leases at groups of affiliated stores that expire onvarious dates from 2010 through 2013, with certain options for renewal.Revenues from gaming machines in these stores did not exceed 10% of the Company’stotal revenues in any of the years ended December 31, 2007, 2008 or 2009.

 

Futureminimum lease payments under non-cancelable operating leases and locationlicense agreements are as follows (dollars in thousands):

 
| 2010       |   | $       | 63,630  |   |
|------------|--------|---------|---------|--------|
| 2011       |   | 46,069  |    |
| 2012       |   | 41,851  |    |
| 2013       |   | 29,140  |    |
| 2014       |   | 18,212  |    |
| Thereafter |   | 190,190 |    |
| Total      |   | $       | 389,092 |   |

 

Rentexpense related to non-cancelable leases with terms exceeding one yearwas $70,350,000, $61,138,000, and $62,619,000 for the years ended December 31,2007, 2008 and 2009, respectively.

 

OnFebruary 17, 2006, the Clark County Circuit Court entered judgment of ajury verdict delivered on January 14, 2006 against ETT for $4.1 million incompensatory damages and $10.1 million in punitive damages.  The juryverdict was delivered in connection with an action brought by the family of anindividual that alleged that ETT had negligently retained and negligentlysupervised a temporary employee who in 2001 stole a truck from ETT and, whiledrunk, hit and killed the individual.  The punitive damage award wassubsequently lowered to $4.1 million in a post-trial ruling.  The Companybelieves the award of compensatory and punitive damages against ETT, theliability of ETT, and the amount thereof, is not supportable in either law orin fact and plans to vigorously pursue all appropriate post-trial and otherremedies, including exercising its right to appeal.  The Company hasappealed this decision and oral arguments were heard by the Supreme Court ofNevada on December 9, 2009.  Based on a review of the legal opinionsand facts available to the Company at this time, the Company believes it isadequately reserved for any potential liability related to this incident.

 

TheCompany was party to an arbitration in 2008 in Las Vegas, Nevada involving thetermination of an employee.  The formeremployee alleged he was terminated without cause and was therefore due amountspursuant to his employment agreement.  OnMarch 10, 2009, the Company received an interim award from the arbitratorthat awarded the former employee $1.3 million as a result of thisarbitration.  The award is currentlyunder appeal; however, the Company fully recognized the award and approximately$0.2 million for attorneys fees in fiscal year 2008.

 

TheCompany is a party to certain other claims, legal actions and complaintsarising in the ordinary course of business or asserted by way of defense orcounterclaim in actions filed by the Company. Management believes that itsdefenses are substantial in each of these matters and that the Company’s legalposition can be successfully defended without material adverse effect on itsconsolidated financial statements.

 

*Nevada Use Tax Refund Claims*

 

OnMarch 27, 2008, the Nevada Supreme Court issued a decision in SparksNugget, Inc. vs. The State of Nevada Department of Taxation (the “Department”),holding that food purchased for subsequent use in the provision ofcomplimentary and/or employee meals was exempt from both sales and usetax.  On April 24, 2008, the Department filed a Petition forRehearing (the 

 

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“Petition”)on the decision.  On July 17, 2008, the Nevada Supreme Court deniedthe Department’s Petition.  We have been paying use tax on food purchasedfor subsequent use as complimentary and employee meals at our Nevada casinoproperties and are in the process of quantifying the amount of our potentialrefund, which we estimate to be approximately $1.8 million, excludinginterest, from July 1, 2001 through January 1, 2008.  Based onthe denial of the petition, as of January 1, 2008, the Company no longeraccrues for these taxes, but due to the uncertainty regarding the method forreimbursement to the Company of taxes paid to date, we will not record any gainfrom previous tax years until the tax refund is realized.

 

**14.****                              ****Employee Benefit Plans**

 

TheCompany has retirement savings plans under Section 401(k) of theInternal Revenue Code for eligible employees.  The plans allow employees to defer, withinprescribed limits, up to 30% of their income on a pre-tax basis throughcontributions to the plans.  The Companymatches, within prescribed limits, a portion of eligible employees’contributions.  The Company recordedcharges for 401(k) contributions of $1,114,000, $933,000 and $504,000 forthe years ended December 31, 2007, 2008 and 2009 respectively. The Companyceased its employee match at December 31, 2009.

 

TheCompany implemented a supplemental executive retirement plan (“SERP”) forcertain key employees effective May 1, 2004.  The SERP is a nonqualified plan under whichthe Company makes monthly contributions which are intended to provide aretirement benefit that is a fixed percentage of a participant’s annual salaryup to a maximum of 33%.  Companycontributions and investment earnings on the contributions are tax-deferred andaccumulate as a retirement fund. Employees do not make contributions under this plan.  A portion of the Company contributions and investmentearnings thereon vest after seven years of SERP participation and the remainingportion vests after both seven years of SERP participation and the participantreaching age 67.  For the years ended December 31,2007 and 2008 the Company recorded expenses under this plan of $297,000 and$279,000, respectively.  For the yearended December 31, 2009, the Company recorded income of $12,000 under thisplan.

 

TheCompany was self-funded for health care benefits at its Midwest casinoproperties for 2007 and 2008.  Under thisplan, the Company is responsible for employee health care costs up to a certainstop loss amount.  For the years ended December 31,2007 and 2008, the Company was fully expensed to the stop loss limit andtherefore had no liability recorded at year end.  During the fourth quarter of 2008, theCompany discovered an error in the placement of the stop loss policy that wasin effect for 2007.  As a result of the incorrectpolicy being in place, the Company was subject to additional exposure forhealth care claims incurred in 2007. Additional expense related to this issue for 2007 in the amount of$1,145,000 and $315,000 were expensed in 2008 and 2009, respectively.  Subsequent to 2008, the Company uses a fullyinsured plan for health care benefits for its Midwest casino properties.

 

**15.****                              ****Business Segments**

 

TheCompany operates through two business segments:  slot route operations andcasino operations. The slot route operations involve the installation,operation and service of slot machines at strategic, high traffic, non-casinolocations, such as grocery stores, drug stores, convenience stores, bars, andrestaurants. Casino operations consist of two geographic areas, Nevada andOther States.  The Nevada locations include: Terrible’s Town Casino(Henderson) in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight,Nevada, Terrible’s Town Casino and Terrible’s Lakeside Casino, both of whichare located in Pahrump, Nevada, Terrible’s Hotel & Casino in LasVegas, Nevada, Rail City Casino in Sparks, Nevada, the Sands Regency CasinoHotel in Reno, Nevada, Terrible’s Gold Ranch Casino and RV Resort in Verdi,Nevada, Terrible’s Dayton Casino in Dayton, Nevada, and Buffalo Bill’s Hoteland Casino, Primm Valley Resort and Casino and Whiskey Pete’s Hotel and Casino,all located in Primm, Nevada.  Casinos located in other states areTerrible’s Lakeside Casino in Osceola, Iowa, Terrible’s St. Jo Frontier Casinoin St. Joseph, Missouri and Terrible’s Mark Twain Casino in La Grange,Missouri. These segment results are regularly provided to the Office of the CEOof the Company, the members of which are the chief operating decision makers ofthe Company.

 

Revenues and income, as well as EBITDA, for these segments are shownbelow.  Route and Casino segment EBITDAare non-GAAP measures but are used by management to measure segment profits andlosses in accordance with ASC Topic 280, “Segment Reporting”.  Route and Casino segment EBITDA have certainlimitations in that they do not take into account the impact of certainexpenses, including allocation of overhead. The Company endeavors to compensate for the limitations of the non-GAAPmeasures presented by providing the comparable GAAP measure with equal orgreater prominence, financial statements prepared in accordance with generallyaccepted accounting principles, and descriptions of the reconciling items,including quantifying such items, to derive the non-GAAP measures.  The following table reconciles Segment EBITDAto net income(loss) (in thousands):

 

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| ** **                                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                        | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                                                                                                        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                                                                      |       |                             |       |   |   |   |   |
| Slot route operations                                                                                             |       | $                                | 276,882    |   | 243,545 |   | $ | 200,511 |   |
| Casino operations                                                                                                 |       |                             |       |   |   |   |   |
| Nevada                                                                                                            |       | 289,058                          |       | 291,813 |   | 259,780 |   |
| Other States                                                                                                      |       | 120,013                          |       | 119,122 |   | 121,987 |   |
| Other—non gaming                                                                                             |       | 98,987                           |       | 116,609 |   | 86,285 |   |
| Total net revenues                                                                                                |       | $                                | 784,940    |   | $ | 771,089 |   | $ | 668,563 |   |
| Depreciation and amortization                                                                                     |       |                             |       |   |   |   |   |
| Slot route operations                                                                                             |       | 21,979                           |       | 17,806 |   | 15,192 |   |
| Casino operations                                                                                                 |       |                             |       |   |   |   |   |
| Nevada                                                                                                            |       | 22,765                           |       | 28,450 |   | 29,361 |   |
| Other States                                                                                                      |       | 11,316                           |       | 11,228 |   | 10,551 |   |
|                                                                                                              |       |                             |       |   |   |   |   |
| Other                                                                                                             |       | 345                              |       | 299 |   | 322 |   |
| Total depreciation and amortization                                                                               |       | $                                | 56,405     |   | $ | 57,783 |   | $ | 55,426 |   |
|                                                                                                              |       |                             |       |   |   |   |   |
| Segment EBITDA(2)                                                                                                 |       |                             |       |   |   |   |   |
| Slot route operations                                                                                             |       | 32,796                           |       | 27,892 |   | 17,777 |   |
| Casino operations                                                                                                 |       |                             |       |   |   |   |   |
| Nevada                                                                                                            |       | 43,551                           |       | 29,475 |   | 16,823 |   |
| Other states                                                                                                      |       | 30,268                           |       | 30,287 |   | 36,882 |   |
| Other and corporate(1)                                                                                            |       | (2,700                           | )          | (16,194 | ) | (9,614 | ) |
| Depreciation and amortization                                                                                     |       | (56,405                          | )          | (57,783 | ) | (55,426 | ) |
| Interest expense, net of capitalized interest  (capitalized interest of $0, $101, $873, $206 and $0 respectively) |       | (85,631                          | )          | (116,832 | ) | (29,530 | ) |
| Loss on impairment of assets                                                                                      |       | (72,965                          | )          | (106,271 | ) | (7,192 | ) |
| Change in value of derivatives                                                                                    |       | (16,114                          | )          | — |   | — |   |
| Reorganization items                                                                                              |       | —                           |       | — |   | (29,810 | ) |
| Loss on early retirement of debt                                                                                  |       | —                           |       | — |   | — |   |
| Net income (loss)                                                                                                 |       | $                                | (127,200   | ) | $ | (209,426 | ) | $ | (60,090 | ) |

 

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(1)           Represents non-gamingrevenues, general and administrative expenses, interest income and loss onlease termination.

 

(2)           Segment EBITDA is used by management to measuresegment profits and losses and consists of income from segment operations plusdepreciation and amortization and is calculated before allocation of overhead.

 

**Selected Quarterly Financial Information (Unaudited)**

**(in thousands)**

** **
| ** **                             | ** ** | **Mar. 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------|------------|
| **Year Ended December 31, 2009**  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net revenues—Route operations     |       | $                | 53,839     |             | $          | 52,198            |       | $                | 47,433     |       | $          | 47,041 |   | $ | 200,511 |   |
| Net revenues—Casino operations    |       |             |       |             |       |              |       |             |       |       |       |
| Nevada                                 |       | 67,728           |       | 67,378           |       | 66,071            |       | 58,603           |       | 259,780    |       |
| Other states                           |       | 31,815           |       | 31,185           |       | 30,854            |       | 28,133           |       | 121,987    |       |
| Net revenues—Other                |       | 18,342           |       | 21,916           |       | 24,339            |       | 21,688           |       | 86,285     |       |
| Operating income (loss)                |       | (3,021           | )          | 7,437            |       | 3,288             |       | (8,615           | )          | (911       | )          |
| Net loss                               |       | (32,846          | )          | 4,469            |       | 385               |       | (32,098          | )          | (60,090    | )          |
| **Year Ended December 31,  2008** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net revenues—Route operations     |       | $                | 64,619     |             | $          | 63,930            |       | $                | 58,288     |       | $          | 56,708 |   | $ | 243,545 |   |
| Net revenues—Casino operations    |       |             |       |             |       |              |       |             |       |       |       |
| Nevada                                 |       | 75,057           |       | 75,602           |       | 75,281            |       | 65,873           |       | 291,813    |       |
| Other states                           |       | 30,674           |       | 29,270           |       | 30,628            |       | 28,550           |       | 119,122    |       |
| Net revenues—Other                |       | 27,778           |       | 35,727           |       | 32,282            |       | 20,822           |       | 116,609    |       |
| Operating income                       |       | 10,167           |       | (32,768          | )          | 5,868             |       | (76,782          | )          | (93,515    | )          |
| Net income (loss)                      |       | (16,524          | )          | (62,329          | )          | (22,399           | )          | (108,174         | )          | (209,426   | )          |
| **Year Ended December 31,  2007** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net revenues—Route operations     |       | $                | 74,749     |             | $          | 71,720            |       | $                | 66,072     |       | $          | 64,341 |   | $ | 276,882 |   |
| Net revenues—Casino operations    |       |             |       |             |       |              |       |             |       |       |       |
| Nevada                                 |       | 37,814           |       | 83,033           |       | 89,341            |       | 78,870           |       | 289,058    |       |
| Other states                           |       | 30,465           |       | 30,856           |       | 30,784            |       | 27,908           |       | 120,013    |       |
| Net revenues—Other                |       | 7,386            |       | 28,615           |       | 32,808            |       | 30,178           |       | 98,987     |       |
| Operating income                       |       | 11,464           |       | 12,537           |       | 10,208            | (1)        | (61,144          | )(2)       | (26,935    | )          |
| Net income                             |       | (3,253           | )          | 581              |       | (26,682           | )          | (97,846          | )          | (127,200   | )          |

 

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(1)           Amount includes $3.2 millionimpairment of lease acquisition costs.

 

(2)           Amount includes $73.0 million impairment ofintangible assets and $16.1 million change in value of derivatives.

 

**Item9.  Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

 

None.

 

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

 

*Disclosure Controls and Procedures. * We maintain “disclosurecontrols and procedures” (as defined in Rule 13a-15(e) under theExchange Act) that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Nevertheless, there can be no assurance that either thisevaluation process or our existing disclosure controls and procedures willprevent or detect all errors and all fraud, if any, or result in accurate andreliable disclosure.  A control system can provide only reasonable and notabsolute assurance that the objectives of the control system are met.  Dueto the inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, have been detected.  Additionally, judgments in decision-makingcan be faulty and breakdowns in internal control can occur because of simpleerrors or mistakes that are not detected on a timely basis.

 

Asof the end of the period covered by this report (the “Evaluation Date”), anevaluation was carried out by management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures.  Based onthis evaluation, the Company’s management concluded that our disclosurecontrols and procedures are effective as of December 31, 2009.

 

*Internal Control over Financial Reporting.* Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting (as defined in Rule 15d-15(f) underthe Exchange Act) for the Company.  Our 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 accountingprinciples in the United States.  Due to its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of any evaluation or effectiveness tofuture periods are subject to risk that controls may become inadequate becauseof changes in conditions or because the degree of compliance with policies orprocedures may deteriorate.

 

Asof the Evaluation Date, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand our Chief Financial Officer, of the effectiveness of the design andoperation of our internal control over financial reporting utilizing criteriaestablished in*Internal Control-IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).

 

Managementbelieves that the financial statements included in this report fairly present,in all material respects, our financial condition, results of operations andcash flows.

 

Therehas been no change in our internal control over financial reporting during theyear ended December 31, 2009 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was not subject to the attestation by theCompany’s registered public accounting firm pursuant to temporary rules ofthe SEC that permit the Company to provide only management’s report in thisannual report.

 

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**Item9B.  Other Information.**

 

None.

 

**PART III**

 

**Item10.  Directors and Executive Officers of the Registrant.**

 

Thefollowing information is furnished with respect to each member of the board ofdirectors, each of whom, unless otherwise indicated, has served as a directorcontinuously since the year set forth below.  Directors are electedannually.  Each director serves until his successor has been elected andqualified.  Similar information is provided for our executive officers.

 

**Directors and Executive Officers**

 

Thefollowing is a list of our directors and executive officers:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                |
|-----------------------|------------|---------|------------|-------------------------------------------------------------|
| Timothy P. Herbst     |       | 46      |       | Chairman  of the Board and Executive Vice President         |
| Ferenc Szony          |       | 54      |       | President                                                   |
| Troy D. Herbst        |       | 43      |       | Chief  Executive Officer, Secretary, Treasurer and Director |
| Edward J. Herbst      |       | 48      |       | Executive  Vice President and Director                      |
| Mary E. Higgins       |       | 52      |       | Chief  Financial Officer                                    |
| David D. Ross         |       | 45      |       | Chief  Operating Officer — Gaming                      |
| John F. O’Reilly |       | 64      |       | Director                                                    |
| Sean Higgins          |       | 45      |       | General  Counsel                                            |

 

Edward,Timothy and Troy Herbst are brothers and the sole shareholders of theCompany.  Until April 30, 2008, Edward served as Chairman and ChiefExecutive Officer.  He is currently on aleave of absence from his officer duties for personal reasons. The Planprovides that the initial board of directors of Reorganized Herbst Gaming shallbe comprised of directors selected by the Lenders.  We cannot assure you that we will besuccessful in consummating the Plan.

 

*Timothy P. Herbst* was appointed as Chairmanof the Board on April 30, 2008 and is a founder of the Company.  He has served as Executive Vice President anda Director of our company and its predecessors since their inception in1987.  Timothy is a member of our Executive Committee.  He alsoserves as a Vice President of Terrible Herbst, Inc.  He has 23 years experience in the gamingindustry as a developer and operator of slot route businesses and variouscasinos.  As a founder, Chairman of theBoard and Executive Vice President, he has a unique viewpoint into the visionand operations of the Company. Additionally, his senior leadership experience allows him to provideguidance and insights to evaluate and respond to various situations encounteredin serving on the Board.

 

*Ferenc Szony* was elected President in2007.  Mr. Szony was previously thePresident and Chief Executive Officer of The Sands Regent from 1997 until itsacquisition by Herbst Gaming in January 2007. Prior to joining the Sands, Mr. Szonyserved in several executive positions within the Hilton Hotel Corporation, lastserving as President at the Reno Hilton Resort from 1994 to 1997.

 

*Troy D. Herbst* was elected Chief ExecutiveOfficer on April 30, 2008 and is a founder of the Company.  He has served as Secretary, Treasurer and aDirector of our company and its predecessors since their inception in 1987, andas Executive Vice President until 2008.  Troy is a member of our Executiveand Audit Committees.  He also serves as a Vice President of TerribleHerbst, Inc.  He has 23 yearsexperience in the gaming industry as a developer and operator of slot routebusinesses and various casinos.  As afounder, Chief Executive Officer, Secretary and Treasurer, he has a uniqueviewpoint into the vision and operations of the Company.  Additionally, his senior leadershipexperience allows him to provide guidance and insights to evaluate and respondto various situations encountered in serving on the Board.

 

*Edward J. Herbst* was elected Executive VicePresident on April 30, 2008 and is a founder of the Company.  He previously served as the Chief ExecutiveOfficer and Chairman of the Board of Directors of our company and itspredecessors from their inception in 1987.  Edward remains a Director ofthe Company.  He is currently on a leaveof absence from his officer duties for personal reasons.  Edward also serves as a Vice President ofTerrible Herbst, Inc. and was formerly a member of U.S. Bank of Nevada’sadvisory board of directors.  He has 23years experience in the gaming industry as a developer and operator of slotroute businesses and various casinos.  Asa founder and Executive Vice President, as well as former Chief ExecutiveOfficer and Chairman of the Board, he has a unique viewpoint into the visionand operations of the Company. Additionally, his senior leadership experience allows him to provideguidance and insights to evaluate and respond to various situations encounteredin serving on the Board.

 

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*Mary E. Higgins* has been the ChiefFinancial Officer of our company since May 2000.  Prior to joiningour company, from March 1997 to June 2000, Ms. Higgins was theChief Financial Officer of Camco, Inc., a Las Vegas based specialtyfinance company.  From August 1987 to October 1996, Ms. Higginswas the Commercial Lending Division Manager of Southern Nevada for Wells FargoBank in Las Vegas.

 

*DavidD. Ross *was appointed to serve as the Company’sChief Operating Officer/Gaming and a member of the Office of the ChiefExecutive Officer in June 2009.  Prior to joining the Company, Mr. Rossspent 25 years with Coast Casinos, a division of Boyd Gaming Corp., serving ina variety of management positions.  Most recently, he served as CoastCasinos’ Chief Operating Officer from 2004-2008.  Mr. Ross obtained aM.S. Hotel Administration from the University of Nevada, Las Vegas, and receivedhis undergraduate degree in Business Management from the University of Nevada,Las Vegas.

 

*John F. O’Reilly* has served as a Director ofour company since November 2004.  Mr. O’Reilly is also a memberof our Audit Committee.  Mr. O’Reilly is the Chairman and ChiefExecutive Officer of the law firm of O’Reilly Law Group, LLC, in Las Vegas,Nevada, a position which he has held since 1999 and where he has practicedsince its inception in 1977 and also serves as the Chairman and Chief ExecutiveOfficer of the O’Reilly Gaming Group, in Las Vegas, Nevada, which he has servedsince its inception in 1999.  Mr. O’Reilly is also Chairman and anofficer and/or Director of various family-owned business entities and relatedinvestments.  Mr. O’Reilly has served as a Director of Nevada PowerCompany since 1995 and Sierra Pacific Resources and Sierra Pacific PowerCompany since 1999.  Mr. O’Reillybrings over 30 years of legal experience and many years of gaming experience tothe Board.  His knowledge of the gamingindustry in Nevada allows to him to contribute keen insights into theoperations and development of the Company.

 

*Sean T. Higgins* has served as the Company’sGeneral Counsel since 1993.  He oversees all legal matters for the Companyincluding gaming regulatory matters and governmental affairs.  Prior tojoining the Company, Mr. Higgins worked at the law firm of Cohen, Lee &Johnson in Las Vegas.   Mr. Higgins obtained a law degree fromSanta Clara University in 1990 and received his undergraduate degree in BusinessAdministration from Southern Methodist University in 1987.  He is licensedto practice law in the States of Nevada and Missouri, as well as, the NinthCircuit Court of Appeals.

 

**Code of Ethics**

 

Wehave adopted a Code of Ethics for the senior management of the Companyincluding the Chief Executive Officer and President, and our Chief FinancialOfficer and Chief Accounting Officer.  This Code of Ethics is reasonablydesigned to deter wrongdoing and to promote:

 

·                  honest andethical conduct, including the ethical handling of actual or apparent conflictsof interest between personal and professional relationships;

 

·                  full, fair,accurate, timely, and understandable disclosure in reports and documents that aregistrant files with, or submits to, the SEC and in other publiccommunications made by us;

 

·                  compliance withapplicable governmental laws, rules and regulations;

 

·                  the promptinternal reporting of violations of the code to an appropriate person orpersons identified in the Code of Ethics; and

 

·                  accountabilityfor adherence to the Code of Ethics.

 

**Committees of our Board of Directors**

 

Ourboard of directors has an Audit Committee and an Executive Committee.  TheAudit Committee’s functions are as follows:

 

·                  to reviewreports of our independent public accountants;

 

·                  to review ourfinancial practices, internal controls and policies with officers and keyemployees;

 

·                  to review suchmatters with our auditors to determine scope of compliance with anydeficiencies;

 

·                  to considerselection of independent public accountants;

 

·                  to reviewrelated party transactions; and

 

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·                  to makeperiodic reports on such matters to the board of directors.

 

OurAudit Committee is comprised of Messrs. Troy Herbst and John F. O’Reilly. Mr. O’Reilly is the current Chairman of the Audit Committee.  OurAudit Committee does not include an audit committee financial expert as definedby Item 401(h) of Regulation S-K and is independent under thelisting standards of the New York Stock Exchange.

 

TheExecutive Committee’s function is to review and make recommendations to ourboard of directors with respect to the salaries and bonuses of our executiveofficers and key employees.  Directors Edward Herbst, Timothy Herbst andTroy Herbst serve on the Executive Committee.

 

TheCompany is managed operationally on a day to day basis by a Committee developedby the Board of Directors called the “Office of The CEO”, This committee iscomprised of the CEO (Mr. Troy D. Herbst) as well as the President (Mr. FerencSzony), the Chief Operating Officer-Gaming (Mr. David Ross), the ChiefFinancial Officer (Ms. Mary E. Higgins) and the General Counsel (Mr. SeanHiggins), and the two Executive Vice Presidents (Messrs. Edward J. Herbstand Timothy P. Herbst). All matters require a four person majority forapproval.  The function of the Office ofthe CEO is formulating the Company’s overall business strategy and businessplans subject to approval by the Board, evaluation and recommending to theBoard of Directors the Company’s capital expenditure plans, monitoring andevaluating the Company’s operating performance and reporting the same to theBoard and evaluating and recommending to the Board the adoption of financialbudgets.  Additionally the Office of theCEO is charged with directing the Company’s restructuring / reorganization /turnaround efforts and providing oversight with respect to the execution ofsame consistent with decisions of the Board and performing such other tasks asmay be delegated from time to time by the Board of Directors.

 

**Item 11.  Executive Compensation.**

 

**Overview of Compensation**

 

TheExecutive Committee, or the “Committee,” of the Board of Directors has theresponsibility for establishing, implementing and monitoring adherence to theCompany’s compensation programs.  The Committee’s goal is to provide acompensation package that attracts, motivates and retains executive talent andis designed to align executives’ interests with the Company’s corporatestrategies and business objectives.  The Committee is comprised of our CEOand Executive Vice Presidents, Troy D. Herbst, Timothy P. Herbst and Edward J.Herbst, all members of which are officers, and the owners, of HerbstGaming.  During 2009, all executive compensation issues were reviewed andapproved by the entire Board of Directors.

 

Thefollowing individuals, included in the Summary Compensation Table, below, wereour “named executive officers” or “NEOs” during fiscal 2009: our ChiefExecutive Officer or “CEO,” Troy D. Herbst; our President, Ferenc Szony; ourChief Financial Officer or “CFO,” Mary E. Higgins; our Chief OperatingOfficer-Gaming, David Ross; our General Counsel, Sean T. Higgins; as well asour Chairman and Executive Vice President, Timothy P. Herbst and our ExecutiveVice President, Edward J. Herbst.

 

Weprovide compensation to our CEO, President, CFO, General Counsel and ChiefOperating Officer-Gaming, primarily through written employment agreements thatset forth base compensation, cash bonus, employee benefit plans and perquisitesdue to such officers.   Our CEO wasappointed to his position in April 2008. We entered into an employment agreement with our CEO in May 2008.  In March 2008 we entered into new oramended employment agreements, as applicable, with each of our President, CFOand General Counsel.  The employmentagreements executed in March 2008 and May 2008 were approved by theentire Board.  These agreements have beenrenewed and provide for automatic renewals on a yearly basis.  We hired our new Chief OperatingOfficer-Gaming in May 2009 and entered into an employment agreement withhim in February 2010, effective January 2010.

 

Wealso have two annual incentive plans in place. We have an Executive Officer and Cash Bonus Plan (the “Bonus Plan”),which was established in 2001.  There have never been any amounts paidunder this plan.  The Bonus Plan isavailable to provide additional incentive-based compensation to our CEO andExecutive Vice Presidents upon the achievement of performance targets shouldthe Committee determine to use it.  Wealso have the 2009 Executive Incentive Plan (the “Incentive Plan”), which wasestablished and approved by the full Board of Directors in 2009 to provideincentive-based compensation to various members of our management team,including three of the NEOs, our President, CFO and General Counsel.  This plan was renewed for 2010 under similarterms and our Chief Operating Officer-Gaming is included in this plan for 2010.

 

Ourcompensation program is designed to promote and reward leadership andcommitment, in addition to performance improvement, with a focus on growth andproductivity to drive financial performance. The main components of our executive compensation program include basesalary, annual incentives and broad-based retirement, health and welfareemployee benefits, subject to the terms and conditions of each benefitprogram.  Our compensation program is designed to remain competitive with 

 

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marketpractices, which is necessary to attract and retain talented executives.  Our compensation program does not include anequity component, as our CEO and Executive Vice Presidents collectively own allof the outstanding stock of the Company.

 

**Role of the Executive Officers and of the Committee inDetermining Compensation**

 

Eachyear the CEO evaluates the performance of the other NEOs and makesrecommendations to the Committee with respect to compensation, includingrecommendations with respect to base salary levels and targets under the BonusPlan and, as they relate to NEO participants, the Incentive Plan, asapplicable.  The Committee takes these recommendations into advisement,but also conducts its own independent review of the CEO and the other NEOsprior to determining base salary increases and target incentive payments. Moreover, the administration of the Bonus Plan and Incentive Plan and theactual declaration of any cash bonus payments under the Bonus Plan andIncentive Plan must be approved by the entire Board of Directors, including ourindependent director(s).

 

**2009 Elements of Executive Compensation**

 

TheCompany’s 2009 compensation program for executive officers was primarilycomprised of a base salary, annual incentives and employee benefits broadlyavailable to all employees of the Company.

 

**Base Salary**

 

Weprovide our NEOs and other employees with base salary to compensate them forservices rendered during the fiscal year.  Base salaries are essential forthe attraction and retention of talented executives and are determinedconsistent with the factors set forth below:

 

·                  industryexperience, knowledge and qualifications;

 

·                  salary levelsin effect for comparable positions within the Company’s principal industrymarketplace competitors;

 

·                  internal reviewof the executive’s compensation, both individually and relative to otherofficers;

 

·                  individualperformance of the executive;

 

·                  expected futurecontributions;

 

·                  historicalcompensation;

 

·                  ability toimpact corporate and/or business unit results; and

 

·                  retentionrisks.

 

During2009, our CEO’s salary remained $973,800. Our President, our CFO and our General Counsel’s salaries were increasedby 5% to $525,000, per the terms of their respective employment agreements thatprovide for an annual 5% salary increase. During 2009, our newly hired Chief Operating Officer-Gaming was paid$50,000 per month.  The company enteredinto an employment agreement with our Chief Operating Officer-Gaming in February 2010,effective January 1, 2010, in which we agreed to pay him an annual basesalary of $600,000.  Base salaries for Messrs. TimothyP. and Edward J. Herbst remained at their 2008 levels (Mr. Edward J.Herbst’s salary changed in May 2008 in connection with a change in hisduties and title).

 

**AnnualIncentives**

 

*Bonus Plan*.  Our CEO andExecutive Vice Presidents are eligible for incentive-based annual bonuses underthe Bonus Plan.  Any payments to be made under this plan are discretionaryand must be approved by our independent directors.  To date, there havebeen no cash bonuses paid under this plan.

 

*Incentive Plan*.  OurPresident, CFO and General Counsel are eligible for incentive-based annualbonuses under the Incentive Plan.  Thetarget payment under the Incentive Plan for our President, CFO and GeneralCounsel was 75% of their base salaries ($393,750).  The Incentive Plan for the participating NEOswas divided into four components, weighted as follows:

 
| **Participant**         | ** ** | **Workload** | ** ** | **Milestones** | ** ** | **EBITDAR** | ** ** | **Operating  Profit  Margin** | ** ** |
|-------------------------|------------|--------------|------------|----------------|------------|-------------|------------|-------------------------------|------------|
| President               |       | 20           | %          | 25             | %          | 35          | %          | 20                            | %          |
| Chief Financial Officer |       | 30           | %          | 30             | %          | 25          | %          | 15                            | %          |
| General Counsel         |       | 30           | %          | 30             | %          | 25          | %          | 15                            | %          |

 

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TheWorkload component compensates the NEO participants for their significantlyincreased workloads and exceptional efforts in connection with the Company’sfinancial restructuring and turnaround efforts. This portion of each NEO participant’s annual bonus was paid ininstallments in conjunction with each regular payroll cycle during 2009.  For 2009, each of the participating NEOsearned 100% of their annual bonus with respect to the Workload component.

 

TheMilestones component incentivizes the NEO participants to achieve certainmission-critical strategic goals related to the Restructuring and thebankruptcy proceedings.  These goalsconstitute confidential information that, if disclosed, could cause competitiveharm to the Company.  The goals are consideredto be challenging, yet achievable.* *For 2009, each NEO participant earned100% of their annual bonus with respect to the Milestones component.

 

TheEBITDAR component incentivizes the NEO participants to maximize enterprisevalue by improving the Company’s financial performance.  EBITDAR is a non-GAAP measure and is definedas earnings before interest, taxes, depreciation, amortization, restructuringcosts/reorganization items and certain other non-cash, non-recurringitems.  EBITDAR for 2009 was $76.9million, which was short of the target of $88.5 million.  Therefore, the NEO participants earned 0% oftheir annual bonus with respect to the EBITDAR component.

 

TheOperating Profit Margin component incentivizes the NEO participants to improveefficiency of the Company’s operations by controlling the cost structure so asto maintain and/or enhance the operating profit margin.  For purposes of the Incentive Plan, theoperating profit margin is calculated by dividing operating profit by totalrevenues (gross).  Operating profit iscalculated as total revenues (gross) minus total operating expenses whichequals the sum of the following expense and contrarevenue items: i) promotionalallowances; ii) cost of goods sold; iii) participation / progressives; iv)space lease; v) payroll & payroll-related; vi) promotion &advertising; vii) other direct expenses; viii) administrative expenses; and ix)any other expense(s) / contra-revenue item(s) as set forth in theIncentive Plan.  The operating profitmargin for 2009 was 9.7%, which was short of the target of 10.5%.  Therefore, the NEO participants earned 0% oftheir annual bonus with respect to the Operating Profit Margin component.

 

Totalpayouts under the Incentive Plan for 2009 were as follows:

 
| **Participant**         | ** ** | **Workload** | ** ** | **Milestones** | ** ** | **EBITDAR** | ** ** | **Operating  Profit  Margin** | ** ** | **Total** | ** ** | **Total as a  % of Base  Salary** | ** ** |
|-------------------------|------------|--------------|------------|----------------|------------|-------------|------------|-------------------------------|------------|-----------|------------|-----------------------------------|------------|
| President               |       | $            | 78,7505    |           | $          | 98,438      |       | $                             | 0          |      | $          | 0                                 |       | $ | 177,1880 |   | 34 | % |
| Chief Financial Officer |       | $            | 118,125    |           | $          | 118,125     |       | $                             | 0          |      | $          | 0                                 |       | $ | 236,250 |   | 45 | % |
| General Counsel         |       | $            | 118,125    |           | $          | 118,125     |       | $                             | 0          |      | $          | 0                                 |       | $ | 236,250 |   | 45 | % |

 

TheNEOs that participated in the Incentive Plan for 2009 will participate in asimilar plan for 2010.  In addition, ourChief Operating Officer-Gaming will participate in the Incentive Plan for 2010under similar terms.

 

**Severance Benefits**

 

Theemployment agreements with our CEO, President, CFO and General Counsel providethat in the event we choose to terminate the executive’s employment for anyreason other than “Cause” (as defined below in the “Potential Payments UponTermination or Change in Control” section), the executive will receive a severancepayment equal to one year’s salary. The employment agreement with ourChief Operating Officer-Gaming, entered into after the end of the fiscal year,provides that in the event that we choose to terminate the executive’semployment for any reason other than “Cause” (as defined below in the “PotentialPayments Upon Termination or Change in Control” section), the executive willreceive a severance payment equal to the remainder of the term of hisagreement.  The Committee provides thisseverance benefit because it believes that it is important for both recruitmentand retention purposes to provide certain NEOs with some measure of financialsecurity in the event of an involuntary termination.

 

**Other Elements of Compensation**

 

Inorder to attract, retain and pay market levels of compensation, we aim toprovide benefits to our NEOs that are consistent with market practices.  These market practices were reviewed based ona survey of current compensation trends in the market.  The Board hired Xroads Management Consultingto perform a full review of executive compensation practices in October 2009.  The current market practices includebroad-based retirement, health and welfare employee benefits, subject to theterms and conditions of each benefit program.  Our NEOs are eligible toparticipate in these benefits on the same basis as other full-timeemployees.  In addition, the Company provides each NEO with anautomobile.  This perquisite is providedbecause our Southern Nevada properties are geographically distant from oneanother and the cost represents a small fraction of the total compensation ofeach NEO.  The value 

 

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ofthe automobile is shown in the “All Other Compensation” column in the SummaryCompensation Table below.  TheCompensation Committee periodically reviews the perquisites that it provides,including the cost to the Company of providing such perquisites.

 

**SUMMARY COMPENSATION TABLE**

 

Thefollowing table sets forth the total compensation awarded, paid to or earned bythe Company’s named executive officers during 2009, 2008 and 2007.

 
| **Name and Principal Position**        | ** ** | **Year** | ** ** | **Salary  ($)(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)(2)** | ** ** | **All Other  Compensation ($)(3)** | ** ** | **Total  ($)** | ** ** |
|-------------------------------------------------------|------------|----------|------------|--------------------|------------|------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| Troy D. Herbst,*Chief Executive Officer*              |       | 2009     |       | 992,822            |       | —                                               |       | —                             |       | 992,822        |       |
| * *                                              |       | 2008     |       | 811,487            |       | —                                               |       | —                             |       | 811,487        |       |
| * *                                              |       | 2007     |       | 427,810            |       | —                                               |       | 3,433,333                          |       | 3,861,143      |       |
| * *                                              |       |     |       |               |       |                                                 |       |                               |       | * *       |       |
| Mary E. Higgins,*Chief Financial Officer*             |       | 2009     |       | 536,877            |       | 261,825                                              |       | 7,375                              |       | 806,077        |       |
| * *                                              |       | 2008     |       | 500,000            |       | 112,500                                              |       | 7,375                              |       | 619,875        |       |
| * *                                              |       | 2007     |       | 366,377            |       | 275,000                                              |       | —                             |       | 641,377        |       |
| * *                                              |       |     |       |               |       |                                                 |       |                               |       | * *       |       |
| Timothy P. Herbst*Chairman, Executive Vice President* |       | 2009     |       | 567,211            |       | —                                               |       | —                             |       | 567,211        |       |
| * *                                              |       | 2008     |       | 551,714            |       | —                                               |       | —                             |       | 551,714        |       |
| * *                                              |       | 2007     |       | 427,140            |       | —                                               |       | 3,433,333                          |       | 3,860,473      |       |
| * *                                              |       |     |       |               |       |                                                 |       |                               |       | * *       |       |
| Edward J. Herbst*Executive Vice President*            |       | 2009     |       | 567,211            |       | —                                               |       | —                             |       | 567,211        |       |
| * *                                              |       | 2008     |       | 714,042            |       | —                                               |       | —                             |       | 714,042        |       |
| * *                                              |       | 2007     |       | 831,991            |       | —                                               |       | 3,433,333                          |       | 4,265,324      |       |
| * *                                              |       |     |       |               |       |                                                 |       |                               |       | * *       |       |
| Ferenc Szony*President*                               |       | 2009     |       | 525,000            |       | 208,125                                              |       | —                             |       | 733,125        |       |
| * *                                              |       | 2008     |       | 489,560            |       | 73,434                                               |       | —                             |       | 562,494        |       |
| * *                                              |       |     |       |               |       |                                                 |       |                               |       | * *       |       |
| Sean T. Higgins*General Counsel*                      |       | 2009     |       | 536,091            |       | 261,825                                              |       | 27,000                             |       | 824,916        |       |
|                                                  |       |     |       |               |       |                                                 |       |                               |       |           |       |
| David Ross*Chief Operating Officer-Gaming*            |       | 2009     |       | 350,700            |       | —                                               |       | —                             |       | 350,700        |       |

 

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(1)                                 Based on theway the calendar and pay periods occurred in 2009, an additional pay periodfell into calendar 2009.  Also, inconnection with the Company’s bankruptcy filing, several executives had paywithheld as it was over the allowed limit for pre-petition claims.  These amounts are $18,479.38 for Troy D.Herbst, $8,315.11 for Mary E. Higgins, $ 5,722.68 for Timothy P. Herbst,$5,722.68 for Edward J. Herbst and $9,100.82 for Sean T. Higgins. These amountsare unsecured claims and will be settled by a gift in the same manner as otherunsecured claims.

 

(2)                                 Representsbonus payments made to Ms. Higgins, Mr. Szony and Mr. Higginsunder the Incentive Plan.

 

(3)                                 Represents autoexpense for Mary E. Higgins and Sean T. Higgins and distributions on commonstock for Troy D. Herbst, Timothy P. Herbst and Edward J. Herbst.

 

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**GRANTS OFPLAN-BASED AWARDS TABLE**

 
| ** **                                     | ** ** | **Estimated Future Payouts Under Non-Equity Incentive  Plan Awards (1)** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Awards**                                                               | ** ** |
| **Name and Principal Position** | ** ** | **Threshold ($)**                                                        | ** ** | **Target  ($)** | ** ** | **Maximum  ($)** | ** ** |
| Mary E. Higgins,*Chief Financial Officer*      |       | 118,125                                                                  |       | 393,750 |   | 462,656 |   |
| * *                                       | * *   | * *                                                                 | * *   | * * | * * | * * | * * |
| Ferenc Szony*President*                        |       | 78,750                                                                   |       | 393,750 |   | 423,281 |   |
|                                           |       |                                                                     |       |   |   |   |   |
| Sean T. Higgins*General Counsel*               |       | 118,125                                                                  |       | 393,750 |   | 423,281 |   |

 

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(1)                                 Representsbonus opportunities for 2009 for Ms. Higgins, Mr. Szony and Mr. Higginsunder the Incentive Plan.  Mr. Rossdid not participate in the Incentive Plan during 2009, but will participate in2010.  Timothy P. Herbst, Troy D. Herbst,and Edward J. Herbst do not participate in the Incentive Plan.

 

**Narrative Disclosure to the Summary Compensation Table andGrants of Plan-Based Awards Table**

 

*CEO Employment Agreement*

 

On May 14, 2008, we entered into a newemployment agreement with Troy D. Herbst, who was appointed our Chief ExecutiveOfficer on April 30, 2008.  Pursuantto this employment agreement, Mr. Herbst receives annual base compensationof $973,800, which may be increased annually by five percent.  The employment agreement commenced May 14,2008 and the initial term ended December 31, 2009.  It will automatically renew for successiveone-year periods unless sooner terminated, or unless either party notifies theother in writing at least 60 days prior to the date the employment agreement isscheduled to expire.  This agreement hasbeen renewed for 2010.

 

*Employment Agreements of Other Named ExecutiveOfficers*

 

In March 2008, we entered into a new employmentagreement with Mary E. Higgins, our Chief Financial Officer, in which we agreedto pay her an initial annual base salary of $500,000, which may be increasedannually by five percent, plus a discretionary bonus of up to 30% of her salaryper year.  Ms. Higgins’ contract was extended and now expires on December 31,2010.  In addition, we entered into a newemployment agreement with Ferenc Szony, our President, in March 2008. His employment agreement provided for an initial annual base salary of$500,000, which may be increased annually by five percent, and was extended andnow expires on December 31, 2010.  In March 2008, we enteredinto a new employment agreement with Sean T. Higgins, our General Counsel, inwhich we agreed to pay him an initial annual base salary of $500,000, which maybe increased annually by five percent.  Mr. Higgins’ contract wasextended and now expires on December 31, 2010. These three contractsautomatically renew for successive one-year periods unless sooner terminated orunless either party to the respective agreements notifies the other in writingat least 60 days prior to the date the respective agreement is scheduled toexpire.  And, all three of these agreements have been renewed for2010.  Pursuant to the terms of theIncentive Plan described above, if Ms. Higgins or Mr. Szony earns anannual incentive payment under the Incentive Plan, such payment shall be inlieu of their bonus payments per their employment agreements. The companyentered into an employment agreement with its Chief Operating Officer-Gaming, Mr. DavidRoss in February 2010, effective January 1, 2010, in which we agreedto pay him an annual base salary of $600,000, pursuant to which he is eligibleto participate in the 2010 executive Incentive Plan. Subject to certain exceptions,the agreement expires on the earlier of December 31, 2010 or theSubstantial Consummation Date (as defined in the agreement).

 

The Company does not currently have an employmentagreement with its other NEOs, Timothy P. Herbst and Edward J. Herbst.

 

**POTENTIALPAYMENTS UPON TERMINATION OR CHANGE IN CONTROL**

 

The Company’s employment agreements with our CEO,President, CFO and General Counsel provide that in the event that we choose toterminate the executive’s employment for any reason other than “Cause,” theexecutive will receive a severance payment equal to one year’s salary.  The employment agreement with our ChiefOperating Officer-Gaming, entered into after the end of the fiscal year,provides that in the event that we choose to terminate him for any reason otherthan “Cause,” he will receive a severance payment equal to the remainder of theterm of his agreement.  Our other NEOs,Timothy P. Herbst and Edward J. Herbst, do not have termination benefits.  “Cause” is defined as: (i) theconviction of, or judgment against, the executive by a civil or criminal courtof competent jurisdiction for a felony or any other offense involvingembezzlement or misappropriation of funds, or any act of moral turpitude,dishonesty or lack of fidelity; (ii) the indictment of the executive by astate or federal grand jury of competent jurisdiction or the filing of acriminal complaint or information, for a felony or any other offense involvingembezzlement or misappropriation of 

 

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funds,or any act of moral turpitude, dishonesty or lack of fidelity; (iii) theconfession by the executive of embezzlement or misappropriation of funds, orany act of moral turpitude, dishonesty or lack of fidelity; (iv) thepayment (or, by the operation solely of the effect of a deductible, the failureof payment) by a surety or insurer of a claim under a fidelity bond issued forthe benefit of the Company reimbursing the Company for a loss due to thewrongful act, or wrongful omission to act, of the executive; (v) thedenial, revocation or suspension of a license, qualification or certificate ofsuitability to the executive by any of the Gaming Authorities (as defined inthe employment agreements); and (vi) any action or failure to act by theexecutive that the Company reasonably believes, as a result of a communicationor action by the Gaming Authorities or on the basis of consultations with itsgaming counsel and/or other professional advisors, will likely cause any of theGaming Authorities to:  (A) fail to license, qualify and/or approvethe Company to own and operate a gaming business; (B) grant any suchlicensing, qualification and/or approval only upon terms and conditions thatare unacceptable to the Company; (C) significantly delay any suchlicensing, qualification and/or approval process; or (D) revoke or suspendany existing license.

 

Upona termination without Cause on December 31, 2009, Mr. Troy Herbst, Ms. Higgins,Mr. Szony, and Mr. Higgins would have been entitled to receive thefollowing amounts, respectively:  $973,800, $525,000, 525,000 and$525,000.  Mr. Ross was not subjectto a severance arrangement as of December 31, 2009.* *All other amounts payable or otherbenefits (such as accrued vacation, vested amounts payable under the Company’s401(k) plan, etc.) are the same as for other salaried employees.

 

**FISCAL YEAR 2009 DIRECTOR COMPENSATION**

 

Directorswho are employees of the Company do not receive any additional compensation fortheir services as a director.  Non-employee directors receive compensationin the amount of $10,000 per month inclusive of all board and committeemeetings.  In addition, our independentdirectors are reimbursed for expenses incurred in attending board or committeemeetings and while representing the Company in conducting certain business.

 

Thefollowing table provides information related to the compensation of ournon-employee directors during fiscal 2009.

 
| **Name**              | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------|------------|-----------------------------------------------------------|------------|----------------|------------|
| John F. O’Reilly |       | 120,000                                                   |       | 120,000        |       |
| John N. Brewer(1)     |       | 50,000                                                    |       | 50,000         |       |

 

----

(1) Mr. Brewer resigned effective as of May 31, 2009.

 

**Compensation Committee Interlocks and Insider Participation**

 

**Relationships and Independence of the Compensation CommitteeMembers**

 

Duringthe fiscal year ended December 31, 2009, Edward Herbst, Timothy Herbst andTroy Herbst were members of the Executive Committee of our board ofdirectors.  Our executive compensation is determined by the Board ofDirectors, three of the members of which are officers, and the owners, ofHerbst Gaming.

 

**Compensation Committee Report**

 

TheCompensation Committee reviewed the Compensation Discussion and Analysis anddiscussed its contents with Company management.  Based on the review anddiscussions, the Committee has recommended that this Compensation Discussionand Analysis be included in this annual report.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

NotApplicable.

 

**Item12.  Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.**

 

Thesecurities entitled to vote consist of shares of our common stock, no parvalue, with each share entitling its owner to one vote.  Common stock isthe only outstanding class of voting securities authorized by our articles ofincorporation.  The number of outstanding shares of common stock as of December 31,2009 was 300.

 

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| **Name and  Address(1)**                                     | ** ** | **Number of  Shares of  Common  Stock  Beneficially  Owned** | ** ** | **Percentage of  Outstanding  Shares** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Edward J. Herbst (2)                                              |       | 100                                                                                             |       | 331/3                                                 | %          |
| Timothy P. Herbst (2)                                             |       | 100                                                                                             |       | 331/3                                                 | %          |
| Troy D. Herbst (2)                                                |       | 100                                                                                             |       | 331/3                                                 | %          |
| Mary E. Higgins                                                   |       | —                                                                                          |       | —                                                |       |
| John F. O’Reilly                                             |       | —                                                                                          |       | —                                                |       |
| All executive officers and directors as a group  (6 persons) |       | 300                                                                                             |       | 100.0                                                 | %          |

 

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(1)         The address of each suchperson is c/o Herbst Gaming, Inc., 3440 West Russell Road, LasVegas, Nevada 89118.

 

(2)         Includes shares held in trusts for the benefit ofeach of Edward J. Herbst, Timothy P. Herbst and Troy D. Herbst.

 

**Item 13.  Certain Relationships and RelatedTransactions.**

 

Webelieve that all of the transactions mentioned below are on terms at least asfavorable to us as would have been obtained from an unrelated third party.  The Plan provides for the modification ofcertain related party agreements.  Exceptas described below and in the Plan, all terms and provisions in the Company’srelated party agreements shall continue to be valid and enforceable under theRestructuring.  We cannot assure you thatthe Plan will be consummated.

 

EdwardHerbst, Timothy Herbst and Troy Herbst are brothers and are officers anddirectors of Herbst Gaming, Inc. and its wholly-owned subsidiaries. In addition, they are officers and directors of Terrible Herbst, Inc. andBerry-Hinckley Industries.  There is no cross ownership between HerbstGaming, Inc. and either Terrible Herbst, Inc. or Berry-HinckleyIndustries.  Terrible Herbst, Inc. is owned solely by Jerry andMaryanna Herbst, the parents of the Herbst brothers.  Sean Higgins, theCompany’s General Counsel, is also the general counsel of Berry-HinckleyIndustries.  The Plan provides for themodification of certain related party agreements.  Except as described below and in the Plan,all terms and provisions in the Company’s related party agreements shallcontinue to be valid and enforceable under the Restructuring.  We cannot assure you that the Plan will beconsummated.

 

*Slot route contract with Terrible Herbst, Inc. *The Companyrents space for certain slot machine route operations in convenience storesowned by Terrible Herbst, Inc. (“Terrible Herbst”), a corporation in whichthe owners of the Company are officers and which is owned by the parent of theCompany’s owners.  Rent expense of $6,954,000, $7,114,000 and $7,185,000was incurred under this agreement for the years ended December 31, 2007,2008 and 2009, respectively, for the exclusive placement of slot machines inTerrible Herbst convenience store locations.  This contract was extendedin 2009 and now expires in December of 2014.  This agreement is expected to be modifiedeffective as of the Substantial Consummation Date and to be assumed under thePlan on the Substantial Consummation Date.

 

*Other arrangements with Terrible Herbst, Inc.. *We have also entered into aservicing arrangement with Terrible Herbst pursuant to which we provideaccounting and administrative services related to the collection of daily depositsfrom Terrible Herbst convenience stores.  We also provide personnel toTerrible Herbst to count, maintain and safeguard large amounts of coin andcurrency.  Terrible Herbst reimburses our expenses in providing theseservices.  Under this servicing arrangement, we were paid approximately$246,000 for services rendered for the year ended December 31, 2007,$246,000 in 2008, and $270,100 in 2009. This agreement is currently on a month-to-month basis.  This agreement is expected to be modifiedeffective as of the Substantial Consummation Date and to be assumed under thePlan on the Substantial Consummation Date.

 

Wehave entered into a master ATM agreement with Terrible Herbst pursuant to whichwe are granted the exclusive right to install and maintain ATMs in TerribleHerbst convenience store locations.  Thisagreement expires in December, 2010, subject to automatic renewal forconsecutive and repetitive terms of one year, unless we or Terrible Herbstnotify the other of non-renewal. **  **This agreement is expected to bemodified effective as of the Substantial Consummation Date and to be assumedunder the Plan on the Substantial Consummation Date.

 

TheCompany has entered into a nonexclusive trademark license agreement withTerrible Herbst for the use of the Terrible Herbst brand name and its cowboylogo which extends through 2011.  At the option of the Company, theagreement provides for the ability to renew the agreement for five additionalsuccessive terms of five years each.  Pursuant to this trademark licenseagreement, the Company paid approximately $1,557,000, $1,649,000 and $1,760,000to Terrible Herbst in the years ended December 31, 2007, 2008 and 2009,respectively.  This agreement is expectedto be modified effective as of the Substantial Consummation Date and to beassumed under the Plan on the Substantial Consummation Date.

 

TheCompany entered into a shared services agreement with Terrible Herbst and Berry-Hinckley Industries in January 2008whereby (i) Terrible Herbst and Berry-Hinckley Industries reimburse theCompany for services performed by certain employees of the Company for TerribleHerbst and Berry-Hinckley Industries asrequested from time to time, consisting primarily of the day-to-day functionsof Terrible Herbst, and Berry-HinckleyIndustries and (ii) effective as of January 1, 2009, pursuantto an amended and 

 

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restatedshared services agreement entered into on January 16, 2009, the Companyreimburses Terrible Herbst for services performed by certain employees ofTerrible Herbst for the Company as requested from time to time, consistingprimarily of maintaining the price books for certain of the Company’s servicestation locations and providing management oversight of the service stationoperations at the Primm Properties. Under this agreement, the Company received approximately $583,000 and$455,300 for services rendered during the year ended December 31, 2008 and2009, respectively, from Terrible Herbst, and the Company received $102,000 and$125,000 for the same periods for services from Berry-Hinckley Industries.  In 2009, payment for services rendered by theCompany’s employees was reduced by amounts due for services rendered for theCompany’s by Terrible Herbst’s employees. The contract expired on December 31, 2009 and is currently on amonth-to-month basis.  This agreement isexpected to be modified effective as of the Substantial Consummation Date andto be assumed under the Plan on the Substantial Consummation Date.

 

TheCompany entered into an advertising purchasing agreement with Terrible Herbstin January 2009 pursuant to which the Company purchases advertising timeon Terrible Herbst’s network of gas pump and interior television screens for$30,000 per month during the twelve months commencing January 1,2009.  This agreement has expired and iscurrently on a month-to-month basis. This agreement is expected to be modified effective as of theSubstantial Consummation Date and to be assumed under the Plan on theSubstantial Consummation Date.

 

*Lease agreements.*

 

Pursuantto a lease agreement that expires in 2067, including renewal periods, we leasethe real property on which our corporate headquarters is located from TheHerbst Family Limited Partnership II, or Herbst FLP II.  Thegeneral partners of Herbst FLP II are Jerry and Maryanna Herbst.  Ineach of 2007, 2008 and 2009 we paid $172,992 under this lease.  Pursuant to the Plan, this lease is expectedto be modified effective as of the Substantial Consummation Date and to beassumed and assigned to one of the Reorganized Debtors on the SubstantialConsummation Date.

 

Pursuantto a lease agreement that expires in 2026, including renewal periods, we leasethe real property on which Terrible’s Town Casino in Pahrump is located fromThe Herbst Family Limited Partnership.  The lease requires monthly rentalpayments of $15,000.  In 2007 2008, and 2009 we paid $180,000 under thislease.  Pursuant to the Plan, this leaseis expected to be modified and assigned.

 

Welease land and office space in certain of our facilities to Terrible Herbstunder various lease agreements with terms ranging from month-to-month to 20years.  Monthly rental income is $63,500.  In 2007, 2008, and 2009 wereceived rental income of $348,000 under these leases.  Pursuant to the Plan, this lease is expectedto be modified and assigned.

 

Welease the real property on which Terrible’s Searchlight Casino in Searchlight islocated from Terrible Herbst for $15,000 per month, pursuant to a leaseagreement entered into on June 30, 2002 that expires in 2022, with optionsto renew the lease for five additional successive terms of ten years each,contingent on Terrible Herbst renewing its lease of the real property. Terrible Herbst leases that real property from an unrelated third party,pursuant to a lease agreement entered into on June 30, 2002 that expiresin 2042, including renewal periods.  In each of 2007, 2008 and 2009, wepaid $180,000 under this lease.  Pursuantto the Plan, this lease is expected to be modified and assigned.

 

Welease a warehouse located in Las Vegas, Nevada for our employment center andpurchasing departments from the Herbst’s Grandchildren’s Trust.  The leasebegan in November 2002 and requires payments of $46,500 per month through November 2012. This expense was $560,500, $555,500 and $569,300 for 2007, 2008 and 2009,respectively.  Pursuant to the Plan, thislease is expected to be modified effective as of the Substantial ConsummationDate and to be assumed and assigned to one of the Reorganized Debtors on theSubstantial Consummation Date.

 

*Related-party transactions.*

 

Mr. Higginsis our General Counsel, the general counsel of Terrible Herbst and the brotherof Mary E. Higgins, our chief financial officer.  Mr. Higginsreceived compensation for services rendered to us in 2007, 2008 and 2009 of$658,700, $638,500 and $824,900 respectively.

 

In2003, we entered into a slot route contract to install, operate and serviceslot machines at a tavern owned by HIGCO, Inc., a company owned andoperated by Mr. Higgins and two of his brothers, G. Michael Higginsand Kevin J. Higgins.  Pursuant to this revenue-sharing contract, HIGCO, Inc.paid us $147,500 in 2007, $182,500 in 2008 and $186,800 in 2009.

 

In2004, ETT entered into a slot route contract with SamCon, Inc., a companyowned and operated by Mr. Higgins, to install, operate and service slotmachines at a new location.  Terms of this revenue-sharing contract aresimilar to the terms of the contract we

 

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enteredinto with HIGCO in 2003.  Pursuant to this revenue-sharing contract,SamCon, Inc. paid ETT $0 in 2007, $72,700 in 2008 and $87,600 in 2009.

 

In2005, ETT entered into a slot route contract to install, operate and serviceslot machines at a tavern owned by Prescott’s Bar LLC, a company owned andoperated by Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, one ofthe owners of the Company.  Pursuant to this revenue-sharing contract,Prescott’s paid ETT $105,700 in 2007, $94,900 in 2008 and $90,700 in 2009.

 

InNovember 2009, ETT entered into a slot route contract with Balboa Pizza, acompany partially owned by Mr. David Ross, the Company’s Chief OperatingOfficer-Gaming, to install, operate and service slot machines at a newlocation.  Terms of this revenue-sharing contract are similar to the termsthe Company has with other taverns.  Pursuant to this revenue-sharingcontract, Balboa Pizza paid ETT $3,100 in 2009.

 

Thebalance sheet item “due from related parties” also includes receivables of$127,700 and $150,900 at December 31, 2008 and 2009, respectively, fromBerry-Hinckley Industries, which arise in the normal course of business.  The balances are non-interest bearing andpayable on demand.

 

Theamount due from related party balance includes $899,000 and $165,500 due fromemployees at December 31, 2008 and 2009, respectively. The balances arecharged interest at varying rates and have original terms ranging from due ondemand to nine years.

 

*Indemnification of Directors and Officers. *Section 78.7502of the Nevada Revised Statutes, Article VIII of our articles ofincorporation and Article IX of our by-laws contain provisions forindemnification of our officers, directors, employees and agents.  Ourarticles require us to indemnify such persons to the full extent permitted byNevada law.  Each person will be indemnified in any proceeding if he actedin good faith and in a manner that he reasonably believed to be in, or notopposed to, our best interests.  Indemnification would cover expenses,including attorneys’ fees, judgments, fines and amounts paid in settlement.

 

Insofaras indemnification for liabilities arising under the Securities Act may bepermitted to directors, officers or controlling persons of the registrantspursuant to the foregoing provisions, we have been informed that in the opinionof the SEC such indemnification is against public policy as expressed in theSecurities Act and is, therefore, unenforceable.

 

**Item 14.********PrincipalAccountant Fees and Services****.**

 

Theaggregate accounting fees billed and services provided by our principalaccountants for the years ended December 31, 2008 and 2009 are as follows:

 
| ** **            | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit fees(1)         |       | $        | 1,113,930  |     | $          | 775,750 |   |
| Audit-related fees(2) |       | —   |       | —   |       |
| Tax fees              |       | —   |       | —   |       |
| All other fees        |       | 129,854  |       | 92,335   |       |
| Total fees            |       | $        | 1,243,784  |     | $          | 868,085 |   |

 

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(1)   Represents the aggregate fees Deloitte &Touche LLP invoiced the Company in each of the last two fiscal years forprofessional services for the audits of our annual financial statements, reviewof financial statements included in our periodic filings with the SEC and forservices that are normally provided by Deloitte & Touche LLP inconnection with those filings.

 

(2)   Represents the aggregate fees Deloitte &Touche LLP invoiced the Company in each of the last two fiscal years forassurance and related services that are reasonably related to the performanceof the audit.

 

Itis our practice that all services provided to us by our independent auditors bepre-approved either by the Audit Committee or by the Chairman of the AuditCommittee pursuant to authority delegated by the Audit Committee.  No partof the independent auditor services related to the audit fees, audit-relatedfees, tax fees, or other fees listed in the table above was approved by theAudit Committee pursuant to the exemption from pre-approval provided byparagraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

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**PART IV**

 

**Item 15.********Exhibitsand Financial Statement Schedules****.**

 

(a)           Financial Statements

 

1.           **List ofFinancial Statements**

 

Includedin Part II of this report:

 

Reportof Independent Registered Public Accounting Firm

 

ConsolidatedFinancial Statements

 

ConsolidatedBalance Sheets As of December 31, 2008 and 2009

 

ConsolidatedStatements of Operations For the years ended December 31, 2007, 2008 and2009

 

Consolidated Statements of Stockholders’ Equity(Deficiency) For the years ended December 31, 2007, 2008 and 2009

 

ConsolidatedStatements of Cash Flows For the years ended December 31, 2007, 2008 and2009

 

Notesto Consolidated Financial Statements

 

2.             **Financial StatementsSchedules**

 

All schedules are omittedgiven the absence of conditions under which they are required to be included orbecause the required information is included in the financial statements ornotes thereto.

 

(c)           Exhibits

 

Inreviewing the agreements included as exhibits to this annual report, pleaseremember they are included to provide you with information regarding theirterms and are not intended to provide any other factual or disclosureinformation about the Company or the other parties to the agreements.  The agreements contain representations andwarranties by each of the parties to the applicable agreement.  These representations and warranties havebeen made solely for the benefit of the other parties to the applicableagreement and:

 

·      Should not in all instancesbe treated as categorical statements of fact, but rather as a way of allocatingthe risk to one of the parties if those statements prove to be inaccurate;

 

·      Have been qualified bydisclosures that were made to the other party in connection with thenegotiation of the applicable agreement, which disclosures are not necessarilyreflected in the agreement;

 

·      May apply standards ofmateriality in a way that is different from what may be viewed as material toyou or other investors; and

 

·      Were made only as of thedate of the applicable agreement or such other date or dates as may bespecified in the agreement and are subject to more recent developments.

 

Accordingly,these representations and warranties may not describe the actual state ofaffairs as of the date they were made or at any other time.  Additional information about the Company maybe found elsewhere in this annual report and the Company’s other publicfilings, which are available without charge through the SEC’s website athttp://www.sec.gov and the Company’s website at http://www.herbstgaming.com.

 
| **Index No.** | ** ** | **Description**                                                                                                                                                                           |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                |
| 2.1(3)             |       | Asset  Purchase Agreement between Anchor Coin and Herbst Gaming, Inc. and  Market Gaming, Inc. and E-T-T, Inc. dated as of November 21,  2002.                        |
|               |       |                                                                                                                                                                                      |
| 2.2(3)             |       | First  Amendment to Asset Purchase Agreement by and among Anchor Coin and Herbst  Gaming, Inc. and Market Gaming, Inc. and E-T-T, Inc. dated as  of January 14, 2003. |

 

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| 2.3(5)      |       | Asset  Purchase and Sale Agreement, dated July 20, 2004, made by and between  Mark Twain Casino, L.L.C. and Herbst Gaming, Inc.                                                                                                         |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                              |
| 2.4(5)      |       | Asset  Purchase and Sale Agreement, dated July 20, 2004, made by and between  St. Joseph Riverboat Partners and Herbst Gaming, Inc.                                                                                                |
|        |       |                                                                                                                                                                                                                                              |
| 2.5(5)      |       | Asset  Purchase and Sale Agreement, dated July 20, 2004, made by and between  Southern Iowa Gaming Company and Herbst Gaming, Inc.                                                                                                      |
|        |       |                                                                                                                                                                                                                                              |
| 2.6(7)      |       | Amendment  to Asset Purchase and Sale Agreement, made by and between Mark Twain Casino,  L.L.C. and Herbst Gaming, Inc. dated as of December 2004.                                                                                      |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                        |
| 2.7(7)      |       | Amendment  to Asset Purchase and Sale Agreement, made by and between St. Joseph  Riverboat Partners and Herbst Gaming, Inc. dated as of  December 2004.                                                                            |
|        |       |                                                                                                                                                                                                                                              |
| 2.8(7)      |       | Amendment  to Asset Purchase and Sale Agreement, made by and between Southern Iowa  Gaming Company and Herbst Gaming, Inc. dated as of December 2004.                                                                                   |
|        |       |                                                                                                                                                                                                                                              |
| 2.9(7)      |       | Second  Amendment to Asset Purchase and Sale Agreement made by and between Southern  Iowa Gaming Company and Herbst Gaming, Inc., dated as of  January 25, 2005.                                                                        |
|        |       |                                                                                                                                                                                                                                              |
| 2.10(9)     |       | Agreement  and Plan of Merger, dated as of May 16, 2006, by and among The Sands  Regent, Herbst Gaming, Inc. and HGI-Casinos, Inc.                                                                                                 |
|        |       |                                                                                                                                                                                                                                              |
| 2.11(10)    |       | Amendment  No. 1 to the Agreement and Plan of Merger among The Sands Regent, Herbst  Gaming, Inc. and HGI-Casinos, Inc. dated as of August 24, 2006                                                                           |
|        |       |                                                                                                                                                                                                                                              |
| 2.12(11)    |       | Purchase  Agreement, dated as of October 31, 2006, by and among New York-New York  Hotel & Casino, LLC, PRMA Land Development Company, The Primadonna  Company LLC, and Herbst Gaming, Inc.                                    |
|        |       |                                                                                                                                                                                                                                              |
| 2.13(30)    |       | Amended Order  Confirming Debtors’ First Amended Joint Plan of Reorganization, filed  January 22, 2010.                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                              |
| 2.14(30)    |       | Findings of Fact and  Conclusions of Law in Support of Order Confirming Debtors’ First Amended  Joint Plan of Reorganization, filed January 22, 2010.                                                                                   |
|        |       |                                                                                                                                                                                                                                              |
| 3.1(1)      |       | Articles  of Incorporation of Herbst Gaming, Inc.                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                              |
| 3.2(2)      |       | By-laws  of Herbst Gaming, Inc.                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                              |
| 4.1(6)      |       | Indenture  dated November 22, 2004 by and among Herbst Gaming, Inc., the  guarantors identified therein and U.S. Bank National Association, as trustee,  relating to 7% Senior Subordinated Notes due 2014.                             |
|        |       |                                                                                                                                                                                                                                              |
| 4.2(6)      |       | Specimen  Form of 7% Senior Subordinated Notes due 2014 (included as part of the  Indenture at Exhibit 4.1).                                                                                                                            |
|        |       |                                                                                                                                                                                                                                              |
| 4.3(5)      |       | Indenture  dated June 11, 2004 by and among Herbst Gaming, Inc., the  guarantors identified therein and U.S. Bank National Association, as trustee,  relating to 81/8% Senior Subordinated  Notes due 2012.                             |
|        |       |                                                                                                                                                                                                                                              |
| 10.1(1)     |       | Trademark  License Agreement dated August 24, 2001 by and between Herbst  Gaming, Inc. and Terrible Herbst, Inc.                                                                                                                   |
|        |       |                                                                                                                                                                                                                                              |
| 10.2++  (5) |       | Gaming  Devices License Agreement dated October 26, 2004 by and between The Vons  Companies, Inc. and Market Gaming, Inc.                                                                                                          |
|        |       |                                                                                                                                                                                                                                              |
| 10.3(1)     |       | Letter  Agreement dated May 31, 2006 among Albertson’s, Inc.,  SUPERVALU, Inc., AB Acquisition LLC and Cardivan Company.                                                                                                      |
|        |       |                                                                                                                                                                                                                                              |
| 10.4++(1)   |       | Gaming License Agreement dated as of June 2,  2006 among Cardivan Company, Nevada CVS Pharmacy, L.L.C., Henderson CVS,  L.L.C., Desert Eastern CVS, L.L.C., Maryland Parkway CVS, L.L.C., CVS 2989  Las Vegas, L.L.C. and Senip CVS, L.L.C.* |

 

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| 10.5+(1)   |       | License  Agreement dated April 24, 1997 between American Drug Stores, Inc.  and Cardivan Company.                                                                                                                                                            |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                   |
| 10.6+(1)   |       | License  Agreement dated April 24, 1997 between American Drug Stores, Inc.  and Corral United, Inc. II-13                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.7+(1)   |       | License  Agreement dated March 12, 1999 between Rite Aid Corporation and Cardivan  Company.                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.8+(1)   |       | First  Amendment to Cardivan License Agreement dated March 27, 2000 between  Rite Aid Corporation and Cardivan Company.                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.9+(1)   |       | License  Agreement dated March 12, 1999 between Rite Aid Corporation and Corral  Coin, Inc.                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.10+(1)  |       | First  Amendment to Corral Coin License Agreement dated March 27, 2000 between  Rite Aid Corporation and Corral Coin, Inc.                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.11+(1)  |       | Gaming  Devices License Agreement dated December 20, 1999 by and between  Terrible Herbst, Inc. and E-T-T, Inc.                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.12(1)   |       | Amendment  to Gaming Device License Agreement dated May , 2001 by and between  E-T-T, Inc. and Terrible Herbst, Inc.                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.13+(1)  |       | Agreement  dated May 1, 1998 by and between Kmart Corporation and Cardivan Company.                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.14+(1)  |       | License  Agreement dated April 24, 1997 between Lucky Stores, Inc. and  Cardivan Company.                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.15+(4)  |       | Lease  and Sublease Agreement dated July 28, 1993, by and between Smith’s  Food & Drug Centers, Inc. and Anchor Coin, as amended.                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.16(4)   |       | Hold Harmless Agreement  dated as of September 2, 1993 executed by Anchor Coin in favor of  Smith’s Food & Drug Centers, Inc.                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.17+(4)  |       | Letter  Agreement and Consent to Assignment dated January 16, 2003.                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.18(1)   |       | Lease  Agreement dated July 1, 1997 by and between The Herbst Family Limited  Partnership II and E-T-T Enterprises, L.L.C.                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.19(1)   |       | Lease  Agreement dated July 1, 1996 by and between The Herbst Family Limited  Partnership and E-T-T, Inc.                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.20(1)   |       | Lease  extension dated April 30, 2001 between The Herbst Family Limited  Partnership and E-T-T, Inc.                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.21(1)   |       | Lease  dated September 3, 1993 between The 1993 Samuel Josephson Revocable  Family Trust and Phoenix Associates.                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.22(1)   |       | Agreement  for Sale dated August 1, 1995 between Phoenix Associates and Market  Gaming, Inc.                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                             |
| 10.23(4)   |       | Lease  Agreement dated November 27, 2002 by and between Herbst Grandchildren’s  Trust and Herbst Gaming, Inc.                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.24(4)   |       | Lease  dated June 2002 by and between Centennial Acquisitions, LLC and Terrible  Herbst, Inc.                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.25(4)   |       | Amendment  to Lease dated July 30, 2002 by and between Centennial Acquisitions, LLC  and Terrible Herbst, Inc.                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.26(4)   |       | Lease  Agreement dated July 1, 2002 by and between Terrible Herbst, Inc.  and E-T-T, Inc.                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.27(23)  |       | Amendment  No. 5 and Second Forbearance and Standstill Agreement dated as of  November 10, 2008 by and among Herbst Gaming, Inc., Wilmington  Trust Company, each lender party thereto and the Subsidiaries of Herbst  Gaming, Inc. party thereto. |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.28(18)  |       | Employment  Agreement with Mary E. Higgins dated March 7, 2008.                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.29(1)   |       | Form of  Executive Compensation and Bonus Plan.                                                                                                                                                                                                                   |

 

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| 10.30(4)    |       | Code  of Ethics.                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31(13)   |       | Second  Amended and Restated Credit Agreement dated as of January 3, 2007 by and  among Herbst Gaming, Inc., Bank of America, N.A., as administrative  agent and the other lending parties thereto.                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32  (14) |       | Gold  Ranch Casino Lease, dated as of December 27, 2001, by and between Last  Chance, Inc., Prospector Gaming Enterprises, Inc. and Target  Investments, L.L.C.                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33(14)   |       | Option  to Purchase the Gold Ranch Casino Property and Improvements, The Leach Field  Property, the Frontage Parcel, the California Lottery Station and the  California Lottery Property, and the Right of First Refusal, dated as of  December 27, 2001, by and among Prospector Gaming  Enterprises, Inc., Target Investments, L. L. C. and Last  Chance, Inc. |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34(15)   |       | Amendment  No. 1 to Second Amended and Restated Credit Agreement dated as of  August 14, 2007 with reference to the Second Amended and Restated Credit  Agreement dated as of January 3, 2007 among Herbst Gaming, Inc.,  the lenders party thereto, and Bank of America, N.A., as administrative agent                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.35(16)   |       | Amendment  No. 2 to Second Amended and Restated Credit Agreement dated as of December 14,  2007 with reference to the Second Amended and Restated Credit Agreement dated  as of January 3, 2007 among Herbst Gaming, Inc., the lenders  referred to therein, and Bank of America, N.A., as administrative agent                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.36(17)   |       | Amendment  to Gaming Device License Agreement dated as of September 30, 2007,  between Market Gaming, Inc. (“MGI”) and Safeway, Inc. to the Gaming  Device License Agreement between MGI and Safeway, Inc. dated as of  October 25, 2004                                                                                                     |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                      |
| 10.37(17)   |       | Amendment to Gaming Device  License Agreement dated as of September 30, 2007, between MGI and The  Vons Companies, Inc. to the Gaming Device License Agreement between MGI  and The Vons Companies, Inc. dated as of October 25, 2004                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.38(17)   |       | Gaming  License Agreement dated as of September 30, 2007 among Cardivan Company  (“Cardivan”), Nevada C.V.S. Pharmacy, L.L.C., Henderson CVS, L.L.C., Desert  Eastern, CVS, L.L.C., Maryland Parkway CVS, L.L.C., CVS 2989 Las Vegas,  L.L.C. and Senip CVS L.L.C.                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.39(17)   |       | Gaming  License Agreement dated as of October 22, 2007 between Cardivan and New  Albertson’s, Inc.                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.40(17)   |       | Gaming  License Agreement dated as of August 24, 2007 between Cardivan and  SaveMart Supermarkets dba Albertson’s                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.41(17)   |       | Gaming  License Agreement dated as of July 1, 2007 among Cardivan, RITE AID  HDQTRS. CORP., and Thrifty Payless Corp.                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.42(18)   |       | Employment  Agreement with Ferenc Szony, dated March 7, 2008.                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.43(25)   |       | Amended  and Restated Shared Services Agreement dated as of January 16, 2009  between Herbst Gaming, Inc. Berry-Hinckley Industries and Terrible  Herbst, Inc.                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.44(25)   |       | Advertising  Purchasing Agreement dated as of January 1, 2009 between Herbst  Gaming, Inc. and Terrible Herbst, Inc.                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.45(19)   |       | Master  ATM Agreement dated as of March 1, 2008 by and between E-T-T, Inc.  and Terrible Herbst, Inc.                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.46(21)   |       | Employment  Agreement with Troy D. Herbst, dated May 14, 2008.                                                                                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.47(20)   |       | Omnibus  Amendment No. 3 and Appointment and Acceptance dated as of  April 24, 2008 by and among Herbst Gaming, Inc., Bank of America,  N.A., Wilmington Trust Company, and each Lender party thereto.                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.48(21)   |       | Amendment  No. 4 and Forbearance and Standstill Agreement dated as of May 15,  2008 by and among Herbst Gaming, Inc., Wilmington Trust Company, each lender  party thereto and the Subsidiaries of Herbst Gaming, Inc. party thereto.                                                                                                                       |

 

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| 10.49(22)     |   | Amendment  to Amendment No. 4 and Forbearance and Standstill Agreement Effective  dated as of September 30, 2008 by and among Herbst Gaming, Inc.,  Wilmington Trust Company and the Subsidiaries of Herbst Gaming, Inc.  party thereto.                                                                                                  |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.50(24)     |   | Letter  agreement dated March 9, 2009 by and among the Company, the Company’s  subsidiaries, consenting lenders under the amended Credit Agreement, Edward  J. Herbst, Timothy P. Herbst, Troy D. Herbst, Terrible Herbst, Inc. and  certain affiliates of Terrible Herbst, Inc.                                                          |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.51(26)     |   | Letter  of Resignation of John N. Brewer, dated as of May 26, 2009.                                                                                                                                                                                                                                                                                      |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.52(27)     |   | Amendment and Waiver to  Letter agreement dated March 9, 2009 by and among the Company,  the Company’s subsidiaries, consenting lenders under the amended Credit  Agreement, Edward J. Herbst, Timothy P. Herbst, Troy D. Herbst, Terrible  Herbst, Inc. and certain affiliates of Terrible Herbst, Inc., dated  as of May 28, 2009. |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.53(28)     |   | Lockup Agreement, dated  as of June 29, 2009.                                                                                                                                                                                                                                                                                                            |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.54(29)  ++ |   | Twenty-Second Amendment  to Lease and Sublease Agreement, dated June 30, 2009, by and between  Smith’s Food & Drug Centers, Inc., Herbst Gaming, Inc. and  Market Gaming, Inc.                                                                                                                                              |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.55(36)     |   | Executive  Employment Agreement between Herbst Gaming, Inc. and David D. Ross,  dated as of February 26, 2010.                                                                                                                                                                                                                                      |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 21.1(19)      |   | Subsidiaries  of Herbst Gaming, Inc.                                                                                                                                                                                                                                                                                                                     |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 31.1*         |   | Certification  of Troy D. Herbst under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                    |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 31.2*         |   | Certification  of Mary E. Higgins under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                   |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 32.1*         |   | Certifications  of Troy D. Herbst and Mary E. Higgins pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                        |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 99.1(31)      |   | Debtors’ Joint Plan of  Reorganization, filed June 15, 2009.                                                                                                                                                                                                                                                                                        |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 99.1(32)      |   | Amended Disclosure  Schedule related to Debtors’ Joint Plan of Reorganization, filed  June 19, 2009.                                                                                                                                                                                                                                                |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 99.2(33)      |   | Debtors’ Amended Joint  Plan of Reorganization, filed July 22, 2009.                                                                                                                                                                                                                                                                                |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 99.3(34)      |   | Second Amended  Disclosure Statement related to Debtors’ Amended Joint Plan of  Reorganization, filed August 7, 2009.                                                                                                                                                                                                                               |
|          |   |                                                                                                                                                                                                                                                                                                                                                          |
| 99.4(35)      |   | Certification of  Acceptance of Debtors’ First Amended Plan of Reorganization (Ballot Summary)  filed September 18, 2009.                                                                                                                                                                                                                           |

 

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| +      |   | Confidential  Treatment for a portion of this document has been granted pursuant to  Rule 406 under the Securities Act.  The omitted portions have been  separately filed with the Commission.   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                       |
| ++     |   | Confidential  Treatment for a portion of this document has been requested pursuant to  Rule 406 under the Securities Act.  The omitted portions have been  separately filed with the Commission. |
|   |   |                                                                                                                                                                                                       |
| (1)    |   | Incorporated  herein by reference from our registration statement on Form S-4 (SEC  No. 33-71094), Part II, Item 21.                                                                   |
|   |   |                                                                                                                                                                                                       |
| (2)    |   | Incorporated  herein by reference from our quarterly report on Form 10-Q filed with  the SEC on November 14, 2002.                                                                               |
|   |   |                                                                                                                                                                                                       |
| (3)    |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on March 10, 2003.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (4)    |   | Incorporated  herein by reference from our annual report on Form 10-K filed with the  SEC on March 24, 2003.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (5)    |   | Incorporated  herein by reference from our registration statement on Form S-4 (SEC  No. 333-118068-05).                                                                                          |
|   |   |                                                                                                                                                                                                       |
| (6)    |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on November 23, 2004.                                                                                  |

 

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|   |   |                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|
| (7)    |   | Incorporated  herein by reference from our registration statement on Form S-4 (SEC  No. 333-122837).             |
|   |   |                                                                                                                       |
| (8)    |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on March 15, 2006.     |
|   |   |                                                                                                                       |
| (9)    |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on May 16, 2006.       |
|   |   |                                                                                                                       |
| (10)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on August 28, 2006.    |
|   |   |                                                                                                                       |
| (11)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on November 2, 2006.   |
|   |   |                                                                                                                       |
| (12)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on August 7, 2006.     |
|   |   |                                                                                                                       |
| (13)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on January 9, 2007.    |
|   |   |                                                                                                                       |
| (14)   |   | Incorporated  herein by reference from our annual report on Form 10-K filed with the  SEC on April 2, 2007.      |
|   |   |                                                                                                                       |
| (15)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on August 17, 2007.    |
|   |   |                                                                                                                       |
| (16)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on December 20, 2007.  |
|   |   |                                                                                                                       |
| (17)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on November 7, 2007.   |
|   |   |                                                                                                                       |
| (18)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on March 11, 2008.     |
|   |   |                                                                                                                       |
| (19)   |   | Incorporated  herein by reference from our annual report on Form 10-K filed with the  SEC on April 2, 2007.      |
|   |   |                                                                                                                       |
| (20)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on April 30, 2008.     |
|   |   |                                                                                                                       |
| (21)   |   | Incorporated  herein by reference from our quarterly report on Form 10-Q filed with  the SEC on May 16, 2008.    |
|   |   |                                                                                                                       |
| (22)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on October 1, 2008.    |
|   |   |                                                                                                                       |
| (23)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on November 12, 2008.  |
|   |   |                                                                                                                       |
| (24)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on March 11, 2009.     |
|   |   |                                                                                                                       |
| (25)   |   | Incorporated  herein by reference from our annual report on Form 10-K filed with the  SEC on March 31, 2009.     |
|   |   |                                                                                                                       |
| (26)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on June 1, 2009.       |
|   |   |                                                                                                                       |
| (27)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on June 10, 2009.      |
|   |   |                                                                                                                       |
| (28)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on July 7, 2009.       |
|   |   |                                                                                                                       |
| (29)   |   | Incorporated  herein by reference from our current report on Form 10-Q filed with the  SEC on November 16, 2009. |
|   |   |                                                                                                                       |
| (30)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on January 28, 2010.   |
|   |   |                                                                                                                       |
| (31)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on June 19, 2009.      |
|   |   |                                                                                                                       |
| (32)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on June 25, 2009.      |
|   |   |                                                                                                                       |
| (33)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on July 28, 2009.      |
|   |   |                                                                                                                       |
| (34)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on August 13, 2009.    |
|   |   |                                                                                                                       |
| (35)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on September 22, 2009. |
|   |   |                                                                                                                       |
| (36)   |   | Incorporated  herein by reference from our current report on Form 8-K filed with the  SEC on March 3, 2010.      |
|   |   |                                                                                                                       |
| *      |   | Filed  herewith.                                                                                                           |

 

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this annual report on Form 10-K to be signed onits behalf by the undersigned, thereunto duly authorized.

 
| ** ** | **HERBST GAMING, INC.** |
|------------|-------------------------|
| ** ** | ** **              | ** ** |
|       | By:                     | /s/ Troy D. Herbst |
|       | Name:                   | Troy D. Herbst |
|       | Title:                  | Chief Executive Officer, |
|       |                    | Secretary and Treasurer |

 

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| **NAME**                         | ** ** | **TITLE**                                                        | ** ** | **DATE**             |
|----------------------------------|------------|------------------------------------------------------------------|------------|----------------------|
|                             |       |                                                             |       |                 |
| /s/ Troy D. Herbst               |       | Chief Executive Officer                                          |       | March 31, 2010  |
| Troy D. Herbst                   |       | Secretary, Treasurer and  Director (Principal Executive Officer) |       |                 |
|                             |       |                                                             |       |                 |
| /s/  Mary E. Higgins             |       | Chief  Financial Officer (Principal                              |       | March 31,  2010 |
| Mary  E. Higgins                 |       | Financial  and Accounting Officer)                               |       |                 |
|                             |       |                                                             |       |                 |
| /s/  Timothy P.  Herbst     |       | Chairman  of the Board and Executive Vice President              |       | March 31,  2010 |
| Timothy  P.  Herbst         |       |                                                             |       |                 |
|                             |       |                                                             |       |                 |
| /s/  Edward J.  Herbst      |       | Executive  Vice President and Director                           |       | March 31,  2010 |
| Edward  J.  Herbst          |       |                                                             |       |                 |
|                             |       |                                                             |       |                 |
| /s/  John F.  O’Reilly |       | Director                                                         |       | March 31,  2010 |
| John  F.  O’Reilly     | ** ** | ** **                                                       | ** ** | ** **           |

 

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