**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

**FORM 10-K/A**

**(Amendment No. 1)**

 

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

 

**For the Fiscal Year Ended December 31, 2007**

 

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

 

**Commission File No. 1-14316**

 

**HERBSTGAMING, INC.**(Exact name ofRegistrant 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 o No x

 

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 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 anyamendment to this Form 10-K.  Applicable o  Not Applicable  x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company (as defined in Rule 12b-2of 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 December 31, 2007, based onthe price at which the common equity was sold, was approximately $0.

 

Indicatethe number of shares outstanding of each of the Registrant’s classes of commonstock, as of December 31, 2007.

 

CommonStock, no par value, 300 outstanding shares.

 

**DocumentsIncorporated by Reference**

 

None.

 

 

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EXPLANATORYNOTE

 

This Amendment No. 1 to theAnnual Report on Form 10-K/A of Herbst Gaming, Inc. (the “Company”)for the fiscal year ended December 31, 2007 is being filed to correctcertain information on Form 10-K that was filed inadvertently by theCompany’s financial printer prior to the Form 10-K being finalized.  This Amendment No. 1 contains a correctionof certain typographical errors and  page numbercross-references, and corrected final information in the following Items:

 

·      Reclassifications of certain 2005historical revenue:  As indicated in the Form 10-K,certain prior period information was reclassified .  Corrected 2005 revenue information isincluded in Part I, Item 1, Business, Part II, Item 6, SelectedFinancial Data and Part II, Item 8, Financial Statements and SupplementaryData (Note 1).

 

·      Part I, Item 1B, Unresolved StaffComments

 

·      Part I, Item 1A, Risk Factors (see “*If interest rates rise, the amount of interest paid by us under ourcredit facility will increase.”*)

 

·      Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations (see“Year 2007 Compared to Year 2006  — *Casino Operations*,” “Year 2006 Compared to Year 2005 — *Casino Operations*,” and “Liquidity andCapital Resources”)

 

·      Part II, Item 8, Financial Statementsand Supplementary Data (see Note 1 — Reclassifications, Note 5—Goodwill andOther Intangibles, Note 14 — Going Concern, and to include the signed Reportof Deloitte & Touche LLP our independent registered publicaccounting firm)

 

·      Part III, Item 12, Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters

 

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**TABLE OF CONTENTS**

 
| PART I   |                                                                                                                |
|---------------|---------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                |
| Item 1.       | Business                                                                                                            |
| Item 1A.      | Risk Factors                                                                                                        |
| Item  1B.     | Unresolved  Staff Comments                                                                                          |
| 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                                                                         |

 

2

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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 approximately7,200 slot machines in our slot route business and are one of the largest slotmachine operators in Nevada.  As of December 31, 2007, our casinooperations in Nevada consisted of 16 casinos. Five of these casinos focus on local gaming patrons, and include theownership and operation of Terrible’s Hotel & Casino in Las Vegas,Nevada and four other small casinos in southern Nevada operated under theTerrible’s name.  As of December 31,2007, these casinos contained an aggregate of approximately 6,800 slot machinesand 138 table games.  Our casinooperations outside of Nevada consist of Terrible’s St. Jo Frontier Casinoin St. Joseph, Missouri (“St. Jo”), Terrible’s Mark Twain Casino inLaGrange, Missouri (“Mark Twain”), and Terrible’s Lakeside Casino Resort inOsceola, Iowa (“Lakeside Iowa”).  As of December 31, 2007, thesethree properties contained an aggregate of approximately 2,300 slot machinesand 47 table games.

 

InJanuary 2007, we acquired Rail City Casino in Sparks, Nevada (“Rail City”);the Sands Regency Casino Hotel in downtown Reno, Nevada (“Sands”); Terrible’sGold Ranch Casino and RV Resort in Verdi, Nevada (“Gold Ranch”) and Terrible’sDayton Depot Casino (“Dayton Casino”) and Red Hawk Sports Bar (“Red Hawk”,together with Rail City, Sands, Gold Ranch and Dayton Casino, the “Sands RegentCasinos”) in Dayton, Nevada, which added approximately 2,050 slot machines and25 table games to our operations (such acquisition, the “Sands RegentAcquisition”).  In April 2007, weacquired  Buffalo Bill’s Hotel and Casino(“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley”) and WhiskeyPete’s Hotel and Casino (“Whiskey Pete’s”, and together with Buffalo Bill’s andPrimm Valley, the “Primm Casinos”), all located in Primm, Nevada (suchacquisition, the “Primm Acquisition”), which added approximately 2,800 slotmachines and 90 table games to our operations.

 

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”).

 

**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.

 

3

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*Route Operations*

 

Ourroute operations involve the exclusive installation and operation of slot machinesin chain store and street account locations.  At December 31, 2007,we operated approximately 7,200 slot machines throughout the state ofNevada.  We define chain stores as grocery stores, drug stores,merchandise stores and convenience stores, each with more than fivelocations.  Our chain store contracts are primarily with large, nationalretailers such as Albertsons, Vons, Safeway, SavOn, Smith’s, Kmart and RiteAid, as well as Terrible Herbst gas stations and convenience stores. Street accounts include local bars, restaurants and non-chain conveniencestores.  Nevada law limits slot route operations to certain types ofnon-casino locations including bars, taverns, convenience stores, grocerystores and drug stores.  Most locations are limited to offering no morethan 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 16 casinos in northern and southern Nevada, six ofwhich we acquired as of January 3, 2007 pursuant to the Sands RegentAcquisition and three of which were acquired as of April 10, 2007 pursuantto the Primm Acquisition (see Note 2 for a discussion of theseacquisitions).  We also own three casinosin Missouri and Iowa.  All of our casinoproperties focus on local customers, with an emphasis on slot play.  The following table summarizes our casinoassets as of December 31, 2007:

 
| ** **                                                         | ** ** | ** **       | ** ** | **Number of** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|--------------------|------------|------------------|------------|
| **Property**                                                       | ** ** | **Location**     | ** ** | **Slot  Machines** | ** ** | **Table  Games** | ** ** | **Hotel  Rooms** | ** ** | **Additional** | ** ** |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| **Herbst  Gaming Casino Properties**(as of December 31, 2007) |       |             |       |               |       |             |       |   |   |   |   |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s Hotel & Casino                            |       | Las Vegas,  NV   |       | 1,000              |       | 12               |       | 330 |   | Race and  sports book  196 seat bingo facility |   |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s Town Casino                                        |       | Pahrump, NV      |       | 396                |       | 6                |       | — |   | Race and  sports book;

120 seat  bingo facility |   |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s  Lakeside Casino & RV Park                |       | Pahrump, NV      |       | 291                |       | 0                |       | 159 RV  spaces |   | Race and  sports book;  192-seat bingo facility;

7 acre lake |   |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s  Casino & Bowl                            |       | Henderson,  NV   |       | 163                |       | —           |       | — |   | 16-lane  bowling alley |   |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s Searchlight Casino                                 |       | Searchlight,  NV |       | 75                 |       | —           |       | — |   | — |   |
|                                                               |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s Lakeside Casino Resort                             |       | Osceola, IA      |       | 1,099              |       | 22               |       | 60  65 RV spaces |   | 10,000 sq.  ft. conference  space;convenience store  and gas station;  121 acres (88 acres un-  developed; 15 acre lake) |   |

 

4

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| Terrible’s Mark  Twain Casino                                        |   | LaGrange, MO         |   | 665    |   | 14     |   | —        |   | —                                                                                              |   |
|---------------------------------------------------------------------------|--------|----------------------|--------|--------|--------|--------|--------|---------------|--------|-----------------------------------------------------------------------------------------------------|--------|
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Terrible’s St. Jo Frontier Casino                               |   | St. Joseph,  MO |   | 579    |   | 11     |   | —        |   | 2,400 sq.  ft. conference  space; 40 acres (32 acres   undeveloped)                            |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| **Sands  Regent Casino Properties**(acquired as of  January 3, 2007) |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Terrible’s Rail City                                                 |   | Sparks, NV           |   | 941    |   | 5      |   | —        |   | Sports book                                                                                         |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Sands Regency                                                             |   | Reno, NV             |   | 609    |   | 20     |   | 833           |   | Sports book;  12,000 sq.  ft. conference space                                            |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Terrible’s Gold Ranch                                                |   | Verdi, NV            |   | 235    |   | — |   | 105 RV spaces |   | Sports book;  California   lottery station                                                          |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Terrible’s Dayton Depot Casino and Red Hawk  Sports Bar              |   | Dayton, NV           |   | 273    |   | 2      |   | —        |   | Sports book                                                                                         |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| **Primm  Casino Properties**(acquired as of April 10, 2007)          |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Buffalo Bill’s                                                       |   | Primm, NV            |   | 1,050  |   | 34     |   | 1,242         |   | 31,280 sq.  ft. conference  space, 6,000 seat “Star of  the Desert” arena,  rollercoaster |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Whiskey Pete’s                                                       |   | Primm, NV            |   | 832    |   | 25     |   | 779           |   | 8,000 sq.  ft. convention  space                                                                    |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Primm Valley Resort and Casino                                            |   | Primm, NV            |   | 925    |   | 34     |   | 625           |   | 21,000 sq.ft  conference  space                                                                     |   |
|                                                                      |   |                 |   |   |   |   |   |          |   |                                                                                                |   |
| Total                                                                     |   |                 |   | 9,133  |   | 185    |   | 3,869 rooms   |   | 329 RV  spaces                                                                                      |   |

 

*Terrible’s Hotel & Casino*

 

Terrible’sHotel & Casino in Las Vegas, Nevada (“Terrible’s”), opened on December 6,2000.  Terrible’s offers a buffet and a 24-hour café.  There arecurrently 350 rooms with standard amenities as well as a pool and spa. Terrible’s is conveniently located approximately one mile east of the Las VegasStrip, which we believe appeals to locals who wish to avoid the congestion ofthe Strip.  Terrible’s favorable location has made it popular with Stripcasino employees.  Although we are not a tourist destination, we receive acertain amount of tourist traffic through our casino due to our location nearthe airport, the Strip and the Las Vegas Convention Center.

 

*Terrible’s Lakeside Casino Resort*

 

LakesideIowa, a riverboat casino located on West Lake in Osceola, Iowa, is a facilitythat opened in January 2000.  Lakeside Iowa offers a 60 room,all-suite hotel, modular conference and meeting facilities that can seatup to 900 people and that are used for meetings, banquets and concerts, afitness center, an outdoor pool and a gift shop.  In addition, LakesideIowa offers a newly renovated 280-seat restaurant/buffet and lounge located inthe main lobby, two bars located in the casino, a convenience store and gasstation that are located adjacent to the casino and 65 RV spaces with utilityhookups.  Lakeside Iowa owns 121 acres of land, 88 acres of which areundeveloped.

 

*Terrible’sMark Twain Casino*

 

MarkTwain, located in a man-made basin adjacent to the Mississippi River inLaGrange, Missouri, is facility that opened in July 2001.  Mark Twainoffers a 165-seat restaurant, an 80-seat bar and an additional bar in thecasino.  The casino has a locally popular theme based on Mark Twain, whogrew up in and wrote about nearby Hannibal, Missouri.

 

5

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*Terrible’s St. Jo FrontierCasino*

 

St. Jo,located in a man-made basin adjacent to the Missouri River in St. Joseph,Missouri, is a facility that opened in May 1998 as a successor to a casinothat opened in June 1994.  St. Jo offers a recently remodeledbar and buffet.  Additionally, St. Jo offers over 2,400 total square feetof modular conference and meeting space.  The casino and its amenitieshave a locally popular Pony Express western theme that plays offSt. Joseph’s heritage as the founding location and headquarters of thePony Express.  St. Jo owns 40 acres of land, 32 acres of which areundeveloped.

 

*Terrible’s Rail City Casino*

 

RailCity completed an expansion in early 2007 and has approximately 30,000 squarefeet of gaming space housing 941 slots, 5 table games, including keno, a sportsbook operated by an independent party, a 24-hour family-style restaurant and anew ale house and brew pub. Rail City’s customer base comes primarily fromnorthern Nevada and a majority of its customers reside in close proximity tothe casino.

 

*Sands Regency Casino Hotel*

 

TheSands has approximately 29,000 square feet of gaming space and a full selectionof gaming alternatives, including 609 slot machines and 20 table games,including keno, bingo, live poker and a sports book operated by an independentparty. Additionally, the Sands resort complex has 833 hotel rooms, including 29suites, a health spa, and a large outdoor swimming pool. Dining options at theSands include Cabana Café, a coffee house/deli-style restaurant, The Buffet atthe Sands, and Fuzio’s, a new Italian restaurant, that opened in the firstquarter of 2007. The property also has a Mel’s, the Original, diner stylerestaurant, and an Arby’s restaurant, both of which are operated by thirdparties. 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 theSands and operate a wedding chapel, a bicycle and ski rental shop, and a beautyshop. The Sands facility contains multiple parking areas, including a parkinggarage, with total combined capacity for approximately 1,100 vehicles. Asubstantial portion of the Sands’ business, particularly our hotel customerbase, is arranged through travel groups, both air and motor coach wholesalers,which offer economy rates, and are primarily from Western Canada, the PacificNorthwest and Northern California.

 

*Terrible’s Gold Ranch Casino and RV Resort*

 

GoldRanch offers approximately 235 slot machines in an 8,370 square foot casino, asports book operated by a third party, a family-style restaurant, aJack-in-the-Box restaurant leased to and operated by a third-party, a bar, a105-space RV park, a California lottery station, a gas station and aconvenience store. Gold Ranch’s guests include both tourists and localresidents with local residents generating over half of the property’s casinopatronage, and attempts to attract local residents through mid-week promotionsgeared toward enhancing local play mainly through lottery, casino, andrestaurant programs. Tourist programs emphasize the RV Park, casino andrestaurant cross-promotions. Gold Ranch attempts to attract as much traffic aspossible off Interstate 80, the major Nevada/California thoroughfare.  We lease the real property on which the GoldRanch is located. The real property lease has a twenty-year term with fourfive-year extension options ending in 2042. We possess the option to purchasethe real property on which the Gold Ranch business assets are located.

 

*Terrible’sDayton Depot Casino and Red Hawk Sports Bar*

 

DaytonCasino and Red Hawk, are each located in Dayton, Nevada.  We own the twobuildings that house the Dayton Casino and the 4.5 acres of real property onwhich the Dayton Casino is located, and the building which houses the Red Hawkand the 0.5 acres of real property on which the Red Hawk is located. DaytonCasino has approximately 16,000 square feet of casino space, a family-stylerestaurant, two bars, 237 slot machines, four poker games, two table games anda sports book operated by a third party. Red Hawk, located across Highway 50from Dayton Casino, houses 30 slot machines.

 

6

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*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 threePrimm properties are subject to a real property lease that has an initialfifty-year term, which expires in 2043, with one twenty-five-year extensionoption ending in 2068.  Also, the threePrimm properties collectively own and manage three gas station/conveniencestores, a Starbucks Coffee outlet and one California Lottery lotto store.

 

Buffalo Bill’s Hotel and Casino

 

BuffaloBills offers approximately 1,050 slot machines and 30 table games. In additionto a 1,242-room hotel and 12,000 square feet of convention space.  Buffalo Bill’s has a full service restaurantand buffet as well as a “Tony Roma’s” restaurant. The western themed propertyalso has extensive entertainment amenities including the 6,000 seat “Star ofthe Desert” arena that hosts big name entertainers throughout the year.  Buffalo Bill’s has a world class rollercoaster as well as water park log rides, two movie theaters and a midway stylearcade.

 

Whiskey Pete’s Hotel and Casino

 

WhiskeyPete’s offers approximately 830 slot machines and 25 table games, a sports bookand two full service bars.  AdditionallyWhiskey Pete’s has a 779 room hotel , a gourmet steakhouse, a recentlyrenovated full service coffee shop and buffet, a McDonald’s restaurant, an8,000 square feet special events and concert venue, a swimming pool and amidway style arcade.

 

Primm Valley Resort and Casino

 

PrimmValley offers approximately 900 slot machines, 30 table games, a sports bookand keno.  Additionally Primm Valley hasa 625 room hotel and 21,000 square feet of convention space. Primm Valley has afull service coffee shop and buffet as well as the GP Steakhouse. The resorthas a swimming pool and is connected to the “Fashion Outlets of Las Vegas”, aretail complex owned by a third party that houses over 150 designer outletstores, including a Neiman Marcus “Last Call”, a William Sonoma Outlet storeand DKNY, Tommy Bahama, Banana Republic and Gap factory outlet stores.

 

**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, 2005, 2006and 2007.

 
| ** **                     | ** ** | **Years Ended December 31,**           | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|
| ** **                     | ** ** | **2005(1)**                                           | ** ** | **2006** | ** ** | **2007(2)** | ** ** |
| ** **                     | ** ** | **Amount**                                            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(in thousands, except percentages)** | ** ** |
| Revenues:                      |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Route operations(3)            |       | $                                                     | 339,401    |   | 63.2 | % | $ | 347,041 |   | 61.7 | % | $ | 276,946 |   | 35.3 | % |
| Casino operations(3)           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Nevada                         |       | 95,400                                                |       | 17.8 |   | 95,614 |   | 17.0 |   | 331,593 |   | 42.2 |   |
| Other states                   |       | 117,774                                               |       | 21.9 |   | 141,435 |   | 25.1 |   | 141,655 |   | 18.0 |   |
| Other                          |       | 4,923                                                 |       | 1.1 |   | 10,676 |   | 2.0 |   | 98,987 |   | 12.6 |   |
| Total revenues                 |       | 557,498                                               |       | 104.0 |   | $ | 594,766 |   | 105.8 |   | $ | 849,181 |   | 108.1 |   |
| Less promotional allowances(3) |       | (21,657                                               | )          | (4.0 | ) | (32,703 | ) | (5.8 | ) | (64,241 | ) | (8.1 | ) |
| Total net revenues             |       | $                                                     | 535,841    |   | 100.0 | % | $ | 562,063 |   | 100.0 | % | $ | 784,940 |   | 100.0 | % |

 

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(1)   Calendar year 2005 reflects a partial year ofoperations of the casinos purchased pursuant to the acquisition of our casinoslocated outside of Nevada from Grace Entertainment, Inc. (the “GraceAcquisition”) in February 2005.  As a result, the results ofoperations for calendar year 2005 may not be comparable to the results ofoperations in 2006 or 2007.

 

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(2)   Calendar year 2007 reflects a year ofoperations of the casinos purchased pursuant to the Sands Regent Acquisitionand a partial year of operations of the casinos purchased pursuant to the PrimmAcquisition.  As a result, the results of operations for calendar year2007 may not be comparable to the results of operations in 2006 or 2005.

 

(3)   Route and casino revenues are the netdifference between gaming wins and losses.  Promotional allowances consistprimarily of food and beverages furnished gratuitously to customers.  Theretail value of such services is included in the respective revenueclassifications and is then deducted as promotional allowances.  See “Note 1. Description of Business and Summary of Significant Accounting Policies” to theaccompanying consolidated financial statements in “Item 8.  FinancialStatements and Supplementary Data”.

 

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, Nevada. These marketing efforts seek to capitalizeon the strong recognition and high level of quality and value associated withthe Terrible Herbst trade name and its cowboy logo, which are used in over 80gasoline stations and convenience stores in southern Nevada and nine gasolinestations and convenience stores in California and Arizona. The Terrible Herbstbrand is prominently displayed in our route and casino operations. Welicense the Terrible Herbst trade name from Terrible Herbst, Inc., arelated party, through 2011. Subject to mutual consent, we may extendthe term of the agreement for two successive 5-year periods.

 

Inaddition, we have implemented a unique players club that rewards customers withpoints for playing at our route and casino locations. Points may beredeemed for cash as well as free or discounted rooms, food or other goods orservices provided at any such location.

 

Thecustomer base of the casinos we acquired pursuant to the Sands RegentAcquisition ranges from locals living in northern Nevada, in the case of RailCity, to customers from Western Canada, the Pacific Northwest and NorthernCalifornia, in the case of the Sands. The marketing efforts for the Sands Regent Casinos prior to ouracquisition were primarily focused on attracting locals and value-mindedout-of-market visitors through aggressive promotions and customer loyaltyprograms.  We expect to continue thisfocus through the adoption of a player’s club points program that is similar tothose that have proven successful at our other casinos.

 

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 begunexpanding the marketing of these casinos into the southern Nevada localsmarket.  We are also installing a stateof the art player’s club loyalty program, “the one card”, that will be combinedwith the loyalty programs at all of our other Nevada casinos.  We anticipate that this will be completed bythe third quarter of 2008.

 

*Midwest Market*

 

Eachof Lakeside Iowa, Mark Twain and St. Jo have 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 vouchers thatmay be used for food, valet or retail items.  Each of the threecasinos also hosts blackjack and slot tournaments as well as other specialevents on the casino premises that seek to recognize and cultivate regularcasino 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

 

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business, generating customer satisfactionand loyalty is a critical component of our strategy.  With respect to the casino businesses, ourbusiness strategy focuses on the value oriented, high repeat, business patronfrom 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. Recent technologies also allow patron jackpot payments on site and help toreduce the need for slot route technicians to drive to locations to fill slotmachines with 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 poker technology. Although perceived value initially attracts a customer to our casinoproperties, actual value generates customer satisfaction and loyalty.  For our drive-in tourist market casinos manyof the same strategies apply as this market is heavily focused on repeatbusiness and high value.  There is verylittle, if any, non-drive-in tourist market. 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.

 

**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 thatprice competition among slot route operators will continue.  We are one ofthe largest route operators with approximately 7,200 slot machines situated inlocations outside of our casinos as of December 31, 2007.

 

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.

 

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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 thegreater Reno area. Over the last few years, existing Native American casinos inNorthern California have undergone significant expansions and now offer most ofthe amenities that casinos in Reno offer, including big name entertainment andhotel rooms. In addition, Thunder Valley, on the Interstate-80 corridor inCalifornia, has grown to be one of the country’s busiest and most profitablecasinos. More Native American casinos and expansions to existing casinos areplanned 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.

 

PrimmCasinos 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. The California legislature recently approved expansions to existingslot capacity of the Native American casinos in southern California and ourcompetitors have greater financial and other resources than we do.

 

*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 PrairieMeadows racino and the Meskwaki Bingo Casino Hotel.  The Prairie Meadowsracino is located approximately 60 miles from Lakeside Iowa east of DesMoines.  The Meskwaki Bingo Casino Hotel is located in Tama, Iowa and isapproximately 110 miles from Lakeside Iowa.  Riverside Casino and GolfResort, a new casino that opened in 2006 in Riverside, Iowa, is approximately175 miles from Osceola.

 

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, which spends thesummer docked in Fort Madison, Iowa and spends the winter docked in Burlington,Iowa, which are approximately 55 miles and 75 miles, respectively, fromLaGrange.

 

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, none of which is closer than 45 miles from St. Joseph.

 

Certainstates have recently legalized, and other states are considering legalizing,casino gaming in certain areas.  In addition, states such as Illinois,Missouri, Iowa and Kansas have recently considered awarding additional gaminglicenses or expanding permitted gaming.

 

**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.

 

**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.

 

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**Employees**

 

As of December 31,2007, we employed approximately 8,700 employees.  None of our currentemployees is covered by a collective bargaining agreement.  We believethat 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 prevention of unsavory or unsuitablepersons from having a direct or indirect involvement with gaming at any time orin any capacity;

 

·                  theestablishment and maintenance of responsible accounting practices andprocedures;

 

·                  themaintenance of effective controls over the financial practices of licensees,including the establishment of minimum procedures for internal fiscal affairsand the safeguarding of assets and revenues, providing reliable record keepingand requiring the filing of periodic reports with the Nevada GamingAuthorities;

 

·                  theprevention of cheating and fraudulent practices; and

 

·                  providinga source 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 “GamingSubsidiaries”).  No person may become a stockholder  or member of, or receive any percentage ofthe profits from,  any of the GamingSubsidiaries without first obtaining licenses and approvals from the NevadaGaming Authorities.  Herbst Gaming and all of its Gaming Subsidiaries haveobtained from the Nevada Gaming Authorities the various registrations,approvals, permits and licenses required in order to engage in the variousgaming businesses that each respectively operates in Nevada.

 

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

 

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Authorities may denyan application for licensing for any cause that they deem reasonable.  Afinding of suitability is comparable to licensing, and both require submissionof detailed personal 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.

 

If the Nevada GamingAuthorities were to find an officer, director or key employee unsuitable forlicensing or unsuitable to continue having a relationship with us, we wouldhave to sever all relationships with that person.  In addition, the NevadaGaming Commission may require us to terminate the employment of any personwho refuses to file appropriate applications.  Determinations ofsuitability or of questions pertaining to licensing are not subject to judicialreview in Nevada.

 

Herbst Gaming and theGaming Subsidiaries are required to submit detailed financial and operatingreports to the Nevada Gaming Commission. Substantially all material loans,leases, sales of securities and similar financing transactions by Herbst Gamingand its Gaming Subsidiaries must be reported to the Nevada Gaming Commission.

 

If it were determinedthat Herbst Gaming or any of its Gaming Subsidiaries violated the Nevada gaminglaws, our gaming licenses and registrations with the Nevada Gaming Commissioncould be limited, conditioned, suspended or revoked, subject to compliance withcertain statutory and regulatory procedures.  In addition, Herbst Gaming,the Gaming Subsidiaries and the persons involved could be subject tosubstantial fines for each separate violation of the Nevada laws at thediscretion of the Nevada Gaming Commission. Further, the Nevada GamingCommission could appoint a supervisor to operate our gaming properties and,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.

 

As a privately ownedcompany, any beneficial holder of Herbst Gaming’s voting securities, regardlessof the number of shares owned, is required to file an application, beinvestigated and have his or her suitability as a beneficial holder of HerbstGaming’s voting securities determined before acquiring an equitable interest inthe company. The applicant must pay all costs of investigation incurred by theNevada Gaming Authorities in connection with conducting such investigation.

 

If Herbst Gaming decidedto register any of its voting equity securities under the federal securitieslaws, it would first have to obtain the approval of the Nevada GamingCommission to do so and, once such approval is obtained, Nevada law wouldrequire any person who acquires more than 5% of a registered corporation’svoting securities to report the acquisition to the Nevada GamingCommission.  Nevada law requires that beneficial owners of more than 10%of a 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 thefiling for a finding of suitability.  Under certain circumstances, an “institutionalinvestor,” as defined in the regulations of the Nevada Gaming Commission, thatacquires more than 10%, but not more than 15%, of our voting securitiesmay apply to the Nevada Gaming Commission for a waiver of such finding ofsuitability if that institutional investor holds the voting securities forinvestment purposes only.  An institutional investor will not be deemed tohold voting securities for investment purposes unless the voting securitieswere acquired and are held in the ordinary course of business as aninstitutional investor and not for the purpose of causing, directly orindirectly, the election of a majority of the members of our board ofdirectors, any change in our corporate charter, bylaws, management, policies oroperations, or any of our gaming affiliates or any other action which theNevada Gaming Commission finds to be inconsistent with holding our votingsecurities for investment purposes only.  Activities which are not deemedto be inconsistent with holding voting securities for investment purposes onlyinclude:

 

·                  voting on all matters voted on bystockholders;

 

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·                  making financial and other inquiries ofmanagement of the type normally made by securities analysts for informationalpurposes and not to cause a change in its management, policies or operations;and

 

·                  other activities as the Nevada GamingCommission may determine to be consistent with such investment intent.

 

If the beneficial holderof voting securities who must be found suitable is a corporation, partnershipor trust, it must submit detailed business and financial information includinga list of beneficial owners.  The applicant is required to pay all costsof investigation.

 

Any person who fails orrefuses to apply for a finding of suitability or a license within 30 days afterbeing ordered to do so by the Nevada Gaming Commission or by the Chairman ofthe Nevada State Gaming Control Board, may be found unsuitable.  Thesame restrictions apply to a record owner if the record owner, after request,fails to identify the beneficial owner.  Any stockholder found unsuitableand who holds, directly or indirectly, any beneficial ownership of the commonstock of a registered corporation beyond the period of time as may beprescribed by the Nevada Gaming Commission may be guilty of a criminaloffense.  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 that person any dividend or interestupon voting securities;

 

·                  allows that person to exercise, directlyor indirectly, any voting right conferred through securities held by thatperson;

 

·                  pays remuneration in any form tothat person for services rendered or otherwise; or

 

·                  fails to pursue all lawful efforts torequire the unsuitable person to relinquish his voting securities for cash atfair market value.

 

Additionally, the ClarkCounty Liquor and Gaming Licensing Board has taken the position that it has theauthority to approve all persons owning or controlling the stock of anycorporation controlling a gaming license.

 

Herbst Gaming may berequired to disclose to the Nevada State Gaming Control Board and the NevadaGaming Commission the identities of all holders of its debt securities. The Nevada Gaming Commission may, in its discretion, require the holder of anydebt security of a registered corporation to file applications, be investigatedand be found suitable to own the debt security of a registeredcorporation.  If the Nevada Gaming Commission determines that a person isunsuitable to own a debt security, then pursuant to Nevada law, the registeredcorporation can be sanctioned, including the loss of its approvals, if withoutthe prior approval of the Nevada Gaming Commission, it:

 

·                  pays to the unsuitable person anydividend, interest, or any distribution whatsoever;

 

·                  recognizes any voting right by theunsuitable person in connection with debt securities;

 

·                  pays the unsuitable person remunerationin any form; or

 

·                  makes any payment to the unsuitableperson by way of principal, redemption, conversion, exchange, liquidation orsimilar transaction.

 

Herbst Gaming is requiredto maintain a current ledger in Nevada, which may be examined by theNevada Gaming Authorities at any time.  If any securities are held intrust by an agent or by a nominee, the record holder may be required todisclose the identity of the beneficial holder to the Nevada GamingAuthorities.  A failure to make such disclosure may be grounds for findingthe record holder unsuitable.  We are also required to render

 

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maximum assistance indetermining the identity of the beneficial owner.  The Nevada GamingCommission has the power to require our securities to bear a legend indicatingthat the securities are subject to the Nevada Act.

 

Herbst Gaming may notmake a public offering of securities without the prior approval of the NevadaGaming Commission if the securities or proceeds from the securities areintended to be used to construct, acquire or finance gaming facilities inNevada, or to retire or extend obligations incurred for the purposes ofconstructing, acquiring or financing gaming facilities.  Furthermore, anyapproval, if granted, does not constitute a finding, recommendation or approvalby the Nevada Gaming Commission or the Nevada State Gaming Control Board as tothe accuracy or adequacy of the prospectus or the investment merits of thesecurities offered.  Any representation to the contrary is unlawful.

 

Changes in the control ofHerbst Gaming through merger, consolidation, stock or asset acquisitions,management or consulting agreements, or any act or conduct by a person wherebythat person obtains control (including foreclosure on the pledged shares), may notoccur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control or ownership of a registered corporationmust satisfy the Nevada State Gaming Control Board and Nevada Gaming Commissionin a variety of stringent standards prior to assuming control of suchregistered corporation.  The Nevada Gaming Commission may alsorequire the stockholders, officers, directors and other persons having amaterial relationship or involvement with the entity proposing to acquire control,to be investigated and licensed as part of the approval process relatingto the transaction.

 

License fees and taxes,computed in various ways depending on the type of gaming or activity involved,are payable to the State of Nevada and to the counties and cities in which theNevada licensee’s respective operations are conducted.  Depending upon theparticular fee or tax involved, these fees and taxes are payable eithermonthly, quarterly or annually and are based upon either:

 

·                  a percentage of the gross revenuesreceived;

 

·                  the number of gaming devices operated; or

 

·                  the number of table games operated.

 

Any person who islicensed, required to be licensed, registered, required to be registered or isunder common control with such persons, or Licensees, and who is or whoproposes to become involved in a gaming venture outside of Nevada, is requiredto deposit with the Nevada State Gaming Control Board, and thereafter maintain,a revolving fund in the amount of $10,000 to pay the expenses of investigationby the Nevada State Gaming Control Board of the Licensees’ participation inforeign gaming.  The revolving fund is subject to increase or decrease inthe discretion of the Nevada Gaming Commission.  Thereafter, Licensees arealso required to comply with certain reporting requirements imposed by theNevada gaming laws.  Licensees are also subject to disciplinary action bythe Nevada Gaming Commission if they knowingly violate any laws of the foreignjurisdiction pertaining to a foreign gaming operation, fail to conduct theforeign gaming operation in accordance with the standards of honesty andintegrity required of Nevada gaming operations, engage in activities or enterinto associations that are harmful to the State of Nevada or its ability tocollect gaming taxes and fees, or employ, contract with or associate with aperson in the foreign operation who has been denied a license or a finding ofsuitability in Nevada on the ground of personal unsuitability.

 

*Missouri*

 

On November 3, 1992,a statewide referendum authorized gaming in the State of Missouri on theMissouri and the Mississippi Rivers.  On April 29, 1993, Missourienacted revised legislation (as amended, the “Missouri Gaming Law”) whichamended the existing legislation.  In a decision handed down on January 25,1994, the Missouri Supreme Court held that games of chance were prohibitedunder the Missouri constitution.  In a statewide election held on November 8,1994, Missouri voters approved the adoption of an amendment to the MissouriConstitution which permits the legislature to allow games of chance to beconducted on excursion boats and floating facilities on the Mississippi Riverand the Missouri River.  As a result of the amendment, games of chance arealso permitted, subject to Missouri Gaming Law.  Pursuant to the MissouriGaming Law, there are eleven operating

 

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riverboat gaming facilitysites in Missouri: one in Caruthersville; one in Boonville; three in the St.Louis area; four in the Kansas City area; one in LaGrange; and one inSt. Joseph.

 

Opponents of gaming inMissouri have brought several legal challenges to gaming in the past andmay 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.

 

Under the Missouri GamingLaw, the ownership and operation of riverboat gaming facilities in Missouri aresubject to extensive state and local regulation.  Herbst Gaming,HGI—St. Jo, Inc., the subsidiary of Herbst Gaming that ownsSt. Jo and the current licensee and HGI—Mark Twain, Inc., thesubsidiary of Herbst Gaming that owns Mark Twain and the current licensee, anysubsidiaries, and some of their officers and employees are and will be subjectto specific regulations, including ongoing licensing requirements.  Aspart of the application and licensing process for a gaming license, theapplicant must submit detailed financial, operating and other reports to theMissouri Gaming Commission.  Each applicant has an ongoing duty to updatethe information provided to the Missouri Gaming Commission in the application,usually within seven days of a material change in the information on file withthe Missouri Gaming Commission.  Each of St. Jo and Mark Twain havefrequently updated its application materials since it was initially licensed. In addition 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 GamingCommission.  All gaming employees must obtain an occupational licenseissued by the Missouri Gaming Commission.  Suppliers are also subject tolicensing requirements of the Missouri Gaming Commission.

 

The operators’ licenses(or “Class A” gaming licenses) are issued through application to theMissouri Gaming Commission, which requires, among other things:

 

·                  suitability investigations into anapplicant’s character, financial responsibility, experience and qualifications;

 

·                  suitability investigations into eachdesignated key person or affiliated business entity’s character, financialresponsibility, experience and qualifications;

 

·                  disclosure of required financial (seeabove) and other personal information on each key person or designatedaffiliated business entity;

 

·                  disclosure of detailed information aboutthe applicant’s history, business, affiliations, officers, directors andowners;

 

·                  an affirmative action plan for the hiringand training of minorities and women; and

 

·                  an economic development or impact report.

 

License fees cover allrelated costs of the Missouri Gaming Commission investigation and are a minimumof $50,000 for the initial application and $25,000 annually thereafter. Each of Herbst Gaming, HGI—St. Jo and HGI—Mark Twain has undergone a fulllicensing investigation and hearing in connection with its licensing.

 

The Missouri Gaming Lawand implementing regulations impose restrictions on the use of and do notpermit the transfer of the gaming licenses as well as limitations ontransactions engaged in by licensees.  The 

 

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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 or issuance of an ownershipinterest in a gaming licensee that is not a publicly held company;

 

·                  any transfer or issuance of an ownershipinterest of five percent or more of the issued and outstanding ownershipinterest of Herbst Gaming which is publicly traded and is a holding company;

 

·                  any private incurrence of debt by thelicensee or any holding company of $1,000,000 or more;

 

·                  any public issuance of debt by a licenseeor its holding company; and

 

·                  defined “significant related party transactions.”

 

In addition, the licenseemust notify the Missouri Gaming Commission of other transactions that includethe transfer of five percent or more of an ownership interest in the licenseeor holding company if publicly held and any transaction of at least $1,000,000.

 

The restrictions ontransfer of ownership apply to Herbst Gaming as well as the direct licensees,HGI—St. Jo and HGI—Mark Twain.  Gaming equipment may not bepledged.  Corporate stock of some licensees may not be pledged exceptin narrow circumstances and subject to regulatory conditions.

 

Missouri statutes andadministrative rules contain detailed requirements and conditionsconcerning the operation of a licensed excursion gaming boat facility,including but not limited to the following:

 

·                  a charge of two dollars per gamingcustomer per excursion that licensees must either collect from each customer orpay itself to the Missouri Gaming Commission;

 

·                  minimum payouts;

 

·                  the payment of a 20% tax on adjustedgross receipts;

 

·                  prohibitions against providing credit togaming customers;

 

·                  the use of credit cards and cashing ofchecks by customers;

 

·                  providing security on the excursiongambling boat, including a requirement that each licensee reimburse theMissouri Gaming Commission for all costs of any Missouri Gaming Commissionstaff, including Missouri Highway Patrol Officers, necessary to protect thepublic on the licensee’s riverboat;

 

·                  the receipt of liquor licenses from theMissouri Gaming Commission and local jurisdictions; and

 

·                  the adoption of minimum control standardsfor the conduct of gaming and the operation of the facility approved by theMissouri Gaming Commission.

 

The Missouri GamingCommission has the power, as well as broad discretion in exercising this power,to revoke or suspend gaming or occupational licenses and impose other penaltiesfor violations of the Missouri Gaming Law and the rules and regulationspromulgated thereunder, including without limitation, forfeiture of all gamingequipment used for improper gaming and fines of up to three times a licensee’shighest daily gross receipts during the preceding twelve months.

 

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Although the MissouriGaming Law provides no limit on the amount of riverboat space that may beused for gaming, the Missouri Gaming Commission is empowered to impose spacelimitations through the adoption of rules and regulations.  Inaddition, the Missouri Gaming Law imposes as to each customer a $500 loss limitper two-hour period established by each licensee with the approval of theMissouri Gaming Commission.  In order to establish an excursion schedule,which allows patrons to enter and exit the gaming floor during the excursion,the licensee must prove to the satisfaction of the Missouri Gaming Commissionthat it can enforce the $500 loss limit.

 

In addition, the MissouriGaming Commission is empowered to determine on a city and county-specific basiswhere “dockside” or permanently-docked gaming is appropriate and may bepermitted.  The Missouri Gaming Commission has authorized all elevenlicensed sites to operate all or a portion of their facilities on acontinuously docked basis.  On February 23, 2000, the Missouri GamingCommission granted Mark Twain Casino, L.L.C., from which Herbst Gaming purchasedthe Mark Twain, the authority to permanently dock the excursion gamblingriverboat facility known as the “Mark Twain Casino.” On February 15, 1996,the Missouri Gaming Commission granted St. Joseph Riverboat Partners, fromwhich Herbst Gaming purchased St. Jo, the authority to permanently dockthe excursion gambling riverboat facility known as the “Biloxi Bell, II.”

 

*Iowa*

 

In 1989, the State ofIowa legalized riverboat gaming on the Mississippi River and other waterwayslocated in Iowa.  Under Iowa law, a license to conduct gaming may beissued in a county only if the county electorate has approved gaming.  Theelectorate of Clarke County, Iowa, approved gaming on February 28, 1995 byreferendum.  Gaming conducted by the Lakeside Casino Resort was approvedby referendum on November 18, 1997.  In addition, a referendum mustbe held every eight years in each of the counties where gambling games areconducted and the proposition to continue to allow gambling games in suchcounties must be approved by a majority of the county electorate voting on theproposition.  Such a referendum took place on November 5, 2002 withapproximately 80% of the electorate voting on the proposition favoringcontinued gaming on riverboats in Clarke County.  The next referendum isscheduled for 2010.  If any reauthorization referendum is defeated, Iowalaw provides that any previously issued gaming license will remain valid andsubject to renewal for a total of nine years from the date of original issuanceof the license, subject to earlier non-renewal or revocation under Iowa law andregulations applicable to all licenses.

 

In addition, Iowa lawauthorizes the granting of licenses to non-profit corporations that, in turn,are permitted to enter into operating agreements with qualified persons whoalso actually conduct riverboat gaming operations.  Such operators mustlikewise be approved and licensed by the Iowa Racing and Gaming Commission (the“Iowa Gaming Commission”).

 

In July 1997, ClarkeCounty Development Corporation, a non-profit corporation organized for thepurpose of facilitating riverboat gaming in Osceola, Iowa, entered into anoperator’s contract, since amended, for Lakeside Iowa for a term of up to 50years.  Under the operator’s contract, as amended, Clarke County DevelopmentCorporation is to be paid a monthly fee equal to 1.5% of the adjusted grossgaming revenue of Lakeside Iowa.  Further, pursuant to a dock siteagreement executed in August 1997 (which also has a term of up to 50years), Lakeside Iowa is required to pay a monthly fee to the City of Osceolaand the Water Works Board of Trustees equal to 1.25% of the adjusted grossgaming revenue of Lakeside Iowa and an annual fee, to be paid in equal monthlyinstallments, equal to approximately $160,000, with such amount to increaseeach 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).

 

Iowa law permits gaminglicensees to offer unlimited stakes gaming on games approved by the Iowa GamingCommission on a 24-hour basis.  Dockside casino gaming is authorized bythe Iowa Gaming Commission 

 

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and the Iowa Legislature,subject to certain limitations not applicable to Lakeside Iowa, eliminated therequirement that gaming licensees cruise, effective May 6, 2004.  Thelegal age for gaming is 21.

 

All Iowa excursiongambling boat licenses were approved for renewal at a March 1, 2007meeting of the Iowa Gaming Commission.  These licenses are nottransferable and will need to be renewed annually and prior to the commencementof each subsequent annual renewal period.

 

The ownership andoperation of gaming facilities in Iowa are subject to extensive state laws,regulations of the Iowa Gaming Commission and various county and municipalordinances (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.

 

Gaming licenses grantedto individuals must be renewed every year, and licensing authorities have broaddiscretion with regard to such renewals.  Licenses are nottransferable.  The Iowa gaming operations must submit detailed financialand operating reports to the Iowa Gaming Commission.  Certain contracts oflicensees in excess of $100,000, that exceed three years in term or thatinvolve related parties must be submitted to and approved by the Iowa GamingCommission.

 

Officers, directors,managers and employees of the Iowa gaming operations are required to belicensed by the Iowa Gaming Commission.  Employees associated with gamingmust obtain a license and these licenses are subject to immediate suspensionunder specific circumstances.  In addition, anyone having a materialrelationship or involvement with the Iowa gaming operations may berequired to be found suitable or to be licensed, in which case those personswould be required to pay the costs and fees of the Iowa Gaming Commission inconnection with the investigation.  The Iowa Gaming Commissionmay 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 inposition by officers or key employees and the power to require the Iowa gamingoperations to suspend or dismiss officers, directors or other key employees orsever relationships with other persons who refuse to file appropriateapplications or whom the Iowa Gaming Commission finds unsuitable to act in suchcapacities.

 

The Iowa GamingCommission may revoke a gaming license if the licensee:

 

·                  has been suspended from operating agaming operation in another jurisdiction by a board or commission of thatjurisdiction;

 

·                  has failed to demonstrate financialresponsibility sufficient to meet adequately the requirements of the gamingenterprise;

 

·                  is not the true owner of the enterprise;

 

·                  has failed to disclose ownership of otherpersons in the enterprise;

 

·                  is a corporation 10% of the stock ofwhich is subject to a contract or option to purchase at any time during theperiod for which the license was issued, unless the contract or option wasdisclosed to the Iowa Gaming Commission and the Iowa Gaming Commission approvedthe sale or transfer during the period of the license;

 

·                  knowingly makes a false statement of amaterial fact to the Iowa Gaming Commission;

 

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·                  fails to meet a monetary obligation inconnection with an excursion gaming boat;

 

·                  pleads guilty to, or is convicted of, afelony;

 

·                  loans to any person, money or other thingof value for the purpose of permitting that person to wager on any game ofchance;

 

·                  is delinquent in the payment of propertytaxes or other taxes or fees or a payment of any other contractual obligationor debt due or owed to a city or county; or

 

·                  assigns, grants or turns over to anotherperson the operation of a licensed excursion boat (this provision does notprohibit assignment of a management contract approved by the Iowa GamingCommission) or permits another person to have a share of the money received foradmission to the excursion boat.

 

If it were determinedthat the Iowa Gaming Laws were violated by a licensee, the gaming licenses heldby a licensee could be limited, made conditional, suspended or revoked. In addition, the licensee and the persons involved could be subject tosubstantial fines for each separate violation of the Iowa Gaming Laws in thediscretion of the Iowa Gaming Commission.  Limitations, conditioning orsuspension of any gaming license could (and revocation of any gaming license would)have a material adverse effect on operations.

 

The Iowa GamingCommission may also require any individual who has a material relationshipwith the Iowa gaming operations to be investigated and licensed or foundsuitable.  The Iowa Gaming Commission, prior to the acquisition, mustapprove any person who acquires 5% or more of a licensee’s equity securities inthe event that approval by the Iowa Gaming Commission is not otherwisecontemplated by the operative acquisition document.  The applicantstockholder is required to pay all costs of this investigation.

 

Gaming taxesapproximating 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.**

 

The following riskfactors, among others, could cause our financial performance to differsignificantly from the goals, plans, objectives, intentions and expectations expressedin this report.  If any of the following risks and uncertainties or otherrisks and uncertainties not currently known to us or not currently consideredto be material actually occur, our business, financial condition or operatingresults could be harmed substantially.

 

*Ouroperations have been adversely affected by the general economic downturn insouthern California and Nevada.  Theopinion of our independent auditor with respect to our financial statements forthe fiscal year ended December 31, 2007 contains a “going concern”qualification, which is a default under our credit agreement.  If we are unable to negotiate a forbearancewith our lenders and they declare an event of default and require repayment ofour credit agreement indebtedness, we may not be able to restructure orrefinance our indebtedness.*

 

The results ofoperations of our route business were negatively impacted during the lastquarter of the 2007 fiscal year by the economic downturn in SouthernNevada.  Our route operations derive asignificant amount of business from the Southern Nevada market, the economy ofwhich has been negatively impacted by the subprime mortgage crisis.  In addition, as previously reported, our slotroute operations were adversely affected earlier in the 2007 fiscal year by theenactment of anti-smoking legislation. Consequently, our route revenues weredown 20% in the 2007 fiscal year when compared to the 2006 fiscal year anddecreased 24.6% during the last quarter of the 2007 fiscal year when comparedto the prior year’s period.

 

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In addition, the resultsof the operations of the Primm Casinos were negatively impacted during the 2007fiscal year by the general economic downturn in southern California, particularlyin the second half of fiscal 2007. Results in the first months of fiscal year 2008 continue to benegatively impacted.  The Primm Casinosderive a significant amount of their business from the Inland Empire region ofsouthern California, which is comprised primarily of the San Bernardino andRiverside counties, the economies of which have been negatively impacted due toa number of factors, including the subprime mortgage crisis and higher gasolinecosts.

 

The results of operationsat our northern Nevada and Midwest casinos did not appear to be affected bythese economic forces during 2007.  Tothe extent the economies of southern California and Nevada do not improve inthe near term and the results from our other businesses do not offset thedecrease in results of the Primm Casinos and our route operations in the nextseveral quarters, we will likely not be in compliance with the financialcovenants in our credit agreement in future quarters.

 

As a result of theadverse change in our results of operations and our significant outstandingindebtedness, the opinion of our independent auditor contains a “going concern”qualification, which is a default under our credit agreement.  We expect to enter into discussions with ourcredit agreement lenders to negotiate a forbearance agreement pursuant to whichthey would agree not to declare, for a specified period of time, an event ofdefault under the credit agreement as a result of the going concern opinion orthe probable failure to comply with financial covenants in the future.  As previously disclosed, we have engagedGoldman, Sachs & Co. as our financial advisor to assist us with ourevaluation of financial and strategic alternatives, which may include arecapitalization, refinancing, restructuring or reorganization of the ourobligations or a sale of some or all of our businesses.  We and our advisors are actively workingtoward such a transaction that would address the decline in our operatingresults and our capital structure, including our outstanding indebtedness.  We cannot assure you that we will besuccessful in negotiating a forbearance with our credit agreement lenders or inundertaking any such alternative in the near term.

 

If we were not successfulin obtaining a forbearance or entering into a transaction to address ourliquidity and capital structure, the lenders under our credit agreement wouldhave the ability to accelerate repayment of all amounts outstanding under thecredit agreement ($853 million at March 15, 2008).  If the lenders under the credit agreementwere to require repayment of the outstanding borrowings upon a default, theholders of our subordinated indebtedness would have the ability to declare adefault, and accelerate repayment of, the subordinated indebtedness($330 million principal amount at March 15, 2008).  If eitherthe credit agreement indebtedness or the subordinated indebtedness were to beaccelerated upon a default, we would be required to refinance or restructurethe payments on that debt.  We cannotassure you that we would be successful in completing a refinancing orrestructuring, if necessary.  If we wereunable to do so, we may be required to seek protection under Chapter 11 of theU. S. Bankruptcy Code.

 

*Ouroperations have been adversely affected by the adoption of certain anti-smokingregulations.*

 

On November 7, 2006,voters in Nevada passed Question 5, which prohibits smoking in indoor places ofemployment including, but not limited to, bars and taverns that serve food,grocery stores, malls and other retail establishments, and that gives futurecontrol over smoking regulation to individual counties or municipalities. Since its adoption, Question 5 has led to significant decreased patron play atour route locations.  A number of ourlarger space leases for our route operations for which we pay a fixed rentprovided for an adjustment to the rent after six months of operations under theanti-smoking legislation have occurred. These adjustments resulted in a decrease in our annual rental paymentsof approximately $20 million when compared to the amounts paid with respect tothese contracts during the previous twelve months.  However, if we are not able to offsetdecreased patron play, or patron play continues to decrease, there may be amaterial adverse effect on our business, financial condition and results ofoperations.

 

*Thesuccess of our route operations is dependent on our ability to renew ourcontracts.*

 

We conduct our routeoperations under contracts with third parties.  Both contracts with chainand street customers are renewable at the option of the owner of the respectivechain store or street account.  As our route contracts expire, we arerequired to compete for renewals.  Although we have historically been ableto renew our contracts, if we are unable to renew a material portion of ourroute contracts because our competitors offer more 

 

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favorable terms or forany other reason, our business, financial condition and results of operationswould be adversely affected.  We cannot assure you that our current chainor street contracts will be renewed.

 

*Wemay experience a loss of market share.*

 

The gaming industry ishighly competitive.  Our slot-route operations are subject to substantialdirect competition for our revenue-sharing and fixed space lease locations fromone large route operator and numerous small operators, located principally inLas Vegas, Nevada.  With respect to our casino operations in Nevada, wecompete for local gaming customers with other locals-oriented casino-hotels andother casinos located in the vicinity of these properties.  Our casinooperations in the Midwest face competitors that include land-based casinos,dockside casinos, riverboat casinos, casinos located on Native American reservationsand racing and pari-mutuel operations.  If our competitors operate moresuccessfully, if existing route operations or properties are enhanced orexpanded, or if additional competitors are established in and around thelocations in which we conduct business, we may lose market share.  Inparticular, the expansion of route operations or casino gaming in or near anygeographic area from which we attract or expect to attract a significant numberof our customers could have a material adverse effect on our business,financial condition and results of operations.

 

*Changesto applicable tax laws could have a material adverse effect on our financialcondition.*

 

We pay substantial taxesand fees in connection with our operations as a gaming company.  From timeto time, federal, state and local legislators and other government officialshave proposed and adopted changes in tax laws, or in the administration ofthose laws affecting the gaming industry.  It is not possible to determinethe likelihood of changes in tax laws or in the administration of thoselaws.  If adopted, changes to applicable tax laws could have a materialadverse effect on our business, financial condition and results ofoperations.  For instance, in 2007 votersin Nevada approved a referendum be placed on the November 2008 generalelection ballot to add 3% to the current gaming tax rate in Nevada of6.76%.  If the voters approve the taxrate, such increase would take effect in July 2011. Any increase intaxation would impact the Company’s future profitability.

 

*Weface extensive regulation from gaming and other government authorities.*

 

As owners and operatorsof gaming facilities, we are subject to extensive state and local regulationsin Nevada, Iowa and Missouri.  State and local government authorities insuch jurisdictions, including the Nevada Gaming Commission, the Iowa Racing andGaming Commission and the Missouri Gaming Commission, require us and oursubsidiaries to obtain gaming licenses and require our officers, key employeesand business entity affiliates to demonstrate suitability to hold gaminglicenses, and such state and local government authorities may limit,condition, suspend or revoke a license for any cause deemed reasonable by therespective licensing agency.  They may also levy substantial finesagainst us or our subsidiaries or the individuals involved in violating anygaming laws or regulations.  The violation of any such state and localregulations could have a material adverse effect on our business, financial conditionand results of operations.

 

In Nevada, the NevadaGaming Commission could request that a state court appoint a supervisor tooperate any non-restricted gaming establishment operated by us if the licensesheld by us are revoked, suspended or otherwise lapse.  In suchextraordinary circumstances, earnings generated by gaming operations during asupervisor’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.

 

Any future publicoffering of debt or equity securities by Herbst Gaming will require review ofand prior approval by the Nevada Gaming Commission, the Iowa Racing and GamingCommission and the Missouri Gaming Commission.  The Missouri GamingCommission also requires notice of the intended incurrence of any private debtexceeding $1,000,000 and reserves the right to elect to have prior review andapproval.

 

We are subject to a varietyof other rules and regulations, including zoning, environmental,construction and land-use laws, regulations and permits that govern the servingof alcoholic beverages.  Any changes to these laws could have a materialadverse effect on our business, financial condition and results of operations.

 

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From time to time,legislators and special interest groups have proposed legislation that wouldexpand, restrict or prevent gaming operations in the jurisdictions in which weoperate.  Any such change to the regulatory environment or the adoption ofnew federal, state or local government legislation could have a materialadverse effect on our business.

 

For a more completesummary of regulations that affect our business, see “Item 1. Business—Regulation and Licensing.”

 

*Wedepend upon our key employees and certain members of our management.*

 

Our success issubstantially dependent upon the efforts and skills of Edward J. Herbst, ourchairman of the board and chief executive officer, Ferenc Szony, our newlyappointed president and chief operating officer, and  Mary E. Higgins, our chief financialofficer.  We have entered into employment agreements with Mr. Herbst,Mr. Szony, and Ms. Higgins through 2009.  These agreements automatically renew forsuccessive one-year periods unless sooner terminated or unless either party tothe respective agreements notifies the other in writing at least 60 days priorto the date the respective agreement is scheduled to expire.  If we wereto lose the services rendered by these employees, our operations could beadversely affected.  In addition, we compete with other potentialemployers for employees, and we may not succeed in hiring and retainingthe executives and other employees that we need.  An inability to hirequality employees could have a material adverse 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 TroyHerbst own all of the outstanding stock of Herbst Gaming.  Thisconcentration of ownership gives them the power to control the outcome of allmatters requiring stockholder approval, including the election of alldirectors, and will give them the power to hinder or delay a change of controlof the Company.  In addition, Edward, Timothy and Troy Herbst are allofficers and directors of Terrible Herbst, Inc., a company owned byparties related to us.  We currently engage in transactions with TerribleHerbst, Inc. and plan to continue to do so in the future.  Theserelated-party transactions could lead to potential conflicts of interest. See “Item 13.  Certain Relationships and Related Transactions.”

 

*The gamingoperations and casinos owned by the Company may be adversely impacted if theeconomy of certain markets declines, which could lead to an adverse impact onthe operations of the Company*.

 

As discussed previously,the results of operations of our route business and the Primm Casinos have beenadversely affected by the decline in the economies of southern Nevada andsouthern California, respectively.

 

In addition, LakesideIowa, Mark Twain and St. Jo depend on customers living principally insouth central Iowa and northeast and northwest Missouri, respectively, and onthe economy of those areas.  An economic downturn in such areas could havea material adverse effect on our operating results.

 

The Sands Regent Casinosheavily market to and rely upon business from Reno area residents, as well asthe national bowling tournament that visits Reno on a three year cycle.  Revenues are favorably impacted in years inwhich there is a national bowling tournament. In addition, the Sands and Gold Ranch also rely on the tourist market ofnorthern California.  Should there benegative changes in the economic climate in Reno or in northern California, thebusiness of the Sands Regent Casinos could be adversely impacted, which couldlead to an adverse impact on the overall results of the Company.

 

In addition, ourproperties use significant amounts of electricity, natural gas and other formsof energy.  While no shortages of energy have been experienced, the substantialincreases in the cost of electricity, natural gas and gasoline in the UnitedStates in general, and in southern and northern California, southern andnorthern 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, whichcould 

 

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negatively impactrevenues.  Gaming industry revenues are sensitive to general economicconditions and are influenced by consumer confidence in the economy and otherfactors.  An extended period of reduced discretionary spending couldsignificantly harm our operations and we may not be able to lower ourcosts rapidly enough, or at all, to offset a decrease in revenues.

 

*Thebusiness of the Sands Regent Casinos and the Primm Casinos may be adverselyimpacted by expanded Native American gaming operations in California and thePacific Northwest, which could lead to an adverse impact on the operations ofthe Company.*

 

The largest sources ofcustomers for the Sands Regent Casinos are California and the PacificNorthwest, including a large number who drive to Reno from the San Franciscoand Sacramento metropolitan areas, and the largest source of customers for thePrimm Casinos are from southern California, including a large number who driveto Las Vegas from the San Bernardino and Barstow metropolitan areas.  Theexpansion of Native American casinos in California, Oregon and Washingtoncontinues to have an impact on casino revenues in Nevada in general, and suchimpact may be significant on the markets in which the Sands Regent Casinos andthe Primm Casinos operate.

 

California’s votersrecently approved propositions that further expand the number of slot machinesin California.  While the effect ofincreased slot machines or any other increase in gaming in California and otherstates is difficult to predict, the business of the Sands Regent Casinos andPrimm Casinos would be adversely impacted if such competing casinos attractpatrons who would otherwise travel to Reno, Nevada or Primm, Nevada, respectively.

 

*Adversewinter weather conditions in the Midwest, the Sierra Nevada Mountains andReno-Lake Tahoe area could have a material adverse effect on the results ofoperations and financial condition of our casinos, which could lead to anadverse impact on the results of operation and financial condition of theCompany.*

 

Adverse winter weatherconditions, particularly snowfall, can deter customers of our northern Nevadaand Midwest Casinos from traveling or make it difficult for them to frequentits facilities.  If these locations wereto experience prolonged adverse winter weather conditions, the results ofoperations and financial condition of these casinos could also be materiallyadversely affected, thereby adversely affecting the results of operations andfinancial condition of the Company.

 

*The business of the Primm Casinosmay be adversely impacted if their use of water exceed allowances permitted byfederal and local governmental agencies or if such governmental agencies imposeadditional requirements in connection with such use of water, which in eachcase could lead to an adverse impact on the operations of the Company.*

 

The Primm Casinos are notserved by a municipal water system.  As aresult, the water supply of such casinos is dependent on rights they have beengranted to water in various wells located on federal land in the vicinity ofthe Primm Casinos and permits that allow the delivery of water to the PrimmCasinos.  These permits and rights aresubject to the jurisdiction and ongoing regulatory authority of the U.S. Bureauof Land Management, the States of Nevada and California and local governmentalunits.  While we believe that adequatewater for the Primm Casinos is available, the future water needs of the PrimmCasinos may exceed the permitted allowance. In such an event, future requests for additional water may not beapproved or may be approved with terms or conditions that are moreonerous.  Any such denial or any suchadditional terms and conditions may have a material adverse effect on theresults of operations of the Primm Casinos, thereby adversely affecting theresults of operations and financial condition of the Company.

 

*We maybe unable to obtain slot machines or related technology from our third partysupplier on a timely, cost-effective basis.*

 

We currently primarilyrely on International Game Technology, Inc. for our supply of slotmachines and related technology, which are only available from a limited numberof suppliers.  We cannot assure you that we can obtain slot machines orrelated technology on a cost-effective basis.  As a result, we may beforced to incur significant unanticipated costs to secure alternative thirdparty suppliers or adjust our operations.

 

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*Riverboatsand dockside facilities are subject to risks relating to weather or mechanicalfailure and must comply with applicable regulations.*

 

We own and operateriverboat and dockside casino facilities, which are subject to risks inaddition to those associated with land-based casinos, including loss of servicedue to casualty, mechanical failure, extended or extraordinary maintenance,flood or other severe weather.  Reduced patronage and the loss of adockside or riverboat casino from service for any period of time couldadversely affect our results of operations.

 

Although not required tocruise, to the extent that the casino boat of Lakeside Iowa, the USS Osceola,cruises, it and the gaming and support facilities located on board must complywith U.S. Coast Guard requirements as to boat design, on-board facilities,equipment, personnel and safety or requirements of state and local law,including the requirements of state gaming authorities, or both.  If theUSS Osceola fails to meet these requirements, we might be forced to stopoperating Lakeside Iowa.  The USS Osceola must hold a Certificate ofInspection or must be approved by the American Bureau of Shipping forstabilization and flotation, and may also be subject to local zoning andbuilding codes, as well as additional requirements mandated by state law or bythe gaming regulatory authority with jurisdiction over the facilities. The U.S. Coast Guard requirements establish design standards, set limits on theoperation of the cruising vessels and require individual licensing of allpersonnel involved with the operation of the cruising vessels.  Loss of aCertificate of Inspection or American Bureau of Shipping approval or otherapproval mandated by state law or by the gaming regulatory authority with respectto the USS Osceola would preclude its use as a floating casino.

 

*Thefailure to achieve the anticipated benefits of the past or future acquisitioncould adversely impact our business.*

 

The Sands Regent andPrimm Acquisitions constitute material acquisitions on the part of theCompany.  We have incurred significant capitalized costs and committedsignificant management time in integrating operations, information,communications and other systems, among other items, which involved retainingprofessionals and consultants to complete the acquisition process and integratetechnology.  However, despite such efforts, difficulties have arisen dueto factors such as integrating personnel with disparate corporate cultures,reconciling different information, communications and other systems andmanaging customer relationships.  The failure to timely resolve thesedifficulties and achieve the anticipated benefits of the Sands Regent and PrimmAcquisitions could harm our business and results of operations.

 

We have spent and maycontinue to spend significant resources identifying businesses toacquire.  The efficient and effective integration of any businesses weacquire into our organization is critical to our growth.  The Sands Regentand Primm Acquisitions, and any future acquisitions or mergers, involvenumerous risks including difficulties in integrating the operations,technologies and personnel of the acquired companies, the diversion ofmanagement’s attention from other business concerns and the potential loss ofkey employees of the acquired companies and businesses.  Additional risksinclude:

 

·                  negative impacts on employee morale and performance as a result of jobchanges and reassignments;

 

·                  difficulties attracting key personnel;

 

·                  loss of customers; and

 

·                  unanticipated incompatibility of logistics, marketing andadministration methods.

 

Failure to achieve theanticipated benefits of any of our past, pending and future acquisitions ormergers or to successfully integrate the operations of the companies we acquirecould also harm our business, results of operations and cash flows.  Additionally,we cannot assure you that we will not incur material charges in future quartersto reflect additional costs associated with any future acquisitions wemay make.

 

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*RisksRelated to Our Outstanding Indebtedness*

 

*Oursubstantial indebtedness could adversely affect our financial health andprevent us from fulfilling our obligations under our outstanding indebtedness.*

 

We have incurred asignificant amount of indebtedness, including indebtedness incurred under oursenior credit facility to consummate the Sands Regent and PrimmAcquisitions.  The following chart shows certain important statistics withrespect to such indebtedness.

 
| ** **                                | ** ** | **As of and for the  Year ended  December 31, 2007** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands, except ratio)**                                         | ** ** |
| Long-term debt, including current portion |       | $                                                                                       | 1,146,070  |   |
| Stockholders’ equity                 |       | $                                                                                       | (118,729   | ) |
| Ratio of earnings to fixed charges(1)     |       | 0.50:1.0                                                                                |       |

 

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(1)          For purposes of determining the ratio of earnings tofixed charges, earnings are defined as earnings before fixed charges and losson early retirement of debt (other than capitalized interest).  Fixedcharges consist of interest expensed and capitalized and the interest componentof rent expense.

 

Our substantialindebtedness could have important consequences.  For example, it could:

 

·                  make it more difficult to satisfy our obligations with respect to theinstruments governing our outstanding indebtedness;

 

·                  increase our vulnerability to general adverse economic and industryconditions;

 

·                  require us to dedicate a substantial portion of our cash flow fromoperations to debt service, thereby reducing the availability of our cash flowto fund working capital, capital expenditures and other general corporatepurposes;

 

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

 

·                  place us at a competitive disadvantage compared to our competitors thathave less debt; and

 

·                  limit, along with the financial and other restrictive covenants in ourindebtedness, among other things, our ability to borrow additional funds.

 

*Ifinterest rates rise, the amount of interest paid by us under our creditfacility will increase.*

 

The interest on revolvingborrowings and on the term loan under our credit facility in effect as of December 31,2007 is based on a floating rate (a base rate or LIBOR, at our option), plus aleverage grid-based variable amount.  At December 31,2007, the principal amount of the borrowings under such credit facility wasapproximately $816.7 million.  Wecannot predict the interest rate environment or guarantee that interest rateswill not rise in the near future. Consequently, a hypothetical 1.0% increase inLIBOR would result in an approximately $8.2 million annual increase ininterest expense.  Should interest ratesrise significantly, our ability to satisfy our obligations under theinstruments governing our outstanding indebtedness will be adversely affected.

 

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*Ourindebtedness imposes restrictive covenants on us.*

 

Our credit facility andthe indentures governing our 8 1/8% senior subordinated notes due 2012 and our7% senior subordinated notes due 2014 impose operational and financialrestrictions on us and our subsidiaries.  The restrictions imposed underthese debt instruments include, among other obligations, limitation on our andour subsidiaries’ ability to:

 

·                  incur additional debt;

 

·                  make payments on subordinated obligations;

 

·                  make dividends or distribution and repurchase stock;

 

·                  make investments;

 

·                  grant liens on our property to secure debt;

 

·                  enter into certain transactions with affiliates;

 

·                  sell assets or enter into mergers or consolidations;

 

·                  sell equity interests in our subsidiaries;

 

·                  create dividend and other payment restrictions affecting subsidiaries;

 

·                  change the nature of our lines of business;

 

·                  make capital expenditures; and

 

·                  designate restricted and unrestricted subsidiaries.

 

Our credit facilityimposes various customary affirmative covenants on us and our subsidiaries,including among others, reporting covenants, covenants to maintain insurance,comply with laws, maintain properties and other covenants customary in seniorcredit financings of this type.  In addition, our credit facility willrequire us to comply with various restrictive financial covenants, includinginterest coverage and debt to operating cash flow ratios, and capital spendinglimits.

 

**Item1B.  Unresolved Staff Comments.**

 

In December 2007,the SEC issued a letter to the Company requesting a description of management’sconsideration to the purchase price allocation and valuation of the assetsacquired pursuant to the Sands Regent and Primm Acquisitions, along with theprimary reasons for these acquisitions and a description of the factors thatcontributed to a recognition of goodwill in accordance with paragraph 51(c) ofSFAS No. 141.  This letter alsorequested the timing of when the final allocation and valuation was expected tobe completed.  The Company’s responsegave the primary reasons for the Sands Regent and Primm Acquisitions and thosefactors that contributed to the recognition of goodwill.  It also indicated that the requested finalvaluations and allocations are to be included in this filing.

 

Thevaluation and allocations for the Primm Acquisition and Sands RegentAcquisition included in this filing are final as to all amounts except forproperty, plant and equipment.  TheCompany is finalizing its review of various valuation data and will recordfinal adjustments to the purchase allocation, if any, in the first quarter of2008.  Any adjustment to property, plantand equipment would result in an offsetting adjustment to goodwill and anadjustment to depreciation expense.

 

**Item 2.    Properties.**

 

Our principal propertiesconsist of the following:

 

**Nevada**

 

*CompanyHeadquarters and Warehouse.*

 

We lease a four-acre sitein Las Vegas and own the 50,000 square foot building where our executiveoffices and operational headquarters are located.  This facility housesour executive and administrative offices and is used for sub-assembly andwarehouse space for our slot route operations.  The lease between theHerbst Family Limited Partnership II, a Nevada limited partnership, and us endson June 30, 2017, with options to renew the lease for five additionalsuccessive terms of ten years each.

 

26

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*OfficeSpace and Convenience Store.*

 

We lease a three-acresite and a 50,000 square foot building where our employment center andpurchasing department are located.  The lease between the 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.

 

*Terrible’sSearchlight Casino.*

 

We lease the space inwhich Terrible’s Searchlight Casino is located in Searchlight, Nevada. The space is leased from Terrible Herbst, Inc. and the lease ends on June 30,2022, with options to renew the lease for five additional successive terms often years each.

 

*Terrible’sHotel & Casino.*

 

We own the ten-acre sitein Las Vegas on which Terrible’s Hotel & Casino is located, consistingof a 45,000 square foot casino with 255 guest rooms.

 

*Terrible’sTown Casino.*

 

Terrible’s Town Casino inPahrump, Nevada, which is approximately 60 miles from Las Vegas, comprises anapproximately 30,000 square foot building on approximately three acres. We lease the land from the Herbst Family Limited Partnership I, a Nevadalimited 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.

 

*Terrible’sLakeside Casino & RV Park.*

 

We own the land inPahrump, Nevada on which Terrible’s Lakeside Casino & RV Park, anapproximately 8,000 square foot casino on 30 acres, is located.

 

*Terrible’sTown Casino & Bowl.*

 

We lease the land andbuilding on which our Terrible’s Town Casino & Bowl is located inHenderson, Nevada from an unrelated third party.  The lease ends on February 9,2014, with options to renew the lease for five additional successive terms often years each.  We own a 0.8-acre lot adjacent to Terrible’s Town Casino &Bowl that we are holding for possible future development.

 

*Terrible’sGold Ranch Casino and RV Park.*

 

We lease the land onwhich Terrible’s Gold Ranch Casino and RV Resort is located in Sparks, Nevadafrom an unrelated third party.  The leaseends on January 1, 2022, with an option to renew the lease for anadditional twenty year term.

 

*BuffaloBill’s, Whiskey Pete’s and Primm Valley Resort Hotels and Casinos.*

 

We lease (from anunrelated party) approximately 143 acres of land on which Buffalo Bill’s,Whiskey Pete’s and Primm Valley are located in Primm, Nevada.  The lease ends on June 30, 2043, with anoption to renew the lease for one additional twenty-five year term.

 

**Midwest**

 

*LakesideCasino Resort.*

 

We own the land inOsceola, Iowa on which certain facilities of Lakeside Iowa are located,including the all-suite hotel, convention facilities, RV park andconvenience store and own an additional 121 acres of land

 

27

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adjacent to or nearby thecasino.  We lease the use of West Lake and certain real estate surroundingWest Lake from the City of Osceola, Iowa.  The lease ends on March 11,2009.  We have an option to extend the lease for seven additionalsuccessive terms of five years each.

 

*MarkTwain Casino.*

 

We own the land inLaGrange, Missouri on which certain facilities of Mark Twain are located, andown an additional 14 acres of land adjacent to or nearby the casino.

 

*St. JoFrontier Casino.*

 

We own the land inSt. Joseph, Missouri on which certain facilities of St. Jo arelocated, and own an additional 72 acres of land adjacent to or nearby thecasino.

 

**Item3.    Legal Proceedings.**

 

On February 17,2006, the Clark County District Court entered judgment of a jury verdictdelivered against our subsidiary, ETT, for $4.2 million in compensatory damagesand $10.1 million in punitive damages.  The jury verdict was lowered in apost trial ruling from $10.1 million to $4.2 to match compensatorydamages.  The verdict was delivered in connection with an action broughtby the family of an individual that alleged that ETT had negligently retainedand negligently supervised a temporary employee who in 2001 stole a truck fromETT and, while drunk, hit and killed the individual.  The Company believesthe award of compensatory and punitive damages against ETT, the liability ofETT, and the amount thereof, are not supportable in either law or in fact andplans to vigorously pursue all appropriate post-trial and other remedies. TheCompany currently has this decision under appeal.

 

From time to time, we area party to various claims arising in the normal course of business. Management believes, however, that there are no proceedings pending orthreatened against us which, if determined adversely, would have a materialadverse effect on our financial condition, results of operations or liquidity.

 

**Item 4.    Submissionof Matters to a Vote of Security Holders.**

 

Not applicable.

 

**PART II**

 

**Item5.    Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

 

(a)           MarketInformation

 

There is no establishedpublic trading market for any class of our common equity.  Noclass of our capital stock has been registered under the Securities Act of1933, as amended, or under Section 12 of the Exchange Act.  All 300shares of our outstanding common stock are beneficially owned by Edward,Timothy and Troy Herbst.

 

(b)           Holders

 

Edward, Timothy and Troy Herbstbeneficially own all of the outstanding shares of our common stock.

 

(c)           Dividends

 

Dividends of $31.3million and $10.3 million were paid in respect of our outstanding commonstock in fiscal 2006 and 2007, respectively.

 

28

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Our credit agreement andthe indentures governing our 81/8% senior subordinated notes due 2012 and our7% senior subordinated notes due 2014 restrict our ability to declare or makedistributions on our capital shares.  To date, the only distributions thatwe have made on our common stock are distributions permitted by the instrumentsgoverning our outstanding indebtedness.  Subject to contractualrestrictions contained in our credit facility, cash dividends may be declaredand paid only in an aggregate amount not to exceed the Company’s percentage ofexcess cash flow (as defined in our credit agreement) for the preceding fiscalyear so long as the Company is in compliance the financial covenants.  See“Item 7.  Management’s Discussion and Analysis of Financial Conditionand Results of Operations — Liquidity and Capital Resources” and “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated FinancialStatements.”

 

**Item6.    Selected Financial Data.**

 

We derived the selectedconsolidated financial data as of and for each of the prior five years ended December 31,2007 from our audited consolidated financial statements, as of and for each ofthe prior three years ended December 31, 2007, which are includedelsewhere in this report.  In February 2005, we consummated the GraceAcquisition, and as a result the period beginning on January 1, 2005may not be comparable to prior years.  Similarly, in January 2007we consummated the Sands Regent Acquisition and in April 2007 weconsummated the Primm Acquisition, and as a result the period beginning January 1,2007 may not be comparable to prior years. The following table summarizes certain selected consolidated financialdata, which you should read in conjunction with our consolidated financialstatements and the related notes contained elsewhere in this report and under “Item7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

 

We have elected to betaxed under the provisions of Subchapter S of the Internal Revenue Code of1986.  Under those provisions, the owners of our company pay income taxeson our taxable income.  Accordingly, a provision for income taxes is notincluded in our financial data.

 

29

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| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | **(in thousands)**                    | ** ** |
| Income statement data:                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                          |       | $                                          | 241,833    |   | $ | 293,244 |   | $ | 339,401 |   | $ | 347,041 |   | $ | 276,946 |   |
| Casino operations                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                    |       | 78,342                                     |       | 91,254 |   | 95,400 |   | 95,614 |   | 331,517 |   |
| Other states                              |       |                                       |       |   |   | 117,774 |   | 141,435 |   | 141,731 |   |
| Other operations                          |       | 3,049                                      |       | 3,628 |   | 4,923 |   | 10,676 |   | 98,987 |   |
| Total revenues                            |       | 323,224                                    |       | 388,126 |   | 557,498 |   | 594,766 |   | 849,181 |   |
| Promotional allowances—route         |       | (371                                       | )          | (376 | ) | (223 | ) | (86 | ) | (64 | ) |
| Promotional allowances—casino        |       | (10,878                                    | )          | (12,138 | ) | (21,434 | ) | (32,617 | ) | (64,177 | ) |
| Net revenues                              |       | 311,975                                    |       | 375,612 |   | 535,841 |   | 562,063 |   | 784,940 |   |
| Costs of revenues:                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                          |       | 192,757                                    |       | 227,929 |   | 258,114 |   | 271,463 |   | 244,086 |   |
| Casino operations                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                    |       | 51,142                                     |       | 56,331 |   | 59,125 |   | 64,349 |   | 245,507 |   |
| Other states                              |       | —                                     |       | — |   | 79,239 |   | 87,852 |   | 89,745 |   |
| Other operations                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization             |       | 22,789                                     |       | 25,407 |   | 33,941 |   | 38,124 |   | 56,405 |   |
| General and administrative                |       | 12,514                                     |       | 14,366 |   | 15,217 |   | 13,324 |   | 22,983 |   |
| Other                                     |       |                                       |       |   |   |   |   | 6,491 |   | 80,184 |   |
| Loss on impairment of assets              |       | —                                     |       | — |   | 3,360 |   | — |   | 72,965 |   |
| Loss on lease termination                 |       | —                                     |       | 600 |   | — |   | — |   | — |   |
| Total costs and expenses                  |       | 279,202                                    |       | 324,633 |   | 448,996 |   | 481,603 |   | 811,875 |   |
| Income from operations                    |       | 32,773                                     |       | 50,979 |   | 86,845 |   | 80,460 |   | (26,935 | ) |
| Interest income                           |       | 228                                        |       | 353 |   | 740 |   | 734 |   | 1,481 |   |
| Interest expense                          |       | (24,525                                    | )          | (22,109 | ) | (36,532 | ) | (39,134 | ) | (85,631 | ) |
| Change in value of derivative instruments |       | —                                     |       | — |   | — |   | — |   | (16,115 | ) |
| Loss on early retirement of debt(1)       |       | (267                                       | )          | (37,991 | ) | (221 | ) | — |   | — |   |
|                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss)                         |       | $                                          | 8,209      |   | $ | (8,768 | ) | $ | 50,832 |   | $ | 42,060 |   | $ | (127,200 | ) |

 
| ** **                                          | ** ** | **Year Ended December 31,**       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(in thousands, except ratios)** | ** ** |
| Other data:                                         |       |                                             |       |   |   |   |   |   |   |   |   |
| Route EBITDA(2)(3)                                  |       | $                                                | 48,705     |   | $ | 64,939 |   | $ | 79,922 |   | $ | 75,492 |   | $ | 32,796 |   |
| Casino EBITDA(2)(4)                                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Nevada(4)                                           |       | $                                                | 16,322     |   | $ | 22,785 |   | $ | 20,281 |   | $ | 17,719 |   | $ | 43,551 |   |
| Other states(4)                                     |       | —                                           |       | — |   | $ | 29,865 |   | $ | 34,512 |   | $ | 30,268 |   |
| Net cash provided by operating activities           |       | $                                                | 34,997     |   | $ | 50,010 |   | $ | 92,204 |   | $ | 81,493 |   | $ | 4,273 |   |
| Net cash used in investing activities               |       | $                                                | (74,724    | ) | $ | (17,009 | ) | $ | (309,172 | ) | $ | (79,758 | ) | $ | (574,128 | ) |
| Net cash provided by (used in) financing activities |       | $                                                | 38,722     |   | $ | 51,141 |   | $ | 152,645 |   | $ | (9,944 | ) | $ | 598,495 |   |
| Capital expenditures                                |       | 15,117                                           |       | 15,229 |   | 43,893 |   | 66,622 |   | 32,418 |   |
| Ratio of earnings to fixed charges(5)               |       | 1.3                                              | x     | 2.3 | x  | 2.4 | x | 2.0 | x | 0.5 | x |

 

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| ** **                             | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2003**                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| **Balance sheet data:**                |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |       | $                       | 54,030     |   | $ | 138,172 |   | $ | 73,849 |   | $ | 65,540 |   | $ | 94,282 |   |
| Total assets                           |       | $                       | 237,068    |   | $ | 318,431 |   | $ | 534,930 |   | $ | 568,450 |   | $ | 1,080,385 |   |
| Total debt(6)                          |       | $                       | 215,269    |   | $ | 333,412 |   | $ | 500,593 |   | $ | 522,618 |   | $ | 1,146,070 |   |
| Stockholders’ equity (deficiency) |       | $                       | 1,554      |   | $ | (30,764 | ) | $ | 7,981 |   | $ | 18,771 |   | $ | (118,729 | ) |

 

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| (1)    | Consists  of (a) a premium of $267,000 paid in conjunction with the repurchase of  $2.0 million of our senior secured notes in 2003, (b) a loss on  early retirement of debt in June 2004 which consisted of  $31.3 million in a debt prepayment penalty and $6.7 million in  unamortized loan fees and (c) a premium of $221,000 paid to call the  balance of our 10 3⁄4% notes in September 2005. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | Route  and Casino segment EBITDA are non-GAAP measures but are used by management to  measure segment profits and losses in accordance with SFAS 131,  “Disclosures about Segments of an Enterprise and Related Information”, and  are calculated before allocation of overhead.  See “Note 12.   Business Segments” to the accompanying consolidated financial statements.                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    | Route  segment EBITDA consists of net income plus depreciation and amortization and  interest expense, net of capitalized interest, and is calculated before  allocation of overhead.                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    | Casino  segment EBITDA consists of net income plus depreciation and amortization,  interest expense, net of capitalized interest, impairment charges and  costs associated with the retirement of assets.  Casino EBITDA for  casinos in Nevada and other states are calculated before allocation of  overhead.                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5)    | For  purposes of determining the ratio of earnings to fixed charges, earnings are  defined as earnings before fixed charges and loss on early retirement of debt,  impairment charges and loss on derivatives (other than capitalized  interest).  Fixed charges consist of interest expensed and capitalized  and the interest component of rent expense.                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (6)    | Total  debt consists of the current and long-term portions for all periods  presented.                                                                                                                                                                                                                                                                                                                                                         |

 

**Item7.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

The following discussionand analysis should be read in conjunction with “Item 6.  SelectedFinancial Data” and with “Item 8.  Financial Statements andSupplementary Data”.

 

**Overview**

 

We are a diversifiedgaming company that focuses on two business lines: slot route operations andcasino operations.  Our route operations involve the exclusiveinstallation and operation of approximately 7,200 slot machines as of December 31,2007 in strategic, high traffic, non-casino locations, such as grocery stores,drug stores, convenience stores, bars and restaurants.  Taking intoaccount the Primm Acquisition and the Sands Regent Acquisition, our casinooperations consist of sixteen casinos located in Nevada, Iowa and Missouri,other than the Sands Regent Casinos and the Primm Casinos, our casinos areoperated under the “Terrible’s” brand. We are in the process of re-branding the Sands and Primm Casinos underthe “Terrible’s” brand.

 

We generally enter intotwo types of route contracts.  With chain store customers, such asAlbertsons, Vons, Safeway, SavOn, Smith’s, Kmart, Terrible Herbst and Rite Aid,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 shared.

 

Our revenues areprimarily derived from gaming revenues, which include revenues from slotmachines and table games.  Gaming revenues are generally defined as gamingwins less gaming losses.  Our largest component of revenues is from ourslot machines.  Promotional allowances consist primarily of food andbeverages furnished gratuitously to customers.  The retail value of suchservices is included in the respective revenue classifications and 

 

31

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is then deducted aspromotional allowances.  We calculate income from operations as netrevenues 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.

 

We have elected to betaxed under the provisions of Subchapter S of the Internal Revenue Code of1986.  Under those provisions, the owners of our Company pay income taxeson our taxable income.  Accordingly, a provision for income taxes is notincluded in our financial statements.  During the first quarter, The SandsRegent elected to be treated as a Subchapter S corporation for federalincome tax purposes.

 

On April 10, 2007,the Company completed the Primm Acquisition for a net cash purchase price of$394 million. The acquired properties include Buffalo Bill’s Hotel and Casino,Whiskey Pete’s Hotel and Casino, and Primm Valley Resort and Casino.  For a detailed description of the acquiredproperties see “Item 1. Business—Narrative Description of Business—PrimmCasinos.”  Also acquired pursuant thePrimm Acquisition were a California lottery station located on theNevada/California border, three gasoline stations and the Primm Travel Center.

 

On January 3, 2007,we consummated the Sands Regent Acquisition, paying approximately $149 millionin cash for the outstanding securities of The Sands Regent, the prepayment ofoutstanding debt and the payment of related fees.  Pursuant to the SandsRegent Acquisition, we acquired Terrible’s Rail City Casino in Sparks, Nevada,Terrible’s Sands Regency Casino Hotel in downtown Reno, Nevada, Terrible’s GoldRanch Casino and RV Resort in Verdi, Nevada, and Terrible’s Dayton Casino andRed Hawk Sports Bar, each located in Dayton, Nevada, which together contain anaggregate of approximately 285 slot machines. For a detailed description of the acquired properties see “Item 1.Business—Narrative Description of Business.”

 

We used proceeds from ourcredit facility to fund both acquisitions.

 

**Year2007 Compared to Year 2006**

 
|                              |   | **Year  ended  December 31, 2006** |       | **Year  ended  December 31, 2007** |   |
|-----------------------------------|--------|----------------------------------------------|------------|----------------------------------------------|--------|
|                              |   | **$**                                        | ** ** | **% of  revenue**                       |   | **$** | ** ** | **% of  revenue** |   |
|                              |   | **(dollars in thousands)**         |       |
|                              |   |                                         |       |                                         |   |   |   |   |   |
| Slot route revenue                |   | $                                            | 347,041    |                                         | 100.0  | % | $ | 276,946 |   | 100.0 | % |
| Promotional allowances            |   | (86                                          | )          | 0.0                                          |   | (64 | ) | 0.0 |   |
| Direct expenses                   |   | (271,463                                     | )          | 78.2                                         |   | (244,086 | ) | 88.1 |   |
| EBITDA                            |   | 75,492                                       |       | 21.8                                         |   | 32,796 |   | 11.9 |   |
| Impairment of Intangibles         |   | —                                       |       |                                         |   | (3,165 | ) | 1.1 |   |
| Depreciation and amortization     |   | (21,431                                      | )          | 6.2                                          |   | (21,979 | ) | 7.9 |   |
| Income from slot route operations |   | $                                            | 54,061     |                                         | 15.6   | % | $ | 7,652 |   | 2.9 | % |

 

*RouteOperations*

 

Route operationsaccounted for 33% of total revenues during the year ended December 31,2007.  This was a decrease from 58% of total revenues for the year ended December 31,2006.  Total revenues from route operations were $276.9 million for theyear ended December 31, 2007, a decrease of $70.1 million, or 20%,from $347.0 million for the year ended December 31, 2006.  Thedecrease in route revenue primarily reflects the impact of the passage in November 2006in Nevada of Question 5 and, in the fourth quarter of 2007, general economicweakness.  At December 31, 2007 and 2006, we operated approximately7200 slot machines.

 

32

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Route operating costswere $244.1 million, or 88%, of route revenues for the year ended December 31,2007.  This compares to $270.1 million, or 78%, of route revenues forthe same period in 2006.  The decrease in route operating expenses wasprimarily associated with the lower revenues at our participation locations,which provide for a decrease in revenue share costs in conjunction with revenuedecline. We typically enter into fixed space leases with our chain store customers,which do not provide for a decrease in our lease payments if revenue declines.However, many of our larger space lease contracts provided for an adjustment oflease payments if a smoking ban were to occur.  We renegotiatedsubstantially all of these larger space lease contracts in the third quarter,resulting in an annual reduction of lease payments of approximately $20.0million in 2007. The reductions applicable to 2007 were approximately $8.2million. In connection with these renewals, the average duration of largerspace lease contracts was increased from approximately two years to four years.

 

As a result of theamendment to many of our space lease contracts we determined that there was animpairment to the intangible value associated with two of those leasecontracts.  The Company recorded animpairment charge of $3.3 million in 2007.

 

Primarily as a result ofthe smoking ban and the general economic weakness discussed above, Route EBITDAfor the year ended December 31, 2007 was $32.8 million, a decrease of$42.7 million, or 57%, from $75.5 million for the year ended December 31,2006.

 

*CasinoOperations*

 
| ** **                           | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**         | ** ** |
|                                 |       |                                         |       |                                         |       |   |   |   |   |   |
| Casino revenue                       |       | $                                            | 237,049    |                                         | 100.0      | % | 473,248 |   | 100.0 |   |
| Promotional allowances               |       | (32,617                                      | )          | 13.8                                         |       | (64,177 | ) | 13.6 |   |
| Direct expenses                      |       | (152,201                                     | )          | 64.2                                         |       | (335,252 | ) | 70.8 |   |
| EBITDA                               |       | 52,231                                       |       | 22.0                                         |       | 73,819 |   | 15.6 |   |
| Impairment of intangibles            |       |                                         |       |                                         |       | (69,800 | ) |   |   |
| Depreciation and amortization        |       | (16,375                                      | )          | 6.9                                          |       | (34,081 | ) |   |   |
| Income (loss) from casino operations |       | $                                            | 35,856     |                                         | 15.1       | % | $ | (30,062 | ) |   |   |
|                                      |            |                                              |            |                                              |            |  |  |  |  |  |  |  |

 

Casino operationsaccounted for 56% of total revenues for the year ended December 31, 2007and 40% of total revenues for the year ended December 31, 2006. Total revenues derived from casino operations were $473.3 million for the yearended December 31, 2007, an increase of $236.3 million, or 100%, from$237.0 million for the year ended December 31, 2006.  Revenuesfrom the Sands Regent Casinos that were acquired on January 3, 2007 andthe Primm Casinos that were acquired on April 10, 2007 accounted forsubstantially all of this increase. However, results from the Primm Casinos, Lakeside Iowa and the Company’scasinos located in Pahrump, Nevada were below expectations.

 

As a result of thefactors mentioned above, Casino EBITDA was $73.8 million for the year ended December 31,2007, an increase of $21.6 million, or 41%, from $52.2 million from the yearended December 31, 2006.

 

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

 

*CasinoOperations — Nevada*

 

33

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| ** **                    | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
|                          |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                |       | $                                            | 95,614     |                                         | 100.0      | % | $ | 331,517 |   | 100.0 | % |
| Promotional allowances        |       | (13,546                                      | )          | 14.2                                         |       | (42,459 | ) | 12.8 |   |
| Direct expenses               |       | (64,349                                      | )          | 67.3                                         |       | (245,507 | ) | 74.1 |   |
| EBITDA                        |       | 17,719                                       |       | 18.5                                         |       | 43,551 |   | 13.1 |   |
| Depreciation and amortization |       | (6,408                                       | )          | 6.7                                          |       | (22,765 | ) | 6.7 |   |
| Impairment of intangibles     |       |                                         |       |                                         |       | (36,500 | ) |   |   |
| Income from casino operations |       | $                                            | 11,311     |                                         | 11.8       | % | (15,714 | ) |   |   |
|                               |            |                                              |            |                                              |            |  |  |  |  |  |  |

 

Nevada casino operationsaccounted for 39% of total Company revenues for the year ended December 31,2007 and 16% of total revenues for the year ended December 31, 2006. Revenues derived from Nevada casino operations were $331.5 million for theyear ended December 31, 2007 compared with $95.6 million for the yearended December 31, 2006. These results reflect increases in revenue due tothe four casinos acquired in the Sands Regent Acquisition, all located innorthern Nevada, and the three casinos acquired in the Primm Acquisition, all locatedin Primm, Nevada.  The new casinos accounted for substantially all of theincrease in net revenues.  Revenues were flat or increased at our othercasinos in Nevada, except at the two casinos in Pahrump.  The decreases inthe revenues at the casinos in Pahrump were due in part to refurbishments ofour primary competitors by new owners, which made them more competitive. In the aggregate, gross revenues at our casinos, other than the Sands RegentCasinos and Primm Casinos, were up approximately 2.2% from of 2006.

 

Nevada casino operatingcosts for the year ended December 31, 2007 were $245.5 million, up$181.8 million, from the year ended December 31, 2006.  Themajority of thisincrease represents operating costs of the Sands Regent and PrimmCasinos.  Nevada casino promotional spending was up $28.7 million.This increase was substantially attributable to spending at the Sands Regentand Primm Casinos.  As a percentage of revenue, promotional allowanceswere 12.8% for the year ended December 31, 2007 compared to 14.2% for theyear ended December 31, 2006.

 

Nevada casino EBITDA was$43.6 million for the year ended December 31, 2007 compared to$17.7 million for the year ended December 31, 2006.

 

The Primm Casinos hadlower than expected results when compared to 2006.  The Primm Casinos derive a significant amountof their business from the Inland Empire region of southern California, whichis comprised primarily of the San Bernardino and Riverside counties, the economiesof which have been negatively impacted due to a number of factors, includingthe subprime mortgage crisis and higher gasoline costs.  For the year ended December 31, 2007,the Company recognized a non- cash impairment charge of $36.5 million to writedown the carrying value of goodwill related to the estimated fair value of thePrimm assets (see Note 5 to the audited financial statements).

 

*CasinoOperations — Other states*

 

34

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| ** **                    | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
|                          |       | **(dollars in thousands)**         |       |
|                          |       | ** **                                   |       |                                         |       |   |   |   |   |
| Other state casino revenue    |       | $                                            | 141,435    |                                         | 100.0      | % | $ | 141,731 |   | 100.0 | % |
| Promotional allowances        |       | (19,071                                      | )          | 13.5                                         |       | (21,718 | ) | 15.3 |   |
| Direct expenses               |       | (87,852                                      | )          | 62.1                                         |       | (89,745 | ) | 63.3 |   |
| EBITDA                        |       | 34,512                                       |       | 24.4                                         |       | 30,268 |   | 21.4 |   |
| Impairment of Intangibles     |       |                                         |       |                                         |       | (33,300 | ) |   |   |
| Depreciation and amortization |       | (9,967                                       | )          | 7.0                                          |       | (11,316 | ) | 8.0 |   |
| Income from casino operations |       | $                                            | 24,545     |                                         | 17.4       | % | $ | (14,348 | ) |   |   |

 

Casino operations inother states accounted for 17% of total company revenues for the year ended December 31,2007, which is down from 24% in 2006.  Total revenues derived from casinooperations located in states other than Nevada were $141.7 million, an increaseof $0.3 million, , compared to $141.4 million for the year ended December 31,2006.  Other state casino operating costs were $89.7 million, or 63.3% ofrevenues, for the year ended December 31, 2007 compared to$87.9 million, or 62.1% of revenues, for the year ended December 31,2006.  The increases in operating costs were associated with increases infood and beverage costs.

 

Promotional allowancesfor the year ended December 31, 2007 were $21.7 million compared to$19.1 million for the three months ended September 30, 2006, anincrease of $2.6 million or 13.6%. The majority of those increases were atthe Lakeside Iowa property as it incurred $1.6 million more in promotionalcosts in 2007 than in 2006 in response to increased competition from four newcasinos.

 

Other state casino EBITDAwas $30.3 million for the year ended December 31, 2007, a decrease of$4.2 million, or 12.2%, from $34.5 million for the year ended December 31,2006.Thisdecrease in EBITDA was due to the operations of Lakeside Iowa, which wassubject to significant competitive pressure from the opening of four newcasinos in Iowa in over the last eighteen months.

 

As discussed above, ouroperating results at Lakeside Iowa were lower than our expectations.  Forthe year ended December 31, 2007, the Company recorded a non-cashimpairment charge of $33.3 million to write down the carrying value ofintangible assets related to the estimated fair value of the Lakeside Iowaassets (see Note 5 to the audited consolidated financial statements).

 

35

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*Other and G and A*

 
| ** **                           | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **$**                                        | ** ** | **% of  Total  revenue**                | ** ** | **$** | ** ** | **% of  Total  revenue** | ** ** |
|                                 |       |                                         |       | **(dollars in thousands)**         |       |   |   |
| Other revenue                        |       | $                                            | 10,676     |                                         | 2.0        | % | $ | 98,987 |   | 11.7 | % |
| Direct expense                       |       | (6,491                                       | )          | 1.1                                          |       | (80,184 | ) | 9.4 |   |
| General and administrative expenses  |       | (13,324                                      | )          | 2.2                                          |       | (22,983 | ) | 2.8 |   |
| Depreciation and amortization        |       | (318                                         | )          |                                         |       | (345 | ) |   |   |
| Income from Operations Other and SGA |       | $                                            | (9,457     | )                                            |       |   | $ | (4,474 | ) |   |   |
| Depreciation and amortization        |       | 318                                          |       |                                         |       | 345 |   |   |   |
| Interest Income                      |       | 734                                          |       |                                         |       | 1,481 |   |   |   |
| Other and Corporate EBITDA           |       | $                                            | (8,405     | )                                            |       |   | $ | (2,699 | ) |   |   |

 

Revenuefrom other operations consists of revenue from sources such as ATM fees, payphone charges, rental income and other miscellaneous items unrelated to routeand casino operations, including sales (i) at our gas station andconvenience store located in Osceola, Iowa, (ii) beginning in the firstquarter, at Terrible’s Gold Ranch, our gas station in Verdi, Nevada, which waspart of the Sands Regent Acquisition and (iii) beginning in the secondquarter, at the three gas stations we acquired in the Primm Acquisition. Revenues from other operations were $99.0 million for the year ended December 31,2007 compared to $10.7 million for the year ended December 31, 2006,an increase of $88.3 million, $85.8 million of which was associatedwith the revenue from the gas stations and other operations at the newfacilities.

 

Costsassociated with other revenues were $80.2 million for the year ended December 31,2007 and $6.5 million for the year ended December 31, 2006, anincrease of $73.7 million.  Of theincrease, $71.1 million was costs associated with the gas station conveniencestore operations at the new facilities and the remainder was associated withincreased gas costs at Lakeside Iowa as the facility had a significantsummertime gas promotion.

 

*Promotional Allowances*

 

Promotionalallowances were $64.2 million, or 7.5% of total revenues, for the year ended December 31,2007, an increase of $31.4 million, or 96%, from $32.7 million, or5.5% of total revenues, for the year ended December 31, 2006. Approximately $29.3 million of the increase was due to the Sands Regent andPrimm Casinos.  Of the remaining $2.1million increase over 2006, $1.6 million was due to increased spending at theLakeside Iowa property.  The remaining$0.5 million was growth in costs from all other existing properties.

 

*Income(Loss) from Operations*

 

Asa result of the factors discussed above, as well as impairment charges of $73.0million, loss from operations was $26.9 million for the year ended December 31,2007, a decrease of $107.4 million, from income of $80.5 million for theyear ended December 31, 2006.

 

36

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*Other Expenses*

 
| ** **                    | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **(dollars in thousands)**         | ** ** |
| Interest Expense              |       | $                                            | (39,134    | )                                            | $          | (85,631 | ) |
| Change in value of derivative |       | —                                       |       | (16,115                                      | )          |
| Interest Income               |       | 734                                          |       | 1,481                                        |       |
| Total Other income (expense)  |       | $                                            | (38,400    | )                                            | $          | (100,265 | ) |

 

Otherexpense was $100.3 million for the year ended December 31, 2007, anincrease of $61.9 million from expenses of $38.4 million for the yearended December 31, 2006.  This increase was primarily a result of theincrease in the Company’s debt. Debt grew from $522.6 million at December 31,2006 to $1,146.1 million at December 31, 2007, as a result of borrowingsincurred to complete the Sands Regent and Primm Acquisitions. Additionally,during 2007, the Company incurred a loss on an interest rate swap, which wasterminated, resulting in a $16.1 million charge to earnings.

 

*Net (Loss) Income*

 

Asa result of the factors discussed above, net loss for the year ended December 31,2007 was $127.2 million compared to net income of $42.1 million recordedfor year ended December 31, 2006.

 

**Year 2006 Compared to Year 2005**

 
| ** **                        | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **$**                                        | ** ** | ** % of  revenue**                 | ** ** | **$** | ** ** | ** % of  revenue** | ** ** |
| ** **                        | ** ** | ** **                                   | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Slot route revenue                |       | $                                            | 339,401    |                                         | 100.0      | % | $ | 347,041 |   | 100.0 | % |
| Promotional allowances            |       | (223                                         | )          | 0.1                                          |       | (86 | ) | 0.0 |   |
| Direct expenses                   |       | (259,255                                     | )          | 76.4                                         |       | (271,463 | ) | 77.8 |   |
| EBITDA                            |       | 79,923                                       |       | 23.5                                         |       | 75,492 |   | 22.2 |   |
| Depreciation and amortization     |       | (20,114                                      | )          | 5.9                                          |       | (21,431 | ) | 6.2 |   |
| Income from slot route operations |       | $                                            | 59,809     |                                         | 17.6       | % | $ | 54,061 |   | 16.0 |   |

 

*Route Operations*

 

Routeoperations accounted for 58% of total revenues during the year ended December 31,2006.  This was a decrease from 61% oftotal revenues for the year ended December 31, 2005.  Total revenues from route operations were$347.0 million for the year ended December 31, 2006, an increase of$7.6 million, or 2.2%, from $339.4 million for the year ended December 31,2005.  The increase in route revenue wasa result of increased number of games during 2006.  At December 31, 2006, we were operatingapproximately 7,200 slot machines, which is 100 greater than the approximately7,100 we operated at December 31, 2005.

 

Routeoperating costs were $271.5 million, or 78%, of route revenues for the yearended December 31, 2006.  Thiscompares to $259.3 million and 76% of route revenues for the same periodin 2005.  The increase in route operatingexpenses was primarily associated with expenses that correlate with increasesin revenue such as participation costs and payroll. In addition, partly due tostaff additions to our systems and operations departments,  payroll and insurance costs grew during theyear, which increase is unrelated to growth in revenue.

 

37

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Asa result of the increased expenses, Route EBITDA for the year ended December 31,2006 was $75.5 million, a decrease of $4.4 million, or 5.5%, from$79.9 million for the year ended December 31, 2005.

 

*Casino Operations*

 
| ** **                    | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | ** **                                   | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Casino revenue                |       | $                                            | 213,174    |                                         | 100.0      | % | $ | 237,049 |   | 100.0 | % |
| Promotional allowances        |       | (21,434                                      | )          | 10.1                                         |       | (32,617 | ) | 13.8 |   |
| Direct expenses               |       | $                                            | (141,594   | )                                            | 66.4       |   | (152,201 | ) | 64.2 |   |
| EBITDA                        |       | 50,146                                       |       | 23.5                                         |       | 52,231 |   | 22.0 |   |
| Depreciation and amortization |       | (13,509                                      | )          | 6.3                                          |       | (16,375 | ) | 6.9 |   |
| Income from casino operations |       | $                                            | 36,637     |                                         | 17.2       | % | $ | 35,856 |   | 15.1 | % |

 

Casinooperations accounted for 40% of total revenues for the year ended December 31,2006 and 38% of revenues for the year ended December 31, 2005.  Total revenues derived from casino operationswere $236.5 million for the year ended December 31, 2006, an increase of$23.8 million, or 11 %, from $213.2 million for the year ended December 31,2005.  This increase was due to growthfrom the Midwest properties, particularly at St. Jo and Lakeside Iowa, where wemade extensive casino renovations.

 

Casinooperating costs were $148.4 million, or 63%, of casino revenues for the yearended December 31, 2006, compared to $138.4 million, or 65%, of casinorevenues for the year ended December 31, 2005.  The increase in expenses was due primarily toexpenses that correlate with increases in revenue such as payroll and gamingtaxes.

 

Asa result of the factors mentioned above, Casino EBITDA was $52.2 million forthe year ended December 31, 2006, an increase of $2.1 million, or 4%, from$50.1 million from the year ended December 31, 2005.

 

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

 

*Casino Operations — Nevada*

 
| ** **                    | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | ** **                                   | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Casino revenue                |       | $                                            | 95,400     |                                         | 100.0      | % | $ | 95,614 |   | 100.0 | % |
| Promotional allowances        |       | (12,528                                      | )          | 13.1                                         |       | (13,546 | ) | 14.2 |   |
| Direct expenses               |       | (62,591                                      | )          | 65.6                                         |       | (64,349 | ) | 67.3 |   |
| EBITDA                        |       | 20,281                                       |       | 21.3                                         |       | 17,719 |   | 18.5 |   |
| Depreciation and amortization |       | (6,359                                       | )          | 6.7                                          |       | (6,408 | ) | 6.7 |   |
| Income from casino operations |       | $                                            | 13,922     |                                         | 14.6       | % | $ | 11,311 |   | 11.8 | % |

 

Nevadacasino operations accounted for 16% of total Company revenues for the yearended December 31, 2006 and 17% of total revenues for the year ended December 31,2005.  Revenues derived from Nevadacasino operations were $95.6 million for the year ended December 31,2006 compared with $95.4 million for the year ended December 31,2005. These results reflect the slight decrease in revenue at Terrible’s Hotel &Casino in Las Vegas as a result of the disruption to operations caused by thedemolition of one-third of its hotel rooms in 

 

38

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connection with the construction of its new parking structure andcasino floor expansion, which was completed in the fourth quarter of 2006.

 

Nevadacasino operating costs were $64.3 million, or 67%, of revenues for theyear ended December 31, 2006, compared to $62.6 million, or 66%, ofrevenues for the year ended December 31, 2005.  This increase in costs was due to an increasein spending at Terrible’s to maintain business during the disruption from theconstruction described in the previous paragraph as well as increase in payrolland insurance costs.

 

*Casino Operations — Other states*

 
| ** **                    | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | ** **                                   | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Other state casino revenue    |       | $                                            | 117,774    |                                         | 100.0      | % | $ | 141,435 |   | 100.0 | % |
| Promotional allowances        |       | (8,906                                       | )          | 7.6                                          |       | (19,071 | ) | 13.5 |   |
| Direct expenses               |       | (79,003                                      | )          | 67.1                                         |       | (87,852 | ) | 62.1 |   |
| EBITDA                        |       | 29,865                                       |       | 25.3                                         |       | 34,512 |   | 24.4 |   |
| Depreciation and amortization |       | (7,150                                       | )          | 6.1                                          |       | (9,967 | ) | 7.0 |   |
| Income from casino operations |       | $                                            | 22,715     |                                         | 19.2       | % | $ | 24,545 |   | 17.4 | % |

 

Casinooperations in other states accounted for 24% of total company revenues for theyear ended December 31, 2006, which is up from 21% in 2005.  Total revenues derived from casino operationslocated in states other than Nevada were $141.4 million, an increase of $ 23.6million, or 20%, compared to $117.8 million for the year ended December 31,2005.  Other state casino operating costswere $ 87.9 million, or 62% of revenues, for the year ended December 31,2006 compared to $79.0 million, or 67% of revenues, for the year ended December 31,2005.  We began floor improvements at ourcasinos in other states in the second quarter of 2005.  The floor renovations consisted of over 1,200new machines, new “ticket-in, ticket-out” software at each casino, new carpetand entirely new slot bases.  Therevenues during these periods were helped by significant increases in our cashpromotions, player point promotions and food specials, which were incurred tooffset the disruption from, and to keep player loyalty during, these extensivefloor renovations.  As these renovationswere completed during the last quarter of 2006, these costs should begin tonormalize.

 

*Other Operations*

* *

Revenuefrom other operations consists of revenue items such as ATM fees, pay phonecharges, rental income, gas and convenience store revenue and othermiscellaneous items unrelated to route and casino operations.  Revenue from other operations were$10.7 million for the year ended December 31, 2006 compared to$4.9 million for the year ended December 31, 2005.  The growth in this revenue was primarily dueto a full year of gasoline sales at Lakeside Iowa.

 

*Promotional Allowances*

* *

Promotionalallowances were $32.7 million, or 5.5% of total revenues, for the year ended December 31,2006, an increase of $11.0 million, or 51%, from $21.7 million, or3.9% of total revenues, for the year ended December 31, 2005.  The increase was due to the increase inpromotions during the year to offset business disruption resulting from thesignificant renovations at the majority of our larger casino properties.

 

39

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*Cost of Revenues*

 
| ** **                            | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                            | ** ** | ** **                                   | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Other operations                      |       | $                                            | (236       | )                                            | 0.0        | % | $ | (6,491 | ) | 1.1 | % |
|                                  |       |                                         |       |                                         |       |   |   |   |   |   |   |
| General and administrative            |       | $                                            | 10,608     |                                         | 1.9        | % | $ | 13,324 |   | 2.2 | % |
| Depreciation and amortization         |       | $                                            | 33,941     |                                         | 6.1        | % | $ | 38,124 |   | 6.4 | % |
| Loss on retirement of debt and assets |       | $                                            | 3,360      |                                         | 0.6        | % | $ | 0 |   | 0.0 | % |

 

Generaland administrative expenses, or G&A, were $13.3 million for the yearended December 31, 2006, an increase of $2.7 million, or 26%, from$10.6 million for the year ended December 31, 2005.  The increase was primarily due to increase inpayroll, utilities and insurance costs. G&A expenses as a percentage of revenue were 2.2% of the revenue forthe year ended December 31, 2006, compared to 1.9% of revenue duringfiscal year ended December 31, 2005.

 

Depreciationand amortization expense was $38.1 million for the year ended December 31,2006, an increase of $4.2 million, or 12%, from $33.9 million for theyear ended December 31, 2005.  Theincrease was due primarily to the depreciation and amortization expensesassociated with the parking structure construction and casino expansion atTerrible’s, as well as the renovations at our Midwest casino properties.

 

Thecosts represented in “other operations” consists of expenses related to theoperations of our gasoline and convenience stories.  In 2006, this expense was $6.5 million.  This amount is primarily related to the costof gasoline and convenience store operations.

 

*Income from Operations*

 

Asa result of the factors discussed above, income from operations was$80.5 million for the year ended December 31, 2006, a decrease of$6.3 million, or 7%, from $86.8 million for the year ended December 31,2005.  As a percentage of total revenues,income from operations decreased from 15.6% during 2005 to 13.5% during thesame period in 2006.

 

*Other Expenses*

 

Otherexpense was $38.4 million for the year ended December 31, 2006, anincrease of $2.4 million from expenses of $36.0 million for the yearended December 31, 2005.  Thisincrease was primarily a result of the increase in the interest rates on ourdebt that coincided with the increases in the prime lending rate during 2006.

 

Ourinterest costs increased from $36.5 million during the year ended December 31,2005 to $39.1 million during the year ended December 31, 2006.  The Company’s debt grew from $500.6 millionat December 31, 2005 to $522.6 million at December 31, 2006.

 

*Net Income*

 

Netincome for the year ended December 31, 2006 was $42.1 million compared tothe net income of $50.8 million recorded for year ended December 31,2005.  The year over year decrease wasprimarily the result of the increased expenses discussed above.

 

40

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**Liquidity and Capital Resources**

 

*Cash Flows*

 

AtDecember 31, 2007, we had cash and cash equivalents of approximately $94.3million on hand and approximately $36 million available under ourrevolving credit facility.   As of March 15,2008, we had fully drawn our revolving line of credit.  As of February 29, 2008, the Company hadcash balances of $124.7 million.

 

 Based on our anticipated future operations, webelieve that cash on hand and expected cash flows will be adequate to meet ouranticipated working capital requirements, capital expenses for both maintenanceand growth, and scheduled payments of interest on our outstanding indebtednessat least through December 31, 2008, although we cannot assure you suchsources will be sufficient.  However, asa result of the default under our credit agreement due to the “going concern”qualification in the opinion of our independent auditors with respect to ourfinancial statements for the fiscal year ended December 31, 2007, ourlenders could declare an event of default under the credit agreement andrequire repayment of all outstanding borrowings ($860 million ).  We expect to enter into discussions with ourcredit agreement lenders to negotiate a forbearance agreement pursuant to whichthey would agree not to declare, for a specified period of time, an event ofdefault under the credit agreement as a result of the going concern opinion orthe probable failure to comply with financial covenants in the future.  As previously disclosed, we have engagedGoldman, Sachs & Co. as our financial advisor to assist us with ourevaluation of financial and strategic alternatives, which may include arecapitalization, refinancing, restructuring or reorganization of the ourobligations or a sale of some or all of our businesses.  We and our advisors are actively workingtoward such a transaction that would address the decline in our operatingresults and our capital structure, including our outstanding indebtedness.  We cannot assure you that we will besuccessful in negotiating a forbearance with our credit agreement lenders or inundertaking any such alternative in the near term.

 

Ifwe were not successful in obtaining a forbearance or entering into atransaction to address our liquidity and capital structure, the lenders underour credit agreement would have the ability to accelerate repayment of allamounts outstanding under the credit agreement ($853 million at March 15,2008)  If the lenders under the creditagreement were to require repayment of the outstanding borrowings upon adefault, the holders of our subordinated indebtedness would have the ability todeclare a default, and accelerate repayment of, the subordinated indebtedness($330 million principal amount at March 15, 2008).  If eitherthe credit agreement indebtedness or the subordinated indebtedness were to beaccelerated upon a default, we would be required to refinance or restructurethe payments on that debt.  We cannotassure you that we would be successful in completing a refinancing orrestructuring, if necessary.  If we wereunable to do so, we may be required to seek protection under Chapter 11 of theU. S. Bankruptcy Code.

 

*Operating Activities*

* *

Duringthe year ended December 31, 2007, operating activities provided $4.3 million in cash flows on a net loss of $(127.2) million.

 

Significantoperating uses of cash in 2007 include interest and distributions made tostockholders for payment of S corporation taxes and discretionarydistributions.  Our cash payments forinterest were $81.6 million for the year ended December 31, 2007 andcash distributions to stockholders were 10.3 million for the year ended December 31,2007.  The distributions to stockholdersincluded $3.3 million in distributions to pay personal taxes and distributions ofapproximately $7.0 million.

 

Pursuantto an amendment to our credit agreement, after December 31, 2007, cashdividends may be declared and paid only in an aggregate amount not to exceedthe Company’s percentage of excess cash flow (as defined in the amendment) forthe preceding fiscal year so long as the Company is in compliance the financialcovenants set forth in the credit agreement. For the year ended December 31, 2007, the Company had no excesscash flow, and no cash dividends (other than for tax purposes) will be allowedin 2008.

 

41

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*Investing Activities andCapital Expenditures*

* *

For the year ended December 31, 2007, we had net cash used forinvesting activities of $574.1 million, of which $541.6 million wasrelated to the net cash used to complete the Sands Regent and PrimmAcquisitions. The remainder was used for the purchase of new property andequipment including gaming devices. Capital expenditures during 2007 wereapproximately $32.4 million.

 

OnJanuary 3, 2007, we consummated the Sands Regent Acquisition, payingapproximately $119 million in cash for the outstanding securities of The SandsRegent.

 

OnApril 10, 2007, we consummated the Primm Acquisition paying $394 millionin cash for certain gaming assets of MGM Mirage including the Buffalo Bill’s,Primm Valley and Whiskey Pete’s hotel-casinos.

 

Capitalprojects for 2008 are anticipated to be approximately $35 million.  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 $598.5 million during the year ended December 31,2007.  We used net loan proceeds of $554million to fund the Sands Regent and Primm Acquisitions.  Also in 2007, we made distributions to ourstockholders of $10.3 million.  Thedistributions included $3.3 million for personal taxes and $7.0 million foradditional distributions.

 

OnJanuary 3, 2007, we entered into the Credit Agreement, which was anamendment and restatement of our previous amended and restated Credit Agreementdated as of October 8, 2004.  We borrowed $375.0 million in termloans under the credit agreement on the date of the agreement to finance theSands Regent Acquisition and $325.0 million in delay draw term loans and adraw on the revolving credit facility in an amount of $75.0 million on April 9,2007 to finance the Primm Acquisition.

 

*Contractual Obligations*

* *

Thefollowing table summarizes our contractual obligations as of December 31,2007.

 
| ** **                         | ** ** | **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                     |       | $                                         | 1,146,070  |   | $ | 7,634 |   | $ | 15,209 |   | $ | 174,565 |   | $ | 948,662 |   |
| Estimated interest payments (1)    |       | 585,236                                   |       | 101,615 |   | 201,086 |   | 190,675 |   | 91,860 |   |
| Operating leases                   |       | 442,170                                   |       | 59,900 |   | 114,351 |   | 70,425 |   | 197,494 |   |
| Total contractual cash obligations |       | $                                         | 2,173,476  |   | $ | 169,149 |   | $ | 330,646 |   | $ | 435,665 |   | $ | 1,238,016 |   |

 

----

(1) Estimated interest for variable rate debtis based on rates at December 31, 2007

 

*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.  Weprepare our financial statements in conformity with accounting principlesgenerally accepted in the United States of America.  Our business and industry is highlyregulated.  The majority of our revenueis counted in the form of cash, chips and tokens and therefore, is notsubject to any significant or complex estimation procedures.

 

42

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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.  Significantaccounting policies that affect the reported amounts for these assets includethe determination of the assets’ estimated useful life, evaluation of theassets’ recoverability and the likelihood of technological obsolescence.  We estimate useful lives for property andequipment based on historical experience and estimates of products’ commerciallives.  Significant incremental costsassociated with the acquisition of location leases are capitalized andamortized using the straight-line method over the term of the related leases,which range from 1 to 20 years.  Shouldthe actual useful life of an asset differ from the estimated useful life, futureoperating results could be positively or negatively affected.  We review useful lives, obsolescence, andassess commercial 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.  If undiscounted expected cash flows to begenerated by a long-lived asset or asset group are less than its carryingamount, we record an impairment to write down the long-lived asset or asset groupto its estimated fair value.  Fair valueis determined based on undiscounted expected future cash flows.  An adverse change to the estimate of theseundiscounted future cash flows could necessitate an impairment charge thatcould 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, 2007.  The purchase price of an acquisition isallocated to the underlying assets acquired and liabilities assumed based upontheir estimated fair values at the date of acquisition.  The estimated fair values of the assetsacquired pursuant to the Grace Acquisition, Sands Regent Acquisition and PrimmAcquisition, a substantial portion of which consisted of intangible assets comprisedof license rights, were determined by management after considering variousinformation including an independent appraisal. To the extent that the purchase price exceeds the fair value of the netidentifiable tangible and intangible assets acquired, such excess is allocatedto goodwill.

 

Wereview the investment in goodwill and license rights for impairmentannually.  The annual evaluation ofgoodwill and license rights requires the use of estimates about futureoperating results of each reporting unit to determine their estimated fairvalue.  Changes in forecasted operationscan materially affect these estimates. Once impairment of goodwill or other intangible assets has beenrecorded, it cannot be reversed.  Anadverse change to the estimate of these future cash flows could necessitate animpairment charge that could adversely affect operating results.

 

 **Recently Issued Accounting****Standards**

 

In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities”. SFAS No. 159 permits companies to choose to measure many financialinstruments and certain other items at fair value.  The objective is toimprove financial reporting by providing companies with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  The fair value option established by SFAS No. 159permits all companies to choose to measure eligible items at fair value atspecified election dates.  At each subsequent reporting date, a companyshall report in earnings any unrealized gains and losses on items for which thefair value option has been elected. SFAS No. 159 is effective as of thebeginning of a company’s first fiscal year that begins after November 15,2007.  Early adoption is permitted as of the beginning of a fiscal yearthat begins on or before November 15, 2007, provided the company alsoelects to apply the provisions of SFAS No. 157, “Fair Value Measurements”. The Company is not going to adopt SFAS No. 159.

 

43

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In September 2006, the FASB issued SFAS No.157, “*Fair Value Measurements*”, which definesfair value, establishes a framework for measuring fair value in GAAP, andexpands disclosures about fair value measurements.  In February 2008, the FASB deferred theadoption of SFAS No. 157 for one year as it applies to certain items, includingassets and liabilities initially measured at fair value in a businesscombination, reporting units and certain assets and liabilities measured atfair value in connection with goodwill impairment tests in accordance with SFASNo. 142 and long-lived assets measured at fair value for impairment assessmentsunder SFAS No. 144, “*Accounting for theImpairment and Disposal of Long-Lived Assets*”.  This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute.  SFAS No.157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years.  The Company does not believe the adoption ofSFAS No. 157 will have a material impact on our consolidated financialstatements.

 

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations*. SFAS No. 141(R) retainsthe fundamental requirements in SFAS No. 141 that the acquisition methodbe used for all business combinations and for an acquirer to be identified foreach business combination. SFAS No. 141(R) defines the acquirer asthe entity that obtains control of one or more businesses in the businesscombination and establishes the acquisition date as the date that the acquirerachieves control. By applying the acquisition method to all transaction andother events in which one entity obtains control over one or more otherbusinesses, this Statement improves the comparability of the information aboutbusiness combinations provided in financial reports. SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. We do not expect the adoption of SFAS No. 141(R) to have amaterial effect on our consolidated financial statements

 

In December 2007, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.160, *“Noncontrolling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51.”*  SFAS No. 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity.  The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement.  SFAS No. 160clarifies that changes in a parent’s ownership in a subsidiary that do notresult in deconsolidation are equity transactions if the parent retains itscontrolling financial interest.  Inaddition, this statement requires that a parent recognize a gain or loss on netincome when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date.  SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  SFAS No. 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not expect the adoption of SFAS No. 160 will have a materialeffect on our consolidated financial statements.  

 

**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 bythe use of forward-looking terminology such as “believes,” “estimates,” “expects,”“intends,” “may,” “will,” “should” or “anticipates” or the negative or othervariation of these or similar words, or by discussions of strategy or risks anduncertainties.  Forward-lookingstatements in this report include, among other things, statements concerning:

 

·                  projections offuture results of operations or financial condition;

 

·                  expectations forour route operations and our casino properties; and

 

·                  expectations ofthe continued availability of capital resources.

 

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 ouroperations may vary materially from any forward-looking statement made byor on our behalf.  Forward-lookingstatements should not be regarded as a representation by us or any other personthat the forward-looking statements will be achieved.  Undue reliance should not be placed on anyforward-looking statements.  Some of thecontingencies and uncertainties to which any forward-looking statementcontained herein is subject include, but are not limited to, the following:

 

·                  The currentgeneral economic downturn, and in particular the economic downturn in southernNevada and southern California (two of our primary markets), may adverselyaffect our business.

 

·                  The currenteconomic downturn may worsen, which may have an adverse impact on the Company’soperations and therefore the Company’s liquidity.

 

·                  Our substantialindebtedness could adversely affect our financial health and prevent us fromfulfilling our obligations under the instruments governing our outstandingindebtedness.

 

·                  We will requirea significant amount of cash to service our indebtedness.  Our ability to generate cash depends on manyfactors beyond our control.

 

44

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

 

·                  Our indebtednessimposes restrictive covenants on us that, should current operating trendscontinue, may require further amendments to our credit facilities, which we maynot be able to negotiate.

 

·                  We may notbe able to successfully integrate the operations of casinos we acquire into ourbusiness.

 

·                  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.

 

·                  Our executiveofficers and members of our board of directors own 100% of the Company, whichcould lead to conflicts of interest.

 

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

 

**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 other knowledge.  We have not independently verified any of thedata from third party sources, and we make no representation as to the accuracyof such information.  While we believeinternal company estimates are reliable and market definitions are appropriate,they have not been verified by any independent sources, and we make norepresentations as to the accuracy of such estimates.

 

## **Item 7A.  Quantitative** and Qualitative Disclosures About Market Risk.

## ** **

Marketrisk is the risk of loss arising from adverse changes in market rates andprices, such as interest rates, foreign currency exchange rates, and commodityprices.  We do not have any cash or cashequivalents as of December 31, 2007 that are subject to market risk basedon changes in interest rates.  As aresult of borrowings under our credit agreement, we are exposed to market riskdue to floating or variable interest rates. The interest on revolving borrowings and on the additional term loan underour credit facility is based on a floating rate (a base rate or LIBOR, at ouroption), plus a leverage grid-based variable amount.  At December 31, 2007, the principalamount of borrowings under our credit facility was approximately$817 million.  In November 2007,we terminated the interest rate swap that we entered into in January 2007which covered notional amounts totaling $450 million.  Consequently, a hypothetical 1.0% increase inLIBOR would result in an approximately $8.2 million annual increase ininterest expense.

 

45

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

 
| **Report  of Independent Registered Public Accounting Firm**                                                                  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** |
| **Consolidated Financial Statements**                                                                                         | ** ** |
| ** **                                                                                                                    | ** ** |
| Consolidated Balance Sheets  As of December 31, 2006 and 2007                                                            |       |
|                                                                                                                          |       |
| Consolidated Statements of Operations  For the years ended December 31, 2005, 2006 and 2007                              |       |
|                                                                                                                          |       |
| Consolidated Statements of Stockholders’ Equity  (Deficiency)  For the years ended December 31, 2005, 2006 and 2007 |       |
|                                                                                                                          |       |
| Consolidated Statements of Cash Flows  For the years ended December 31, 2005, 2006 and 2007                              |       |
|                                                                                                                          |       |
| **Notes to Consolidated Financial Statements**                                                                                | ** ** |

 

46

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# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

# ** **

Tothe Board of Directors and Stockholders ofHerbst Gaming, Inc. and subsidiariesLas Vegas, Nevada

 

Wehave audited the accompanying consolidated balance sheets of Herbst Gaming, Inc.and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and therelated consolidated statements of operations, stockholders’ equity(deficiency), and cash flows for each of the three years in the period ended December 31,2007.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

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 ofmaterial misstatement.  The Company isnot required 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 statement presentation.  We believe that our audits provide areasonable 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, 2007 and 2006, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2007, in conformity with accounting principles generallyaccepted in the United States of America.

 

The accompanying financial statements havebeen prepared assuming that the Company will continue as a going concern.  As discussed in Note 14 to the financialstatements, the Company’s operating loss, stockholders’ capital deficiency andprobable failure to comply with its financial covenants during 2008 raisesubstantial doubt about its ability to continue as a going concern.  Management’s plans concerning these mattersare also discussed in Note 14 to the financial statements.  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 
|                           |   |
|--------------------------------|--------|
| /s/  Deloitte & Touche LLP |   |
| Las  Vegas, Nevada             |   |
| March  31, 2008                |   |

 

47

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**Herbst Gaming, Inc.**

**Consolidated Balance Sheets**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **2006**             | ** ** | **2007** | ** ** |
| **Assets**                                                                               |       |                 |       |   |   |
| Current assets                                                                           |       |                 |       |   |   |
| Cash and cash equivalents                                                                |       | $                    | 65,640     |   | $ | 94,282 |   |
| Accounts receivable, net                                                                 |       | 3,515                |       | 7,012 |   |
| Notes and loans receivable                                                               |       | 864                  |       | 609 |   |
| Prepaid expenses                                                                         |       | 6,681                |       | 17,134 |   |
| Inventory                                                                                |       | 2,553                |       | 4,995 |   |
| Total  current assets                                                                    |       | 79,253               |       | 124,032 |   |
| Property and equipment, net                                                              |       | 234,515              |       | 548,709 |   |
| Lease acquisition costs, net                                                             |       | 33,162               |       | 21,551 |   |
| Due from related parties                                                                 |       | 1,627                |       | 1,704 |   |
| Other assets, net                                                                        |       | 16,419               |       | 27,892 |   |
| Intangibles,  net                                                                        |       | 200,219              |       | 244,059 |   |
| Goodwill                                                                                 |       | 3,255                |       | 112,438 |   |
|                                                                                     |       |                 |       |   |   |
| Total  assets                                                                            |       | $                    | 568,450    |   | $ | 1,080,385 |   |
|                                                                                     |       |                 |       |   |   |
| **Liabilities  and stockholders’ equity**                                           |       |                 |       |   |   |
| Current liabilities                                                                      |       |                 |       |   |   |
| Current portion of long-term debt                                                        |       | $                    | 1,105      |   | $ | 7,634 |   |
| Accounts payable                                                                         |       | 10,016               |       | 18,429 |   |
| Accrued expenses                                                                         |       | 15,408               |       | 32,946 |   |
| Due to related parties                                                                   |       | —               |       | — |   |
| Total current liabilities                                                                |       | 26,529               |       | 59,009 |   |
| Long-term debt, less current portion                                                     |       | 521,513              |       | 1,138,436 |   |
| Other liabilities                                                                        |       | 1,637                |       | 1,669 |   |
| Commitments and contingencies (Note 11)                                                  |       |                 |       |   |   |
| Stockholders’ equity                                                                |       |                 |       |   |   |
| 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 |   |
| Retained earnings(accumulated deficit)                                                   |       | 14,772               |       | (122,728 | ) |
| Total stockholders’ equity                                                          |       | 18,771               |       | (118,729 | ) |
|                                                                                     |       |                 |       |   |   |
| Total liabilities and stockholders’ equity                                          |       | $                    | 568,450    |   | $ | 1,080,385 |   |

 

Seenotes to consolidated financial statements.

 

48

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**Herbst Gaming, Inc.**

**Consolidated Statements ofOperations**

**(in thousands)**

** **
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Route operations                                                                   |       | $                                          | 339,401    |   | $ | 347,041 |   | $ | 276,946 |   |
| Casino operations                                                                  |       | 213,174                                    |       | 237,049 |   | 473,248 |   |
| Other—non gaming                                                              |       | 4,923                                      |       | 10,676 |   | 98,987 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Total revenues                                                                     |       | 557,498                                    |       | 594,766 |   | 849,181 |   |
| Less promotional allowances                                                        |       | (21,657                                    | )          | (32,703 | ) | (64,241 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Net revenues                                                                       |       | 535,841                                    |       | 562,063 |   | 784,940 |   |
| Costs and expenses                                                                 |       |                                       |       |   |   |   |   |
| Route operations                                                                   |       | 258,114                                    |       | 271,463 |   | 244,086 |   |
| Casino operations                                                                  |       | 138,364                                    |       | 152,201 |   | 335,252 |   |
| Depreciation and amortization                                                      |       | 33,941                                     |       | 38,124 |   | 56,405 |   |
| General and administrative                                                         |       | 15,217                                     |       | 13,324 |   | 22,983 |   |
| Other – non-gaming                                                            |       |                                       |       | 6,491 |   | 80,184 |   |
| Loss on impairment of assets                                                       |       | —                                     |       | — |   | 72,965 |   |
| Loss on asset retirement                                                           |       | 3,360                                      |       | — |   | — |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Total costs and expenses                                                           |       | 448,996                                    |       | 481,603 |   | 811,875 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Income (Loss) from operations                                                      |       | 86,845                                     |       | 80,460 |   | (26,935 | ) |
| Other income (expense)                                                             |       |                                       |       |   |   |   |   |
| Interest income                                                                    |       | 740                                        |       | 734 |   | 1,481 |   |
| Interest expense, net of capitalized  interest of $0, $101, and $873, respectively |       | (36,532                                    | )          | (39,134 | ) | (85,631 | ) |
| Change in value of derivative instruments                                          |       | —                                     |       | — |   | (16,115 | ) |
| Loss on early retirement of debt                                                   |       | (221                                       | )          | — |   | — |   |
| Total other expense, Net                                                           |       | (36,013                                    | )          | (38,400 | ) | (100,265 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Net (loss) income                                                                  |       | $                                          | 50,832     |   | $ | 42,060 |   | $ | (127,200 | ) |

 

Seenotes to consolidated financial statements.

 

49

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**Herbst Gaming, Inc.**

**Consolidated Statements ofStockholders’ Equity (Deficit)**

**(in thousands)**

 
| **Balance**                      | ** ** | **Common   Stock** | ** ** | **Additional   Paid-In   Capital** | ** ** | **Retained   Earnings   (accumulated   deficit)** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------|------------|
|                             |       |                    |       |                                         |       |                                                             |       |      |       |
| Balance, January 1, 2005    |       | $                       | 2,368      |                                         | $          | 1,631                                                            |       | $         | (34,763    | ) | $ | (30,764 | ) |
| Net income                       |       |                    |       |                                         |       | 50,832                                                           |       | 50,832    |       |
| Stockholders’ distributions |       | —                  |       | —                                       |       | (12,087                                                          | )          | (12,087   | )          |
| Balance December 31, 2005   |       | $                       | 2,368      |                                         | $          | 1,631                                                            |       | $         | 3,982      |   | $ | 7,981 |   |
| Net income                       |       |                    |       |                                         |       | 42,060                                                           |       | 42,060    |       |
| Stockholders’ distributions |       |                    |       |                                         |       | (31,270                                                          | )          | (31,270   | )          |
| Balance December 31, 2006   |       | $                       | 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 | ) |

 

Seenotes to consolidated financial statements.

 

50

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**Herbst Gaming, Inc.**

**Consolidated Statements of CashFlows**

**(in thousands)**

 
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| Cash flows from operating activities                                                     |       |                                       |       |   |   |   |   |
| Net (loss)income                                                                         |       | $                                          | 50,832     |   | $ | 42,060 |   | (127,200 | ) |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                            |       | 33,941                                     |       | 38,124 |   | 56,405 |   |
| Amortization of debt issuance costs                                                      |       | 1,801                                      |       | 1,811 |   | 3,188 |   |
| Debt discount amortization                                                               |       | 146                                        |       | 143 |   | 144 |   |
| Gain (loss) on sale of property and  equipment                                           |       | (27                                        | )          | 152 |   | 105 |   |
| Loss on retirement of assets                                                             |       | 3,360                                      |       | — |   | — |   |
| Loss on early retirement of debt                                                         |       | 221                                        |       | — |   | — |   |
| Loss on impairment of assets                                                             |       | —                                     |       | — |   | 72,965 |   |
| Decrease (increase) in:                                                                  |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                      |       | (621                                       | )          | (1,527 | ) | 3,790 |   |
| Prepaid expenses                                                                         |       | (37                                        | )          | (443 | ) | (4,169 | ) |
| Inventory                                                                                |       | (1,101                                     | )          | 77 |   | (239 | ) |
| Due from related parties                                                                 |       | (3                                         | )          | (4 | ) | (606 | ) |
| Other assets                                                                             |       | (1,303                                     | )          | (1,295 | ) | (538 | ) |
| Increase (decrease) in:                                                                  |       |                                       |       |   |   |   |   |
| Accounts payable                                                                         |       | 2,813                                      |       | 848 |   | (1,074 | ) |
| Accrued expenses                                                                         |       | 1,799                                      |       | 1,447 |   | 1,994 |   |
| Due to related parties                                                                   |       | (34                                        | )          | (2 | ) | — |   |
| Other liabilities                                                                        |       | 417                                        |       | 102 |   | (492 | ) |
| Net cash provided by operating activities                                                |       | $                                          | 92,204     |   | $ | 81,493 |   | $ | 4,273 |   |
| Cash flows from investing activities                                                     |       |                                       |       |   |   |   |   |
| Net cash paid for acquisition of riverboat  assets, net of cash acquired                 |       | (264,457                                   | )          | — |   | — |   |
| Net cash paid for acquisition of software  assets, net of cash acquired                  |       | —                                     |       | (10,231 | ) | — |   |
| Net cash paid for Sands Regent Acquisition,  net of cash acquired                        |       | —                                     |       | (1,542 | ) | (147,878 | ) |
| Net cash paid for Primm Acquisition, net of  cash acquired                               |       | —                                     |       | — |   | (393,682 | ) |
| Additions to notes and loans receivable                                                  |       | (1,303                                     | )          | (1,090 | ) | (1,153 | ) |
| Collection on notes and loans receivable                                                 |       | 1,322                                      |       | 872 |   | 1,937 |   |
| Proceeds from sale of property and  equipment                                            |       | 264                                        |       | 378 |   | 248 |   |
| Purchases of property and equipment                                                      |       | (43,893                                    | )          | (66,622 | ) | (32,418 | ) |
| Lease acquisition costs                                                                  |       | (1,105                                     | )          | (1,523 | ) | (1,180 | ) |
|                                                                                     |       |                                       |       |   |   |   |   |
| Net cash used in investing activities                                                    |       | $                                          | (309,172   | ) | $ | (79,758 | ) | $ | (574,128 | ) |

 

Seenotes to consolidated financial statements.

 

51

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| ** **                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from financing activities                                        |       |                                       |       |   |   |   |   |
| Proceeds from long term debt                                                |       | $                                          | 191,000    |   | $ | 33,000 |   | $ | 853,000 |   |
| Payments on long term debt                                                  |       | (23,965                                    | )          | (11,118 | ) | (229,692 | ) |
| Loan origination fees                                                       |       | (2,082                                     | )          | (556 | ) | (14,513 | ) |
| Loss on early retirement of debt                                            |       | (221                                       | )          | — |   | — |   |
| Stockholders’ distributions                                            |       | (12,087                                    | )          | (31,270 | ) | (10,300 | ) |
| Net cash provided (used in) by financing  activities                        |       | 152,645                                    |       | (9,944 | ) | 598,495 |   |
| Net increase (decrease) in cash and cash  equivalents                       |       | (64,323                                    | )          | (8,209 | ) | 28,642 |   |
| Cash and cash equivalents                                                   |       |                                       |       |   |   |   |   |
| Beginning of year                                                           |       | 138,172                                    |       | 73,849 |   | 65,640 |   |
| End of year                                                                 |       | $                                          | 73,849     |   | $ | 65,540 |   | $ | 94,282 |   |
| Supplemental cash flow information:                                         |       |                                       |       |   |   |   |   |
| Cash paid during the period for interest                                    |       | $                                          | 33,979     |   | $ | 37,790 |   | $ | 81,579 |   |
| Supplemental schedule of non cash  investing and financing activities: |       |                                       |       |   |   |   |   |
| Purchase of property and equipment financed  through accounts payable       |       | $                                          | 3,495      |   | $ | 1,802 |   | $ | 1,028 |   |
|                                                                             |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

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**Herbst Gaming, Inc.**

 

**Notes to consolidated financialstatements**

 

**1.****                                     ****Description of Business andSummary of Significant Accounting Policies**

 

***Description of Business and Principles ofConsolidation***—Theaccompanying condensed consolidated financial statements of Herbst Gaming, Inc.(“Herbst” or the “Company”) include the accounts of Herbst and itssubsidiaries: E-T-T, Inc. and subsidiaries (“ETT”), Market Gaming, Inc.(“MGI”), E-T-T Enterprises L.L.C. (“E-T-T Enterprises”), Flamingo ParadiseGaming, LLC (“FPG”), HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HGI-SJ”), HGI-MarkTwain (“HGI-MT”), The Sands Regent and subsidiaries (“The Sands Regent”) andThe Primadonna Company LLC (“Primadonna”). The financial statements of ETT are consolidated and include thefollowing wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc.and Corral Country Coin, Inc.  Thefinancial 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 Herbst, ETT,MGI, E-T-T Enterprises, FPG, HGI-L, HGI-SJ, HGI-MT, The Sands Regent andPrimadonna have been eliminated in the condensed consolidated financialstatements.  ETT and MGI conduct businessin the gaming industry and generate revenue principally from gaming machineroute operations and casino operations. Gaming machine route operations involve the installation, operation andservice of gaming machines owned by the Company that are located in licensed,leased or subleased space in retail stores (supermarkets, convenience stores,etc.), bars and restaurants throughout the State of Nevada.  The Company owns and operates Terrible’s TownCasino & Bowl in Henderson, Nevada, Terrible’s Searchlight Casino inSearchlight, Nevada and Terrible’s Town Casino and Terrible’s Lakeside Casino &RV Park, both of which are located in Pahrump, Nevada.  The operations of the subsidiaries of theCompany are as follows:

 

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

 

·                  FPGowns and operates Terrible’s Hotel & Casino (“Terrible’s Casino”) inLas Vegas, Nevada, which began operations in December 2000.

 

·                  HGI-Lowns and operates Terrible’s Lakeside Casino (“Lakeside Iowa”), as well as ahotel, gas station and convenience store, all located in Osceola, Iowa, whichwere acquired in February 2005.

 

·                  HGI-SJowns and operates Terrible’s St. Jo Frontier Casino (“St. Jo”) in St. Joseph,Missouri, which was acquired in February 2005.

 

·                  HGI-MTowns and operates Terrible’s Mark Twain Casino in La Grange, Missouri, whichwas acquired in February 2005.

 

·                  TheSands Regent and its direct and indirect wholly-owned subsidiaries, which wereacquired on January 3, 2007, own and operate Terrible’s Rail City Casinoin Sparks, Nevada, the Sands Regency Casino Hotel in Reno, Nevada, the Terrible’sGold Ranch Casino and RV Resort in Verdi, Nevada and Terrible’s Dayton Casinoand Red Hawk Sports Bar, each of which is in Dayton, Nevada (all suchproperties acquired pursuant to the Sands Regent Acquisition, together the “SandsRegent Casinos” see Note 2)).

 

·                  Primadonna,which was acquired on April 10, 2007, owns and operates Whiskey Pete’sHotel and Casino (“Whiskey Pete’s”), Buffalo Bill’s Hotel and Casino (“BuffaloBill’s”), Primm Valley Resort and Casino (“Primm Valley,” and together withWhiskey Pete’s and Buffalo Bill’s, 

 

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together the “Primm Casinos”), a Californialottery station located on the Nevada/California border, three gasolinestations and the Primm Travel Center (such properties, together with the PrimmCasinos, the “Primm Properties”), all of which are located in Primm, Nevada(see Note 2).

 

Wehave elected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under thoseprovisions, the owners of the Company pay income taxes on its taxableincome.  Accordingly, a provision forincome taxes is not included in our financial statements.  During the first quarter of 2007, The SandsRegent converted to a Subchapter S Corporation from a C Corporation.

 

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.

 

***Use of Estimates***—The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the period. Significant estimatesincorporated into the Company’s consolidated financial statements include theestimated useful lives for depreciable and amortizable assets, the estimatedallowance for doubtful accounts receivable and the estimated cash flows inassessing the recoverability of long-lived assets as well as estimated fairvalues of certain assets related to write downs and impairments. Actual resultscould differ from those estimates.

 

***Reclassifications***—As noted above, during 2007 we completed theacquisitions of the Sands Regent and Primadonna properties.  After the acquisitions, we analyzed theoperations of our newly acquired properties, in comparison to our previousoperational mix between route and casino operations as it related to theclassification of certain expenses.  As aresult of this analysis, certain amounts have been reclassified from generaland administrative expenses to route and casino expenses to present theexpenses incurred for operations going forward to conform to the current period’spresentation.  Expenses for the twelvemonths ended December 31, 2005 include the following: general andadministrative expenses are decreased by $4,372,000, route expenses areincreased by $1,142,000, Nevada casino expenses are increased by $3,466,000,Midwest casino expenses are decreased by $236,000.  In addition, expenses for the twelve monthsended December 31, 2006 include the following: general and administrativeexpenses are decreased by $5,124,000, route expenses are increased by$1,315,000 and Nevada casino expenses are increased by $3,809,000.  Such reclassifications had no impact on netincome or equity. There was also a reclassification of revenue in 2005 due to$299 in entertainment revenue being moved from “Other Revenue” to “CasinoRevenue” and the movement of $802 Route related service revenue from “OtherRevenue” to “Route Revenue”. These reclassifications did not impact “TotalRevenue” and conform to the 2007 presentation. 

 

***Cash and Cash Equivalents***—Cash and cash equivalents include highlyliquid investments with a maturity at the date of purchase of three months orless. The carrying value of these investments approximates their fair value dueto their short maturities.

 

***Fair Value of Financial Instruments***—The carrying value of the Company’s cash,notes and loans receivable, and trade payables approximates fair valueprimarily because of the short maturities of these instruments. The fair valueof the Company’s long-term debt is estimated based on the quoted market pricesfor the same or similar issues or on the current rates offered to the Companyfor debt of the same remaining maturities. Based on the borrowing ratescurrently available to the Company for debt with similar terms and averagematurities, the estimated fair value of long-term debt outstanding isapproximately $1,025,396,051 as of December 31, 2007.

 

***Accounts Receivable***—Receivables consist primarily of amounts duefrom customers as a result of normal business operations. The Companyperiodically performs credit evaluations of its customers. The Company reviewsaccounts receivable balances in order to determine an allowance for potentialcredit losses based on our collections experience and the age of thereceivables. At December 31, 2006 and 2007, the allowance for potentialcredit losses was $488,000 and $802,000, respectively.

 

***Notes and Loans Receivable***—In order to secure various route locations,the Company has provided certain incentives to the location operators in theform of loans. The loans, made for build-outs, tenant improvements, and initialoperating expenses, are generally secured by the personal guarantees of theoperators and 

 

54

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the locations’ assets. The majority of the loans are non-interestbearing and are expected to be repaid within one year from the locations’ shareof net gaming win.

 

TheCompany regularly evaluates the collectibility 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, 2006 and 2007, no allowance for potentialcredit losses was deemed necessary.

 

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

 

***Property and Equipment***—Property and equipment are stated at costand depreciated using the straight-line method over the estimated useful livesof the assets. Leasehold improvements are amortized using the straight-linemethod over the shorter of the lease term or estimated useful life of theasset. 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***— Significant incremental costs associatedwith the acquisition of location leases are capitalized and amortized using thestraight-line method over the term of the related leases. Lease acquisitioncosts are stated at cost less accumulated amortization of $43,110,000 and$34,129,000 at December 31, 2006 and 2007, respectively.

 

***Debt Issuance Costs***—Debt issuance costs incurred in connectionwith the issuance of long-term debt are capitalized and amortized to interestexpense using the effective interest method over the terms of the related debtagreements. Debt issuance costs are included in other assets on the balancesheets (see Note 6).

 

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**1.****                                     ****Description of Business andSummary of Significant Accounting Policies (continued)**

 

***Long-Lived Assets***—In accordance with the provisions of SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Companyevaluates the potential impairment of long-lived assets when events or changesin circumstances indicate that the carrying amount of a long-lived asset maynot be recoverable. If it is determined that the carrying value of long-livedassets may not be recoverable based upon the relevant facts and circumstances,the Company estimates the future undiscounted cash flows expected to resultfrom the use of the asset and its eventual disposition. If the sum of theexpected undiscounted future cash flows is less than the carrying value of theasset, the Company will recognize an impairment loss for the difference betweenthe carrying value of the asset and its fair value. The Company believes thatno impairment of long-lived assets exists at December 31, 2007.

 

***Goodwill and Intangible Assets***— We had approximately $3,255,000 and $112,438,000 in goodwill on ourconsolidated balance sheet as of December 31, 2006 and December 31,2007, respectively.  Approximately $56,467,000of the total goodwill for fiscal year 2007 is from the Sands RegentAcquisition, and an additional $89,215,000 is from the Primm Acquisition, eachas described in Note 2 below. The amount recorded as of December 31,2007 also reflects a decrease of $36,500,000 associated with the impairment of goodwillat the casino in Primm, Nevada (see Note 5).

 

Wehad $200,219,000 and $244,059,000 in other intangible assets on ourconsolidated balance sheet as of December 31, 2006 and December 31,2007, respectively. Approximately $25,950,000 of the total for fiscal year 2007is from the Sands Regent Acquisition, and an additional $53,850,000 is from thePrimm Acquisition, each as described in Note 2 below.  The number also reflects a decrease of$33,300,000 associated with the impairment of intangibles at Lakeside Iowa (seeNote 5).

 

SFASNo. 142, “Goodwill and Other Intangible Assets,” requires a review ofgoodwill and the license rights for impairment at least annually. We completeour annual assessment for impairment in the fourth quarter of each year. Theannual evaluation of goodwill and the license rights requires the use ofestimates about future operating results of each reporting unit to determinetheir estimated fair value. Changes in forecasted operations can materiallyaffect these estimates. Once impairment of goodwill or other intangible assetshas been recorded, it cannot be reversed.

 

***Revenue and Promotional Allowances***—In accordance with industry practice, theCompany recognizes as gaming revenues the net win from route operations, whichis the difference between gaming wins and losses. The Company recognizes totalnet win from gaming devices as revenues from gaming routes that operate underrevenue-sharing arrangements. Revenue-sharing payments to route locations arerecorded as costs of route operations. Revenues from casino operations aregaming wins less losses. Revenues from retail sales are presented net of salestax. Revenues from casino operations include the retail value of food andbeverage and goods and services provided to customers on a complimentary basis.Such amounts are then deducted as promotional allowances. The estimated cost ofproviding these promotional allowances is as follows:

 
| ** **        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **        | ** ** | **(dollars in thousands)**       | ** ** |
| Room              |       | $                                          | 858        |   | $ | 986 |   | $ | 8,094 |   |
| Food and Beverage |       | 6,807                                      |       | 8,096 |   | 21,507 |   |
| Other             |       | 10,974                                     |       | 19,824 |   | 20,150 |   |
| Total             |       | $                                          | 18,639     |   | $ | 28,906 |   | $ | 49,751 |   |

 

These costs are reclassified out of the respectivedepartment into the casino department.

 

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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 ofthe Company’s player’s club program are included in the “Promotional allowances”line of the Company’s statement of operations.

 

***Location Rent Expense***— Fixed rental payments (including scheduledincreases) are recorded on a straight-line basis over the agreement term.Renewal agreements are considered new agreements and are accounted for asdescribed above over the new agreement term.

 

***Income Taxes***—Herbst, E-T-T and MGI have elected to be taxed under the provisions ofSubchapter S of the Internal Revenue Code. Under those provisions, the ownersare liable for income tax on the taxable income of the Company as it affectsthe owners’ individual income tax returns. Therefore, a provision for incometaxes has not been included in the accompanying consolidated financialstatements.

 

***Concentrations of Credit Risk***—The Company maintains cash balances atcertain financial institutions located in southern Nevada. The balances areinsured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000.At times, cash balances may be in excess of FDIC limits. As of December 31,2007, the Company does not consider itself to have any significantconcentrations of credit risk.

 

***Recently Issued and Adopted AccountingStandards— ***In February 2007, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities”. SFAS No. 159permits companies to choose to measure many financial instruments and certainother items at fair value.  The objective is to improve financial reportingby providing companies with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.  The fair valueoption established by SFAS No. 159 permits all companies to choose tomeasure eligible items at fair value at specified election dates.  At eachsubsequent reporting date, a company shall report in earnings any unrealizedgains and losses on items for which the fair value option has been elected.SFAS No. 159 is effective as of the beginning of a company’s first fiscalyear that begins after November 15, 2007. The Company does not expectto adopt SFAS No. 159.

 

In September 2006, the FASB issued SFAS No.157, *“Fair Value Measurements”*, which definesfair value, establishes a framework for measuring fair value in GAAP, andexpands disclosures about fair value measurements.  In February 2008, the FASB deferred theadoption of SFAS No. 157 for one year as it applies to certain items, includingassets and liabilities initially measured at fair value in a businesscombination, reporting units and certain assets and liabilities measured atfair value in connection with goodwill impairment tests in accordance with SFASNo. 142 and long-lived assets measured at fair value for impairment assessmentsunder SFAS No. 144, *“Accounting for theImpairment and Disposal of Long-Lived Assets”*.  This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute.  SFAS No.157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years.  The Company does not believe the adoption ofSFAS No. 157 will have a material impact on our consolidated financialstatements. 

 

In December 2007, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.160, *“Noncontrolling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51.”*  SFAS No. 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity.  The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement.  SFAS No. 160clarifies that changes in a parent’s ownership in a subsidiary that do notresult in deconsolidation are equity transactions if the parent retains itscontrolling financial interest.  Inaddition, this statement requires that a parent recognize a gain or loss on netincome when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date.  SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  SFAS No. 160 iseffective for fiscal years, and interim periods within those fiscal years, beginningon or after December 15, 2008.  Earlieradoption is prohibited.  We do not expectthe adoption of SFAS No. 160 will have a material effect on our consolidatedfinancial statements.  

 

**2.****                                     ****Acquisitions**

 

**PrimmAcquisition**

 

OnApril 10, 2007, the Company completed the acquisition of certain gamingassets of MGM MIRAGE (the “Primm Acquisition”) for a net cash purchase price of$394 million.  These assets includeBuffalo Bill’s Hotel and Casino, Primm Valley Resort and Whiskey Pete’s Hoteland Casino located in Primm, Nevada.  Thepurchase price allocation is described in the following tables.  The Company used borrowings under its seniorcredit facility to fund the purchase price of the Primm Acquisition.  The acquisition was recorded under thepurchase method of accounting and the results of operations of the PrimmProperties have been included in the Company’s consolidated results followingthe date of acquisition. All of the goodwill associated with the PrimmAcquisition is included in the “Casino Operations—Nevada” reporting segment.

 

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The allocation of thepurchase price for the Primm Acquisition, is as follows:

 

Estimated Fair Market Valueof assets acquired (in thousands) net of cash:

 
| Receivables                   |   | $       | 2,513  |   |
|-------------------------------|--------|---------|--------|--------|
| Inventory                     |   | 1,603   |   |
| Prepaid expenses              |   | 4,152   |   |
| Property, plant and equipment |   | 262,002 |   |
| Other assets                  |   | 1,310   |   |
| Intangible assets             |   |    |   |
| Trade Name                    |   | 40,600  |   |
| Customer Loyalty Program      |   | 13,250  |   |
| Goodwill                      |   | 89,215  |   |

 

EstimatedFair Market Value of liabilities assumed (in thousands):

 
| Accounts payable          |   | $       | (8,112  | )      |
|---------------------------|--------|---------|---------|--------|
| Accrued expenses          |   | (11,582 | )       |
| Other Liabilities         |   | (500    | )       |
| Total cash purchase price |   | $       | 394,451 |   |

 

The purchaseprice allocation presented above is final as it relates to all amounts exceptfor property, plant and equipment.  TheCompany is finalizing its review of various valuation data and will recordfinal adjustments to the purchase allocation, if any, in the first quarter of2008.  Any adjustment to property, plantand equipment would result in an offsetting adjustment to goodwill.

 

As further discussed in Note5, intangible assets presented in the table above reflect the allocation of thepurchase price of the Primm assets on April 10, 2007. Due to a continueddeterioration in the operating results of the Primm casinos from that datethrough the date of our annual review of the fair value of the assets acquiredon October 31, 2007, management concluded that the assets were impairedand recognized non cash impairment charges of $36.5 million to write down thecarrying value of goodwill to its estimated fair value.

 

**Sands Regent Acquisition**

 

On January 3, 2007, theCompany completed the acquisition of The Sands Regent (the “Sands RegentAcquisition”), paying approximately $149 million in cash for the outstandingsecurities of The Sands Regent, the repayment of outstanding debt and relatedfees. The purchase price allocation is described in the following tables.  Pursuant to the Sands Regent Acquisition, theCompany acquired Rail City Casino in Sparks, Nevada, Sands Regency Casino Hotelin Reno, Nevada, Gold Ranch Casino and RV Resort in Verdi Nevada and DaytonCasino and Red Hawk Sports Bar, each in Dayton, Nevada.  The Company used borrowings under its seniorcredit facility to fund the purchase price of the Sands Regent Acquisition.  The Sands Regent Acquisition was recorded underthe purchase method of accounting and the results of operations of the assetsof The Sands Regent have been included in the Company’s consolidated resultsfollowing the date of acquisition. All of the goodwill associated with theSands Regent Acquisition is included in the “Casino Operations—Nevada”reporting segment.

 

The allocation of thepurchase price for the Sands Regent Acquisition is as follows:

 

Estimated Fair Market Valueof assets acquired (in thousands) net of cash:

 
| Receivables                   |   | $      | 4,726  |   |
|-------------------------------|--------|--------|--------|--------|
| Inventory                     |   | 600    |   |
| Prepaid                       |   | 2,132  |   |
| Property, plant and equipment |   | 64,888 |   |
| Intangible assets             |   |   |   |
| Trade Name                    |   | 14,550 |   |
| Customer Loyalty Program      |   | 11,400 |   |
| Goodwill                      |   | 56,467 |   |

 

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EstimatedFair Market Value of liabilities assumed (in thousands):

 
| Accounts payable          |   | $      | (2,150  | )      |
|---------------------------|--------|--------|---------|--------|
| Accrued expenses          |   | (3,962 | )       |
| Total cash purchase price |   | $      | 148,651 |   |

 

The purchase priceallocation presented above is final as it relates to all amounts except forproperty, plant and equipment.  TheCompany is finalizing its review of various valuation data and will recordfinal adjustments to the purchase allocation, if any, in the first quarter of2008.  Any adjustment to property, plantand equipment would result in an offsetting adjustment to goodwill. 

 

The table below reflectsunaudited pro forma consolidated results of the Company as if the Sands RegentAcquisition and the Primm Acquisition had taken place at January 1, 2006(dollars in thousands).

 
| ** **                    | ** ** | **Year Ended  December 31,**            | ** ** |
|-------------------------------|------------|---------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                          | ** ** | **2007** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)  (unaudited)** | ** ** |
| Revenue                       |       | $                                                 | 990,433    |   | $ | 924,943 |   |
| Income (loss) from operations |       | 108,800                                           |       | (24,593 | ) |
| Net income (loss)             |       | $                                                 | 29,252     |   | $ | (133,179 | ) |

 

In management’s opinion,these unaudited pro forma amounts are not necessarily indicative of what theactual combined results of operations might have been if the acquisition hadbeen effective at the beginning of the earliest period presented.

 

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

 

Property and equipmentconsist of the following (in thousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2007** | ** ** |
| Building                           |       | $                     | 133,867    |   | $ | 411,730 |   |
| Gaming equipment                   |       | 116,630               |       | 139,212 |   |
| Furniture, fixtures, and equipment |       | 52,248                |       | 81,078 |   |
| Leasehold improvements             |       | 2,001                 |       | 2,038 |   |
| Land                               |       | 19,425                |       | 37,528 |   |
| Barge                              |       | 17,153                |       | 17,160 |   |
| Construction-in-progress           |       | 2,344                 |       | 10,673 |   |
|                               |       | 343,668               |       | 699,719 |   |
| Less accumulated depreciation      |       | (109,153              | )          | (150,710 | ) |
|                               |       | $                     | 234,515    |   | $ | 548,709 |   |

 

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

 
| ** **              | ** ** | **December 31, 2006** | ** ** | **December 31, 2007**      | ** ** |
|-------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization**        | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **              | ** ** | ** **                      | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                      | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Lease Acquisition Costs |       | $                               | 76,272     |                                 | $          | 43,110 |   | $ | 55,681 |   | $ | 34,130 |   |
|                         |            |                                 |            |                                      |            |  |  |  |  |  |  |  |  |

 

59

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Theaggregate amortization expense for the years ended December 31, 2005, 2006and 2007 was $10,011,000, $10,272,000 and $9,577,731, respectively.

 

During2007, the Company recognized the impairment of two of its route space leasecontracts in conjunction with the renegotiation of those contracts in responseto the Nevada smoking ban. The gross carrying amount of those leases was$21,643,202 and the accumulated amortization was $ 18,478,502, resulting in anet impairment of $3,165,000.

 

Estimatedamortization expense for the years ended 2008, 2009, 2010, 2011 and 2012 is$7,107,000, $6,640,000, $6,478,000, $760,000 and $269,000, respectively.

 

**5.****                                     ****Goodwill and OtherIntangible Assets**

 

SFAS No. 142 requiresthe Company to test intangibles licenses and other indefinite live intangibleson an annual basis and between annual tests if events occur or circumstanceschange that would, more likely than not, reduce the fair value below the amountreflected in the balance sheet.  Theannual test, which is performed by the Company as of October 31 in thefourth quarter of each year, requires that the Company compare the carryingamount of the intangibles reflected on the balance sheet to the fair value ofthe intangibles.

 

The Company determines thefair value of the intangible license’s within its markets by relying primarilyon a discounted cash flow approach.  Forpurpose of testing the carrying values of its intangible licenses forimpairment, the fair value of intangibles contains significant assumptionsincorporating variables that are based on past experiences and judgments aboutfuture performance using industry normalized information for an averagelocation within a market.  Thesevariables include, but are not limited to: (1) the forecasted earningsgrowth rate of each market, (2) risk-adjusted discount rate and (3) expectedgrowth rates for perpetuity to estimated terminal values.

 

SFAS No. 142 alsorequires the Company to test goodwill at its reporting units within its marketsegment on a annual basis and between annual tests if events occur orcircumstances change that would, more likely than not, reduce the fair value ofgoodwill below the amount reflected in the balance sheet.  The Company performs its annual impairmenttest as of October 31 in the fourth quarter of each year by comparing thefair value with the amount reflected in the balance sheet.  If the fair value of the goodwill is lessthan the amount reflected in the balance sheet, an indication exists that theamount of goodwill attributed to a reporting unit may be impaired, and theCompany is required to perform a second step of the impairment test.  In the second step, the Company compares theimplied fair value of the reporting units goodwill, determined by allocatingthe reporting units’ fair value to all of its assets and liabilities in amanner similar to a purchase price allocation in accordance with SFAS No. 141,to the amount reflected in the balance sheet.

 

To determine the fair value,the Company uses an income and/or market approach for each reporting unit.  The market approach compares recent sales andpurchase price multiples of similar businesses. The income approach uses the subject property’s income generated over aspecified time and capitalized at an appropriate market rate to arrive at anindication of the most probable selling price. If actual market conditions are less favorable than those projected bythe industry or the Company, or if an event occurs or circumstances change thatwould, more likely than not, reduce the fair value of the Company’s intangiblesor goodwill below the carrying amounts of the respective reporting unit, theCompany may be required to recognize impairment charges in future periods,which could have a material impact on its consolidated financial condition andresults of operations.

 

On February 2, 2005,the Company acquired the assets of the casino operation located in Osceola,Iowa (the Grace Acquisition).  During2006, four new casino licenses began operations in the state of Iowa.  Since those new licensees have begun operations,the casino located in Osceola, Iowa (“Lakeside Iowa”) has experiencedsignificant operational challenges and the earnings of this casino havedeclined significantly.  Fair marketvalues of the Intangibles and goodwill, totaling approximately $122.0 millionand $1.2 million respectively, were recorded on our balance sheet andrepresented a substantial portion of total assets.  The fair value of intangibles and goodwill isdependent on both the future cash flows expected to be generated by the assets andother market conditions that impact the value a willing buyer would pay forsuch assets.  Due to a continueddeterioration in the operations of Lakeside Iowa and management’s belief thatthe deterioration in operations is likely to continue, the Company

 

60

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recognized a non-cash impairment charge of$33.3 million, which is comprised entirely of impairment to the gaming licenseto reduce its carrying value to its estimated fair value.  If market conditions and operationalperformance of Lakeside Iowa were to continue to deteriorate, or if facts andcircumstances change that would more likely than not reduce the estimated fairvalue of the intangibles and goodwill below their adjusted carrying amounts, theCompany may be required to recognize additional non-cash impairment charges infuture periods, which could have a material impact on the Company’s financialcondition and results of operations.

 

On April 10, 2007, theCompany acquired the equity of the Primadonna Company LLC.  Intangibles and goodwill, totalingapproximately $53.9 million and $89.2 million, respectively, were recorded aspart of the purchase price allocation and represented a substantial portion oftotal assets.  The fair value ofintangibles and goodwill is dependent on both the future cash flows expected tobe generated by the assets and other market conditions that impact the value abuyer would pay for such assets. Subsequent to the purchase of this company, the operating results declinedsignificantly, primarily as a result of economic pressures in Primm’s primarymarkets in southern California.  At October 31,2007, (the Company’s annual impairment testing date), the Company recognized anon-cash impairment charge of $36.5 million, which is comprised of $36.5million in goodwill impairment to reduce the carrying values of the Primmassets to their estimated fair values. If market conditions and operational performance of the PrimmCasinos  continue to deteriorate, or iffacts and circumstances change that would more likely than not reduce theestimated fair value of the intangibles and goodwill below their adjustedcarrying amounts, the Company may be required to recognize additional non-cashimpairment charges in future periods, which could have a material impact on theCompany’s financial condition and results of operations.

 

During 2007, the Companyacquired the equity of both The Sands Regent and The Primadonna CompanyLLC.  In connection with thesetransactions, we recorded significant amounts of intangible assets and goodwillduring the year ended December 31, 2007 that are included in the tablebelow as well as the aforementioned impairment charges.

 

Intangible assets consist ofthe following (dollars in thousands):

 

| ** **                    | ** ** | **December 31, 2006**      | ** ** | **December 31, 2007** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Gross  Carrying  Amount**          | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)** | ** ** |
| Amortized intangible assets   |       |                                 |       |                            |       |   |   |   |   |
| Customer Loyalty Programs     |       | $                                    | 2,900      |                            | $          | 1,389 |   | $ | 27,550 |   | $ | 3,612 |   |
| Non-Competition Agreement     |       | 2,180                                |       | 512                             |       | 2,180 |   | 948 |   |
| Total                         |       | 5,080                                |       | 1,901                           |       | 29,730 |   | 4,560 |   |
|                          |       |                                 |       |                            |       |   |   |   |   |
| Unamortized intangible assets |       |                                 |       |                            |       |   |   |   |   |
| Gaming License Rights         |       | 196,800                              |       |                            |       | 196,800 |   |   |   |
| Impairment of intangibles     |       | —                               |       |                            |       | (33,300 | )  |   |   |
| Patent applications           |       | 240                                  |       |                            |       | 240 |   |   |   |
| Tradename                     |       | —                               |       |                            |       | 55,150 |   |   |   |
| Total                         |       | $                                    | 197,040    |                            |       |   | $ | 218,890 |   |   |   |
|                               |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

The changes in the carryingamount of goodwill for the year ended December 31, 2007 are as follows:

 

| Balance as of January 1, 2007 |   | $       | 3,255   |   |
|------------------------------------|--------|---------|---------|--------|
| Goodwill acquired during the year  |   | 145,683 |    |
| Impairment of goodwill             |   | (36,500 | )       |
| Total                              |   | $       | 112,438 |   |

 

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License rights areintangible assets acquired from the purchase of gaming entities that operate ingaming jurisdictions where competition is limited, such as states where only acertain number of operators are allowed by law. Intangible license rights are not currently subject to amortization aswe have determined they have an indefinite useful life.

 

Customer loyalty programassets are being ratably amortized over an average life of 9.7 years.

 

Non-competition agreementswere entered with certain previous owners and management and are amortized overfive years, which is the contractual life of the agreement.

 

Forthe year ended December 31, 2007, amortization expense of intangibles was$2,659,000.  The expected annualamortization of those assets for the years ended December 31, 2008, 2009,2010, 2011 and 2012; the amortization costs will be $2,880,000, $2,216,000, $1,954,000,$1,845,000 and $ 1,719,000, respectively.

 

6.                                       Other Assets

 

Other assets consist of thefollowing (dollars in thousands):

 

| ** **                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **2006**              | ** ** | **2007** | ** ** |
| Debt issuance costs, net of accumulated  amortization of $4,145, and $7,333, respectively |       | $                     | 10,475     |   | $ | 21,799 |   |
| Other assets                                                                              |       | 6,174                 |       | 6,093 |   |
| Total                                                                                     |       | $                     | 16,419     |   | $ | 27,892 |   |

 

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

 

Accruedexpenses consist of the following (dollars in thousands):

 

| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2007** | ** ** |
| Accrued interest                |       | $                     | 3,635      |   | $ | 4,562 |   |
| Progressive jackpot liabilities |       | 2,080                 |       | 3,003 |   |
| Accrued payroll and related     |       | 4,267                 |       | 13,312 |   |
| Slot club point liability       |       | 1,201                 |       | 4,054 |   |
| Other accrued                   |       | 4,225                 |       | 8,015 |   |
| Total                           |       | $                     | 15,408     |   | $ | 32,946 |   |

 

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

 

Long-termdebt consists of the following (dollars in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **2006**              | ** ** | **2007** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                  |       |   |   |
| Revolving credit facility secured by assets of  the Company. The draws 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 12/31/07 was 9.4%. The revolving credit facility  matures on June 10, 2009                                                                                                                                                                                                                 |       | $                     | 95,000     |   | $ | 63,000 |   |
| 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 12/31/07 was 9.4%. The term loan matures on  January 31, 2011                                                                                                          |       | 98,250                |       | 371,250 |   |
| 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 12/31/07 was 9.4%. The term loan matures on  January 31, 2011                                                                                                          |       |                  |       | 59,850 |   |
| 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  December 31, 2007 was 9.4%. The delay draw term loan matures on  December 2, 2011 |       |                  |       | 322,563 |   |
| 81/8 % 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                                                                                                                                                                                                                                                                                                                                                                                                  |       | 159,221               |       | 159,365 |   |
| 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%                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 147                   |       | 42 |   |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 522,618               |       | 1,146,070 |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (1,105                | )          | (7,634 | ) |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                     | 521,513    |   | $ | 1,138,436 |   |

 

*8 1/8% Senior Subordinated Notes*

 

On June 11,2004, the Company issued (through a private placement) $160 million in 8 1/8%senior subordinated notes due June 1, 2012 (the “8 1/8%notes”).

 

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The proceeds from the 8 1/8%notes, along with the amended credit facility, were used to retire 97% of theoutstanding 10 3/4% notes for $242.1 million and topay a $15.0 million dividend to shareholders. Fees of $4.3 million associatedwith the 8 1/8% notesand $3.5 million associated with the amended credit facility are included inOther assets at December 31, 2006 and are being amortized over the life ofthe indebtedness. In connection with the retirement of 97% of the 10 3/4%notes in 2004, the Company recorded a loss on the early retirement of debt of$38.0 million. The loss consisted of $31.3 million in debt prepayment premiumsand $6.7 million in unamortized loan fees.

 

The 8 1/8%notes mature on June 1, 2012. Interest is payable in cash at a rate of 8 1/8% perannum on June 1 and December 1 of each year, beginning on December 1,2005. The indenture under which the 8 1/8% notes wereissued contains various limitations and restrictions including (i) changein control provisions, (ii) limitations on indebtedness and (iii) limitationson certain payments such as dividends. The Company is in compliance with thesecovenants as of December 31, 2006.

 

In August 2005, theCompany filed a Form S-4 registration statement with the SEC for thepurpose of effecting the exchange of the 8 1/8% notes foridentical notes registered for resale under the federal securities laws. This registration statement became effective in November 2005and the exchange offer was consummated in December 2005.

 

*7% Senior Subordinated Notes*

 

On November 22,2004, the Company issued (through a private placement) $170 million in 7%senior subordinated notes due November 15, 2014 (the “7% notes”).

 

The proceeds from the 7%notes, along with borrowings under the amended credit facility were used tofinance the Grace Acquisition in February 2005 (see Note 2).  Fees of $6.2 million associated with the 7%Notes and amended credit facility are included in other assets at December 31,2006 and are being amortized over the life of the indebtedness.

 

The 7% Notesmature on November 15, 2014. Interest is payable in cash at a rate 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 were issued contains various limitations and restrictions including (i) changein control provisions, (ii) limitations on indebtedness and (iii) limitationson certain payments such as dividends. The Company is in compliance with thesecovenants as of December 31, 2006.

 

The Company’s senior notesare guaranteed by E-T-T, Inc., Cardivan Company, Corral Coin, Inc.,Corral Country Coin, Inc., Corral Coin, Inc., E-T-T EnterprisesL.L.C., Market Gaming, Inc., and Flamingo Paradise Gaming, LLC,HGI-Lakeside, HGI-St Jo and HGI-Mark Twain, The Sands Regent and The PrimadonnaCompany LLC (100 percent-owned subsidiaries of Herbst Gaming, Inc.) andZante, Inc., Last Chance, Inc., California Prospectors, Ltd. (whichis a wholly owned subsidiary of Last Chance, Inc.), Plantation Investments, Inc.and Dayton Gaming, Inc.(100 percent-owned subsidiaries of The Sands Regent) (collectively, the “SubsidiaryGuarantors”). Condensed consolidating financial information with respect to theSubsidiary Guarantors is not provided because the Company has no independentassets or operations, the Subsidiary Guarantees are full and unconditional andjoint and several, and there are no other material subsidiaries of the Companyother than the Subsidiary Guarantors. There are no significant restrictions on the ability of the Company’sSubsidiary Guarantors to transfer funds to the Company in the form of cashdividends, loans or advances.

 

*Credit Facilities*

 

On January 3, 2007, theCompany entered into a second amended and restated credit agreement (the “CreditAgreement”) with Bank of America, N.A. (“Bank of America”), as AdministrativeAgent, Swing Line Lender and L/C Issuer, Lehman Commercial Paper, Inc. andWachovia Bank, National Association, as Syndication Agents, U.S. Bank, NationalAssociation, as Documentation Agent and Lehman Brothers Inc. and WachoviaCapital Markets, LLC, as Joint Lead Arrangers and Joint Book Runners as amendedby Amendment No. 1 to the Credit Agreement dated August 14, 2007 andAmendment No. 2 to the Credit Agreement dated as if December 14,2007.

 

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TheCredit Agreement was an amendment and restatement of our previous amended andrestated Credit Agreement dated as of October 8, 2004.

 

The Company borrowed $375million in term loans under the Credit Agreement on January 3, 2007 tofinance the Sands Regent Acquisition.  The Company also borrowed $325.0million in delay draw term loans drew on the revolving credit facility in anamount of $75.0 million to finance the Primm Acquisition.

 

On December 14, 2007,the Company entered into Amendment No. 2 to the Credit Agreement (the “Amendment”).  The Amendment provided for a waiver fromcompliance with the financial covenants set forth in the Credit Agreement forthe fiscal quarter ended September 30, 2007.  In addition, the Amendment provided for,among other modifications, the following changes to the terms of the CreditAgreement:

 

·                  the interest rate premium payable in respectof loans available under the Credit Agreement was increased for Eurodollarloans from LIBOR plus 3.50% to LIBOR plus 3.50%, 4.00% or 4.50% depending onthe Company’s Senior Debt to EBITDA Ratio (as defined in the Amendment), andwas increased for base rate loans from the base rate plus 3.25% to the baserate plus 2.25%, 2.75% or 3.25% depending on the Company’s Senior Debt toEBITDA Ratio;

 

·                  the definition of EBITDA was modified so thatEBITDA will be increased (i) for any period that includes the fiscal yearending December 31, 2007, to the extent of the loss associated with theCompany’s previously announced termination of interest rate swap agreements and(ii) for certain fiscal quarters, by amounts equal to the anticipatedsavings resulting from the Company’s previously announced renegotiation ofmaterial route agreements;

 

·                  the threshold for cash to qualify as “ExcessCash” for purposes of calculating the Total Debt to EBITDA Ratio (as defined inthe Credit Agreement) and the Senior Debt to EBITDA Ratio was increased;

 

·                  $60,000,000 of outstanding revolving loanswere converted into term loans and the revolving commitments in respect thereofhave been permanently reduced, and additionally the Company further reduced therevolving commitments by an additional $15,000,000, resulting in an aggregatereduction of the revolving commitments under the Credit Agreement from$175,000,000 to $100,000,000;

 

·                  the Company’s right to request increases tothe aggregate revolving commitments and additional term loans was terminated;

 

·                  the indebtedness and lien covenants weremodified to allow the Company to incur up to an additional $275,000,000 ofsecond lien, senior or senior subordinated indebtedness, subject to the termsset forth in the Amendment;

 

·                  the Senior Debt to EBITDA Ratio and the TotalDebt to EBITDA Ratio have each been adjusted for future measurement periods andthe Interest Charge Coverage Ratio (as defined in the Amendment) was decreasedfor future measurement periods;

 

·                  prior to the issuance of any QualifiedAdditional Debt Capital (as defined in the Amendment) other than subordinatedobligations, the Company agreed to enter into control agreements in respect ofsubstantially all of its deposit, brokerage, or other similar accountmaintained by the Company or its subsidiaries;

 

·                  the Company received a waiver of compliancefor a specified period of time with the provision of the Credit Agreementrequiring that the Company have in place swap contracts on or prior to December 31,2008 with one or more of the lenders resulting in not less than 50% of itsindebtedness for borrowed money having a fixed interest rate;

 

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·                  in addition to any prepayment premiumsrequired by the Credit Agreement, upon any voluntary prepayment of term loansprior to December 15, 2010, the Company will pay an additional premium of1%, provided that it will not have to pay any such prepayment premiums requiredunder the Credit Agreement for any prepayments that are in an aggregateprincipal amount not in excess of $275,000,000 and are made on or prior to December 31,2008 using proceeds of any qualifying additional debt capital or the proceeds ofequity securities issued by the Company;

 

·                  the Company used $25,000,000 of its cash onhand to reduce the outstanding principal balance of the revolving loans; and

 

·                  after December 31, 2007, cash dividendsmay be declared and paid only in an aggregate amount not to exceed the Company’spercentage of Excess Cash Flow (as defined in the Amendment) for the precedingfiscal year so long as the Company is in compliance with those financialcovenants set forth in the Amendment.

 

Long-term debt is expectedto mature as follows (dollars in thousands):

 

| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2007**              | ** ** |
| ** ** | ** ** | ** **            | ** ** |
| 2008       |       | $                     | 7,634      |   |
| 2009       |       | 7,609                 |       |
| 2010       |       | 7,600                 |       |
| 2011       |       | 7,600                 |       |
| 2012       |       | 166,965               |       |
| Thereafter |       | 948,662               |       |
| Total      |       | $                     | 1,146,070  |   |

 

**9.****                                      AssetRetirement Obligation.**

 

The Company has adopted SFASNo. 143, “Accounting for Asset Retirement Obligations,” which requiresthat the fair value of a liability for an asset retirement obligation berecognized in the period in which it was incurred if a reasonable estimate offair value could be made. The associated asset retirement costs are capitalizedas part of the carrying amount of the long-lived asset and depreciated over theestimated useful life of the related assets. The Company recognized this obligation in association with a lease forreal property in Primm, Nevada, which was a liability assumed under the PrimmAcquisition in April 2007. The Company recorded a liability of $0.5million related to expected costs to return leased land to its original stateat the end of the lease agreement (using a 6.7% discount rate and a 3.0%inflation rate). The information below reconciles the value of the assetretirement obligation for the periods presented.

 

| **December 31,**        | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of period |       | $        | 0          |     | $          | 0 |   |
| Liabilities incurred         |       | —   |       | 500      |       |
| Accretion expense            |       | —   |       | 24       |       |
| Balance, end of period       |       | $        | 0          |     | $          | 524 |   |

 

**10.****                              ****Related-Party Transactions**

 

*General.*

* *

Edward Herbst, TimothyHerbst and Troy Herbst are brothers and are the officers and directors ofHerbst Gaming, Inc. and its wholly-owned subsidiaries.  In addition, they are officers and directorsof Terrible Herbst, Inc.  There isno cross ownership between Herbst Gaming, Inc. and Terrible Herbst, Inc.  Terrible Herbst, Inc. is owned

 

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solelyby Jerry and Maryanna Herbst, the parents of the Herbst brothers.  Sean Higgins, the Company’s general counsel,is also the general counsel of Terrible Herbst, Inc.

 

*Slot route contract with Terrible Herbst, Inc.*

* *

The Company rents space forcertain slot machine route operations in convenience stores owned by TerribleHerbst, Inc. (“Terrible Herbst”), a corporation in which the owners of theCompany are officers and which is owned by the parent of the Company’sowners.  Rent expense of $5,909,000,$6,623,000 and $6,954,000 was incurred under this agreement for the years endedDecember 31, 2005, 2006 and 2007, respectively, for the exclusiveplacement of slot machines in Terrible Herbst convenience store locations.  This contract expires in 2010 but may beextended at the option of the Company for two additional terms of five years.

 

*Other arrangements with Terrible Herbst, Inc.*

* *

The Company has entered intoa servicing arrangement with Terrible Herbst pursuant to which it providesaccounting and administrative services related to the collection of dailydeposits from Terrible Herbst convenience stores.  The Company also provides personnel toTerrible Herbst to count, maintain and safeguard large amounts of coin andcurrency.  Terrible Herbst reimburses theCompany’s expenses in providing these services. Under this servicing arrangement, the Company was paid approximately$205,800 for services rendered for each of the years ended December 31,2005, 2006 and $246,004 for the Year ended December 31, 2007.

 

The Company has entered intoa nonexclusive trademark and license agreement with Terrible Herbst for the useof the Terrible Herbst brand name and its cowboy logo which extends through2011.  Subject to mutual consent, theagreement provides for the ability to renew the agreement for two additionalsuccessive terms of five years each. Pursuant to this trademark and license agreement, the Company paidapproximately $1,412,000, $1,483,000 and $1,557,064 to Terrible Herbst in theyears ended December 31, 2005, 2006 and 2007, respectively.

 

*Lease agreements.*

* *

Pursuant to a leaseagreement that expires in 2067, including renewal periods, the Company leasesthe real property on which its corporate headquarters is located from TheHerbst Family Limited Partnership II, or Herbst FLP II.  The general partners of the HerbstFLP II are Jerry and Maryanna Herbst. The lease requires monthly rental payments of $14,416.  In each of 2005, 2006 and 2007, the Companypaid $172,992 under this lease.

 

Pursuant to a leaseagreement that expires in 2026, including renewal periods, the Company leasesthe real property on which Terrible’s Town Casino in Pahrump is located fromThe Herbst Family Limited Partnership. The lease requires monthly rental payments of $15,000.  In each of 2004, 2005, the Company paid $150,000under this lease. During 2006, the company paid $165,000 under this lease.  During 2007, the company paid $180,000 underthis lease.

 

The Company leases land andoffice space in certain of its facilities to Terrible Herbst under variouslease agreements with terms ranging from monthly to 20 years.  Monthly rental income is $29,000.  Under these leases, in 2005 the Companyreceived rental income of $762,000 and in 2006 the Company received rentalincome of $640,500.  In 2007 the Companyreceived rental income of $348,000.

 

The Company subleases thereal property on which Terrible’s Searchlight Casino in Searchlight is locatedfrom Terrible Herbst for $15,000 per month, pursuant to a lease agreemententered into on June 30, 2002 that expires in 2022, with options to renewthe lease for five additional successive terms of ten years each.  Terrible Herbst leases that real propertyfrom an unrelated third party, pursuant to a lease agreement entered into on June 30,2002 that expires in 2042, including renewal periods.  In each of 2005, 2006 and 2007, amounts paidunder this lease was $180,000.

 

The Company leases awarehouse located in Las Vegas, Nevada for its employment center and purchasingdepartments from the Herbst’s Grandchildren’s Trust.  The lease began in November 2002 andrequires payments of

 

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$46,500per month through November 2012. Rent expense incurred under this lease arrangement was $522,300 for theyear ended December 31, 2005, $558,000 during 2006 and $560,500 during2007.

 

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

 

| 2008       |   | $     | 348    |   |
|------------|--------|-------|--------|--------|
| 2009       |   | 348   |   |
| 2010       |   | 348   |   |
| 2011       |   | 348   |   |
| 2012       |   | 348   |   |
| Thereafter |   | 1,736 |   |
| Total      |   | $     | 3,476  |   |

* *

*Related-party transactions.*

* *

Mr. Higgins is theCompany’s General Counsel, the General Counsel of Terrible Herbst, Inc.and the brother of Mary E. Higgins, the Company’s Chief Financial Officer.  Mr. Higgins received a salary forservices rendered to us in 2005, 2006 and 2007 of $426,763, $625,851 and$$658,694 , respectively.

 

In 2003, the Company enteredinto a slot route contract to install, operate and service slot machines at atavern owned by HIGCO, Inc., a company owned and operated by Mr. Higginsand two of his brothers.  Pursuant to thisrevenue-sharing contract, HIGCO, Inc. paid the Company $155,804 in 2005,$154,220 in 2006 and $147,524 in 2007.

 

In 2004, E-T-T entered intoa slot route contract with SamCon, Inc., a company owned and operated by Mr. Higgins,to install, operate and service slot machines at a new location.  Terms of this revenue-sharing contract aresimilar to the terms of the contract the Company entered into with HIGCO in2003.  Pursuant to this revenue-sharingcontract, SamCon, Inc. paid E-T-T $40,800 in 2005, $21,112 in 2006 and $0in 2007.

 

In March 2006, E-T-Tentered into a slot route contract to install, operate and service slotmachines at a tavern owned by Prescott’s Bar LLC, a company owned and operatedby Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, one of the ownersof the Company. Pursuant to this revenue-sharing contract, Prescott’s Bar LLCpaid E-T-T $52,844 in 2006 and $105,665 in 2007.

 

John N. Brewer, a member ofthe Company’s board of directors, is a partner with Kummer Kaempfer Bonner &Renshaw.  The Company retained KummerKaempfer Bonner & Renshaw as outside legal counsel through December 31,2004, and Kummer Kaempfer Bonner & Renshaw has received fees for legalservices in the amount of $3,500, $5,673 and $5,160 for 2005, 2006 and 2007, respectively.

 

The balance sheet item “duefrom related parties” includes receivables of $167,000 and $711,000 at December 31,2006 and 2007, respectively, from Terrible Herbst, which are non-interestbearing.

 

The balance sheet item “duefrom related parties” also includes balances from employees.  These amounts were $1,459,000 and $930,000for 2006 and 2007, respectively.

 

Obligations due to relatedparties at December 31, 2005, 2006 and 2007 consisted of balances due toTerrible Herbst for expenditures made on behalf of the Company, accrued rent,and accrued administrative fees.  Thebalances are non-interest bearing and payable on demand.

 

68

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**11.****                              ****Commitments andContingencies**

 

At December 31,2007, the Company has non-cancelable location license agreements for spaceleases at groups of affiliated stores that expire on various dates from 2006through 2011, with certain options for renewal. Revenues from gaming machinesin these stores accounted for approximately 15.9% of the Company’s totalrevenues for the year ended December 31, 2007.

 

Future minimum leasepayments under non-cancelable operating leases and location license agreementsare as follows (dollars in thousands):

 

| 2008       |   | 59,900  |    |
|------------|--------|---------|---------|
| 2009       |   | 57,443  |    |
| 2010       |   | 56,908  |    |
| 2011       |   | 37,812  |    |
| 2012       |   | 32,613  |    |
| Thereafter |   | 197,493 |    |
| Total      |   | $       | 422,170 |   |
|            |        |         |         |  |

 

Rentexpense related to non-cancelable leases with terms exceeding one year was  $74,378,000, $74,852,000 and $70,350,000 forthe years ended December 31, 2005, 2006 and 2007, respectively.

 

On February 17, 2006,the Clark County District Court entered judgment of a jury verdict delivered onJanuary 14, 2006 against ETT for $4.1 million in compensatory damages and$10.1 million in punitive damages.  Thejury verdict was delivered in connection with an action brought by the familyof an individual 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 was subsequently lowered to $4.1 million in apost-trial ruling.  The Company believesthe award of compensatory and punitive damages against ETT, the liability ofETT, and the amount thereof, is not supportable in either law or in fact andplans to vigorously pursue all appropriate post-trial  and other remedies, including exercising itsright to appeal. Based on a review of the legal opinions and facts available tothe Company at this time, the Company has not reserved for this lawsuit. Thelawsuit is currently on appeal.

 

The Company is a party tocertain other claims, legal actions, and complaints arising in the ordinarycourse of business or asserted by way of defense or counterclaim in actionsfiled by the Company. Management believes that its defenses are substantial ineach of these matters and that the Company’s legal position can be successfullydefended without material adverse effect on its consolidated financialstatements.

 

**12.****                              ****DERIVATIVE INSTRUMENTS**

 

Weuse interest rate swaps to manage the risk related to variable rate of our debtbetween fixed and variable rate instruments entered into in January 2007. In the fourth quarter of 2007, we terminated all interest rate swapagreements.  The termination costs were$16,115,000.  As of December 31,2007, we had no interest rate swap agreements.

 

Duringthe year we accounted for the derivative instruments in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” and allamendments thereto.  SFAS No. 133 requires that all derivativeinstruments be recognized in the financial statements at fair value.

 

**13.****                              ****Revenue Derived From MajorLocations**

 

Routeoperations revenues at three groups of affiliated store chains in the yearended December 31, 2005 accounted for more than 10 percent of the Company’stotal route revenues.

 

69

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The total of such revenues were approximately$150,933,000 in the year ended December 31, 2005. Each individual store chainincluded in such affiliated group of store chains has a separate lease with theCompany. No one chain accounted for more than 10% in either 2006 or 2007.

 

**14.****                              ****Going Concern**

 

The Company’sroute business in Southern Nevada and the results of the Primm Casinos havebeen adversely affected by the downturn in the economies of Nevada and SouthernCalifornia, respectively, causing the Company to realize operating losses andimpairment charges.

 

As a result ofthe default under the credit agreement due to the “going concern” qualificationin the opinion of the Company’s independent auditors with respect to thefinancial statements for the fiscal year ended December 31, 2007, theCompany’s lenders could declare an event of default under the credit agreementand require repayment of all outstanding borrowings ($860 million ).  Although the Company is currently incompliance with its financial covenants, it does not expect to remain in compliancethroughout 2008.  The Company expects toenter into discussions with its credit agreement lenders to negotiate aforbearance agreement pursuant to which they would agree not to declare, for aspecified period of time, an event of default under the credit agreement as aresult of the going concern opinion or the probable failure to comply withfinancial covenants in the future.  TheCompany has engaged Goldman, Sachs & Co. as its financial advisor to assistus with our evaluation of financial and strategic alternatives, which mayinclude a recapitalization, refinancing, restructuring or reorganization of theCompany’s obligations or a sale of some or all of our businesses.

 

If the Companyis not successful in obtaining a forbearance or entering into a transaction toaddress its liquidity and capital structure, the lenders under the creditagreement would have the ability to accelerate repayment of all amountsoutstanding under the credit agreement ($853 million at March 15, 2008).  If the lenders under the credit agreementwere to require repayment of the outstanding borrowings upon a default, theholders of our subordinated indebtedness would have the ability to declare adefault, and accelerate repayment of, the subordinated indebtedness($330 million principal amount at March 15, 2008).  If eitherthe credit agreement indebtedness or the subordinated indebtedness were to beaccelerated upon a default, the Company would berequired to refinance or restructure the payments on that debt.  If the Company is unable do so, it may berequired to seek protection under Chapter 11 of the U. S. Bankruptcy Code.

 

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

 

The Company operates throughtwo business segments:  slot routeoperations and casino operations. The slot route operations involve theinstallation, operation, and service of slot machines at strategic, hightraffic non-casino locations, such as grocery stores, drug stores, conveniencestores, bars, and restaurants. Casino operations consist of two geographicareas, Nevada and Other States.  TheNevada locations include: Terrible’s Town Casino (Henderson) in Henderson,Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada, Terrible’s TownCasino and Terrible’s Lakeside Casino, both of which are located in Pahrump,Nevada, Terrible’s Hotel & Casino in Las Vegas, Nevada, Rail CityCasino in Sparks, Nevada, the Sands Regency Casino Hotel in Reno, Nevada,Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada, Terrible’s DaytonCasino and Red Hawk Sports Bar, both located in Dayton, Nevada, and BuffaloBill’s Hotel and Casino, Primm Valley Resort and Casino and Whiskey Pete’sHotel and Casino, all located in Primm, Nevada. Casinos located in other states are Terrible’s Lakeside Casino inOsceola, Iowa, Terrible’s St. Jo Frontier Casino in St. Joseph, Missouri andTerrible’s Mark Twain Casino in La Grange, Missouri. These segmentsresults are regularly provided to the Executive Committee of the Company, whoare the chief operating decision makers ofthe Company.

 

70

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Revenuesand income for these segments are as follows (dollars in thousands):

 
| ** **                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                                                              |       |                                       |       |   |   |   |   |
| Slot route operations                                                                                     |       | $                                          | 339,178    |   | $ | 346,955 |   | $ | 276,882 |   |
| Casino operations                                                                                         |       |                                       |       |   |   |   |   |
| Nevada                                                                                                    |       | 82,872                                     |       | 82,068 |   | 289,058 |   |
| Other States                                                                                              |       | 108,868                                    |       | 122,364 |   | 120,013 |   |
| Other—non gaming                                                                                     |       | 4,923                                      |       | 10,676 |   | 98,987 |   |
| Total net revenues                                                                                        |       | $                                          | 535,841    |   | $ | 562,063 |   | $ | 784,940 |   |
| Depreciation and amortization                                                                             |       |                                       |       |   |   |   |   |
| Slot route operations                                                                                     |       | 20,114                                     |       | 21,431 |   | 21,979 |   |
| Casino operations                                                                                         |       |                                       |       |   |   |   |   |
| Nevada                                                                                                    |       | 6,359                                      |       | 6,408 |   | 22,765 |   |
| Other States                                                                                              |       | 7,150                                      |       | 9,967 |   | 11,316 |   |
|                                                                                                      |       |                                       |       |   |   |   |   |
| Other                                                                                                     |       | 318                                        |       | 318 |   | 345 |   |
| Total depreciation and amortization                                                                       |       | $                                          | 33,941     |   | $ | 38,124 |   | 56,405 |   |
| Segment EBITDA(2)                                                                                         |       |                                       |       |   |   |   |   |
| Slot route operations                                                                                     |       | $                                          | 79,922     |   | 75,492 |   | 32,796 |   |
| Casino operations                                                                                         |       |                                       |       |   |   |   |   |
| Nevada                                                                                                    |       | 20,281                                     |       | 17,719 |   | 43,551 |   |
| Other states                                                                                              |       | 29,865                                     |       | 34,512 |   | 30,268 |   |
| Other and corporate(1)                                                                                    |       | (5,182                                     | )          | (8,405 | ) | (2,700 | ) |
| Depreciation and amortization                                                                             |       | (33,941                                    | )          | (38,124 | ) | (56,405 | ) |
| Interest expense, net of capitalized interest (capitalized interest  of $102, $873 and $873 respectively) |       | (36,532                                    | )          | (39,134 | ) | (85,631 | ) |
| Loss on impairment of assets                                                                              |       | —                                     |       | — |   | (72,965 | ) |
| Change in value of derivatives                                                                            |       | —                                     |       | — |   | (16,114 | ) |
| Loss on early retirement of debt                                                                          |       | (221                                       | )          | — |   | — |   |
| Net income (loss)                                                                                         |       | $                                          | 50,832     |   | $ | 42,060 |   | $ | (127,200 | ) |

 

----

(1)   Representsnon-gaming revenues, general andadministrative expenses, interest income and loss on lease termination.

 

(2)   SegmentEBITDA is used by management to measure segment profits and losses and consistsof income from segment operations plus depreciation and amortization and iscalculated before allocation of overhead.

 

71

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**Selected Quarterly Financial Information (Unaudited)(in thousands)**

 
| ** **                            | ** ** | **Mar. 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
| **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  | )          |
| **Year Ended December 31, 2006** |       |             |       |             |       |              |       |             |       |      |       |
| Net revenues—Route operations    |       | $                | 90,858     |             | $          | 86,999            |       | $                | 83,707     |      | $          | 85,391 |   | $ | 346,955 |   |
| Net revenues—Casino operations   |       |             |       |             |       |              |       |             |       |      |       |
| Nevada                                |       | 21,345           |       | 19,999           |       | 19,950            |       | 20,774           |       | 82,068    |       |
| Other states                          |       | 30,791           |       | 29,511           |       | 31,131            |       | 30,930           |       | 122,363   |       |
| Net revenues—Other               |       | 1,914            |       | 2,286            |       | 3,309             |       | 3,167            |       | 10,676    |       |
| Operating income                      |       | 26,243           |       | 20,655           |       | 17,905            |       | 15,657           |       | 80,460    |       |
| Net income                            |       | 17,222           |       | 11,286           |       | 8,200             |       | 5,352            |       | 42,060    |       |
| **Year Ended December 31, 2005** |       |             |       |             |       |              |       |             |       |      |       |
| Net revenues—Route operations    |       | $                | 81,640     |             | $          | 85,231            |       | $                | 83,719     |      | $          | 88,587 |   | $ | 339,178 |   |
| Net revenues—Casino operations   |       |             |       |             |       |              |       |             |       |      |       |
| Nevada                                |       | 21,600           |       | 20,877           |       | 19,425            |       | 20,970           |       | 82,872    |       |
| Other states                          |       | 21,175           |       | 29,371           |       | 29,602            |       | 28,721           |       | 108,869   |       |
| Net revenues—Other               |       | 1,140            |       | 1,144            |       | 1,212             |       | 1,427            |       | 4,923     |       |
| Operating income                      |       | 24,175           |       | 23,466           |       | 17,065            |       | 22,139           |       | 86,845    |       |
| Net income                            |       | 16,147           |       | 14,236           |       | 7,574             | (3)        | 12,875           |       | 50,832    |       |

 

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

 

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

 

(3)          Amount includes $3.4 millionloss on retirement of assets

 

## **Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

## ** **

None.

 

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

## ** **

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of the end of the periodcovered by this report (the “Evaluation Date”), we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures 

 

72

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utilizingcriteria established in *InternalControl-Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

**Conclusion Regarding theeffectiveness of disclosure Controls and Procedures**

 

As previously disclosed inour prior public filings, our Chief Executive Officer and Chief FinancialOfficer identified a material weakness in our internal control for the quarterended March 31, 2007, which consisted of a failure to have in placesufficient documentation as required by generally accepted accountingprinciples in order to permit interest rate swaps in the notional amount of$350.0 million to properly qualify as a hedge of a corresponding principleamount under our Credit Agreement. During the fourth quarter of 2007, theCompany terminated this interest rate swap. Prior to the institution of any newinterest rate swap arrangements, the remediation of this material weaknessrequires the Company to develop an internal policy regarding hedgingtransactions that sets forth the required procedures and documentation in orderto permit such transactions undertaken by us to qualify for hedge accounting.

 

Management believes that thefinancial statements included in this report fairly present, in all materialrespects, our financial condition, results of operations and cash flows.

 

Nevertheless, there can beno assurance that either this evaluation process or our existing disclosurecontrols and procedures will prevent or detect all errors and all fraud, ifany, or result in accurate and reliable disclosure.  A control system can provide only reasonableand not absolute assurance that the objectives of the control system aremet.  Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance 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.

 

Based on the evaluation andfindings, discussed above the Company’s management concluded that internal controlsover financial reporting was effective as of December 31, 2007

 

There has been no change inour internal controls over financial reporting during the fourth quarter ended December 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reports.

 

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

## ** **

None.

 

73

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# **PART III**

# ** **

## **Item 10.  Directors and Executive Officers of theRegistrant.**

## ** **

The following information isfurnished with respect to each member of the board of directors, each of whom,unless otherwise indicated, has served as a director continuously since theyear set forth below.  Directors areelected annually.  Each director servesuntil his successor has been elected and qualified.  Similar information is provided for ourexecutive officers.

** **

**Directors and Executive Officers**

** **

The following is a list ofour directors and executive officers:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                 | ** ** |
|-----------------------|------------|---------|------------|--------------------------------------------------------------|------------|
| Edward J. Herbst      |       | 46      |       | Chairman of the Board and  Chief Executive Officer           |       |
| Ferenc Szony          |       | 51      |       | President and Chief  Operating Officer                       |       |
| Timothy P. Herbst     |       | 44      |       | Executive Vice President  and Director                       |       |
| Troy D. Herbst        |       | 41      |       | Executive Vice President,  Secretary, Treasurer and Director |       |
| Mary E. Higgins       |       | 50      |       | Chief Financial Officer                                      |       |
| John N. Brewer        |       | 50      |       | Director                                                     |       |
| John F. O’Reilly |       | 62      |       | Director                                                     |       |
| Sean Higgins          |       | 44      |       | General Counsel                                              |       |

 

Edward, Timothy and TroyHerbst are brothers.  Timothy and TroyHerbst are members of our Executive Committee and Troy Herbst is a member ofour Audit Committee, but they are not involved in day-to-day operations.

 

*Edward J. Herbst* has served as the Chief Executive Officer and Chairman of the Board ofDirectors of our company and its predecessors since their inception in1987.  Edward oversees all aspects of ourbusiness, including gaming route operations, casino operations, new businessinitiatives and the solicitation of new contracts.  Edward also serves as a Vice President ofTerrible Herbst, Inc. and sits as a member of U.S. Bank of Nevada’sadvisory board of directors.

 

*Timothy P. Herbst* has served as Executive Vice President and a Director of our companyand its predecessors since their inception in 1987.  Timothy is a member of our ExecutiveCommittee.  He also serves as a VicePresident of Terrible Herbst, Inc.

 

*Troy D. Herbst* has served as Executive Vice President, Secretary, Treasurer and aDirector of our company and its predecessors since their inception in1987.  Troy is a member of our Executiveand Audit Committees.  He also serves asa Vice President of Terrible Herbst, Inc.

 

*Ferenc Szony* is the newly elected President and ChiefOperating Officer of Herbst Gaming, Inc. 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.

 

*Mary E. Higgins* has been the Chief Financial Officer of our company since May 2000.  Prior to joining our company, from March 1997to June 2000, Ms. Higgins was the Chief Financial Officer of Camco, Inc.,a Las Vegas based specialty finance company. From August 1987 to October 1996, Ms. Higgins was theCommercial Lending Division Manager of Southern Nevada for Wells Fargo Bank inLas Vegas.

 

*John N. Brewer* has served as a Director of our company since December 2001.  Mr. Brewer is also a member of our AuditCommittee.  Mr. Brewer is a partnerwith the law firm of Kummer Kaempfer Bonner Renshaw & Ferrario in LasVegas, Nevada, where he has practiced principally in corporate and securitieslaw since its inception in 1994.

 

*John F. O’Reilly* has served as a Director of our company since November 2004.  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’Reillyis also Chairman and an officer and/or Director of various family-ownedbusiness entities and related investments. Mr. O’Reilly has served as a Director of Nevada Power Company since1995 and Sierra Pacific Resources and Sierra Pacific Power Company since 1999.

 

74

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*Sean T.Higgins* has servedas the Company’s General Counsel since 1993. He oversees all legal matters for the Company including gamingregulatory matters and governmental affairs. Prior to joining the Company, Mr. Higgins worked at the law firm ofCohen, Lee & Johnson in Las Vegas.  Mr. Higgins obtained a law degree from Santa Clara University in1990 and received his undergraduate degree in Business Administration fromSouthern Methodist University in 1987. He is licensed to practice law in the States of Nevada and Missouri, aswell as, the Ninth Circuit Court of Appeals.

 

**Code of Ethics**

** **

We have adopted a Code ofEthics for the senior management of the Company including the Chief ExecutiveOfficer and President, and our Chief Financial Officer and Chief AccountingOfficer.  This Code of Ethics isreasonably designed to deter wrongdoing and to promote:

 

·                  honest and ethical conduct, includingthe ethical handling of actual or apparent conflicts of interest betweenpersonal and professional relationships;

 

·                  full, fair, accurate, timely, andunderstandable disclosure in reports and documents that a registrant fileswith, or submits to, the SEC and in other public communications made by us;

 

·                  compliance with applicablegovernmental laws, rules and regulations;

 

·                  the prompt internal reporting ofviolations of the code to an appropriate person or persons identified in theCode of Ethics; and

 

·                  accountability for adherence to theCode of Ethics.

 

**Committees of our Board of Directors**

** **

Our board of directors hasan Audit Committee and an Executive Committee. The Audit Committee’s functions are as follows:

 

·                  to review reports of our independentpublic accountants;

 

·                  to review our financial practices,internal controls and policies with officers and key employees;

 

·                  to review such matters with ourauditors to determine scope of compliance with any deficiencies;

 

·                  to consider selection of independentpublic accountants;

 

·                  to review related party transactions;and

 

·                  to make periodic reports on suchmatters to the board of directors.

 

Our Audit Committee iscomprised of Messrs. Troy Herbst and John Brewer.  Mr. Brewer is the Chairman of the AuditCommittee.  Our board of directors hasdetermined that Mr. Brewer is qualified as an audit committee financialexpert as defined by Item 401(h) of Regulation S-K and isindependent under the listing standards of the New York Stock Exchange.

 

The Executive Committee’sfunction is to review and make recommendations to our board of directors withrespect to the salaries and bonuses of our executive officers and keyemployees.  Directors Edward Herbst,Timothy Herbst and Troy Herbst serve on the Executive Committee.

 

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## ** **

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

## ** **

## **Overview of Compensation**

## ** **

The Executive Committee, orCommittee, of the Board of Directors has the responsibility for establishing,implementing and monitoring adherence to the Company’s compensationprograms.  The Committee’s goal is toprovide a compensation package that attracts, motivates and retains executivetalent and is designed to align executives’ interest with the Company’scorporate strategies and business objectives. We refer to our chief executive officer, or CEO, our chief financialofficer, or CFO, and our chief operating officer, or COO, as well as the othertwo individuals included in the Summary Compensation Table, as our “namedexecutive officers” or “NEOs.”  TheCommittee is comprised of the CEO and two Executive Vice Presidents, allmembers of which are officers, and the owners, of Herbst Gaming.  The Committee has establishes thecompensation for all the NEOs, including the members of the Committee.  (The new employment agreements executed in March 2008discussed under the heading “Executive Compensation and Bonus Plan” wereapproved by the entire Board).

 

We provide compensation toour CEO, CFO and COO primarily through written employment agreements that setforth base compensation, cash bonus, employee benefit plans and perquisites dueto such officers.  Prior to this year,our CEO had been employed under an employment agreement entered into in 2001,while our CFO had been employed under an employment agreement that was enteredinto in 2005.  Our COO was newlyappointed to his position in the 2007 fiscal year, upon our completion of theSands Regent Acquisition.  In March 2008we entered into new employment agreements with each of our CEO, CFO and COO.

 

We also have an ExecutiveOfficer and Cash Bonus Plan (the “Plan”), which was established in 2001.  This Plan is available to provide additionalincentive-based compensation to our Executive Vice Presidents upon theachievement of performance targets should the Committee determine to use it.

 

Our compensation program isto designed to promote and reward leadership and commitment, in addition toperformance improvement, with a focus on growth and productivity to drivefinancial performance. The main components of our executive compensationprogram include base salary and broad-based retirement, health and welfareemployee benefits, subject to the terms and conditions of each benefit program.  Our compensation program is designed toremain competitive with market practices, which is necessary to attract andretain talented executives. Our compensation program does not include an equitycomponent, as our CEO and two Executive Vice Presidents collectively own all ofthe outstanding stock of the Company.

 

## **Role of the ExecutiveOfficers and of the Committee in Determining Compensation**

## ** **

Each year the CEO evaluatesthe performance of the other NEOs and makes recommendations to the Committeewith respect to compensation, including recommendations with respect to basesalary levels and targets under the Plan, as applicable.  The Committee takes these recommendationsinto advisement, but also conducts its own independent review of the CEO andthe other NEOs prior to determining base salary increases and target incentivepayments.  Moreover, the administrationof the Plan and the actual declaration of any cash bonus payments under thePlan must be approved by a committee consisting of not less than twoindependent directors.

 

## **2007 Elements ofExecutive Compensation**

## ** **

The Company’s 2007compensation program for executive officers was primarily comprised of a basesalary and  employee benefits broadlyavailable to all employees of the Company.

 

**Base Salary**

** **

The Company provides ournamed executive officers and other employees with base salary to compensatethem for services rendered during the fiscal year.  Base salaries are essential for theattraction and retention of talented executives and are determined consistentwith the factors set forth below.  Indetermining the base salary amount for each named executive officer, theCommittee primarily considers:

 

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·                  industryexperience, knowledge and qualifications;

 

·                  salarylevels in effect for comparable positions within the Company’s principalindustry marketplace competitors;

 

·                  internalreview of the executive’s compensation, both individually and relative to otherofficers;

 

·                  individualperformance of the executive;

 

·                  expectedfuture contributions;

 

·                  historicalcompensation;

 

·                  abilityto impact corporate and/or business unit results; and

 

·                  retentionrisks.

 

Prior to the execution ofthe new employment agreements for our CEO and CFO in March 2008, theemployment agreement for the CEO provided for a salary at an annualized rate of$465,000 subject to 5% increases on January 1 of each year during the termof the agreement ($831,991 in 2007).  The CFO’s employment agreement provided for a salary at an annualizedrate of $325,625 and $25,000 non-discretionary semi-annual bonuses payable in June andDecember.  The salary was subject to a 5%increase each year at January 1 for the term of the contract ($366,377 in2007).   The new employment agreementsfor our CEO and CFO provide for an annual salary of, respectively, $973,845 and$500,000.  The increase in base salary isdue to a recognition of the long-time dedication, service, leadership anddirection provided to the Company during the past 8 years.

 

**Other Elements of Compensation**

** **

In order to attract, retainand pay market levels of compensation, we aim to provide benefits to our NEOsthat are consistent with market practices and include broad-based retirement,health and welfare employee benefits, subject to the terms and conditions ofeach benefit program.  Our NEOs areeligible to participate in these benefits on the same basis as other full-timeemployees.  In addition, the Companyprovides each NEO with an automobile. The value of the automobile is shown in the “All Other Compensation”column in the Summary Compensation Table on page 79.

 

*Severance Benefits*

 

Each employment agreementfor the named executive officers provides 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.  “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 funds, or any act of moral turpitude,dishonesty or lack of fidelity; (iii) the confession by the Executive ofembezzlement or misappropriation of funds, or any act of moral turpitude,dishonesty or lack of fidelity; (iv) the payment (or, by the operationsolely of the effect of a deductible, the failure of payment) by a surety orinsurer of a claim under a fidelity bond issued for the benefit of the Companyreimbursing the Company for a loss due to the wrongful act, or wrongfulomission to act, of the Executive; (v) the denial, revocation orsuspension of a license, qualification or certificate of suitability to theExecutive by any of the Gaming Authorities; and (vi) any action or failureto act by the Executive that the Company reasonably believes, as a result of acommunication or action by the Gaming Authorities or on the basis ofconsultations with its gaming counsel and/or other professional advisors, willlikely cause any of the Gaming Authorities to: (A) fail to license, qualify and/or approve the Company to own andoperate a gaming business; (B) grant any such licensing, qualificationand/or approval only upon terms and conditions that are 

 

77

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unacceptableto the Company; (C) significantly delay any such licensing, qualificationand/or approval process; or (D) revoke or suspend any existing license.

 

## **Executive Compensationand Bonus Plan**

## ** **

Our board of directors hasadopted the Executive Compensation and Bonus Plan for our executive officerswho are also stockholders (our CEO and two Executive Vice Presidents).  Any payments to be made under this plan mustbe approved by our independent directors. Commencing with calendar year 2003 and each succeeding calendar year,the maximum aggregate amount of annual compensation and cash bonuses increasesby 5%.  To date, there have been no cashbonuses paid to the executive officers under this plan.  If any cash bonus plan is implemented it willbe administered by our independent directors.

 

## **Equity Compensation**

## ** **

The Company does not makeequity awards to its NEOs.

 

## **CEO Employment Agreement**

## ** **

On August 1, 2001, weentered into an employment agreement with Edward J. Herbst, our Chairman, ChiefExecutive Officer and President, in which we agreed to pay him annual basecompensation of $465,000, which may be increased annually by five percent.  This agreement commenced on August 1,2001.  The initial term ended July 31,2006, and the agreement automatically was renewed for a one-year period.  For fiscal year 2007, Mr. Herbst’sannual base salary was $831,991.

 

In March of 2008, weentered into a new employment agreement with Mr. Herbst.  In Mr. Herbst’s new agreement, we agreedto pay an annual base salary of $973,845, which may be increased annually byfive percent.  Mr. Herbst’s contractexpires on December 31, 2009.

 

## **Employment Agreements ofOther Named Executive Officers**

## ** **

In January 2005, weentered into an employment agreement with Mary E. Higgins, our Chief FinancialOfficer, in which we agreed to pay her an annual base salary of $325,625 plus anon-discretionary bonus of $50,000 per year (in equal semi-annualinstallments).  That agreement terminateson December 31, 2008.  In March 2008,we entered into new employment agreement with Ms. Higgins.  In Ms. Higgins’ new agreement, we agreedto pay annual base salary of $500,000, plus a discretionary bonus of up to 30%of her salary per year.  Ms. Higgins’contract expires on December 31, 2009.

 

In addition, we entered intoan employment agreement with Ferenc Szony, our President and COO in March 2008.  His employment agreement provides for anannual base salary of $500,000, which may be increased annual by five percent,and expires on December 31, 2009. Both Ms. Higgins’ and Mr. Szony’s agreements automaticallyrenew for successive one-year periods unless sooner terminated or unless eitherparty to the respective agreements notifies the other in writing at least 60days prior to the date the respective agreement is scheduled to expire.  Each employment agreement provides that inthe event that we choose to terminate the executive’s employment for any reasonother than Cause (as defined above), the executive will receive a severancepayment equal to one year’s salary.  Theemployment agreements with these executives also contain a covenant to protectconfidential information.

 

78

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# **FISCAL YEAR 2007SUMMARY COMPENSATION TABLE**

# ** **

The following table setsforth the total compensation awarded, paid to or earned by the Company’s ChiefExecutive Officer, Chief Financial Officer and the next three most highlycompensated executive officers during 2007.

 
| **Name and Principal Position**                      | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)(1)** | ** ** | **All Other  Compensation  ($)(2)** | ** ** | **Total  ($)** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|-----------------|------------|-------------------|------------|------------------------------------------|------------|----------------|------------|
| Edward J. Herbst,*Chairman, Chief Executive  Officer and President* |       | 2007     |       | $               | 831,991    |              | —     |                                     | $          | 3,433,333      |       | $ | 4,265,324 |   |
| * *                                                            |       |     |       |            |       |              |       |                                     |       |           |       |
| Mary Higgins,*Chief Financial Officer*                              |       | 2007     |       | $               | 366,377    |              | $          | 275,000                                  |       | —         |       | $ | 641,377 |   |
| * *                                                            |       |     |       |            |       |              |       |                                     |       |           |       |
| Tim Herbst*Executive Vice President*                                |       | 2007     |       | $               | 427,140    |              | —     |                                     | $          | 3,433,333      |       | $ | 3,860,473 |   |
| * *                                                            |       |     |       |            |       |              |       |                                     |       |           |       |
| Troy Herbst*Executive Vice President*                               |       | 2007     |       | $               | 427,810    |              | —     |                                     | $          | 3,433,333      |       | $ | 3,861,143 |   |
| * *                                                            |       |     |       |            |       |              |       |                                     |       |           |       |
| Michael Puggi*Regional General Manager*                             |       | 2007     |       | $               | 399,491    |              | $          | 2,068,797                                |       | —         |       | $ | 2,378,426 |   |

 

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(1)                                  Represents bonuspayments made to Ms. Higgins and Mr. Puggi under the terms of theiremployment contracts, as well as a $2,059,935 signing bonus paid to Mr. Puggiupon the completion of the Primm Acquisition.

 

(2)                                  Represents the valueof distributions made to owners.

 

**POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL**

 

As described in the sectionsentitled “Severance Benefits,” “CEO Employment Agreement” and “EmploymentAgreements of other Named Executive Officers,” the employment agreementagreements with each of Mr. Herbst, Ms. Higgins and Mr. Szonyprovide for severance payments equal to one years’ base salary in the event oftermination of employment by the Company without Cause (as defined above on page 77).  Accordingly, upon a termination without Causeon December 1, 2007, Mr. Herbst, Ms. Higgins and Mr. Szonywould have been entitled to receive the following amounts, respectively:  $927,472, $409,000, and $0.  All other amounts payable or other benefits(such as accrued vacation, vested amounts payable under the Company’s 401(k) plan,etc.) are the same as for other salaried employees.

 

**FISCAL YEAR 2007 DIRECTOR COMPENSATION**

 

The following table providesinformation related to the compensation of our non-employee directors duringfiscal 2007.

 
| **Name**              | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------|------------|-----------------------------------------------------------|------------|----------------|------------|
| John F. O’Reilly |       | $                                                         | 35,000     | (1)            | $          | 35,000 |   |
| John N. Brewer        |       | $                                                         | 39,500     | (2)            | $          | 39,500 |   |

 

79

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## ** **

----

## **(1)**                                  $10,000 of this amount was forattendance at 2 Board meetings.

## ** **

## **(2)**                                  $10,000 of this amount was forattendance at 2 Board meetings and $4,500 of this amount was for meetings ofthe audit committee.

## ** **

Directors who are employeesof the Company do not receive any additional compensation for their services asa director.  Our independent directorswill receive compensation in the amount of $25,000 per year for serving on ourboard and in addition will receive $5,000 per board meeting attended and $1,500per committee meeting attended, and are reimbursed for expenses incurred inattending board or committee meetings and while representing the Company inconducting certain business.

 

## **Compensation CommitteeInterlocks and Insider Participation**

## ** **

**Relationships and Independence of the CompensationCommittee Members**

** **

During the fiscal year endedDecember 31, 2007, Edward Herbst, Timothy Herbst and Troy Herbst weremembers of the Executive Committee of our board of directors.  Our executive compensation is determined bythe Executive Committee, all members of which are officers, and the owners, ofHerbst Gaming.

 

## **Compensation CommitteeReport**

## ** **

The Compensation Committeereviewed the Compensation Discussion and Analysis and discussed its contentswith Company management.  Based on thereview and discussions, the Committee has recommended that this CompensationDiscussion and Analysis be included in this annual report.

 

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

** **

Not Applicable.

 

## **Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

## ** **

The securities entitled tovote consist of shares of our common stock, no par value, with each shareentitling its owner to one vote.  Commonstock is the only outstanding class of voting securities authorized by ourarticles of incorporation.  The number ofoutstanding shares of common stock as of December 31, 2007 was 300.

 
| **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                                       | %          |
| John N. Brewer                                                   |       | —                                                                 |       | —                                      |       |
| Mary E. Higgins                                                  |       | —                                                                 |       | —                                      |       |
| John F. O’Reilly                                            |       | —                                                                 |       | —                                      |       |
| All executive officers and directors as a group (6 persons) |       | 300                                                                    |       | 100.0                                       | %          |

 

----

(1)          The address of each such person is c/o HerbstGaming, Inc., 3440 West Russell Road, Las Vegas, Nevada 89118.

 

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

 

80

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## ** **

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

## ** **

We believe that all ofthe transactions mentioned below are on terms at least as favorable to us aswould have been obtained from an unrelated third party.

 

*General. *Edward Herbst, Timothy Herbst and Troy Herbst arebrothers and are the officers and directors of Herbst Gaming, Inc. and itswholly-owned subsidiaries.  In addition,they are officers and directors of Terrible Herbst, Inc.  There is no cross ownership between HerbstGaming, Inc. and Terrible Herbst, Inc.  Terrible Herbst, Inc. is owned solely byJerry and Maryanna Herbst, the parents of the Herbst brothers.  Sean Higgins, our general counsel, is alsothe general counsel of Terrible Herbst, Inc.

 

*Slotroute contract with Terrible Herbst, Inc. *We rentspace for certain slot machine route operations in convenience stores owned byTerrible Herbst, Inc., a corporation in which our owners are officers andwhich is owned by the father of our owners. Rent expense of $5,909,000, $6,623,000 and $6,954,000 was incurred underthis agreement for the years ended December 31, 2005, 2006 and 2007,respectively, for the exclusive placement of slot machines in Terrible Herbstconvenience store locations.  Thiscontract expires in 2010 but may be extended at our option for two additionalterms of five years.

 

*Otherarrangements with Terrible Herbst, Inc.*We have also entered into a servicing arrangement withTerrible Herbst pursuant to which we provide accounting and administrativeservices related to the collection of daily deposits from Terrible Herbstconvenience stores.  We also providepersonnel to Terrible Herbst to count, maintain and safeguard large amounts ofcoin and currency.  Terrible Herbstreimburses our expenses in providing these services.  Under this servicing arrangement, we were paidapproximately $205,800 for services rendered for each of the years ended December 31,2005 and 2006 and $246,004 in 2007.

 

We have entered into anonexclusive trademark and license agreement with Terrible Herbst for the useof the Terrible Herbst brand name and its cowboy logo which extends through2011.  Subject to mutual consent, theagreement provides for the ability to renew the agreement for two additionalsuccessive terms of five years each. Pursuant to this trademark and license agreement, we paid approximately$1,412,000, $ 1,483,000 and $1,557,064 to Terrible Herbst in the years ended December 31,2005, 2006 and 2007, respectively.

 

*Leaseagreements. *Pursuant to a lease agreement thatexpires in 2067, including renewal periods, we lease the real property on whichour corporate headquarters is located from The Herbst Family LimitedPartnership II, or Herbst FLP II. The general partners of the Herbst FLP II are Jerry and MaryannaHerbst.  In each of 2005, 2006 and 2007we paid $172,992 under this lease.

 

Pursuant to a leaseagreement that expires in 2026, including renewal periods, we lease the realproperty on which Terrible’s Town Casino in Pahrump is located from The HerbstFamily Limited Partnership.  The leaserequires monthly rental payments of $15,000. In 2005, we paid $150,000 under this lease and in 2006 we paid $165,000under this lease.  In 2007, we paid$180,000 under this lease.

 

We lease land and officespace in certain of our facilities to Terrible Herbst under various leaseagreements with terms ranging from month-to-month to 20 years.  Monthly rental income is $63,500.  In 2005, we received rental income of $762,000under these leases. In 2006 we received rental income of $641,000 under theseleases.  In 2007 we received rentalincome of $348,000 under these leases.

 

We lease the realproperty on which Terrible’s Searchlight Casino in Searchlight is located fromTerrible Herbst for $15,000 per month, pursuant to a lease agreement entered intoon June 30, 2002 that expires in 2022, with options to renew the lease forfive additional successive terms of ten years each.  Terrible Herbst leases that real propertyfrom an unrelated third party, pursuant to a lease agreement entered into on June 30,2002 that expires in 2042, including renewal periods.  In each of 2005, 2006 and 2007, we paid$180,000 under this lease.

 

We lease a warehouselocated in Las Vegas, Nevada for our employment center and purchasingdepartments from the Herbst’s Grandchildren’s Trust.  The lease began in November 2002 andrequires payments of 

 

81

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$46,500 per monththrough November 2012.  In 2005, weincurred rent expense of $522,300 under this lease. In 2006 this expense was$558,000, while in 2007 it was $560,500.

 

*Related-partytransactions. *Mr. Higgins is our general counsel,the general counsel of Terrible Herbst and the brother of Mary E. Higgins, ourchief financial officer.  Mr. Higginsreceived a salary for services rendered to us in 2005, 2006 and 2007 of$426,763, $625,851 and $658,694, respectively.

 

In 2003, we entered intoa slot route contract to install, operate and service slot machines at a tavernowned by HIGCO, Inc., a company owned and operated by Mr. Higgins andtwo of his brothers, G. Michael Higgins and Kevin J. Higgins.  Pursuant to this revenue-sharing contract,HIGCO, Inc. paid us $155,804 in 2005, $154,220 in 2006 and $147,524 in2007.

 

In 2004, ETT entered intoa slot route contract with SamCon, Inc., a company owned and operated by Mr. Higgins,to install, operate and service slot machines 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 $40,800 in 2005, $21,112 in 2006 and $0 in 2007.

 

In 2005, ETT entered intoa slot route contract to install, operate and service slot machines at a tavernowned by Prescott’s Bar LLC, a company owned and operated by Mr. ToddSosey, the brother-in-law of Troy D. Herbst, one of the owners of theCompany.  Pursuant to thisrevenue-sharing contract, Prescott’s paid ETT $0 in 2005, $52,844 in 2006 and$105,665 in 2007.

 

The amount due fromrelated party balance includes $1,459,000 and $930,000 due from employees at December 31,2006 and 2007, respectively.

 

John N. Brewer, a memberof our board of directors, is a partner with Kummer Kaempfer Bonner &Renshaw.  We retained Kummer KaempferBonner & Renshaw as outside legal counsel through December 31,2004, and Kummer Kaempfer Bonner & Renshaw has received fees for legalservices in the amount of $3,500, $5,673 and $5,160 for 2005, 2006 and 2007,respectively.

 

*Indemnificationof Directors and Officers. *Section 78.7502 of the NevadaRevised Statutes, Article VIII of our articles of incorporation and Article IXof our by-laws contain provisions for indemnification of our officers,directors, employees and agents.  Ourarticles require us to indemnify such persons to the full extent permitted byNevada law.  Each person will beindemnified in any proceeding if he acted in good faith and in a manner that hereasonably believed to be in, or not opposed to, our best interests.  Indemnification would cover expenses,including attorneys’ fees, judgments, fines and amounts paid in settlement.

 

Insofar asindemnification 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.  Principal Accountant Fees and Services.**

## ** **

Theaggregate accounting fees billed and services provided by our principalaccountants for the years ended December 31, 2006 and 2007 are as follows:

 
| ** **            | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit fees(1)         |       | $        | 309,000    |     | $          | 497,074 |   |
| Audit-related fees(2) |       | 61,700   |       | 714,250  |       |
| Tax fees              |       | —   |       | —   |       |
| All other fees        |       | —   |       | 55,236   |       |
| Total fees            |       | $        | 370,700    |     | 1,266,560  |   |
|                       |            |          |            |          |            |  |  |

 

82

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----

| (1)    | Represents the aggregate fees Deloitte & Touche LLP billed  us in each of the last two fiscal years for professional services for the  audits of our annual financial statements and review of financial statements  included in our periodic filings with the SEC and for services that are  normally provided by Deloitte & Touche LLP in connection with those  filings. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    | Represents the aggregate fees Deloitte & Touche LLP billed  us in each of the last two fiscal years for assurance and related services  that are reasonably related to the performance of the audit, including  audit-related services in conjunction with the Primm properties.                                                                                                     |

 

It is our practice thatall services provided to us by our independent auditors be pre-approved eitherby the Audit Committee or by the Chairman of the Audit Committee pursuant toauthority delegated by the Audit Committee. No part of the independent auditor services related to the audit fees,audit-related fees, tax fees, or other fees listed in the table above wasapproved by the Audit Committee pursuant to the exemption from pre-approvalprovided by paragraph (c)(7)(i)(C) of Rule 2-01 ofRegulation S-X.

 

83

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# ** **

# **PART IV**

# ** **

## **Item 15.  Exhibits and Financial Statement Schedules.**

## ** **

(a)                                  Financial Statements

 

**1.**                                       List of FinancialStatements

** **

Includedin Part II of this report:

 

Reportof Independent Registered Public Accounting Firm

 

ConsolidatedFinancial Statements

 

ConsolidatedBalance Sheets As of December 31, 2006 and 2007

 

ConsolidatedStatements of Operations For the years ended December 31, 2005, 2006 and2007

 

ConsolidatedStatements of Stockholders’ Equity (Deficiency) For the years ended December 31,2005, 2006 and 2007

 

ConsolidatedStatements of Cash Flows For the years ended December 31, 2005, 2006 and2007

 

Notesto Consolidated Financial Statements

 

**2.**                                       Financial StatementsSchedules

** **

Allschedules are omitted given the absence of conditions under which they arerequired to be included or because the required information is included in thefinancial statements or notes thereto.

 

(c)                                  Exhibits

 
| **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. |
|               |       |                                                                                                                                                                                      |
| 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.                              |

 

84

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                                                   |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                                                                        |
| 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.                                    |
|               |       |                                                                                                                                                                                                                                              |
| 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.* |

 

85

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| **Index No.** | ** ** | **Description**                                                                                                                                           |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                |
| 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.                                                    |

 

86

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                     |
| 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(18)          |       | Employment Agreement  with Edward J. Herbst dated March 7, 2008.                                                                                                                                                                                                                                                                                                          |
|               |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.28(18)          |       | Employment Agreement  with Mary E. Higgins dated March 7, 2008.                                                                                                                                                                                                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.29(1)           |       | Form of Executive  Compensation and Bonus Plan.                                                                                                                                                                                                                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 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                                                                                                     |

 

87

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                                                                                  |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                                                                                                       |
| 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*             |       | Shared Services Agreement dated as of  January 1, 2008 between Herbst Gaming, Inc. Berry-Hinckley  Industries and Terrible Herbst, Inc.                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                             |
| 10.44*             |       | Advertising Purchasing Agreement dated as of  March 1, 2008 between Herbst Gaming, Inc. and Terrible  Herbst, Inc.                                                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                             |
| 10.45*             |       | Master ATM Agreement dated as of March 1, 2008  by and between E-T-T, Inc. and Terrible Herbst, Inc.                                                                                                                                                              |
|               |       |                                                                                                                                                                                                                                                                             |
| 12.1*              |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                               |
|               |       |                                                                                                                                                                                                                                                                             |
| 21.1(19)           |       | Subsidiaries of Herbst Gaming, Inc.                                                                                                                                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                                             |
| 31.1*              |       | Certification of Edward J. Herbst under  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                     |
|               |       |                                                                                                                                                                                                                                                                             |
| 31.2*              |       | Certification of Edward J. Herbst under  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                     |
|               |       |                                                                                                                                                                                                                                                                             |
| 32.1*              |       | Certifications of Edward J. Herbst and Mary E.  Higgins pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                          |

 

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+                                                                 Confidential Treatment fora portion of this document has been granted pursuant to Rule 406 under theSecurities Act.  The omitted portionshave been separately filed with the Commission.

++                                                          Confidential Treatment fora portion of this document has been requested pursuant to Rule 406 underthe Securities Act.  The omitted portionshave been separately filed with the Commission.

(1)                                                          Incorporated herein byreference from our registration statement on Form S-4 (SEC No. 33-71094),Part II, Item 21.

(2)                                                          Incorporated herein byreference from our quarterly report on Form 10-Q filed with the SEC on November 14,2002.

(3)                                                          Incorporated herein byreference from our current report on Form 8-K filed with the SEC on March 10,

 

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2003.

(4)                                                          Incorporated herein byreference from our annual report on Form 10-K filed with the SEC on March 24,2003.

(5)                                                          Incorporated herein byreference from our registration statement on Form S-4 (SEC No. 333-118068-05).

(6)                                                          Incorporated herein byreference from our current report on Form 8-K filed with the SEC on November 23,2004.

(7)                                                          Incorporated herein byreference from our registration statement on Form S-4 (SEC No. 333-122837).

(8)                                                          Incorporated herein byreference from our current report on Form 8-K filed with the SEC on March 15,2006.

(9)                                                          Incorporated herein byreference from our current report on Form 8-K filed with the SEC on May 16,2006.

(10)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on August 28,2006.

(11)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on November 2,2006.

(12)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on August 7,2006.

(13)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on January 9,2007.

(14)                                                    Incorporated herein byreference from our annual report on Form 10-K filed with the SEC on April 2,2007.

(15)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on August 17,2007.

(16)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on December 20,2007.

(17)                                                    Incorporated herein by referencefrom our current report on Form 8-K filed with the SEC on November 7,2007.

(18)                                                    Incorporated herein byreference from our current report on Form 8-K filed with the SEC on March 11,2008.

(19)                                                    Incorporated herein byreference from our annual report on Form 10-K filed with the SEC on April 2,2007.

*                                                                 Filed herewith.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this Amendment No. 1 to the annual reporton Form 10-K/A to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   | **HERBST GAMING, INC.** |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | By:                     |   | /s/ Edward J. Herbst |   |
|   | Name:                   | Edward J. Herbst |
|   | Title:                  | Chairman of the Board, Chief |
|   |                    | Executive  Officer and President |
|        |                         |  |  |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **NAME**                        | ** ** | **TITLE**                                            | ** ** | **DATE**            |
|---------------------------------|------------|------------------------------------------------------|------------|---------------------|
| ** **                      | ** ** | ** **                                           | ** ** | ** **          |
| /s/ Edward J. Herbst            |       | Chairman of the Board,  Chief Executive              |       | March 31, 2008 |
| Edward J. Herbst                |       | Officer and President  (Principal Executive Officer) |       |                |
|                            |       |                                                 |       |                |
| /s/ Mary E. Higgins             |       | Chief Financial Officer (Principal                   |       | March 31, 2008 |
| Mary E. Higgins                 |       | Financial and Accounting Officer                     |       |                |
|                            |       |                                                 |       |                |
| /s/ Timothy P.   Herbst    |       | Executive Vice President and Director                |       | March 31, 2008 |
| Timothy P.   Herbst        |       |                                                 |       |                |
|                            |       |                                                 |       |                |
| /s/ Troy D.   Herbst       |       | Executive Vice President, Secretary,                 |       | March 31, 2008 |
| Troy D.  Herbst            |       | Treasurer and Director                               |       |                |
|                            |       |                                                 |       |                |
| /s/ John N.   Brewer       |       | Director                                             |       | March 31, 2008 |
| John N.  Brewer            |       |                                                 |       |                |
|                            |       |                                                 |       |                |
| /s/ John F.  O’Reilly |       | Director                                             |       | March 31, 2008 |
| John F.  O’Reilly     |       |                                                 |       |                |

 

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