** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.20549

** **

**FORM 10-K**

 

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

 

**For the Fiscal Year Ended December 31, 2005**

 

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

 

**Commission File No. 1-14316**

 

**HERBSTGAMING, INC.**

(Exact name of Registrant as specified in itscharter)

 

| **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) ofthe Act:

 

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

 

Securities registered pursuant to Section 12(g) ofthe Act:  **NotApplicable**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes o No ý

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

 

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

 

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

 

Indicate by check mark whether the Registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

 

Large Accelerated Filer  o Accelerated Filer  o  Non-AcceleratedFiler  ý

 

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

 

The aggregate market value of the shares ofvoting and non-voting common equity held by non-affiliates of the Registrant asof December 31, 2005, based on the price at which the common equity wassold, was approximately $0.

 

Indicate the number of shares outstanding ofeach of the Registrant’s classes of common stock, as of December 31, 2005.

 

Common Stock, no par value, 300 outstandingshares.

 

** **

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** **

**DocumentsIncorporated by Reference**

None.

 

**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                                                                         |   |

 

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# **PART I**

## **Item 1.**    Business.

 

**General**

** **

We are a diversified gaming company thatfocuses on two business lines: slot route operations and casino operations. Ourslot route operations involve the exclusive installation and operation of slotmachines in certain strategic, high traffic, non-casino locations, such asgrocery stores, drug stores, convenience stores, bars and restaurants. Wecurrently own and operate approximately 7,100 slot machines in our slot routebusiness and are one of the largest slot machine operators in Nevada. Ourcasino operations in Nevada consist of five casinos that focus on local gamingpatrons, and include the ownership and operation of Terrible’s Hotel &Casino in Las Vegas, Nevada and four other small casinos in southern Nevadaoperated under the Terrible’s name. Our Nevada casinos contain an aggregate of approximately1,795 slot machines and 15 table games. As a result of the acquisition on February 1,2005 of assets from Grace Entertainment, Inc. described below, or theGrace Acquisition, as of that date our casino operations also included what arenow Terrible’s St. Jo Frontier Casino in St. Joseph, Missouri, or St. Jo, Terrible’sMark Twain Casino in LaGrange, Missouri, or Mark Twain, and Terrible’s LakesideCasino Resort in Osceola, Iowa, or Lakeside Iowa. These three properties haveadded approximately 2,217 slot machines and 44 table games to our casinobusiness.

 

Herbst Gaming, Inc. was incorporated inNevada on January 21, 1997. It commenced business operations as a holdingcompany of subsidiaries conducting slot route and casino operations on August 23,2001.

 

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

 

Herbst Gaming, Inc. has elected to betaxed as an S corporation.

 

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

 

**AvailableInformation**

** **

Our Internet address is *www.herbstgaming.com*. We make availablefree of charge on or through our Internet website our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, or the ExchangeAct, as soon as reasonably practicable after we electronically file suchmaterial with, or furnish it to, the Securities and Exchange Commission, orSEC.

 

**RecentDevelopments**

** **

*Legal Judgment*

 

On February 17, 2006, the Clark CountyCircuit Court entered judgment of a jury verdict delivered on January 14,2006 against E-T-T, Inc., or ETT, a wholly owned subsidiary of theCompany, for $4.2 million in compensatory damages and $10.0 million in punitivedamages. The jury verdict was delivered in connection with an action brought bythe family of an individual that alleged that ETT had negligentlyretained and negligently supervised a temporary employee who in 2001stole a truck from ETT and, while drunk, hit and killed the individual. TheCompany believes the award of compensatory and punitive damages against ETT,the liability of ETT, and the amount thereof, is not supportable in either lawor in fact and plans to vigorously pursue all appropriate post-trial and otherremedies, including exercising its right to appeal.

 

**NarrativeDescription of Business**

** **

Our business focuses on attracting andfostering repeat business from local gaming patrons in both our route andcasino operations. Local patrons are typically sophisticated gaming customerswho seek convenient locations, high payouts and a pleasant atmosphere.

 

*Route Operations*

 

Our route operations involve the exclusiveinstallation and operation of slot machines in chain store and street accountlocations. At December 31, 2005 we operated approximately 7,100 slotmachines throughout the state of Nevada. We define chain stores as grocerystores, drug stores, merchandise stores and convenience stores, with more thanfive

 

1

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locations. Our chain store contractsare primarily with large, national retailers, such as Albertsons, Vons,Safeway, SavOn, Smith’s, Kmart and Rite Aid, as well as Terrible Herbst gasstations and convenience stores. Street accounts include local bars,restaurants and non-chain convenience stores. Nevada law limits slot routeoperations to certain types of non-casino locations including bars, taverns,convenience stores, grocery stores and drug stores. Most locations are limitedto offering no more than 15 slot machines.

 

We generally enter into two types of routecontracts—one is a space lease arrangement and the other is a revenue-sharingarrangement. Under space lease arrangements, which we principally enter intowith chain stores, we pay a fixed monthly fee for each location in which weplace slot machines. Under revenue-sharing arrangements, which we typicallyenter into with street accounts, we pay the location owner a percentage of therevenues generated by our slot machines located at that particular streetaccount. In order to enter into a revenue-sharing arrangement, the locationowner must hold a gaming license. Both space lease and revenue-sharingarrangements typically involve long-term contracts that provide us with theexclusive right to install our slot machines at particular locations. In thecase of chain stores, our contracts give us the exclusive right to install slotmachines at stores opened in the future.

 

*Casino Operations*

 

On February 1, 2005, we consummated thepurchase of assets consisting of three casinos from Grace Entertainment, Inc.for an aggregate cash purchase price of approximately $266.8 million (the “GraceAcquisition”). The Grace Acquisition allowed us to expand our casino operationssegment to stable and relatively protected markets outside of southern Nevadawith casinos that we believe have significant upside potential. The acquiredassets consisted of Terrible’s Lakeside Casino Resort, which contained 921 slotmachines, 31 table games and an adjacent 60 room all-suite hotel,Terrible’s Mark Twain Casino, which contained 505 slot machines and 17 tablegames, and Terrible’s St. Jo Frontier Casino, which contained 487 slot machinesand 15 table games, in each case as of the closing date of the GraceAcquisition. As further described under “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources—Investing Activities and Capital Expenditures,” we used proceeds froma $170.0 million 7% senior subordinated notes offering along with borrowingsunder our amended and restated credit facility to fund the purchase price ofthe Grace Acquisition.

 

Our casino operations consist of five casinosin southern Nevada and, as a result of the Grace Acquisition, three casinos inMissouri and Iowa. All of our casino properties focus on local customers, withan emphasis on slot play. The following table summarizes our casino assets asof December 31, 2005:

 
| ** **                                         | ** ** | ** **      | ** ** | **Number of**      | ** ** | ** **       | ** ** |
|----------------------------------------------------|------------|-----------------|------------|--------------------|------------|------------------|------------|
| **Property**                                       | ** ** | **Location**    | ** ** | **Slot  Machines** | ** ** | **Table  Games** | ** ** | **Hotel  Rooms** | ** ** | **Additional** | ** ** |
|                                               |       |            |       |               |       |             |       |   |   |   |   |
| Terrible’s  Hotel & Casino           |       | Las Vegas, NV   |       | 873                |       | 9                |       | 257 |   | Race and sports book; 196 seat bingo  facility |   |
| Terrible’s  Town Casino                       |       | Pahrump, NV     |       | 403                |       | 6                |       | — |   | Race and sports book; 120 seat bingo  facility |   |
| Terrible’s Lakeside Casino & RV Park |       | Pahrump, NV     |       | 265                |       | —           |       | 159 RV  spaces |   | Race and sports book; 192-seat bingo  facility; 7 acre lake |   |
| Terrible’s Casino & Bowl             |       | Henderson, NV   |       | 157                |       | —           |       | — |   | 16-lane bowling alley |   |
| Terrible’s  Searchlight Casino                |       | Searchlight, NV |       | 75                 |       | —           |       | — |   | — |   |
|                                               |       |            |       |               |       |             |       |   |   |   |   |
| Terrible’s  Lakeside Casino Resort            |       | Osceola, IA     |       | 1,045              |       | 19               |       | 60  65 RV  spaces |   | 10,000 sq. ft. conference space;  convenience store and gas station; 121 acres (88 acres undeveloped; 15 acre  lake) |   |
| Terrible’s Mark Twain Casino                  |       | LaGrange, MO    |       | 591                |       | 14               |       | — |   | — |   |
| Terrible’s  St. Jo Frontier Casino            |       | St. Joseph, MO  |       | 585                |       | 11               |       | — |   | 2,400 sq. ft. conference space; 40 acres  (32 acres undeveloped) |   |
| Total                                              |       |            |       | 4,012              |       | 59               |       |   |   |   |   |

 

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### *Terrible’s Hotel & Casino*

### * *

Terrible’s Hotel & Casino in LasVegas, Nevada (“Terrible’s”), opened on December 6, 2000. Terrible’soffers a buffet and a 24-hour café. There are currently 257 rooms with standardamenities as well as a pool and spa. Terrible’s is conveniently locatedapproximately one mile east of the Las Vegas Strip, which we believe appeals tolocals who wish to avoid the congestion of the Strip. Terrible’s favorablelocation has made it popular with Strip casino employees. Although we are not atourist destination, we receive a certain amount of tourist traffic through ourcasino due to our location near the airport, the Strip and the Las VegasConvention Center.

 

### *Terrible’s Lakeside Casino Resort*

### * *

Lakeside Iowa, a riverboat casino located onWest Lake in Osceola, Iowa, is a facility that opened in January 2000.Lakeside Iowa offers a 60 room, all-suite hotel, modular conference andmeeting facilities which can seat up to 900 people and that are used formeetings, banquets and concerts, a fitness center, an outdoor pool and a giftshop. In addition, Lakeside Iowa offers a50-seat steakhouse, a 200-seat buffet, a 70-seat lounge and bar located in themain lobby, two bars located in the casino, a convenience store and gas stationthat are located adjacent to the casino and 65 RV spaces with utility hookups.Lakeside Iowa owns 121 acres of land, 88 acres of which are undeveloped.

 

### *Terrible’s Mark Twain Casino*

### * *

Mark Twain, located in a man-made basinadjacent to the Mississippi River in LaGrange, Missouri, is facility thatopened in July 2001. Mark Twain offers a 165-seat restaurant, an 80-seatbar and an additional bar in the casino. The casino has a locally populartheme based on Mark Twain, who grew up in and wrote about nearby Hannibal,Missouri.

 

### *Terrible’s St. Jo Frontier Casino*

### * *

St. Jo, located in a man-made basin adjacentto the Missouri River in St. Joseph, Missouri, is a facility that opened in May 1998as a successor to a casino that opened in June 1994. St. Jo offers a187-seat buffet, an 80-seat steakhouse, a 72-seat bar and a private banquetroom. There are 2,400 total square feet of modular conference and meetingspace. The casino and its amenities have a locally popular Pony Express westerntheme which plays off St. Joseph’s heritage as the founding location andheadquarters of the Pony Express. St. Jo owns 40 acres of land, 32 acres ofwhich are undeveloped.

 

**FinancialInformation**

** **

The primary source of our revenue and incomeis from our route and casino operations, although we view the restaurants, barsand services to be important adjuncts to our casino operations. The followingtable sets forth the contribution to total net revenues on a dollar andpercentage basis of our major activities for the years ended December 31,2003, 2004 and 2005. 

 
| ** **                      | ** ** | **Years Ended December 31,**       | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2005(1)** | ** ** |
| ** **                      | ** ** | **Amount**                              | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(in thousands, except  percentages)** | ** ** |
| Revenues:                       |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Route  operations(2)            |       | $                                       | 241,833    |   | 77.5 | % | $ | 293,244 |   | 78.1 | % | $ | 338,599 |   | 63.2 | % |
| Casino  operations(2)           |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Nevada                          |       | 78,342                                  |       | 25.1 |   | 91,254 |   | 24.3 |   | 95,400 |   | 17.8 |   |
| Other states                    |       | —                                  |       | — |   | — |   | — |   | 117,475 |   | 21.9 |   |
| Other                           |       | 3,049                                   |       | 1.0 |   | 3,628 |   | 1.0 |   | 6,024 |   | 1.1 |   |
| Total  revenues(3)              |       | 323,224                                 |       | 103.6 |   | 388,126 |   | 103.4 |   | 557,498 |   | 104.0 |   |
| Less  promotional allowances(2) |       | (11,249                                 | )          | (3.6 | ) | (12,514 | ) | (3.3 | ) | (21,657 | ) | (4.0 | ) |
| Total net  revenues             |       | $                                       | 311,975    |   | 100.0 | % | $ | 375,612 |   | 100.0 | % | $ | 535,841 |   | 100.0 | % |

 

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(1)   Calendaryear 2005 reflects a partial year of operations of the casinos purchasedpursuant to the Grace Acquisition in February 2005. As a result, theresults of operations for calendar year 2005 may not be comparable to theresults of operations in earlier years.

 

(2)   Routeand casino revenues are the net difference between gaming wins and losses. Promotionalallowances consist primarily of food and beverages furnished gratuitously tocustomers. The retail value of such services is included in the respectiverevenue classifications and is then deducted as promotional allowances. See “Note1. Description of Business and Summary of Significant Accounting Policies” tothe accompanying consolidated financial statements in “Item 8. FinancialStatements and Supplementary Data”.

 

(3)   Doesnot include interest income.

 

See “Item 8.Financial Statements and Supplementary Data” for additional financialinformation about us.

** **

**Marketing**

** **

*Nevada Market*

 

Our marketing efforts seek to capitalize onthe strong recognition and high level of quality and value associated with theTerrible Herbst trade name and its cowboy logo, which are used in 77 gasolinestations and convenience stores in southern Nevada and 7 gasoline stations andconvenience stores in California and Arizona. The Terrible Herbst brand is prominentlydisplayed in our route and casino operations. We license the Terrible Herbsttrade name from Terrible Herbst, Inc., a related party, through 2011.Subject to mutual consent, we may extend the term of the agreement for twosuccessive 5-year periods.

 

In addition, we have implemented a uniqueplayers club that rewards customers with points for playing at our route andcasino locations, including the three casinos acquired in the Grace Acquisitionas well as for purchases made at Terrible Herbst gas stations and conveniencestores in the Las Vegas area. Points may be redeemed for cash as well asfree or discounted rooms, food or other goods or services provided at any suchlocation.

 

*Midwest Market*

 

Each of Lakeside Iowa, Mark Twain and St. Johave a highly recognizable brand name within its respective community. Inaddition, each of Lakeside Iowa, Mark Twain and St. Jo has implemented a slotclub that rewards customers with points for every coin-in. Points areredeemable for vouchers that may be used for food, valet or retail items.After the Grace Acquisition was consummated, we expanded the scope of theexisting slot club as well as the items for which points may be redeemed.Each of the three casinos also hosts blackjack and slot tournaments as well asother special events on the casino premises that seek to recognize andcultivate regular casino patrons.

 

**BusinessStrategy**

** **

Our business strategy focuses on attractingand fostering repeat business from local gaming patrons in both our route andcasino operations. Local patrons are typically sophisticated gaming customerswho seek convenient locations, high payouts and a pleasant atmosphere. Becauselocal gaming consumers represent high potential repeat business, generatingcustomer satisfaction and loyalty is a critical component of our strategy.

 

*Route Operations*

* *

We believe that route patrons choose to playslot machines near their homes. We attract and retain these players byinstalling state-of-the-art slot machines with popular games, offering a highlevel of customer service and providing an attractive, comfortable atmosphereat our route locations. We actively manage our route locations as if they werecasinos. For example, we extend patrons’ slot play by offering free snacks andbeverages at some of our route locations. We place our gaming machines inlocations where they will receive maximum customer traffic, generally near astore’s entrance. In addition, we utilize a game tracking system and othertechnology to monitor the play of our patrons. Upon reviewing and analyzing ourcustomer play, we adjust the types of games available. By providing the mostdesirable mix of games at our locations, we have been able to increase the winper day at our route locations.

 

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We also maximize profitability throughcost-saving technologies. For example, our multi-denominational, multi-gamemachines, which allow patrons to tailor their gaming experience to theirpreferences, may be upgraded by exchanging a computer chip instead ofreplacing the entire machine. Recent technologies also allow patron jackpotpayments on site and help to reduce the need for slot route technicians todrive to locations to fill slot machines with coins or to pay jackpots.

 

*Casino Operations*

* *

Our casino operations strategy is to offerhigh quality gaming, hotel and dining experiences at affordable prices. Ourprimary target market consists of value oriented local middle market gamingpatrons who gamble frequently. We believe that we attract our targetedcustomers and that they return to our casinos because of our convenientlocations, great food, ample parking and high slot machine payout rates.Because locals demand variety and quality in their slot and video poker machineplay, our casino properties offer the latest in slot and video pokertechnology. Although perceived value initially attracts a customer to ourcasino properties, actual value generates customer satisfaction and loyalty.

 

As part of our commitment to providing aquality entertainment experience for our patrons, we are dedicated to ensuringa high level of customer satisfaction and loyalty by providing attentivecustomer service in a friendly, casual atmosphere. We recognize that consistentquality and a comfortable atmosphere stem from the collective care andfriendliness of each employee.

 

### *Nevada Market*

### * *

Since we believe that a vast majority of ourpatrons are locals, our marketing efforts are primarily focused on the localpopulation of Clark County, Nevada. Based on official state forecasts, ClarkCounty’s population has increased from just over 741,400 residents in 1990 toapproximately 1,833,500 residents in 2005. In addition, Clark County’spopulation is expected to increase by almost 450,000 residents, or an additional24%, by 2010. Over the past decade, Nevada has been one of the fastest growingstates in the nation, with a majority of that growth found in Clark County, andthe 2000 Census ranked Nevada as the nation’s fastest growing state. Managementexpects to benefit from the continued strong growth in the population of ClarkCounty.

 

Gaming revenues have increased significantlyalong with population growth in Clark County. According to the Center forBusiness and Economic Research at the University of Nevada Las Vegas, gamingrevenues in Clark County in 2005 were 11.9% greater than in 2004. Clark Countyenjoys low unemployment rates, a steady increase in available jobs and a percapita income in 2004 of $23,805, comparable to the national average.

 

### *Midwest Market*

### * *

Lakeside Iowa, Mark Twain and St. Jo focus onlocals, and each uses a mix of billboard, television, radio and printadvertising in both local and regional markets. Lakeside Iowa is located alongInterstate 35, approximately 40 miles south of Des Moines, Iowa, which has ametropolitan area with a population of approximately 476,000 people. Mark Twainis the only casino in northeast Missouri and is approximately 15 miles fromQuincy, Illinois, which has an approximate population of 40,000 people andapproximately 25 miles from Hannibal, Missouri, which has an approximatepopulation of 18,000 people. St. Jo is the only casino in St. Joseph, Missouri,which has an approximate population of 73,000 people, and is approximately 50miles north of Kansas City, Missouri.

 

Our business strategy for the three casinosacquired from Grace Entertainment includes continued focus on local gamingpatrons with the goal of driving additional customer visitation throughenhanced incentive programs and improved food and beverage operations. Each ofLakeside Iowa, Mark Twain and St. Jo are now operated under the Terrible’s name.Since the acquisition of these assets in February 2005, we have initiatedsignificant property improvements and have added over 308 slot machines to theproperties. Additionally we have replaced the older, “coin-in, coin-out” slotmachines with newer, “ticket-in, ticket-out” slot machines, and we are close tocompleting a full renovation of the gaming area at each facility. Once therenovations of the gaming areas are complete, we intend to upgrade theland-based operations of these casinos such as restaurants and common areas. Weanticipate completion of these renovations by late 2006.

 

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**Competition**

** **

*Nevada Market*

* *

Our slot route operations are subject tosubstantial direct competition for our revenue-sharing and fixed space leaselocations from one large route operator and numerous small operators, locatedprincipally in Las Vegas, Nevada. The principal method of competition for slotroute operators includes the economic terms of the revenue-sharing or spacelease arrangement, the services provided and the reputation of the routeoperator. Price competition for revenue-sharing or space lease arrangements isintense and we believe that price competition among slot route operators willcontinue. We are one of the largest route operators with approximately 7,100slot machines situated in locations outside of our casinos as of December 31,2005.

 

With respect to our casino operations in LasVegas, Terrible’s Hotel & Casino competes for local gaming customerswith other locals-oriented casino-hotels in Las Vegas. We do not believe thatwe are in direct competition with many of the resort-casino properties on theLas Vegas Strip, which focus primarily on attracting tourist players. Rather,we believe that our principal competitors in our casino operations are the twoother local casinos 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 construction of newcasinos or the expansion of existing casinos near our casinos could have anegative impact on our casino operations.

 

Our casino operations in Pahrump, Henderson,and Searchlight, Nevada face competition from other casinos located in thevicinity of these properties.

 

*Midwest Market*

* *

Each of Lakeside Iowa, Mark Twain and St. Jocompetes for local gaming customers with other casinos in their respectivemarkets.

 

Lakeside Iowa is located 40 miles southwestof Des Moines, Iowa. The primary competitors of Lakeside Iowa are PrairieMeadows racino and the Meskwaki Bingo Casino Hotel. The Prairie Meadows racinois located approximately 60 miles from Lakeside Iowa east of Des Moines. TheMeskwaki Bingo Casino Hotel is located in Tama, Iowa and is approximately 110miles from Lakeside Iowa.

 

The closest casino to Mark Twain is theCatfish Bend Casino, which spends the summer docked in Fort Madison, Iowa andspends the winter docked in Burlington, Iowa, which are approximately 55 milesand 75 miles, respectively, from LaGrange.

 

St. Jo primarily targets residents of St. Joseph,Missouri and is the only casino in St. Joseph. However, St. Jo competesindirectly with four riverboats in Kansas City, Missouri, which isapproximately 50 miles to the south of St. Joseph, and to a lesser extent withseveral Native American casinos, none of which is closer than 45 miles from St.Joseph.

 

Certain states have recently legalized, andother states are considering legalizing, casino gaming in certain areas. Inaddition, states such as Illinois, Missouri, Iowa and Kansas have recently consideredawarding additional gaming licenses or expanding permitted gaming. In June 2004,the Iowa Racing and Gaming Commission voted to lift a cap on casino licenses inIowa and in 2005 issued 4 new licenses. None of theses licenses were placed injurisdictions that directly compete with our casinos in the Midwest market.

 

**Seasonality**

** **

We do not believe that our business as awhole is seasonal to any significant degree.

 

**EnvironmentalLaws**

** **

Compliance with federal, state and local lawsenacted for the protection of the environment to date had no material effectupon our capital expenditures, earnings or competitive position and we do notanticipate any material adverse effects in the future based on the nature ofour operations.

 

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**Employees**

** **

As of December 31, 2005, we employedapproximately 3,300 employees. None of our current employees is or will becovered by a collective bargaining agreement. We believe that our relationshipwith our employees is good.

 

**RegulationAnd Licensing**

** **

*Nevada*

* *

The ownership and operation of casino gamingfacilities and slot routes in Nevada are subject to the Nevada Gaming ControlAct and the regulations promulgated thereunder, or the Nevada Act, and variouslocal regulations.

 

Our gaming operations are subject to thelicensing and regulatory control of the Nevada Gaming Commission, the NevadaState Gaming Control Board, the Clark County Liquor and Gaming Licensing Board,and the Cities of Las Vegas, Reno, Henderson and other local regulatoryauthorities, or the Nevada Gaming Authorities.

 

The laws, regulations and supervisoryprocedures of the Nevada Gaming Authorities are based upon declarations ofpublic policy which are concerned with, among other things:

 

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

 

•      theestablishment and maintenance of responsible accounting practices andprocedures;

 

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

 

•      the preventionof cheating and fraudulent practices; and

 

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

 

Changes in these laws, regulations andprocedures could have an adverse effect on our gaming operations.

 

Corporations and other entities that operatecasinos or slot routes in Nevada are required to be licensed by the NevadaGaming Authorities. A gaming license for such activities requires the periodicpayment of fees and taxes and is not transferable. Herbst Gaming is registeredby the Nevada Gaming Commission as a publicly traded corporation (a “registeredcorporation”). As a registered corporation, we are required periodically tosubmit detailed financial and operating reports to the Nevada Gaming Commissionand furnish any other information that the Nevada Gaming Commission may require.Herbst Gaming has been found suitable by the Nevada Gaming Commission to ownthe stock of ETT, which is licensed by the Nevada Gaming Commission as a casinoand slot route operator, Market Gaming, Inc., which is licensed as a slotroute operator, and Flamingo Paradise Gaming, LLC, which is licensed as acasino operator. ETT is also registered by the Nevada Gaming Commission as anintermediary holding company (the “Intermediary Company”) and has been foundsuitable to own the stock of Corral Country Coin, Inc., Cardivan Company,and Corral Coin, Inc., all of which are licensed by the Nevada GamingAuthorities as slot route operators (all of the foregoing, including MarketGaming, Inc., and Flamingo Paradise Gaming, LLC, are referred to as the “GamingSubsidiaries”). No person may become a stockholder of, or receive anypercentage of the profits from, the Intermediary Company or any of the GamingSubsidiaries without first obtaining licenses and approvals from the NevadaGaming Authorities. Herbst Gaming, the Intermediary Company, and all of theGaming Subsidiaries have obtained from the Nevada Gaming Authorities thevarious registrations, approvals, permits and licenses required in order toengage in gaming activities in Nevada.

 

The Nevada Gaming Authorities may investigateany individual who has a material relationship to, or material involvementwith, Herbst Gaming, the Intermediary Company or the Gaming Subsidiaries inorder to determine whether such individual is suitable or should be licensed asa business associate of a gaming licensee. Officers, directors and certain keyemployees of Herbst Gaming, the Intermediary Company, and the GamingSubsidiaries must file applications with the Nevada Gaming Authorities and arerequired to be licensed by the Nevada Gaming Authorities. The Nevada GamingAuthorities may deny an application for licensing for any cause that theydeem reasonable. A finding of suitability is comparable to licensing, and bothrequire submission of detailed personal and financial information followed by athorough investigation. Changes in

 

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licensed positions must bereported to the Nevada Gaming Authorities, and, in addition to their authorityto deny an application for a finding of suitability or licensure, the NevadaGaming Authorities have jurisdiction to disapprove a change in a corporateposition.

 

If the Nevada Gaming Authorities were to findan officer, director or key employee unsuitable for licensing or unsuitable tocontinue having a relationship with us, we would have to sever allrelationships with that person. In addition, the Nevada Gaming Commission may requireus to terminate the employment of any person who refuses to file appropriateapplications. Determinations of suitability or of questions pertaining tolicensing are not subject to judicial review in Nevada.

 

Herbst Gaming, the Intermediary Company, andthe Gaming 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 HerbstGaming, the Intermediary Company and the Gaming Subsidiaries must be reportedto the Nevada Gaming Commission.

 

If it were determined that Herbst Gaming, theIntermediary Company or the 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, theIntermediary Company, the Gaming Subsidiaries and the persons involved could besubject to substantial fines for each separate violation of the Nevada laws atthe discretion 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.

 

Any beneficial holder of Herbst Gaming’svoting securities, regardless of the number of shares owned, may berequired to file an application, be investigated, and have his suitability as abeneficial holder of Herbst Gaming’s voting securities determined if the NevadaGaming Commission has reason to believe that such ownership would otherwise beinconsistent with the declared policies of the State of Nevada. The applicant mustpay all costs of investigation incurred by the Nevada Gaming Authorities inconducting such investigation.

 

Although we do not intend to register or sellany equity securities, Nevada law requires any person who acquires more than 5%of a registered corporation’s voting securities to report the acquisition tothe Nevada Gaming Commission. Nevada law requires that beneficial owners ofmore than 10% of a registered corporation’s voting securities apply to theNevada Gaming Commission for a finding of suitability within 30 days after theChairman of the Nevada State Gaming Control Board mails the written noticerequiring the filing for a finding of suitability. Under certain circumstances,an “institutional investor,” as defined in the regulations of the Nevada GamingCommission, which acquires more than 10%, but not more than 15%, of our votingsecurities may apply to the Nevada Gaming Commission for a waiver of suchfinding of suitability if that institutional investor holds the votingsecurities for investment purposes only. An institutional investor will not bedeemed to hold voting securities for investment purposes unless the votingsecurities were 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 the NevadaGaming Commission finds to be inconsistent with holding our voting securitiesfor investment purposes only. Activities which are not deemed to beinconsistent with holding voting securities for investment purposes onlyinclude:

 

•      voting on allmatters voted on by stockholders;

 

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

 

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

 

If the beneficial holder of voting securitieswho must be found suitable is a corporation, partnership or trust, it mustsubmit detailed business and financial information including a list ofbeneficial owners. The applicant is required to pay all costs of investigation.

 

Any person who fails or refuses to apply fora finding of suitability or a license within 30 days after being ordered to doso by the Nevada Gaming Commission or the Chairman of the Nevada State GamingControl Board, may be found

 

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unsuitable. The samerestrictions apply to a record owner if the record owner, after request, failsto identify the beneficial owner. Any stockholder found unsuitable and whoholds, directly or indirectly, any beneficial ownership of the common stock ofa registered corporation beyond the period of time as may be prescribed bythe Nevada Gaming Commission may be guilty of a criminal offense. HerbstGaming, the Intermediary Company or the Gaming Subsidiaries may becomesubject to disciplinary action if, after receipt of notice that a person isunsuitable to be a stockholder or to have any other relationship with HerbstGaming, the Intermediary Company or the Gaming Subsidiaries, Herbst Gaming:

 

•      pays thatperson any dividend or interest upon voting securities;

 

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

 

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

 

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

 

Additionally, the Clark County Liquor andGaming Licensing Board has taken the position that it has the authority toapprove all persons owning or controlling the stock of any corporationcontrolling a gaming license.

 

Herbst Gaming may be required todisclose to the Nevada State Gaming Control Board and the Nevada GamingCommission the identities of all holders of its debt securities. The NevadaGaming Commission may, in its discretion, require the holder of any debtsecurity of a registered corporation to file applications, be investigated andbe found suitable to own the debt security of a registered corporation. If theNevada Gaming Commission determines that a person is unsuitable to own a debtsecurity, then pursuant to Nevada law, the registered corporation can besanctioned, including the loss of its approvals, if without the prior approvalof the Nevada Gaming Commission, it:

 

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

 

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

 

•      pays theunsuitable person remuneration in any form; or

 

•      makes anypayment to the unsuitable person by way of principal, redemption, conversion,exchange, liquidation or similar transaction.

 

Herbst Gaming is required to maintain acurrent ledger in Nevada, which may be examined by the Nevada GamingAuthorities at any time. If any securities are held in trust by an agent or bya nominee, the record holder may be required to disclose the identity ofthe beneficial holder to the Nevada Gaming Authorities. A failure to make suchdisclosure may be grounds for finding the record holder unsuitable. We arealso required to render maximum assistance in determining the identity of thebeneficial owner. The Nevada Gaming Commission has the power to require oursecurities to bear a legend indicating that the securities are subject to theNevada Act. However, to date, the Nevada Gaming Commission has not imposed sucha requirement on Herbst Gaming.

 

Herbst Gaming may not make a public offeringof securities without the prior approval of the Nevada Gaming Commission if thesecurities or proceeds from the securities are intended to be used toconstruct, acquire or finance gaming facilities in Nevada, or to retire orextend obligations incurred for the purposes of constructing, acquiring orfinancing gaming facilities. Furthermore, any approval, if granted, does notconstitute a finding, recommendation or approval by the Nevada GamingCommission or the Nevada State Gaming Control Board as to the accuracy oradequacy of the prospectus or the investment merits of the securities offered.Any representation to the contrary is unlawful.

 

Changes in the control of Herbst Gamingthrough merger, consolidation, stock or asset acquisitions, management orconsulting agreements, or any act or conduct by a person whereby that personobtains control (including foreclosure on the pledged shares), may notoccur without the prior approval of the Nevada Gaming Commission. Entitiesseeking to acquire control or ownership of a registered corporation mustsatisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in avariety of stringent standards prior to assuming control of such registeredcorporation. The Nevada Gaming Commission may also require thestockholders, officers, directors and other persons having a materialrelationship or

 

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involvement with the entityproposing to acquire control, to be investigated and licensed as part ofthe approval process relating to the transaction.

 

License fees and taxes, computed in variousways depending on the type of gaming or activity involved, are payable to theState of Nevada and to the counties and cities in which the Nevada licensee’srespective operations are conducted. Depending upon the particular fee or taxinvolved, these fees and taxes are payable either monthly, quarterly orannually and are based upon either:

 

•      a percentage ofthe gross revenues received;

 

•      the number ofgaming devices operated; or

 

•      the number oftable games operated.

 

Any person who is licensed, required to belicensed, registered, required to be registered, or is under common controlwith such persons, or Licensees, and who is or who proposes to become involvedin a gaming venture outside of Nevada, is required to deposit with the NevadaState Gaming Control Board, and thereafter maintain, a revolving fund in theamount of $10,000 to pay the expenses of investigation by the Nevada StateGaming Control Board of the Licensees’ participation in foreign gaming. Therevolving fund is subject to increase or decrease in the discretion of theNevada Gaming Commission. Thereafter, Licensees are also required to complywith certain reporting requirements imposed by the Nevada gaming laws.Licensees are also subject to disciplinary action by the Nevada GamingCommission if they knowingly violate any laws of the foreign jurisdictionpertaining to a foreign gaming operation, fail to conduct the foreign gamingoperation in accordance with the standards of honesty and integrity required ofNevada gaming operations, engage in activities or enter into associations thatare harmful to the State of Nevada or its ability to collect gaming taxes andfees, or employ, contract with or associate with a person in the foreignoperation who has been denied a license or a finding of suitability in Nevadaon the ground of personal unsuitability.

 

*Missouri*

* *

On November 3, 1992, a statewidereferendum authorized gaming in the State of Missouri on the Missouri and theMississippi Rivers. On April 29, 1993, Missouri enacted revisedlegislation (as amended, the “Missouri Gaming Law”) which amended the existinglegislation. In a decision handed down on January 25, 1994, the MissouriSupreme Court held that games of chance were prohibited under the Missouriconstitution. In a statewide election held on November 8, 1994, Missourivoters approved the adoption of an amendment to the Missouri Constitution whichpermits the legislature to allow games of chance to be conducted on excursionboats and floating facilities on the Mississippi River and the Missouri River.As a result of the amendment, games of chance are also permitted, subject toMissouri Gaming Law. Pursuant to the Missouri Gaming Law, there are eleven operatingriverboat gaming facility sites in Missouri: one in Caruthersville; one inBoonville; three in the St. Louis area; four in the Kansas City area; one inLaGrange; and one in St. Joseph.

 

Opponents of gaming in Missouri have broughtseveral legal challenges to gaming in the past and may possibly bringsimilar challenges in the future. On November 25, 1997, the MissouriSupreme Court overturned a state lower court and held that a portion of theMissouri Gaming Law that authorized excursion gaming facilities in “artificialbasins” up to 1,000 feet from the Mississippi or Missouri rivers wasunconstitutional. This ruling created uncertainty as to the legal status ofseveral 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 and MarkTwain.

 

Under the Missouri Gaming Law, the ownershipand operation of riverboat gaming facilities in Missouri are subject toextensive state and local regulation. Herbst Gaming, HGI—St. Jo, the subsidiaryof Herbst Gaming that owns St. Jo and the current licensee and HGI—Mark Twain,the subsidiary of Herbst Gaming that owns Mark Twain and the current licensee,any subsidiaries, and some of their officers and employees are and will besubject to specific regulations, including ongoing licensing requirements. As part ofthe application and licensing process for a gaming license, the applicant mustsubmit detailed financial, operating and other reports to the Missouri GamingCommission. Each applicant has an ongoing duty to update the informationprovided to the Missouri Gaming Commission in the application, usually withinseven days of a material change in the information on file with the MissouriGaming Commission. Each of St. Jo and Mark Twain have frequently updated itsapplication materials since it was initially licensed. In addition to theinformation required of the applicant, directors, officers, affiliated businessentities and other defined “key persons” (which include individuals andcompanies designated by the

 

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Missouri Gaming Commission)must submit Personal Disclosure Forms, which include detailed financialinformation, and are subject to thorough investigations. In addition, someofficers and directors of Herbst Gaming, as well as Herbst Gaming itself, havesubmitted Personal Disclosure Forms and applications to the Missouri GamingCommission. All gaming employees must obtain an occupational license issued bythe Missouri Gaming Commission. Suppliers are also subject to licensingrequirements of the Missouri Gaming Commission.

 

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

 

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

 

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

 

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

 

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

 

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

 

•      an economicdevelopment or impact report.

 

License fees cover all related costs of theMissouri Gaming Commission investigation and are a minimum of $50,000 for theinitial application and $25,000 annually thereafter. Each of Herbst Gaming,HGI—St. Jo and HGI—Mark Twain has undergone a full licensing investigation andhearing in connection with its licensing.

 

The Missouri Gaming Law and implementingregulations impose restrictions on the use of and do not permit the transfer ofthe gaming licenses as well as limitations on transactions engaged in bylicensees. The licenses issued by the Missouri Gaming Commission may notbe transferred nor pledged as collateral. The Missouri Gaming Law regulationsbar a licensee from taking any of the following actions without prior noticeto, and approval by, the Missouri Gaming Commission:

 

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

 

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

 

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

 

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

 

•      defined “significantrelated party transactions.”

 

In addition, the licensee must notify theMissouri Gaming Commission of other transactions that include the transfer offive percent or more of an ownership interest in the licensee or holdingcompany if publicly held and any transaction of at least $1,000,000.

 

The restrictions on transfer of ownershipapply to Herbst Gaming as well as the direct licensees, HGI—St. Jo and HGI—MarkTwain. Gaming equipment may not be pledged. Corporate stock of somelicensees may not be pledged except in narrow circumstances and subject toregulatory conditions.

 

Missouri statutes and administrative rules containdetailed requirements and conditions concerning the operation of a licensedexcursion gaming boat facility, including but not limited to the following:

 

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

 

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•      minimumpayouts;

 

•      the payment ofa 20% tax on adjusted gross receipts;

 

•      prohibitionsagainst providing credit to gaming customers;

 

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

 

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

 

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

 

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

 

The Missouri Gaming Commission has the power,as well as broad discretion in exercising this power, to revoke or suspendgaming or occupational licenses and impose other penalties for violations ofthe Missouri Gaming Law and the rules and regulations promulgatedthereunder, including without limitation, forfeiture of all gaming equipmentused for improper gaming and fines of up to three times a licensee’s highestdaily gross receipts during the preceding twelve months.

 

Although the Missouri Gaming Law provides nolimit on the amount of riverboat space that may be used for gaming, theMissouri Gaming Commission is empowered to impose space limitations through theadoption of rules and regulations. In addition, the Missouri Gaming Lawimposes as to each customer a $500 loss limit per two-hour period establishedby each licensee with the approval of the Missouri Gaming Commission. In orderto establish an excursion schedule, which allows patrons to enter and exit thegaming floor during the excursion, the licensee must prove to the satisfactionof the Missouri Gaming Commission that it can enforce the $500 loss limit.

 

In addition, the Missouri Gaming Commissionis empowered to determine on a city and county-specific basis where “dockside”or permanently-docked gaming is appropriate and may be permitted. TheMissouri Gaming Commission has authorized all eleven licensed sites to operateall or a portion of their facilities on a continuously docked basis. On February 23,2000, the Missouri Gaming Commission granted Mark Twain Casino, L.L.C., fromwhich Herbst Gaming purchased the Mark Twain, the authority to permanently dockthe excursion gambling riverboat facility known as the “Mark Twain Casino.” On February 15,1996, the Missouri Gaming Commission granted St. Joseph Riverboat Partners,from which 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 of Iowa legalizedriverboat gaming on the Mississippi River and other waterways located in Iowa.Under Iowa law, a license to conduct gaming may be issued in a county onlyif the county electorate has approved gaming. The electorate of Clarke County,Iowa, approved gaming on February 28, 1995 by referendum. Gaming conductedby the Lakeside Casino Resort was approved by referendum on November 18,1997. In addition, a referendum must be held every eight years in each of thecounties where gambling games are conducted and the proposition to continue toallow gambling games in such counties must be approved by a majority of thecounty electorate voting on the proposition. Such a referendum took place on November 5,2002 with approximately 80% of the electorate voting on the propositionfavoring continued gaming on riverboats in Clarke County. The next referendumis scheduled for 2010. If any reauthorization referendum is defeated, Iowa lawprovides 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 law authorizes the grantingof licenses to non-profit corporations that, in turn, are permitted to enterinto operating agreements with qualified persons who also actually conductriverboat gaming operations. Such operators must likewise be approved andlicensed by the Iowa Racing and Gaming Commission (the “Iowa Gaming Commission”).

 

In July 1997, Clarke County DevelopmentCorporation, a non-profit corporation organized for the purpose of facilitatingriverboat gaming in Osceola, Iowa, entered into an operator’s contract, sinceamended, for Lakeside Iowa for a term

 

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of up to 50 years. Under theoperator’s contract, as amended, Clarke County Development Corporation is to bepaid a monthly fee equal to 1.5% of the adjusted gross gaming revenue ofLakeside Iowa. Further, pursuant to a dock site agreement executed in August 1997(which also has a term of up to 50 years), Lakeside Iowa is required to pay amonthly fee to the City of Osceola and the Water Works Board of Trustees equalto 1.25% of the adjusted gross gaming revenue of Lakeside Iowa and an annualfee, to be paid in equal monthly installments, equal to approximately $160,000,with such amount to increase each year by 1% until termination of the lease. InSeptember 2004, we entered into an agreement whereby upon the later of ourobtaining approval from the Iowa Gaming Commission or our closing thetransactions contemplated with Southern Iowa Gaming Company, Southern Iowa willimmediately pay $3.2 million to the City of Osceola. Beginning eight years fromthe date of such 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 annual adjusted gross receipts from Lakeside Iowa. We may, however, offsetup to 50% of this 1% annual payment with any expenditures we have made forcapital improvements (excluding gaming devices and improvements to the gamingfacility, casino floor, development of a truck stop and general repairs andmaintenance).

 

Iowa law permits gaming licensees to offerunlimited stakes gaming on games approved by the Iowa Gaming Commission on a24-hour basis. Dockside casino gaming is authorized by the Iowa GamingCommission and the Iowa Legislature, subject to certain limitations notapplicable to Lakeside Iowa, eliminated the requirement that gaming licenseescruise, effective May 6, 2004. The legal age for gaming is 21.

 

All Iowa excursion gambling boat licenseswere approved for renewal at a March 2, 2006 meeting of the Iowa GamingCommission. These licenses are not transferable and will need to be renewedannually and prior to the commencement of each subsequent annual renewalperiod.

 

The ownership and operation of gamingfacilities in Iowa are subject to extensive state laws, regulations of the IowaGaming Commission and various county and municipal ordinances (collectively,the “Iowa Gaming Laws”), concerning the responsibility, financial stability andcharacter of gaming operators and persons financially interested or involved ingaming operations. Iowa Gaming Laws seek to: (1) prevent unsavory orunsuitable persons from having direct or indirect involvement with gaming atany time or in any capacity; (2) establish and maintain responsibleaccounting practices and procedures; (3) maintain effective control overthe financial practices of licensees (including the establishment of minimumprocedures for internal fiscal affairs, the safeguarding of assets andrevenues, the provision of reliable record keeping and the filing of periodicreports with the Iowa Gaming Commission); (4) prevent cheating andfraudulent practices; and (5) provide a source of state and local revenuesthrough taxation and licensing fees. Changes in Iowa Gaming Laws could have amaterial adverse effect on the Iowa gaming operations.

 

Gaming licenses granted to individuals mustbe renewed every year, and licensing authorities have broad discretion with regardto such renewals. Licenses are not transferable. The Iowa gaming operationsmust submit detailed financial and operating reports to the Iowa GamingCommission. Certain contracts of licensees in excess of $100,000, that exceedthree years in term or that involve related parties must be submitted to andapproved by the Iowa Gaming Commission.

 

Officers, directors, managers and employeesof the Iowa gaming operations are required to be licensed by the Iowa GamingCommission. Employees associated with gaming must obtain a license and theselicenses are subject to immediate suspension under specific circumstances. Inaddition, anyone having a material relationship or involvement with the Iowagaming operations may be required to be found suitable or to be licensed,in which case those persons would be required to pay the costs and fees of theIowa Gaming Commission in connection with the investigation. The Iowa GamingCommission may deny an application for a license for any cause deemedreasonable. In addition to its authority to deny an application for license,the Iowa Gaming Commission has jurisdiction to disapprove a change in positionby officers or key employees and the power to require the Iowa gamingoperations to 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 Gaming Commission may revoke agaming license if the licensee:

 

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

 

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

 

•      is not the trueowner of the enterprise;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

If it were determined that the Iowa GamingLaws were violated by a licensee, the gaming licenses held by a licensee couldbe limited, made conditional, suspended or revoked. In addition, the licenseeand the persons involved could be subject to substantial fines for eachseparate violation of the Iowa Gaming Laws in the discretion of the Iowa GamingCommission. Limitations, conditioning or suspension of any gaming license could(and revocation of any gaming license would) have a material adverse effect onoperations.

 

The Iowa Gaming Commission may alsorequire any individual who has a material relationship with the Iowa gamingoperations to be investigated and licensed or found suitable. The Iowa GamingCommission, prior to the acquisition, must approve any person who acquires 5%or more of a licensee’s equity securities in the event that approval by theIowa Gaming Commission is not otherwise contemplated by the operativeacquisition document. The applicant stockholder is required to pay all costs ofthis investigation.

 

Gaming taxes approximating 22% of theadjusted gross receipts above $3,000,000 will be payable by each licensee onits operations to the State of Iowa. In addition, there was a prepaidassessment due on June 1, 2005 and will be another prepaid assessment dueon June 1, 2006, in an aggregate amount equal to 2.152% of each licensee’sestimated adjusted gross receipts for fiscal year 2004. These assessments willbe offset by future state gaming taxes paid by each licensee with a credit for20% of the assessments paid allowed each year beginning July 1, 2010 forfive consecutive years. The state of Iowa is also reimbursed by the licenseesfor all costs associated with monitoring and enforcement by the Iowa GamingCommission and the Iowa Department of Criminal Investigation.

 

## **Item 1A. Risk Factors.**

## ** **

The following risk factors, among others,could cause our financial performance to differ significantly from the goals,plans, objectives, intentions and expectations expressed in this report. If anyof the following risks and uncertainties or other risks and uncertainties notcurrently known to us or not currently considered to be material actuallyoccur, our business, financial condition or operating results could be harmedsubstantially.

 

*Risks Related to Our Company*

* *

*The success of our route operations is dependent on our ability torenew our contracts.*

 

We conduct our route operations undercontracts with third parties. Both contracts with chain and street customersare renewable at the option of the owner of the respective chain store orstreet account. As our route contracts expire, we are required to compete forrenewals. Although we have historically been able to renew our contracts, if weare unable to renew a material portion of our route contracts because ourcompetitors offer more favorable terms or for any other reason, our business,financial condition and results of operations would be

 

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adversely affected. We cannotassure you that our current chain or street contracts will be renewed.

 

*We may experience a loss of market share.*

 

The gaming industry is highly competitive.Our slot-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. Withrespect to our casino operations in Nevada, we compete for local gamingcustomers with other locals-oriented casino-hotels and other casinos located inthe vicinity of these properties. Our casino operations in the Midwest facecompetitors that include land-based casinos, dockside casinos, riverboatcasinos, casinos located on Native American reservations and racing andpari-mutuel operations. If our competitors operate more successfully, ifexisting route operations or properties are enhanced or expanded, or ifadditional competitors are established in and around the locations in which weconduct business, we may lose market share. In particular, the expansionof route operations or casino gaming in or near any geographic area from whichwe attract or expect to attract a significant number of our customers couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

*Changes to applicable tax laws could have a material adverse effect onour financial condition.*

 

We pay substantial taxes and fees inconnection with our operations as a gaming company. From time to time, federal,state and local legislators and other government officials have proposed andadopted changes in tax laws, or in the administration of those laws affectingthe gaming industry. It is not possible to determine the likelihood of changesin tax laws or in the administration of those laws. If adopted, changes toapplicable tax laws could have a material adverse effect on our business,financial condition and results of operations. For example, during the 2003Nevada state legislative session, there was an increase in the payroll taxes to0.7% of payroll, an increase of the gross casino gaming taxes from 6.25% to6.75% and a 33% increase in fees imposed on the operation of slot machineslocated in a restricted location (15 machines or less). In addition, in April 2004,the Iowa state legislature approved an increase on the maximum tax rate ongaming revenues of riverboat casinos from 20% to 22%, effective July 1,2004.

 

*Our operations could be adversely affected due to the adoption ofcertain anti-smoking regulations.*

 

There are two competing initiative petitionsin the State of Nevada regarding smoking in public places that will be subjectto public referendum in November 2006. The first initiative would prohibitsmoking in indoor places of employment including, but not limited to, bars,taverns, grocery stores, drug stores and convenience stores, as well as givefuture control over smoking regulation to individual counties ormunicipalities. The second initiative bans smoking in restaurants and otherlocations frequented by minors and vests all future smoking regulation with theNevada State Legislature. The measure that garners the most votes will becomelaw, assuming that such measure wins a majority of votes cast.

 

If the second initiative becomes law, it wouldhave no effect on us as such initiative would not apply to our operations.However, the first initiative, if adopted, could have a material adverse effecton our business, financial condition and results of operation.

 

*We face extensive regulation from gaming and other governmentauthorities.*

 

As owners and operators of gaming facilities,we are subject to extensive state and local regulations in Nevada, Iowa andMissouri. State and local government authorities in such jurisdictions,including the Nevada Gaming Commission, the Iowa Racing and Gaming Commissionand the Missouri Gaming Commission, require us and our subsidiaries to obtaingaming licenses and require our officers, key employees and business entityaffiliates to demonstrate suitability to hold gaming licenses, and such stateand local government authorities may limit, condition, suspend or revoke alicense for any cause deemed reasonable by the respective licensing agency.They may also levy substantial fines against us or our subsidiaries or theindividuals involved in violating any gaming laws or regulations. The violationof any such state and local regulations could have a material adverse effect onour business, financial condition and results of operations.

 

In Nevada, the Nevada Gaming Commission couldrequest that a state court appoint a supervisor to operate any non-restrictedgaming establishment operated by us if the licenses held by us are revoked,suspended or otherwise lapse. In such extraordinary circumstances, earningsgenerated by gaming operations during a supervisor’s appointment (except forreasonable rental value) could be forfeited to the State of Nevada. Theoccurrence of any of these events could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

15

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Any future public offering of debt or equitysecurities by Herbst Gaming will require review of and prior approval by theNevada Gaming Commission, the Iowa Racing and Gaming Commission and theMissouri Gaming Commission. The Missouri Gaming Commission also requires noticeof the intended incurrence of any private debt exceeding $1,000,000 andreserves the right to elect to have prior review and approval.

 

We are subject to a variety of other rules andregulations, including zoning, environmental, construction and land-use laws,regulations and permits that govern the serving of alcoholic beverages. Anychanges to these laws could have a material adverse effect on our business,financial condition and results of operations.

 

From time to time, legislators and specialinterest groups have proposed legislation that would expand, restrict orprevent gaming operations in the jurisdictions in which we operate. Any suchchange to the regulatory environment or the adoption of new federal, state orlocal government legislation could have a material adverse effect on ourbusiness.

 

For a more complete summary of regulationsthat affect our business, see “Item 1. Business–Regulation and Licensing.”

 

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

 

Our success is substantially dependent uponthe efforts and skills of Edward J. Herbst, our chairman of the board, chiefexecutive officer and president, and Mary E. Higgins, our chief financialofficer. We have entered into employment agreements with Mr. Herbstthrough 2006 and Ms. Higgins through 2008. These 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. If wewere to lose the services rendered by either of them, our operations could beadversely affected. In addition, we compete with other potential employers foremployees, and we may not succeed in hiring and retaining the executivesand other employees that we need. An inability to hire quality employees couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

*Our executive officers and members of our board of directors own 100%of the company and conflicts of interests could arise.*

 

Edward, Timothy and Troy Herbst own all ofthe outstanding stock of Herbst Gaming. This concentration of ownership givesthem the power to control the outcome of all matters requiring stockholderapproval, including the election of all directors, and will give them the powerto hinder or delay a change of control of Herbst Gaming. In addition, Edward,Timothy and Troy Herbst are all officers and directors of Terrible Herbst, Inc.,a company owned by parties related to us. We currently engage in transactionswith Terrible Herbst, Inc. and plan to continue to do so in the future.These related-party transactions could lead to potential conflicts of interest.See “Item 13. Certain Relationships and Related Transactions.”

 

*Our business relies heavily on certain markets and an economic downturnin these markets could have a material adverse effect on our results.*

 

Our Nevada properties depend on our customersliving principally in southern Nevada, an area that has recently experiencedsignificant population growth. However, we cannot be certain that this growthwill continue. In addition, our Nevada properties are dependent on Nevada’seconomy, particularly the economy of southern Nevada. An economic downturn insouthern Nevada could have a material adverse effect on our operating results,and we cannot assure you that the economy in southern Nevada will continue togrow.

 

Lakeside Iowa, Mark Twain and St. Jo dependon customers living principally in south central Iowa and northeast andnorthwest Missouri, respectively, and on the economy of those areas. Aneconomic downturn in such areas could have a material adverse effect on ouroperating results.

 

Our properties use significant amounts ofelectricity, natural gas and other forms of energy. While no shortages ofenergy have been experienced, the substantial increases in the cost ofelectricity, natural gas and gasoline in the United States in general, and insouthern Nevada, south central Iowa and northeast and northwest Missouri inparticular, may negatively affect our operating results. In addition,further energy price increases in such areas could result in a decline indisposable income of potential customers and a corresponding decrease invisitation and spending at our route and casino operations, which couldnegatively impact revenues. Gaming industry revenues are sensitive to generaleconomic conditions and are influenced by consumer confidence in the economyand other factors. The terrorist attacks of September 11, 2001, ongoingterrorist and war activities in the United States and elsewhere generally havehad a negative impact on leisure expenditures,

 

16

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including gaming. An extendedperiod of reduced discretionary spending could significantly harm ouroperations and we may not be able to lower our costs rapidly enough, or atall, to offset a decrease in revenues.

 

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

 

We currently primarily rely on InternationalGame Technology, Inc. for our supply of slot machines and related technology,which are only available from a limited number of suppliers. We cannot assureyou that we can obtain slot machines or related technology on a cost-effectivebasis. As a result, we may be forced to incur significant unanticipatedcosts to secure alternative third party suppliers or adjust our operations.

 

*Risks Related to the GraceAcquisition*

* *

*Riverboats and dockside facilities are subject to risks relating toweather or mechanical failure and must comply with applicable regulations.*

 

As a result of the Grace Acquisition, we ownand operate riverboat and dockside casino facilities. Dockside and riverboatfacilities are subject to risks in addition to those associated with land-basedcasinos, including loss of service due to casualty, mechanical failure, extendedor extraordinary maintenance, flood or other severe weather. Reduced patronageand the loss of a dockside or riverboat casino from service for any period oftime could adversely affect our results of operations.

 

Although not required to cruise, to theextent that the casino boat of Lakeside Iowa, the USS Osceola, cruises, it andthe gaming and support facilities located on board must comply with U.S. CoastGuard requirements as to boat design, on-board facilities, equipment, personneland safety or requirements of state and local law, including the requirementsof state gaming authorities, or both. If the USS Osceola fails to meet theserequirements, we might be forced to stop operating Lakeside Iowa. The USSOsceola must hold a Certificate of Inspection or must be approved by theAmerican Bureau of Shipping for stabilization and flotation, and may alsobe subject to local zoning and building codes, as well as additionalrequirements mandated by state law or by the gaming regulatory authority with jurisdictionover the facilities. The U.S. Coast Guard requirements establish designstandards, set limits on the operation of the cruising vessels and requireindividual licensing of all personnel involved with the operation of thecruising vessels. Loss of a Certificate of Inspection or American Bureau ofShipping approval or other approval mandated by state law or by the gamingregulatory authority with respect to the USS Osceola would preclude its use asa floating casino.

 

*The failure to achieve the anticipated benefits of the GraceAcquisition could adversely impact our business.*

 

Taken as a whole, the Grace Acquisition isthe largest acquisition we have completed and is our first acquisition ofcasino properties located outside of Nevada. The complex process of integratingeach of Lakeside Iowa, Mark Twain and St. Jo into our operations has requiredsignificant resources and we have incurred and will continue to incursignificant capitalized costs and have committed and will continue to commitsignificant management time in integrating operations, information,communications and other systems, among other items. Failure to achieve theanticipated benefits of any of the purchases or to successfully integrate anyof the operations could harm our business and results of operations.

 

*Difficulties in integrating past or future acquisitions could adverselyaffect our business.*

 

We have spent and may continue to spendsignificant resources identifying businesses to acquire. The efficient andeffective integration of any businesses we acquire into our organization iscritical to our growth. Our acquisitions of Lakeside Iowa, Mark Twain and St.Jo, and any future acquisitions or mergers, involve numerous risks includingdifficulties in integrating the operations, technologies and personnel of theacquired companies, the diversion of management’s attention from other businessconcerns and the potential loss of key employees of the acquired companies andbusinesses. Additional risks include:

 

•      negativeimpacts on employee morale and performance as a result of job changes andreassignments;

 

•      difficultiesattracting key personnel;

 

•      loss ofcustomers; and

 

•      unanticipatedincompatibility of logistics, marketing and administration methods.

 

17

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Failure to achieve the anticipated benefitsof any of our past, pending and future acquisitions or mergers or tosuccessfully integrate the operations of the companies we acquire could alsoharm our business, results of operations and cash flows. Additionally, wecannot assure you that we will not incur material charges in future quarters toreflect additional costs associated with any future acquisitions we may make.

 

*As we expand our casino operations into states other than Nevada, wewill, among other things, incur additional management costs, face differentregulatory requirements and be affected by different economic environments andtax laws, any of which could adversely affect our business.*

 

Historically, our route and casino operationswere located exclusively in Nevada. However, the Grace Acquisition has resultedin casino operations in Iowa and Missouri. In addition, in the future we may consummateadditional acquisitions outside of Nevada. As we begin to expand our operationsin other states, we will face risks that we would not have faced had ouroperations remained solely in Nevada. Certain aspects inherent in maintainingoperations in multiple jurisdictions could negatively impact our businessresults, including:

 

•      costs anddifficulties in staffing and managing operations outside of Nevada;

 

•      regulatoryrequirements and changes in regulatory requirements;

 

•      local politicaland economic conditions; and

 

•      changes toapplicable tax laws.

 

*Risks Related to Our OutstandingIndebtedness*

* *

*Our substantial indebtedness could adversely affect our financialhealth and prevent us from fulfilling our obligations under our outstandingindebtedness.*

 

We have a significant amount of indebtedness.The following chart shows certain important statistics with respect to suchindebtedness.

 
| ** **                                 | ** ** | **As of and for the  Year ended  December 31, 2005** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands, except ratio)**                          | ** ** |
| Long-term  debt, including current portion |       | $                                                         | 500,593    |   |
| Stockholders’  equity                 |       | 7,981                                                     |       |
| Ratio of  earnings to fixed charges(1)     |       | 2.4x                                                      |       |
|                                            |            |                                                           |            |  |

 

----

(1)   For purposes ofdetermining the ratio of earnings to fixed charges, earnings are defined asearnings before fixed charges and loss on early retirement of debt (other thancapitalized interest). Fixed charges consist of interest expensed andcapitalized and the interest component of rent expense.

 

Our substantial indebtedness could haveimportant consequences. For example, it could:

 

•      make it moredifficult to satisfy our obligations with respect to the instruments governingour outstanding indebtedness;

 

•      increase ourvulnerability to general adverse economic and industry conditions;

 

•      require us todedicate a substantial portion of our cash flow from operations to debtservice, thereby reducing the availability of our cash flow to fund workingcapital, capital expenditures and other general corporate purposes;

 

•      limit ourflexibility in planning for, or reacting to, competitive pressures and changesin our business and the industry in which we operate;

 

•      place us at acompetitive disadvantage compared to our competitors that have less debt; and

 

18

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•      limit, alongwith the financial and other restrictive covenants in our indebtedness, amongother things, our ability to borrow additional funds.

 

Furthermore, all of our indebtedness underour amended credit facility will bear interest at variable rates. If theserates were to increase significantly, our ability to borrow additional funds may bereduced and the risks related to our substantial indebtedness would intensify.

 

*If interest rates rise, the amount of interest paid by us under ouramended credit facility will increase.*

 

The interest on revolving borrowings and onthe term loan under our amended credit facility is based on a floating rate (abase rate or LIBOR, at our option), plus a leverage grid-based variable amount.At December 31, 2005, the principal amount of the borrowings under ouramended credit facility was approximately $171.3 million. We cannot predict theinterest rate environment or guarantee that interest rates will not rise in thenear future. A hypothetical 1.0% increase in LIBOR would result in anapproximately $1.7 million annual increase in interest expense. Should interestrates rise significantly, our ability to satisfy our obligations under theinstruments governing our outstanding indebtedness will be adversely affected.

 

*Despite our significant indebtedness, we and our subsidiaries may stillbe able to incur substantially more debt, which could further exacerbate therisks described above.*

 

We will have the right to incur substantialadditional indebtedness in the future. The terms of our amended credit facilityand the indentures governing our indebtedness restrict our ability to incuradditional indebtedness, but do not prohibit us from doing so. Subject tosatisfying the conditions for borrowing under our amended credit facility, wecould borrow up to the committed amount in full. If new debt is added to ourcurrent debt levels, the related risks that we now face could intensify.

 

*We will require a significant amount of cash to service ourindebtedness. Our ability to generate cash depends on many factors beyond ourcontrol.*

 

Our ability to make payments on and torefinance our indebtedness, and to fund our operations will depend upon ourability to generate cash in the future. This, to a certain extent, is subjectto general economic, financial, competitive, legislative, regulatory and otherfactors that are beyond our control. We cannot assure you that our businesswill generate sufficient cash flow from operations or that future borrowingswill be available to us in amounts sufficient to enable us to pay ourindebtedness, or to fund our other liquidity needs. In addition, if weconsummate significant acquisitions in the future, our cash requirements may increasesignificantly. If we are unable to generate sufficient cash flow and are unableto refinance or extend outstanding borrowings, we may have to:

 

•      reduce or delayplanned expansion and capital expenditures;

 

•      sell assets;

 

•      restructuredebt; or

 

•      raiseadditional capital.

 

Furthermore, we may need to refinanceall or a portion of our debt on or before maturity. We cannot assure you thatwe will be able to refinance any of our debt on commercially reasonable termsor at all.

 

*Our indebtedness imposes restrictive covenants on us.*

 

Our amended credit facility and theindentures governing our 8 1¤8%senior subordinated notes due 2012 and our 7% senior subordinated notes due2014 impose operational and financial restrictions on us and our subsidiaries.The restrictions imposed under these debt instruments include, among otherobligations, limitation on our and our subsidiaries’ ability to:

 

•      incuradditional debt;

 

•      make paymentson subordinated obligations;

 

19

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•      make dividendsor distribution and repurchase stock;

 

•      makeinvestments;

 

•      grant liens onour property to secure debt;

 

•      enter intocertain transactions with affiliates;

 

•      sell assets orenter into mergers or consolidations;

 

•      sell equityinterests in our subsidiaries;

 

•      create dividendand other payment restrictions affecting subsidiaries;

 

•      change thenature of our lines of business;

 

•      make capitalexpenditures; and

 

•      designaterestrictions and unrestricted subsidiaries.

 

Our amended credit facility imposes variouscustomary affirmative covenants on us and our subsidiaries, including amongothers, reporting covenants, covenants to maintain insurance, comply with laws,maintain properties and other covenants customary in senior credit financingsof this type. In addition, our amended credit facility will require us tocomply with various restrictive financial covenants, including interestcoverage and debt to operating cash flow ratios, and capital spending limits.

 

Our ability to comply with these provisions may beaffected by general economic conditions, industry conditions, and other eventsbeyond our control. As a result, we cannot assure you that we will be able tocomply with these covenants. Our failure to comply with the covenants containedin the instruments governing our indebtedness, including our amended creditfacility and the indentures governing our outstanding senior subordinatednotes, including failure as a result of events beyond our control, could resultin an event of default, which could materially and adversely affect ouroperation results and our financial condition.

 

If there were an event of default under oneof our debt instruments, the holders of the defaulted debt could cause allamounts outstanding with respect to that debt to be due and payable, subject toapplicable grace periods. This could trigger cross-defaults under our otherdebt instruments. We cannot assure you that our assets or cash flow would besufficient to fully repay borrowings under our outstanding debt instruments ifaccelerated upon an event of default, or that we would be able to repay,refinance or restructure the payments on any of those debt instruments.

 

## **Item 1B. Unresolved Staff Comments.**

## ** **

None.

 

## **Item 2.**    Properties.

## ** **

Our principal properties consist of thefollowing:

 

**Nevada**

** **

*Company Headquarters andWarehouse.*

* *

We lease a four-acre site in Las Vegas andown the 50,000 square foot building where our executive offices and operationalheadquarters are located. This facility houses our executive and administrativeoffices and is used for sub-assembly and warehouse space for our slot routeoperations. The lease between the Herbst Family Limited Partnership II, aNevada limited partnership, and us ends on June 30, 2017, with options torenew the lease for five additional successive terms of ten years each.

 

20

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*Office Space and ConvenienceStore.*

* *

We lease a three-acre site and a 50,000square foot building where our employment center and purchasing department arelocated. The lease between the Herbst Grandchildren’s Trust, a trust governedunder the laws of the State of Nevada and a related party, and us ends on November 27,2012, with options to renew the lease for five additional successive terms often years each.

* *

*Terrible’s Searchlight Casino.*

* *

We lease the land on which Terrible’sSearchlight Casino is located in Searchlight, Nevada. The lease ends on June 30,2022, with options to renew the lease for five additional successive terms often years each.

 

*Terrible’s Hotel &Casino.*

* *

We own the ten-acre site in Las Vegas onwhich Terrible’s Hotel & Casino is located, consisting of a 45,000square foot casino with 373 guest rooms.

 

*Terrible’s Town Casino.*

* *

Terrible’s Town Casino in Pahrump, Nevada,which is approximately 60 miles from Las Vegas, comprises an approximately30,000 square foot building on approximately three acres. We lease the landfrom the Herbst Family Limited Partnership I, a Nevada limited partnership anda related party. The lease expires on June 30, 2006. We also have anoption to further extend the lease for four additional successive terms of fiveyears each.

 

*Terrible’sLakeside Casino & RV Park.*

* *

We own the land in Pahrump, Nevada on whichTerrible’s Lakeside Casino & RV Park, an approximately 8,000 squarefoot casino on 30 acres, is located.

 

*Terrible’s Town Casino &Bowl.*

* *

We lease the land and building on which ourTerrible’s Town Casino & Bowl is located in Henderson, Nevada. Thelease ends on February 9, 2014, with options to renew the lease for fiveadditional successive terms of ten years each. We own a 0.8-acre lot adjacentto Terrible’s Town Casino & Bowl that we are holding for possiblefuture development.

 

**Midwest**

** **

*Lakeside Casino Resort.*

* *

We own the land in Osceola, Iowa on whichcertain facilities of Lakeside Iowa are located, including the all-suite hotel,convention facilities, RV park and convenience store and own an additional 121acres of land adjacent to or nearby the casino. We lease the use of WestLake and certain real estate surrounding West Lake from the City of Osceola,Iowa. The lease ends on March 11, 2009. We also have an option to furtherextend the lease for seven additional successive terms of five years each.

 

*Mark Twain Casino.*

* *

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

 

*St. Jo Frontier Casino.*

* *

We own the land in St. Joseph, Missouri onwhich certain facilities of St. Jo are located, and own an additional 72 acresof land adjacent to or nearby the casino.

 

21

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## **Item 3.**    Legal Proceedings.

## ** **

On February 17, 2006, the Clark CountyCircuit Court entered judgment of a jury verdict delivered on January 14,2006 against ETT for $4.1 million in compensatory damages and $10.0 million inpunitive damages. The jury verdict was delivered in connectionwith an action brought by the family of an individual that alleged that ETT had negligently retained and negligentlysupervised a temporary employee who in 2001 stole a truck from ETT and,while drunk, hit and killed the individual. The Company believes the award ofcompensatory and punitive damages against ETT, the liability of ETT, and theamount thereof, is not supportable in either law or in fact and plans tovigorously pursue all appropriate post-trial and other remedies, includingexercising its right to appeal.

 

From time to time, we are a party to variousclaims arising in the normal course of business. Management believes, however,that there are no proceedings pending or threatened against us which, ifdetermined adversely, would have a material adverse effect on our financialcondition, results of operations or liquidity.

 

## **Item 4.**    Submission of Matters to a Vote of SecurityHolders.

## ** **

Not applicable.

 

# **PART II**

# ** **

## **Item 5.**    Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.

## ** **

(a)           MarketInformation

 

There is no established public trading marketfor any class of our common equity. No class of our capital stock hasbeen registered under the Securities Act of 1933, as amended, or under Section 12of the Exchange Act. All 300 shares of our outstanding common stock are ownedby Edward, Timothy and Troy Herbst.

 

(b)           Holders

 

Edward, Timothy and Troy Herbst own all ofthe outstanding shares of our common stock.

 

(c)           Dividends

 

Dividends of $23.6 million and $12.1 millionwere paid in respect of our outstanding common stock in fiscal 2004 and 2005,respectively.

 

Our amended credit facility and theindentures governing our 81/8% senior subordinated notesdue 2012 and our 7% senior subordinated notes due 2014 restrict our ability todeclare or make distributions on our capital shares. To date, the onlydistributions that we have made on our common stock are distributions permittedby the instruments governing our outstanding indebtedness. Subject tocontractual restrictions contained in our amended credit facility and theseindentures, any future determinations as to the payment of dividends will be atthe discretion of our board of directors, and will depend on our financialcondition, results of operations, capital requirements, and such other factorsas the board of directors deems relevant. See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources” and “Item 8. Financial Statements andSupplementary Data – Notes to Consolidated Financial Statements.”

 

## **Item 6.**    Selected Financial Data.

## ** **

We derived the selected consolidatedfinancial data as of and for each of the five years ended December 31,2005 from our audited consolidated financial statements, as of and for each ofthe three years ended December 31, 2005, which are included elsewhere inthis report. In February 2003, we acquired the slot route assets of AnchorCoin. As a result, the periods beginning on or after January 1, 2003 may notbe comparable to prior years. Similarly, in February 2005, we consummatedthe Grace Acquisition, and as a result the period beginning on January 1,2005 may not be comparable to prior years. The following table summarizescertain selected consolidated financial data, which you should read inconjunction with our consolidated financial statements and the related notescontained elsewhere in this report and under “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

 

22

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We have elected to be taxed under theprovisions of Subchapter S of the Internal Revenue Code of 1986. Under thoseprovisions, the owners of our company pay income taxes on our taxable income.Accordingly, a provision for income taxes is not included in our financialdata.

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2001**                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**               | ** ** |
| Income  statement data:              |       |                             |       |   |   |   |   |   |   |   |   |
| Revenues                             |       |                             |       |   |   |   |   |   |   |   |   |
| Route  operations                    |       | $                                | 170,893    |   | $ | 183,877 |   | $ | 241,833 |   | $ | 293,244 |   | $ | 338,599 |   |
| Casino  operations                   |       | —                           |       | — |   | — |   | — |   |   |   |
| Nevada                               |       | 67,831                           |       | 72,498 |   | 78,342 |   | 91,254 |   | 95,400 |   |
| Other states                         |       |                             |       |   |   |   |   |   |   | 117,475 |   |
| Other                                |       | 2,878                            |       | 3,078 |   | 3,049 |   | 3,628 |   | 6,024 |   |
| Total  revenues                      |       | 241,602                          |       | 259,453 |   | 323,224 |   | 388,126 |   | 557,498 |   |
| Promotional  allowances—route   |       | (143                             | )          | (305 | ) | (371 | ) | (376 | ) | (223 | ) |
| Promotional  allowances—casino  |       | (8,267                           | )          | (9,497 | ) | (10,878 | ) | (12,138 | ) | (21,434 | ) |
| Net revenues                         |       | 233,192                          |       | 249,651 |   | 311,975 |   | 375,612 |   | 535,841 |   |
| Costs of  revenues:                  |       |                             |       |   |   |   |   |   |   |   |   |
| Route  operations                    |       | 141,535                          |       | 150,781 |   | 192,757 |   | 227,929 |   | 258,114 |   |
| Casino  operations                   |       |                             |       |   |   |   |   |   |   |   |   |
| Nevada                               |       | 46,686                           |       | 48,635 |   | 51,142 |   | 56,331 |   | 59,125 |   |
| Other states                         |       | —                           |       | — |   | — |   | — |   | 79,239 |   |
| General and  administrative          |       | 10,168                           |       | 10,812 |   | 12,514 |   | 14,366 |   | 15,217 |   |
| Depreciation  and amortization       |       | 13,221                           |       | 14,562 |   | 22,789 |   | 25,407 |   | 33,941 |   |
| Loss on  retirement of assets        |       | —                           |       | — |   | — |   | — |   | 3,360 |   |
| Loss on  lease termination           |       | —                           |       | — |   | — |   | 600 |   | — |   |
| Total costs  and expenses            |       | 211,610                          |       | 224,790 |   | 279,202 |   | 324,633 |   | 448,996 |   |
| Income from  operations              |       | 21,582                           |       | 24,861 |   | 32,773 |   | 50,979 |   | 86,845 |   |
| Interest  income                     |       | 407                              |       | 336 |   | 228 |   | 353 |   | 740 |   |
| Interest  expense                    |       | (20,929                          | )          | (19,964 | ) | (24,525 | ) | (22,109 | ) | (36,532 | ) |
| Loss on  early retirement of debt(1) |       | (13,024                          | )          | — |   | (267 | ) | (37,991 | ) | (221 | ) |
| Net income  (loss)                   |       | $                                | (11,964    | ) | $ | 5,233 |   | $ | 8,209 |   | $ | (8,768 | ) | $ | 50,832 |   |

 

23

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| ** **                                           | ** ** | **Year Ended December 31,**  | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2001**                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands, except ratios)** | ** ** |
| Other data:                                          |       |                              |       |   |   |   |   |   |   |   |   |
| Route  EBITDA(2)(3)                                  |       | $                                 | 29,215     |   | $ | 32,791 |   | $ | 48,705 |   | $ | 64,939 |   | $ | 80,262 |   |
| Casino  EBITDA(2)(4)                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Nevada(4)                                            |       | $                                 | 12,878     |   | $ | 14,366 |   | $ | 16,322 |   | $ | 22,785 |   | $ | 23,747 |   |
| Other  states(4)                                     |       | —                            |       | — |   | — |   | — |   | $ | 29,330 |   |
| Net cash  provided by operating activities           |       | $                                 | 14,945     |   | $ | 19,323 |   | $ | 34,997 |   | $ | 50,010 |   | $ | 92,204 |   |
| Net cash  used in investing activities               |       | $                                 | (2,778     | ) | $ | (8,700 | ) | $ | (74,724 | ) | $ | (17,009 | ) | $ | (309,172 | ) |
| Net cash  provided by (used in) financing activities |       | $                                 | 3,010      |   | $ | (338 | ) | $ | 38,722 |   | $ | 51,141 |   | $ | 152,645 |   |
| Capital  expenditures                                |       | 3,226                             |       | 8,442 |   | 15,117 |   | 15,229 |   | 43,893 |   |
| Ratio of  earnings to fixed charges(5)               |       | 1.0                               | x          | 1.3 | x | 1.3 | x | 2.3 | x | 2.4 | x |

 
| ** **                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **2001**                    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**          | ** ** |
| Balance  sheet data:                    |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and  cash equivalents              |       | $                           | 44,750     |   | $ | 55,035 |   | $ | 54,030 |   | $ | 138,172 |   | $ | 73,849 |   |
| Total assets                            |       | $                           | 180,183    |   | $ | 183,713 |   | $ | 237,068 |   | $ | 318,431 |   | $ | 534,930 |   |
| Total  debt(6)                          |       | $                           | 167,319    |   | $ | 167,941 |   | $ | 215,269 |   | $ | 333,412 |   | $ | 500,593 |   |
| Stockholders’  equity (deficiency) |       | $                           | (6,468     | ) | $ | (1,235 | ) | $ | 1,554 |   | $ | (30,764 | ) | $ | 7,981 |   |

 

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(1)   Consists of (a) acharge of $13.0 million in August 2001 related to the write-off ofunamortized financing fees and other costs due to the repayment of $143.8million of our long-term debt in conjunction with the issuance of $170.0million senior secured notes, (b) a premium of $267,000 paid inconjunction with the repurchase of $2.0 million of our senior secured notes in2003, (c) a loss on early retirement of debt in June 2004 whichconsisted of $31.3 million in a debt prepayment penalty and $6.7 million inunamortized loan fees and (d) a premium of $221,000 paid to call thebalance of our 10 3⁄4% notes in September 2005.

 

(2)   Route andCasino EBITDA are used by management to measure segment profits and losses inaccordance with SFAS 131, “Disclosures about Segments of an Enterprise andRelated Information”, and are calculated before allocation of overhead. See “Note 12.Business Segments” to the accompanying consolidated financial statements.

 

(3)   Route EBITDAconsists of net income plus depreciation and amortization and interest expense,net of capitalized interest, and is calculated before allocation of overhead.

 

(4)   Casino EBITDAconsists of net income plus depreciation and amortization, interest expense,net of capitalized interest and costs associated with the retirement of assets.Casino EBITDA for casinos in Nevada and other states are calculated beforeallocation of overhead.

 

(5)   For purposes ofdetermining the ratio of earnings to fixed charges, earnings are defined asearnings before fixed charges and loss on early retirement of debt (other thancapitalized interest). Fixed charges consist of interest expensed andcapitalized and the interest component of rent expense.

 

(6)   Total debtconsists of the current and long-term portions for all periods presented.

 

24

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## **Item 7.**    Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

The following discussion and analysis shouldbe read in conjunction with “Item 6. Selected Financial Data” and with “Item 8.Financial Statements and Supplementary Data”.

 

**Overview**

 

We are a diversified gaming company thatfocuses on two business lines: slot route operations and casino operations. At December 31,2005, we owned and operated approximately 11,000 slot machines. Our routeoperations involve the exclusive installation and operation of approximately7,100 slot machines as of December 31, 2005 in strategic, high traffic,non-casino locations, such as grocery stores, drug stores, convenience stores,bars and restaurants. Our casino operations consist of eight casinos located inthree states, Nevada, Iowa and Missouri, all operated under the “Terrible’s”brand.

 

On February 1, 2005, we consummated thepurchase of assets consisting of three casinos from Grace Entertainment, Inc.for an aggregate cash purchase price of approximately $266.8 million. The GraceAcquisition allowed us to expand our casino operations segment to stable andrelatively protected markets outside of southern Nevada with casinos that webelieve have significant upside potential. The acquired assets consisted ofTerrible’s Lakeside Casino Resort, located in Osceola, Iowa, or Lakeside Iowa,which contained 921 slot machines, 31 table games and an adjacent 60 room all-suite hotel,Terrible’s Mark Twain Casino, located in LaGrange, Missouri, or Mark Twain,which contained 505 slot machines and 17 table games, and Terrible’s St. JoFrontier Casino, located in St. Joseph, Missouri, or St. Jo, which contained487 slot machines and 15 table games, in each case as of the consummation ofthe Grace Acquisition. As further described under “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Investing Activities and Capital Expenditures,”we used proceeds from a $170.0 million 7% senior subordinated notes offeringalong with borrowings under our amended and restated credit facility to fundthe purchase price of the Grace Acquisition.

 

We generallyenter into two 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 slot machines.With our street accounts, such as bars, restaurants and non-chain conveniencestores, we share in the revenues on a percentage basis with the location owner.

 

Our revenuesare primarily derived from gaming revenues, which include revenues from slotmachines and table games. Gaming revenues is generally defined as gaming winsless gaming losses. Our largest component of revenues is from our slotmachines. Promotional allowances consist primarily of food and beveragesfurnished gratuitously to customers. The retail value of such services isincluded in the respective revenue classifications and is then deducted aspromotional allowance. We calculate income from operations as net revenues lesstotal operating costs and expenses. Income from operations represents onlythose amounts that relate to our operations and excludes interest income,interest expense, and other non-operating income and expenses.

 

We haveelected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986. Under those provisions, the owners of our company payincome taxes on our taxable income. Accordingly, a provision for income taxesis not included in our financial data.

 

25

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**Year 2005Compared to Year 2004**

 
| ** **                        | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**              | ** ** |
| Slot route revenue                |       | $                                       | 293,244    |                                    | 100.0      | % | $ | 338,599 |   | 100.0 | % |
| Promotional allowances            |       | (376                                    | )          | .1                                      | %          | (223 | ) | 0.1 |   |
| Direct expenses                   |       | (227,929                                | )          | 77.7                                    | %          | (258,114 | ) | 76.2 |   |
| EBITDA                            |       | 64,939                                  |       | 22.2                                    | %          | 80,262 |   | 23.7 |   |
| Depreciation and amortization     |       | (19,362                                 | )          | 6.6                                     | %          | (20,114 | ) | 5.9 |   |
| Income from slot route operations |       | $                                       | 45,577     |                                    | 15.6       | % | $ | 60,148 |   | 17.8 | % |

 

*Route Operations*

 

Routeoperations accounted for 61% of total revenues during the year ended December 31,2005. This was a decrease from 76% of total revenues for the year ended December 31,2004. Total revenues from route operations were $338.6 million for theyear ended December 31, 2005, an increase of $45.4 million, or 15%,from $293.2 million for the year ended December 31, 2004. Theincrease in route revenue was a result of growth from the strong Las Vegasmarket during 2005. At December 31, 2005, we were operating approximately7,100 slot machines, which is 300 greater than the 6,800 we operated at December 31,2004.

 

Routeoperating costs were $258.1 million, or 76%, of route revenues for theyear ended December 31, 2005. This compares to $227.9 million and 78%of route revenues for the same period in 2004. The dollar increase in routeoperating expenses was primarily associated with expenses that correlate withincreases in revenue such as participation costs and payroll.

 

Route EBITDAfor the year ended December 31, 2005 was $80.3 million, an increaseof $15.4 million, or 24%, from $64.9 million for the year ended December 31,2004. The increase in EBITDA was a direct result of revenue increases from ourexisting locations.

 

*Casino Operations*

* *
| ** **                    | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**              | ** ** |
| Casino revenue                |       | $                                       | 91,254     |                                    | 100.0      | % | $ | 212,875 |   | 100.0 | % |
| Promotional allowances        |       | (12,138                                 | )          | 13.3                                    | %          | (21,434 | ) | 10.1 |   |
| Direct expenses               |       | (56,331                                 | )          | 61.7                                    | %          | (138,364 | ) | 65.0 |   |
| EBITDA                        |       | 22,785                                  |       | 25.0                                    | %          | 53,077 |   | 24.9 |   |
| Depreciation and amortization |       | (5,727                                  | )          | 6.3                                     | %          | (13,509 | ) | 6.3 |   |
| Income from casino operations |       | $                                       | 17,058     |                                    | 18.7       | % | $ | 39,568 |   | 18.6 | % |

 

Casinooperations accounted for 38% of total revenues for the year ended December 31,2005 and 23% of revenues for the year ended December 31, 2004. Totalrevenues derived from casino operations were $212.9 million for the year ended December 31,2005, an increase of $121.6 million, or 133%, from $91.3 million for the yearended December 31, 2004. This increase was due to the inclusion of theresults from the assets acquired in February 2005 pursuant to the GraceAcquisition, as well as growth from our existing operations.

 

Casinooperating costs were $138.4 million, or 65%, of casino revenues for the yearended December 31, 2005, compared to $56.3 million, or 62%, of casinorevenues for the year ended December 31, 2004. The increase in expenseswas due to the inclusion of expenses incurred by the casinos acquired pursuantto the Grace Acquisition. Casino EBITDA was $53.1 million for the year ended December 31,2005, an increase of $30.3 million, or 133%, from $22.8 million from the yearended December 31, 2004.

 

26

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The followingparagraphs divide the results from our casino operations geographically betweencasinos in Nevada and those in other states.

 

*Casino Operations — Nevada*

 
| ** **                    | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**              | ** ** |
| Casino revenue                |       | $                                       | 91,254     |                                    | 100.0      | % | $ | 95,400 |   | 100.0 | % |
| Promotional allowances        |       | (12,138                                 | )          | 13.3                                    | %          | (12,528 | ) | 13.1 |   |
| Direct expenses               |       | (56,331                                 | )          | 61.7                                    | %          | (59,125 | ) | 62.0 |   |
| EBITDA                        |       | 22,785                                  |       | 25.0                                    | %          | 23,747 |   | 24.9 |   |
| Depreciation and amortization |       | (5,727                                  | )          | 6.3                                     | %          | (6,359 | ) | 6.7 |   |
| Income from casino operations |       | $                                       | 17,058     |                                    | 18.7       | % | $ | 17,388 |   | 18.2 | % |

 

Nevada casinooperations accounted for 17% of total Company revenues for the year ended December 31,2005 and 23% of total revenues for the year ended December 31, 2004. Revenuesderived from Nevada casino operations were $95.4 million for the yearended December 31, 2005 compared with $91.3 million for the yearended December 31, 2004, an increase of $4.1 million or 4%. Each of theNevada properties other than Terrible’s Hotel and Casino contributed to thisincrease of revenues. These results reflect the slight decrease in revenue atTerrible’s Hotel & Casino in Las Vegas as a result of the disruptionto operations caused by the demolition of one-third of its hotel rooms inconnection with the construction of its new parking structure and casino floorexpansion. This construction should be completed by September 2006.

 

Nevada casinooperating costs were $59.1 million, or 62%, of revenues for the year ended December 31,2005, compared to $56.3 million, or 62%, of revenues for the year ended December 31,2004.

 

*Casino Operations — Other states*

* *
| ** **                    | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**              | ** ** |
| Other state casino revenue    |       | $                                       | —     |                                    | —     |   | $ | 117,475 |   | 100.0 | % |
| Promotional allowances        |       | —                                  |       | —                                  |       | (8,906 | ) | 7.6 |   |
| Direct expenses               |       | —                                  |       | —                                  |       | (79,239 | ) | 67.5 |   |
| EBITDA                        |       | —                                  |       | —                                  |       | 29,330 |   | 24.9 |   |
| Depreciation and amortization |       | —                                  |       | —                                  |       | (7,150 | ) | 6.1 |   |
| Income from casino operations |       | $                                       | —     |                                    | —     |   | $ | 22,180 |   | 18.8 | % |

 

Casinooperations in other states accounted for 21% of total company revenues for theyear ended December 31, 2005. Total revenues derived from casinooperations located in states other than Nevada were $117.5 million for the yearended December 31, 2005. Other state casino operating costs were$79.2 million, or 67%, of revenues for the year ended December 31,2005. We began floor improvements at our casinos in other states in the secondquarter of 2005. The floor renovations consisted of over 1,200 new machines,new “ticket-in, ticket-out” software at each casino, new carpet and entirelynew slot bases. The revenues during these periods were helped by significantincreases in our cash, player point promotions and food specials, which wereincurred to offset the disruption and to keep player loyalty during theseextensive floor renovations. As these renovations are completed and the gamingfloor stabilizes, these costs should be reduced. We anticipate the improvementsto the gaming floors to be completed early in the first quarter of 2006, afterwhich we will begin renovating the land-based facilities of these casinos, byupgrading amenities such as the restaurants and common areas. These renovationsshould be completed by late 2006.

 

*OtherRevenue*

 

Other revenueconsists of revenue items such as ATM fees, pay phone charges, rental income,gas and convenience store revenue and other miscellaneous items unrelated toroute and casino operations. Other revenues were $6.0 million for the yearended

 

27

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December 31, 2005 comparedto $3.6 million for the year ended December 31, 2004. The growth in thisrevenue was primarily due to the addition of ancillary revenue sources from theassets acquired pursuant to the Grace Acquisition.

 

*PromotionalAllowances*

 

Promotionalallowances were $21.7 million, or 3.9% of total revenues, for the yearended December 31, 2005, an increase of $9.2 million, or 74%, from$12.5 million, or 3.2% of total revenues for the year ended December 31,2004. The increase was due to heavier promotional spending at the Nevadacasinos, and the inclusion of the new casino properties acquired pursuant tothe Grace Acquisition.

 

*Other Costs*

* *
| ** **                            | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **$**                                   | ** ** | **% of total  revenues**                | ** ** | **$** | ** ** | **% of total   revenues** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)**              | ** ** |
| General and administrative            |       | $                                       | 14,366     |                                    | 3.7        | % | $ | 15,217 |   | 2.7 | % |
| Depreciation and amortization         |       | $                                       | 25,407     |                                    | 6.5        | % | $ | 33,941 |   | 6.1 | % |
| Loss on retirement of debt and assets |       | $                                       | 37,991     |                                    | 10.1       | % | $ | 3,360 |   | 0.6 | % |

 

General andadministrative expenses, or G&A, were $15.2 million for the year endedDecember 31, 2005, an increase of $0.8 million, or 6.0%, from $14.4million for the year ended December 31, 2004. The increase was primarilydue to the overhead associated with the casinos acquired pursuant to the GraceAcquisition. G&A expenses as a percentage of revenue were 2.7% of therevenue for the year ended December 31, 2005, compared to 3.7% of revenueduring fiscal year ended December 31, 2004.

 

Depreciationand amortization expense was $33.9 million for the year ended December 31,2005, an increase of $8.5 million, or 33.0%, from $25.4 million forthe year ended December 31, 2004. The increase was due primarily to thedepreciation and amortization expenses associated with the acquired casinoassets of Grace Entertainment, Inc.

 

For the yearended December 31, 2005, we incurred approximately $3.4 million inexpense related to the demolition of a portion of Terrible’s Hotel &Casino in Las Vegas in connection with the construction of its new parkingstructure and casino floor expansion.

 

*Income fromOperations*

 

As a result ofthe factors discussed above, income from operations was $86.8 million forthe year ended December 31, 2005, an increase of $35.8 million, from$51.0 million for the year ended December 31, 2004. This was a 70%increase. As a percentage of total revenues, income from operations increasedfrom 13.1% during 2004 to 15.6% during the same period in 2005.

 

*OtherExpenses*

 

Other expensewas $36.0 million for the year ended December 31, 2005, a decrease of$23.7 million from expenses of $59.7 million for the year ended December 31,2004. This decrease was a primarily a result of $38.0 million costs incurred in2004 for the early retirement of debt.

 

Our interestcosts increased from $22.1 million during the year ended December 31, 2004to $36.5 million during the year ended December 31, 2005 due to the debtincurred in connection with the Grace Acquisition in February 2005. TheCompany’s debt grew from $333.4 million at December 31, 2004 to$500.6 million at December 31, 2005.

 

The Companyincurred approximately $0.2 million in early retirement of debt chargesassociated with the repayment of the remaining principal amount of the Company’s10 3⁄4% senior subordinated notes due 2008.

 

*Net Income*

 

Net income forthe year ended December 31, 2005 was $50.8 million. This is an improvementof $59.6 million from a net loss of $8.8 million recorded for year ended December 31,2004. The year over year increase was primarily the

 

28

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result of a $38.0 million losson the early retirement of debt in 2004 and is also attributable to increasedprofitability of existing businesses and income provided by the Grace casinoassets acquired in 2005.

 

**Year 2004Compared to Year 2003**

 
| ** **                        | ** ** | **Year  ended  December 31, 2003** | ** ** | **Year  ended  December 31, 2004** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**              | ** ** |
| Slot route revenue                |       | $                                       | 241,833    |                                    | 100.0      | % | $ | 293,244 |   | 100.0 | % |
| Promotional allowances            |       | (371                                    | )          | 0.2                                     | %          | (376 | ) | 0.1 | % |
| Direct expenses                   |       | (192,757                                | )          | 79.7                                    | %          | (227,929 | ) | 77.7 | % |
| EBITDA                            |       | 48,705                                  |       | 20.1                                    | %          | 64,939 |   | 22.2 | % |
| Depreciation and amortization     |       | (16,894                                 | )          | 7.0                                     | %          | (19,362 | ) | 6.6 | % |
|                              |       |                                    |       |                                    |       |   |   |   |   |
| Income from slot route operations |       | $                                       | 31,811     |                                    | 13.1       | % | $ | 45,577 |   | 15.6 | % |

 

*RouteOperations*

 

Route operationsaccounted for 76% of total revenues during the year ended December 31,2004. This was an increase from 75% of total revenues for the year ended December 31,2003. Total revenues from route operations were $293.2 million for the yearended December 31, 2004, an increase of $51.4 million, or 21%, from $241.8million for the year ended December 31, 2003. At December 31, 2004,we were operating approximately 6,800 slot machines, which is unchanged since2003. The increase in route revenue was a result of a full year of operationsof the locations that were acquired in Anchor Coin acquisition that occurred inFebruary of 2003, as well as revenue growth from the strong Las Vegasmarket during 2004.

 

Routeoperating costs were $227.9 million, or 78%, of route revenues for the yearended December 31, 2004. This compares to $192.8 million and 80% of routerevenues for the same period in 2003. The dollar increase in route operatingexpenses was primarily associated with the full year results of the Anchor Coinacquisition as well as increases in participation expenses associated with thatrevenue growth and scheduled space lease increases to our existing slot routecontracts.

 

Route EBITDAfor the year ended December 31, 2004 was $64.9 million, an increase of $16.2million, or 33%, from $48.7 million for the year ended December 31, 2003.The increase in EBITDA was a direct result of revenue increases from both ourexisting locations and the results of the full year of the Anchor Coinlocations.

 

*CasinoOperations*

 
| ** **                    | ** ** | **Year  ended  December 31, 2003** | ** ** | **Year  ended  December 31, 2004** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **$**                                   | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**              | ** ** |
| Casino revenue                |       | $                                       | 78,342     |                                    | 100.0      | % | $ | 91,254 |   | 100.0 | % |
| Promotional allowances        |       | (10,878                                 | )          | 13.9                                    | %          | (12,138 | ) | 13.3 | % |
| Direct expenses               |       | (51,142                                 | )          | 65.3                                    | %          | (56,331 | ) | 61.7 | % |
| EBITDA                        |       | 16,322                                  |       | 20.8                                    | %          | 22,785 |   | 25.0 | % |
| Depreciation and amortization |       | (5,577                                  | )          | 7.1                                     | %          | (5,727 | ) | 6.3 | % |
|                          |       |                                    |       |                                    |       |   |   |   |   |
| Income from casino operations |       | $                                       | 10,745     |                                    | 13.7       | % | $ | 17,058 |   | 18.7 | % |

 

Casinooperations accounted for 23% of total revenues for the year ended December 31,2004 and 24% of revenues for the year ended December 31, 2003. Totalrevenues derived from casino operations were $91.3 million for the year ended December 31,2004, an increase of $13.0 million, or 17%, from $78.3 million for the yearended December 31, 2003. This increase in revenue was primarily due toincreased customer play at Terrible’s Hotel & Casino in Las Vegas andour two casinos in Pahrump. In late 2003, one of the main competitors inPahrump, Nevada closed due to a fire, and this location remained closed duringmost of 2004. This closure helped our Pahrump properties achieve higherrevenues during 2004. The competitor reopened in late 2004, but this has nothad a significant impact on revenues since reopening.

 

29

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Casinooperating costs were $56.3 million, or 62%, of casino revenues for the yearended December 31, 2004, compared to $51.1 million, or 65%, of casinorevenues for the year ended December 31, 2003. The increase in expenseswas generally in areas that helped to drive the increase in revenue, such ascomps, slot club, payroll, and participation game fees. Casino EBITDA was $22.8million for the year ended December 31, 2004, an increase of $6.5 million,or 40%, from $16.3 million from the year ended December 31, 2003.

 

*Other Revenue*

 

Other revenue consists of revenue items suchas ATM fees, pay phone charges, rental income and other miscellaneous itemsunrelated to route and casino operations. Other revenues were $3.6 million forthe year ended December 31, 2004 compared to $3.0 million for the yearended December 31, 2003.

 

*Promotional Allowances*

 

Promotional allowances were $12.5 million, or3.2% of total revenues, for the year ended December 31, 2004, an increaseof $1.3 million, or 12%, from $11.2 million, or 3.5%, of total revenues for theyear ended December 31, 2003. The increase was primarily due to heavierpromotional spending at the casinos.

 

*Other Costs*

 
| ** **                       | ** ** | **Year  ended  December 31, 2003** | ** ** | **Year  ended  December 31, 2004** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                       | ** ** | **$**                                   | ** ** | **% of total  revenues**                | ** ** | **$** | ** ** | **% of total   revenues** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**              | ** ** |
| General and administrative       |       | $                                       | 12,514     |                                    | 3.9        | % | $ | 14,366 |   | 3.7 | % |
| Depreciation and amortization    |       | $                                       | 22,789     |                                    | 7.1        | % | $ | 25,407 |   | 6.5 | % |
| Loss on early retirement of debt |       | $                                       | 267        |                                    | —     | % | $ | 37,991 |   | 10.1 | % |

 

G&A expenses were $14.4 million for theyear ended December 31, 2004, an increase of $1.9 million, or 15%, from$12.5 million for the year ended December 31, 2003. The increase wasprimarily due to the full year of overhead associated with the purchase of theslot route assets of Anchor Coin in February 2003. G&A costs alsoincreased due to costs associated with an increase in insurance expenses.G&A expenses as a percentage of revenue were 3.7% of the revenue for theyear ended December 31, 2004, down from 3.9% of revenue during fiscal yearended December 31, 2003.

 

Depreciation and amortization expense was$25.4 million for the year ended December 31, 2004, an increase of $2.6million, or 11.5%, from $22.8 million for the year ended December 31,2003. The increase was due primarily to the amortization expenses associatedwith the acquired slot route contracts and depreciation expenses associatedwith new fixed assets.

 

We incurred $0.6 million in costs associatedwith the termination of the lease with McDonald’s at Terrible’s Hotel & Casinoin Las Vegas. This space will be used as a portion of the expansion and parkinggarage planned at Terrible’s.

 

*Income from Operations*

 

As a result of the factors discussed above,income from operations was $51.0 million for the year ended December 31,2004, an increase of $18.2 million, from $32.8 million for the year ended December 31,2003. This was a 55% increase. As a percentage of total revenues, income fromoperations increased from 10.1% during 2003 to 13.1% during the same period in2004.

 

*Other Expenses*

 

Other expense was $59.7 million for the yearended December 31, 2004, an increase of $35.1 million from the year ended December 31,2003. The increase in expenses was due to a one-time charge of $38.0 millionrelating to the early retirement of our 10 3⁄4% senior secured notes.

 

30

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*Net Income*

 

Net loss for the year ended December 31,2004 was $8.8 million. The net loss included the $38.0 million in costsassociated with the early retirement of debt. These costs consisted of $31.3million in prepayment premiums and $6.7 million in unamortized loan fees. Netincome for the year ended December 31, 2003 was $8.2 million.

 

**Liquidity and CapitalResources**

 

*Cash Flows*

 

At December 31, 2005, we had cash andcash equivalents of approximately $73.8 million on hand and approximately$103.0 million available under our revolving credit facility. Based upon ouranticipated future operations, we believe that cash on hand, available cashflow and borrowings under our revolving credit facility will be adequate tomeet our anticipated working capital requirements, capital expenditures, andscheduled payments of interest on our outstanding indebtedness for at least thenext 12 months. We cannot assure you, however, that these sources will besufficient for that purpose or that additional financing, if required, will beavailable or, if available, will be on terms favorable to us.

 

*Operating Activities*

 

During the year ended December 31, 2005,operating activities provided $92.2 million in cash flows on net income of$50.8 million.

 

*Investing Activities and Capital Expenditures*

 

For the year ended December 31, 2005, wehad net cash used for investing activities of $309.2 million of which$43.9 million related to the net cash used to purchase of new equipmentincluding gaming devices.

 

On November 24, 2004, we received netproceeds of approximately $165.0 million from our issuance of $170.0 million 7%senior subordinated notes due 2014. As the Grace Acquisition did not close infiscal 2004, we used approximately $74.2 million from the proceeds of our 7%senior subordinated note offering to repay all borrowings under our revolvingcredit facility, leaving us with $90.8 million in remaining cash proceeds at December 31,2004. On February 1, 2005, we used this $90.8 million in cash, and drewdown a $100.0 million term loan and $86.0 million in revolving loans under ourcredit facility to consummate the Grace Acquisition. Of the $86.0 millionrevolving borrowing, $74.2 million was used to re-borrow revolving creditfacility borrowings repaid with the proceeds of our 7% senior subordinated noteoffering and $11.8 million was used in connection with the Grace Acquisition. Asa result, the $281.8 million of total debt incurred by the Company pursuant tothe Grace Acquisition consisted of $170.0 million aggregate principal amount ofits 7% senior subordinated notes, a $100.0 million term loan and a borrowing of$11.8 million under its revolving credit facility.

 

For the year ended December 31, 2005, webegan the construction of a new parking structure, casino expansion and generalproperty renovations at Terrible’s Hotel & Casino in Las Vegas, thetotal cost of which is estimated to be $20.0 million. Approximately $5.6million was spent in connection with this project in 2005 and the remainder isanticipated to be spent in 2006. We began renovations at the casinos acquiredpursuant to the Grace Acquisition in 2005 that consisted of adding new andupdating existing slot machines and remodeling each property’s casino floor ata cost of approximately $27 million. We anticipate completing the renovationsat each of Terrible’s Hotel & Casino and the casinos acquired pursuantto the Grace Acquisition in 2006.

 

For the year ended December 31, 2005,route and other maintenance expenditures were approximately $12.0 million.

 

Capital projects for 2006 are anticipated tobe approximately $30.0 million plus general maintenance and capitalexpenditures costs of approximately $18.0 million.

 

In 2005, we entered into an agreement withBrenden Theatres to place a 10 theater movie complex in our casino in Pahrump,Nevada. We anticipate that those theaters will be built sometime in late 2006early 2007 for a cost of approximately $5.0 to $6.0 million. We may alsobe adding on to our casino floor in conjunction with this theater addition,which is currently in the planning stage.

 

31

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*Financing Activities*

 

Cash flows used by financing activities were$152.6 million during the year ended December 31, 2005. This was theresult of the remaining funding for the Grace Acquisition in early 2005. Alsoin 2005, we made distributions to our stockholders of $12.1 million.

 

On September 1, 2005, we redeemedapproximately $4.1 million remaining principal amount of our 103⁄4% seniorsecured notes at a redemption price of 105.375% of the principal amountthereof.

 

We may from time to time seek to retireour outstanding debt through cash purchases, in open market purchases,privately negotiated transactions or otherwise. Such repurchases, if any, willdepend on prevailing market conditions, our liquidity requirements, contractualrestrictions and other factors. The amounts involved may be material.

 

Our ability to service our debt will bedependent on our future performance, which will be affected by, among otherthings, prevailing economic conditions and financial, business and otherfactors, certain of which are beyond our control.

 

*Contractual Obligations*

 

The following table summarizes ourcontractual obligations as of December 31, 2005.

 
| ** **                         | ** ** | **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                     |       | $                          | 500,593    |   | $ | 1,117 |   | $ | 2,143 |   | $ | 74,005 |   | $ | 423,328 |   |
| Estimated interest payments (1)    |       | $                          | 241,613    |   | $ | 35,155 |   | $ | 70,124 |   | $ | 63,387 |   | $ | 72,947 |   |
| Operating leases                   |       | 284,154                    |       | 74,709 |   | 125,001 |   | 62,235 |   | 22,209 |   |
| Total contractual cash obligations |       | $                          | 1,026,360  |   | $ | 110,981 |   | $ | 197,268 |   | $ | 199,627 |   | $ | 518,484 |   |

 

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(1) Estimated interest forvariable rate debt is based on rates at December 31, 2005

 

Other significant operating uses of cash in2005 include interest and distributions made to stockholders for payment of Scorporation taxes and discretionary distributions. Our cash payments forinterest were $34.0 million for the year ended December 31, 2005 andcash distributions to stockholders were $12.1 million for the year ended December 31,2005. The distributions to stockholders included $6.2 million indistributions for S corporation taxes and the recurring annual distributions ofapproximately $5.9 million.

 

Cash interest payments and recurring stockholderdistributions in 2006 should be approximately the same as 2005. Stockholderdistributions for S corporation taxes will be higher in 2006 as net incomecontinues to grow and as all tax loss carryforwards have been absorbed .

 

**Critical AccountingPolicies**

 

The preparation of our financial statementsrequires our management to adopt accounting policies and make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities. Weprepare our financial statements in conformity with accounting principlesgenerally accepted in the United States of America. Our business and industryis highly regulated. The majority of our revenue is counted in the form ofcash, chips and tokens and therefore, is not subject to any significant orcomplex estimation procedures.

 

We have determined that the followingaccounting policies and related estimates are critical to the preparation ofour consolidated financial statements:

 

*Long-Lived Assets*

 

We have a significant investment inlong-lived property and equipment and lease acquisition 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. Weestimate useful lives for property and equipment based on historical experienceand estimates of products’ commercial lives. Significant incremental

 

32

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costs associated with theacquisition of location leases are capitalized and amortized using thestraight-line method over the term of the related leases, which range from 1 to20 years. Should the actual useful life of an asset differ from the estimateduseful life, future operating results could be positively or negativelyaffected. We review useful lives, obsolescence, and assess commercial viabilityof these assets periodically.

 

We assess the recoverability of long-livedassets when circumstances indicate that the carrying amount of an asset may notbe fully recoverable. If undiscounted expected cash flows to be generated by along-lived asset or asset group are less than its carrying amount, we record animpairment to write down the long-lived asset or asset group to its estimatedfair value. Fair value is determined based on undiscounted expected future cashflows. An adverse change to the estimate of these undiscounted future cashflows could necessitate an impairment charge that could adversely affectoperating results.

 

*Goodwilland Intangible Assets*

 

We have a significant investment in goodwilland other intangible assets on our consolidated balance sheet as of December 31,2005. The purchase price of an acquisition is allocated to the underlyingassets acquired and liabilities assumed based upon their estimated fair valuesat the date of acquisition. The estimated fair values of the assets acquiredpursuant to the Grace Acquisition, a substantial portion of which consisted ofintangible assets comprised of license rights, were based on an independentappraisal and estimates made by management. To the extent that the purchaseprice exceeds the fair value of the net identifiable tangible and intangible assetsacquired, such excess is allocated to goodwill.

 

We review the investment in goodwill andlicense rights for impairment annually. The annual evaluation of goodwill andlicense rights requires the use of estimates about future operating results ofeach reporting unit to determine their estimated fair value. Changes inforecasted operations can materially affect these estimates. Once impairment ofgoodwill or other intangible assets has been recorded, it cannot be reversed.An adverse change to the estimate of these future cash flows could necessitatean impairment charge that could adversely affect operating results.

 

**Recently Issued andAdopted Accounting Standards**

 

The adoption of the following recentaccounting pronouncements did not have any impact on our results of operationsor financial condition:

 

•      FASB Interpretation No. 47,“Accounting for Conditional Asset Retirement obligations – an interpretation ofFASB No. 143”;

 

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN47”), “Accounting for Conditional Asset Retirement Obligations, anInterpretation of FAS 143”. FIN 47 requires recognition of a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. When sufficient information exists,uncertainty about the amount and/or timing of future settlement should befactored into the liability measurement. The interpretation was effective forthe fiscal years ending after December 15, 2005. The adoption of FIN 47had no impact on our results of operations, financial position or cash flows.

 

•      FASB Statement No. 151,“Inventory Costs – an amendment of ARB No. 43, Chapter 4”;

 

In November 2004, the FASB issued SFAS No. 151revising Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, whichclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, wasted material (spoilage). This statement iseffective for inventory costs incurred during fiscal years beginning after June 15,2005. We do not believe that adoption of this statement will have a materialimpact on our results of operations, financial position or cash flows

 

Other than as specified herein, the followingpronouncements on accounting policies issued during 2005 are not expected tohave any impact on our results of operations or financial condition:

 

•      FASB Statement No. 123R,“Share-Based Payment”;

 

In December 2004, the FASB issued Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”). SFAS 123R focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions. On April 14,2005, the SEC announced the adoption of a rule that defers the requiredeffective date of SFAS 123R. The SEC rule provides

 

33

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that SFAS 123R is now effective for registrants as of the beginning ofthe first fiscal year beginning after June 15, 2005. We do not believethat adoption of this statement will have a material impact on our results ofoperations, financial position or cash flows.

 

•      FASB Statement No. 153,“Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”;

 

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchangesof Nonmonetary Assets”, amending APB Opinion No. 29, which treatednonmonetary exchanges of similar productive assets as an exception from fairvalue measurement. SFAS 153 replaces this exception with a general exceptionfrom fair value measurement for exchanges of nonmonetary assets that do nothave commercial substance. Nonmonetary exchanges have commercial substance ifthe future cash flows of an entity are expected to change significantly as aresult of the exchange. This statement is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005, whichincludes our results as of December 31, 2005. The adoption had no materialimpact on our results of operations, financial position or cash flows.

 

•      FASB Statement No. 154,“Accounting Changes and Error Correction- a Replacement of APB Opinion No. 20and SFAS No. 3”.

 

In May 2005, the FASB issued SFAS No. 154(“SFAS 154”), “Accounting Changes and Error Corrections”, a replacement ofAccounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS 154changes the requirement for the accounting for and reporting of a change inaccounting principles. SFAS 154 applies to all voluntary changes in accountingprinciples. It also applies to changes required by an accounting pronouncementif the pronouncement does not include specific transition provisions. When apronouncement includes specific transition provisions, those provisions shouldbe followed. The provisions of SFAS 154 will be effective for accountingchanges made in fiscal years beginning after December 15, 2005. We do notexpect the adoption to have any effect on the Company.

 

**Statement onForward-Looking Information**

 

We make statements in this report that relateto matters that are not historical facts that we refer to as “forward-lookingstatements” regarding, among other things, our business strategy, our prospectsand our financial position. These statements may be identified by the useof forward-looking terminology such as “believes,” “estimates,” “expects,” “intends,”“may,” “will,” “should” or “anticipates” or the negative or other variation ofthese or similar words, or by discussions of strategy or risks anduncertainties. Forward-looking statements in this report include, among otherthings, statements concerning:

 

•      projections of futureresults of operations or financial condition;

 

•      expectations for our routeoperations and our casino properties; and

 

•      expectations of thecontinued availability of capital resources.

 

Any forward-looking statement made by usnecessarily is based upon a number of estimates and assumptions that, whileconsidered reasonable by us, is inherently subject to significant business,economic and competitive uncertainties and contingencies, many of which arebeyond our control, and are subject to change. Actual results of our operationsmay vary materially from any forward-looking statement made by or on ourbehalf. Forward-looking statements should not be regarded as a representationby us or any other person that the forward-looking statements will be achieved.Undue reliance should not be placed on any forward-looking statements. Some ofthe contingencies and uncertainties to which any forward-looking statementcontained herein is subject include, but are not limited to, the following:

 

•      Our substantial indebtednesscould adversely affect our financial health and prevent us from fulfilling ourobligations under the instruments governing our outstanding indebtedness.

 

•      We will require asignificant amount of cash to service our indebtedness. Our ability to generatecash depends on many factors beyond our control.

 

•      The success of our routeoperations is dependent on our ability to renew our contracts.

 

•      Our indebtedness imposesrestrictive covenants on us.

 

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•      We may not be able tosuccessfully integrate the operations of the three casinos acquired pursuant tothe Grace Acquisition into our business.

 

•      We may experience aloss of market share due to intense competition.

 

•      We face extensive regulationfrom gaming and other government authorities.

 

•      Changes to applicable taxlaws could have a material adverse effect on our financial condition.

 

•      Our operations could beadversely affected due to the adoption of anti-smoking regulations.

 

•      We depend upon our keyemployees and certain members of our management.

 

•      Our executive officers andmembers of our board of directors own 100% of the Company, which could lead toconflicts of interest.

 

•      Our business relies heavilyon certain markets and an economic downturn in these markets could have amaterial adverse effect on our results.

 

For additional contingencies anduncertainties, see “Item 1. Business-Risk Factors.”

 

**Industry andMarket Data**

 

This report includes market and industry datathat we obtained from our own research, studies conducted by third partysources that we believe to be reliable and industry and general publicationspublished by third parties and, in some cases, management estimates based onindustry 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 believe internal company estimates are reliableand market definitions are appropriate, they have not been verified by anyindependent sources, and we make no representations as to the accuracy of suchestimates.

 

## **Item 7A.**       Quantitative and Qualitative Disclosures AboutMarket Risk.

## ** **

Market risk is the risk of loss arising fromadverse changes in market rates and prices, such as interest rates, foreigncurrency exchange rates, and commodity prices. We do not have any cash or cashequivalents as of December 31, 2005 that are subject to market risk basedon changes in interest rates. As a result of borrowings under our amendedcredit facility, we are exposed to some market risk due to floating or variableinterest rates. The interest on revolving borrowings and on the additional termloan under our amended credit facility is based on a floating rate (a base rateor LIBOR, at our option), plus a leverage grid-based variable amount. At December 31,2005, the principal amount of borrowings under our amended credit facility wasapproximately $172.5 million. A hypothetical 1.0% increase in LIBOR wouldresult in an approximately $1.7 million annual increase in interestexpense.

 

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**Item 8.       FinancialStatements and Supplementary Data.**

 
| **Report of Independent Registered Public Accounting Firm**                                                                  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                         |       |
| **Consolidated Financial Statements**                                                                                        | ** ** |
|                                                                                                                         |       |
| Consolidated Balance Sheets  As of December 31, 2004 and 2005                                                           |       |
|                                                                                                                         |       |
| Consolidated Statements of Operations  For the years ended December 31, 2003, 2004 and 2005                             |       |
|                                                                                                                         |       |
| Consolidated Statements of Stockholders’ Equity (Deficiency)  For the years ended December 31, 2003, 2004 and 2005 |       |
|                                                                                                                         |       |
| Consolidated Statements of Cash Flows  For the years ended December 31, 2003, 2004 and 2005                             |       |
|                                                                                                                         |       |
| **Notes to Consolidated Financial Statements**                                                                               | ** ** |

** **

 

36

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

We have audited the accompanying consolidated balance sheets of HerbstGaming, Inc. and subsidiaries (the “Company”) as of December 31, 2005and 2004, and the related consolidated statements of operations, stockholders’equity (deficiency), and cash flows for each of the three years in the periodended December 31, 2005. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. The Companyis not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Herbst Gaming, Inc.and subsidiaries as of December 31, 2005 and 2004, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America.

 
| /s/ Deloitte & Touche LLP |   |
|------------------------------------|--------|

 

Las Vegas, Nevada

March 30, 2006

 

37

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**HerbstGaming, Inc.**Consolidated Balance Sheets(in thousands)

 
| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **2004**             | ** ** | **2005** | ** ** |
| ** **                                                                               | ** ** | ** **           | ** ** | ** ** | ** ** |
| **Assets**                                                                               |       |                 |       |   |   |
| Current assets                                                                           |       |                 |       |   |   |
| Cash and cash equivalents                                                                |       | $                    | 138,172    |   | $ | 73,849 |   |
| Accounts receivable, net                                                                 |       | 1,281                |       | 2,001 |   |
| Notes and loans receivable                                                               |       | 411                  |       | 597 |   |
| Prepaid expenses                                                                         |       | 5,182                |       | 6,238 |   |
| Inventory                                                                                |       | 1,080                |       | 2,351 |   |
| Total current  assets                                                                    |       | 146,126              |       | 85,036 |   |
| Property and equipment, net                                                              |       | 107,205              |       | 189,648 |   |
| Lease acquisition costs, net                                                             |       | 51,394               |       | 41,921 |   |
| Due from related parties                                                                 |       | 161                  |       | 164 |   |
| Other assets, net                                                                        |       | 13,545               |       | 14,972 |   |
| Intangibles,  net                                                                        |       | —               |       | 199,934 |   |
| Goodwill                                                                                 |       | —               |       | 3,255 |   |
|                                                                                     |       |                 |       |   |   |
| Total assets                                                                             |       | $                    | 318,431    |   | $ | 534,930 |   |
|                                                                                     |       |                 |       |   |   |
| **Liabilities and stockholders’ (deficiency) equity**                               |       |                 |       |   |   |
| Current liabilities                                                                      |       |                 |       |   |   |
| Current portion of long-term debt                                                        |       | $                    | 154        |   | $ | 1,117 |   |
| Accounts payable                                                                         |       | 5,733                |       | 10,858 |   |
| Accrued expenses                                                                         |       | 8,896                |       | 13,961 |   |
| Due to related parties                                                                   |       | 36                   |       | 2 |   |
| Total current liabilities                                                                |       | 14,819               |       | 25,938 |   |
| Long-term debt, less current portion                                                     |       | 333,258              |       | 499,476 |   |
| Other liabilities                                                                        |       | 1,118                |       | 1,535 |   |
| Commitments and contingencies (Note 10)                                                  |       |                 |       |   |   |
| Stockholders’ (deficiency) 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 |   |
| (Accumulated deficit) retained earnings                                                  |       | (34,763              | )          | 3,982 |   |
| Total stockholders’ (deficiency) equity                                             |       | (30,764              | )          | 7,981 |   |
|                                                                                     |       |                 |       |   |   |
| Total liabilities and stockholders’  (deficiency) equity                            |       | $                    | 318,431    |   | $ | 534,930 |   |

 

See notes to consolidatedfinancial statements.

 

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**HerbstGaming, Inc.**Consolidated Statements of Operations(in thousands)

 
| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Route operations                                               |       | $                                | 241,833    |   | $ | 293,244 |   | $ | 338,599 |   |
| Casino operations                                              |       | 78,342                           |       | 91,254 |   | 212,875 |   |
| Other—non gaming                                          |       | 3,049                            |       | 3,628 |   | 6,024 |   |
|                                                           |       |                             |       |   |   |   |   |
| Total revenues                                                 |       | 323,224                          |       | 388,126 |   | 557,498 |   |
| Less promotional allowances                                    |       | (11,249                          | )          | (12,514 | ) | (21,657 | ) |
|                                                           |       |                             |       |   |   |   |   |
| Net revenues                                                   |       | 311,975                          |       | 375,612 |   | 535,841 |   |
| Costs and expenses                                             |       |                             |       |   |   |   |   |
| Route operations                                               |       | 192,757                          |       | 227,929 |   | 258,114 |   |
| Casino operations                                              |       | 51,142                           |       | 56,331 |   | 138,364 |   |
| Depreciation and amortization                                  |       | 22,789                           |       | 25,407 |   | 33,941 |   |
| General and administrative                                     |       | 12,514                           |       | 14,366 |   | 15,217 |   |
| Loss on lease termination                                      |       | —                           |       | 600 |   | — |   |
| Loss on asset retirement                                       |       | —                           |       | — |   | 3,360 |   |
|                                                           |       |                             |       |   |   |   |   |
| Total costs and expenses                                       |       | 279,202                          |       | 324,633 |   | 448,996 |   |
|                                                           |       |                             |       |   |   |   |   |
| Income from operations                                         |       | 32,773                           |       | 50,979 |   | 86,845 |   |
| Other income (expense)                                         |       |                             |       |   |   |   |   |
| Interest income                                                |       | 228                              |       | 353 |   | 740 |   |
| Interest expense, net of capitalized interest  of $101 in 2005 |       | (24,525                          | )          | (22,109 | ) | (36,532 | ) |
| Loss on early retirement of debt                               |       | (267                             | )          | (37,991 | ) | (221 | ) |
| Total other expense                                            |       | (24,564                          | )          | (59,747 | ) | (36,013 | ) |
|                                                           |       |                             |       |   |   |   |   |
| Net income (loss)                                              |       | $                                | 8,209      |   | $ | (8,768 | ) | $ | 50,832 |   |

 

See notes to consolidated financialstatements.

 

39

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**Herbst Gaming, Inc.Consolidated Statements of Stockholders’ Equity (Deficiency)(in thousands)**

 
| **Balance**                      | ** ** | **Common   Stock** | ** ** | **Additional   Paid-In   Capital** | ** ** | **Retained Earning   (Accumulated   Deficit)** | ** ** | **Total** | ** ** |
|----------------------------------|------------|--------------------|------------|------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Balance, January 1, 2003    |       | $                  | 2,368      |                               | $          | 1,631                                          |       | $         | (5,234     | ) | $ | (1,235 | ) |
| Net income                       |       | —             |       | —                             |       | 8,209                                          |       | 8,209     |       |
| Stockholders’ distributions |       | —             |       | —                             |       | (5,420                                         | )          | (5,420    | )          |
| Balance December 31, 2003   |       | $                  | 2,368      |                               | $          | 1,631                                          |       | $         | (2,445     | ) | $ | 1,554 |   |
| Net loss                         |       | —             |       | —                             |       | (8,768                                         | )          | (8,768    | )          |
| Stockholders’ distributions |       | —             |       | —                             |       | (23,550                                        | )          | (23,550   | )          |
| Balance, December 31, 2004  |       | $                  | 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 |   |

 

See notes to consolidatedfinancial statements.

 

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**Herbst Gaming, Inc.Consolidated Statements of Cash Flows(in thousands)**

 
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating activities                                                     |       |                             |       |   |   |   |   |
| Net income (loss)                                                                        |       | $                                | 8,209      |   | $ | (8,768 | ) | $ | 50,832 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                            |       | 22,789                           |       | 25,407 |   | 33,941 |   |
| Amortization of debt issuance costs                                                      |       | 1,593                            |       | 1,260 |   | 1,801 |   |
| Debt discount amortization                                                               |       | 83                               |       | 100 |   | 146 |   |
| Gain (loss) on sale of property and  equipment                                           |       | (119                             | )          | 41 |   | (27 | ) |
| Loss on retirement of assets                                                             |       | —                           |       | — |   | 3,360 |   |
| Loss on early retirement of debt                                                         |       | 267                              |       | 37,991 |   | 221 |   |
| Decrease (increase) in:                                                                  |       |                             |       |   |   |   |   |
| Accounts receivable                                                                      |       | 173                              |       | (6 | ) | (621 | ) |
| Prepaid expenses                                                                         |       | (343                             | )          | (1,112 | ) | (37 | ) |
| Inventory                                                                                |       | 104                              |       | (41 | ) | (1,101 | ) |
| Due from related parties                                                                 |       | (17                              | )          | 402 |   | (3 | ) |
| Other assets                                                                             |       | —                           |       | (84 | ) | (1,303 | ) |
| Increase (decrease) in:                                                                  |       |                             |       |   |   |   |   |
| Accounts payable                                                                         |       | 630                              |       | (712 | ) | 2,813 |   |
| Accrued expenses                                                                         |       | 2,314                            |       | (4,703 | ) | 1,799 |   |
| Due to related parties                                                                   |       | (430                             | )          | 36 |   | (34 | ) |
| Other liabilities                                                                        |       | (256                             | )          | 199 |   | 417 |   |
| Net cash provided by operating activities                                                |       | $                                | 34,997     |   | $ | 50,010 |   | $ | 92,204 |   |
| Cash flows from investing activities                                                     |       |                             |       |   |   |   |   |
| Net cash paid for acquisition of slot route                                              |       | (57,171                          | )          | — |   | — |   |
|                                                                                     |       |                             |       |   |   |   |   |
| Net cash paid for acquisition of riverboat  assets                                       |       | —                           |       | — |   | (264,457 | ) |
| Additions to notes receivable                                                            |       | (619                             | )          | (914 | ) | (1,303 | ) |
| Collection on notes receivable                                                           |       | 689                              |       | 699 |   | 1,322 |   |
| Proceeds from sale of property and  equipment                                            |       | 577                              |       | 260 |   | 264 |   |
| Purchases of property and equipment                                                      |       | (15,117                          | )          | (15,229 | ) | (43,893 | ) |
| Lease acquisition costs                                                                  |       | (3,083                           | )          | (1,825 | ) | (1,105 | ) |
| Net cash used in investing activities                                                    |       | $                                | (74,724    | ) | $ | (17,009 | ) | $ | (309,172 | ) |

 

See notes to consolidatedfinancial statements.

 

41

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| ** **                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from financing activities                                        |       |                             |       |   |   |   |   |
| Proceeds from long term debt                                                |       | $                                | 49,115     |   | $ | 428,022 |   | $ | 191,000 |   |
| Reduction of long term debt                                                 |       | (2,153                           | )          | (310,098 | ) | (23,965 | ) |
| Loan origination fees                                                       |       | (2,553                           | )          | (11,904 | ) | (2,082 | ) |
| Prepayment penalty on retired debt                                          |       | (267                             | )          | (31,329 | ) | (221 | ) |
| Stockholders’ distributions                                            |       | (5,420                           | )          | (23,550 | ) | (12,087 | ) |
| Net cash provided by financing activities                                   |       | 38,722                           |       | 51,141 |   | 152,645 |   |
| Net increase (decrease) in cash and cash  equivalents                       |       | (1,005                           | )          | 84,142 |   | (64,323 | ) |
| Cash and cash equivalents                                                   |       |                             |       |   |   |   |   |
| Beginning of year                                                           |       | 55,035                           |       | 54,030 |   | 138,172 |   |
| End of year                                                                 |       | $                                | 54,030     |   | $ | 138,172 |   | $ | 73,849 |   |
| Supplemental cash flow information:                                         |       |                             |       |   |   |   |   |
| Cash paid during the period for interest                                    |       | $                                | 21,198     |   | $ | 25,918 |   | $ | 33,979 |   |
| Supplemental schedule of non cash  investing and financing activities: |       |                             |       |   |   |   |   |
| Purchase of property and equipment financed  through accounts payable       |       | $                                | 661        |   | $ | 1,343 |   | $ | 3,495 |   |
| Purchase of assets through direct financing                                 |       | 283                              |       | 119 |   | — |   |

 

See notes to consolidatedfinancial statements.

 

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**Herbst Gaming, Inc.**

 

**Notes to consolidated financial statements**

 

**1.****             Description of Business and Summary ofSignificant Accounting Policies**

 

***Description of Businessand Principles of Consolidation***—The accompanyingconsolidated financial statements of Herbst Gaming, Inc. (“Herbst” or the “Company”)include the accounts of Herbst and its subsidiaries: E-T-T, Inc. andSubsidiaries (“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-ST ”)and HGI-Mark Twain (“HGI-MT ”). The financial statements of E-T-T areconsolidated and include the following wholly-owned subsidiaries: CardivanCompany, Corral Coin, Inc., and Corral Country Coin, Inc.

 

All significant intercompany balances andtransactions between Herbst, E-T-T, MGI, E-T-T Enterprises, FPG, HGI-L,HGI-ST and HGI- MT have been eliminated in the consolidated financialstatements.

 

Herbst Gaming, Inc. was incorporated inNevada on January 21, 1997. In August of 2001, a restructuringoccurred, wherein E-T-T, MGI, FPG and E-T-T Enterprises became wholly-ownedsubsidiaries of Herbst. This restructuring occurred in conjunction with the$170.0 million offering of senior secured notes that was used to retire themajority of the existing debt of the consolidated entities. Prior to August of2001, the newly consolidated entities were combined for presentation purposes.

 

E-T-T and MGI conduct business in the gamingindustry and generate revenue principally from gaming machine route operationsand casino operations. Gaming machine route operations involve theinstallation, operation, and service of gaming machines owned by the Companythat are located in licensed, leased, or subleased space in retail stores(supermarkets, convenience stores, etc.), bars, and restaurants throughout theState of Nevada. The Company operates Terrible’s Town Casino & Bowl inHenderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada, andTerrible’s Town Casino and Terrible’s Lakeside Casino & RV Park, bothof which are located in Pahrump, Nevada, a community 60 miles west of LasVegas.

 

E-T-T Enterprises develops and leases realestate to E-T-T.

 

FPG owns and operates Terrible’s Hotel &Casino in Las Vegas, Nevada, which began operations in December 2000.

 

HGI-L owns and operates Terrible’s LakesideCasino in Osceola, Iowa, which was acquired in February 2005.

 

HGI-ST owns and operatesTerrible’s St Jo Frontier Casino in St Joseph, Missouri, which was acquired in February 2005.

 

HGI-MT owns and operatesTerrible’s Mark Twain Casino in La Grange, Missouri which was acquired in February 2005.

 

The gaming industry in the States of Nevada,Iowa, and Missouri is subject to extensive state and local governmentregulation. The Company’s gaming operations are subject to the licensing andregulatory control of the Nevada Gaming Commission, the Nevada Gaming ControlBoard, the Iowa Race and Gaming Commission, the Missouri Gaming Commission aswell as local jurisdictions.

 

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

 

43

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***Reclassifications***—Certainprior period amounts have been reclassified in the consolidated financialstatements to conform to the current period’s presentation. Suchreclassifications had no impact on net income (loss) or equity.

 

***Cash and CashEquivalents***—Cash and cash equivalents includehighly liquid investments with a maturity at the date of purchase of threemonths or less. The carrying value of these investments approximates their fairvalue due to their short maturities.

 

***Fair Value ofFinancial Instruments***—The carrying value of theCompany’s cash, notes and loans receivable, and trade payables approximatesfair value primarily because of the short maturities of these instruments. Thefair value of the Company’s long-term debt is estimated based on the quotedmarket prices for the same or similar issues or on the current rates offered tothe Company for debt of the same remaining maturities. Based on the borrowingrates currently available to the Company for debt with similar terms andaverage maturities, the estimated fair value of long-term debt outstanding isapproximately $505,836,000 as of December 31, 2005.

 

***Accounts Receivable***—Receivablesconsist primarily of amounts due from customers as a result of normal businessoperations. The Company periodically performs credit evaluations of itscustomers. The Company reviews accounts receivable balances in order todetermine an allowance for potential credit losses based on our collectionsexperience and the age of the receivables. At December 31, 2004 and 2005,an allowance for potential credit losses was $450,978 and $625,777,respectively.

 

***Notes and Loans Receivable***—Inorder to secure various route locations, the Company has provided certainincentives to the location operators in the form of loans. The loans, madefor build-outs, tenant improvements, and initial operating expenses, aregenerally secured by the personal guarantees of the operators and the locations’assets. The majority of the loans are non-interest bearing and are expected tobe repaid within one year from the locations’ share of net gaming win.

 

The Company regularly evaluates the collectibilityof the loans by individually evaluating each location’s operating results andcash flows. Management provides for the carrying value of loans that aredetermined to be uncollectible. At December 31, 2004 and 2005, noallowance for potential credit losses was deemed necessary.

 

***Inventory***—Inventoriesare stated at the lower of cost or market value. Cost is determined using thefirst-in, first-out method.

 

***Property andEquipment***—Property and equipment are stated atcost and depreciated using the straight-line method over the estimated usefullives of the assets. Leasehold improvements are amortized using thestraight-line method over the shorter of the lease term or estimated usefullife of the asset. Useful lives are as follows:

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

*** ***

***Lease AcquisitionCosts***— 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 $26,635,000 and$35,832,000 at December 31, 2004 and 2005, respectively.

 

***Debt Issuance Costs***—Debtissuance costs incurred in connection with the issuance of long-term debt arecapitalized and amortized to interest expense over the terms of the relateddebt agreements. Debt issuance costs are included in other assets on thebalance sheets (see “Note 6. Other Assets”).

 

***Long-Lived Assets***—Inaccordance with the provisions of SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Company evaluates thepotential impairment of long-lived assets when events or changes incircumstances indicate that the carrying amount of a long-lived asset may notbe recoverable. If it is determined that the carrying value of long-livedassets may not be recoverable based upon the relevant facts andcircumstances, the Company estimates the future undiscounted cash flowsexpected to result from the use of the asset and its eventual disposition. Ifthe sum of the expected undiscounted future cash flows is less than thecarrying value of the asset, the Company will recognize an impairment loss forthe difference between the carrying value of the asset and its fair value. TheCompany believes that no impairment of long-lived assets exists at December 31,2005.

 

44

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***Goodwill and Intangible Assets***—Wehave approximately $3,255,000 in goodwill and $199,934,000 in other intangibleassets on our consolidated balance sheet as of December 31, 2005 resultingfrom the Grace Acquisition (see “Note 2. Acquisitions”). The purchaseprice of an acquisition is allocated to the underlying assets acquired andliabilities assumed based upon their estimated fair values at the date ofacquisition. The estimated fair values of the assets acquired pursuant to theGrace Acquisition, a substantial portion of which consisted of intangibleassets comprised of license rights, were based on an independent appraisal andestimates made by management. To the extent that the purchase price exceeds thefair value of the net identifiable tangible and intangible assets acquired,such excess is allocated to goodwill.

 

SFAS No. 142, “Goodwill and OtherIntangible Assets,” requires a review of goodwill and license rights forimpairment at least annually. We complete our annual assessment for impairmentin the fourth quarter of each year. The annual evaluation of goodwill andlicense rights requires the use of estimates about future operating results ofeach reporting unit to determine their estimated fair value. Changes inforecasted operations can materially affect these estimates. Once impairment ofgoodwill or other intangible assets has been recorded, it cannot be reversed.

 

***Revenue andPromotional Allowances***—In accordance with industrypractice, the Company recognizes as gaming revenues the net win from routeoperations, which is the difference between gaming wins and losses. The Companyrecognizes total net win from gaming devices as revenues from gaming routesthat operate under revenue-sharing arrangements. Revenue-sharing payments toroute locations are recorded as costs of route operations. Revenues from casinooperations are gaming wins less losses. Revenues from casino operations includethe retail value of food and beverage and goods and services provided tocustomers on a complimentary basis. Such amounts are then deducted aspromotional allowances. The estimated cost of providing these promotionalallowances is as follows:

 
| ** **        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------|------------|----------------------------------|------------|
| ** **        | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **        | ** ** | **(dollars in thousands)**       | ** ** |
| Room              |       | $                                | 498        |   | $ | 502 |   | $ | 858 |   |
| Food and Beverage |       | 4,798                            |       | 5,677 |   | 6,701 |   |
| Other             |       | 3,538                            |       | 4,299 |   | 10,766 |   |
| Total             |       | $                                | 8,834      |   | $ | 10,478 |   | $ | 18,325 |   |

 

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

 

Liabilities in respect of the Company’splayer’s club program are recognized as points are earned and are included inthe “Other liabilities” line of the Company’s balance sheet. Expenses inrespect of the Company’s player’s club program are included in the “Promotionalallowances” line of the Company’s statement of operations.

 

***Location RentExpense***— Fixed rental payments (includingscheduled increases) are recorded on a straight-line basis over the agreementterm. 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 of Subchapter S ofthe Internal Revenue Code. Under those provisions, the owners are liable forincome tax on the taxable income of the Company as it affects the owners’individual income tax returns. Therefore, a provision for income taxes has notbeen included in the accompanying consolidated financial statements.

 

***Concentrations ofCredit 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 31,2005, the Company does not consider itself to have any significantconcentrations of credit risk.

 

***Recently Issued and Adopted Accounting Standards***

 

The adoption of the following recentaccounting pronouncements did not have any impact on our results of operationsor financial condition:

 

•      FASB Interpretation No. 47,  “Accounting for Conditional Asset Retirementobligations – an interpretation of FASB No. 143”;

 

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In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN47”), “Accounting for Conditional Asset Retirement Obligations, anInterpretation of FAS 143”. FIN 47 requires recognition of a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. When sufficient information exists,uncertainty about the amount and/or timing of future settlement should befactored into the liability measurement. The interpretation was effective forthe fiscal years ending after December 15, 2005. The adoption of FIN 47had no impact on our results of operations, financial position or cash flows.

 

•      FASB Statement No. 151,“Inventory Costs – an amendment of ARB No. 43, Chapter 4”;

 

In November 2004, the FASB issued SFAS No. 151revising Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, whichclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, wasted material (spoilage). This statement iseffective for inventory costs incurred during fiscal years beginning after June 15,2005. We do not believe that adoption of this statement will have a materialimpact on our results of operations, financial position or cash flows.

 

Other than as specified herein, the followingpronouncements on accounting policies issued during 2005 are not expected tohave any impact on our results of operations or financial condition:

 

•      FASB Statement No. 123R,“Share-Based Payment”;

 

In December 2004, the FASB issued Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”). SFAS 123R focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions. On April 14,2005, the Securities and Exchange Commission (“SEC”) announced the adoption ofa rule that defers the required effective date of SFAS 123R. The SEC rule providesthat SFAS 123R is now effective for registrants as of the beginning of thefirst fiscal year beginning after June 15, 2005. We do not believe thatadoption of this statement will have a material impact on our results ofoperations, financial position or cash flows.

 

•      FASB Statement No. 153,“Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”;

 

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchangesof Nonmonetary Assets”, amending APB Opinion No. 29, which treatednonmonetary exchanges of similar productive assets as an exception from fairvalue measurement. SFAS 153 replaces this exception with a general exceptionfrom fair value measurement for exchanges of nonmonetary assets that do nothave commercial substance. Nonmonetary exchanges have commercial substance ifthe future cash flows of an entity are expected to change significantly as aresult of the exchange. This statement is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005, whichincludes our results as of December 31, 2005. The adoption had no materialimpact on our results of operations, financial position or cash flows.

 

•      FASB Statement No. 154,“Accounting Changes and Error Correction- a Replacement of APB Opinion No. 20and SFAS No. 3”.

 

In May 2005, the FASB issued SFAS No. 154(“SFAS 154”), “Accounting Changes and Error Corrections”, a replacement ofAccounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS 154changes the requirement for the accounting for and reporting of a change inaccounting principles. SFAS 154 applies to all voluntary changes in accountingprinciples. It also applies to changes required by an accounting pronouncementif the pronouncement does not include specific transition provisions. When apronouncement includes specific transition provisions, those provisions shouldbe followed. The provisions of SFAS 154 will be effective for accountingchanges made in fiscal years beginning after December 15, 2005. We do notexpect the adoption to have any effect on the Company.

 

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**2.****             Acquisition**

 

On February 1, 2005, the Companyconsummated the purchase of assets consisting of three casinos from GraceEntertainment, Inc. for an aggregate cash purchase price of $266.8 million(the “Grace Acquisition”). The purchase price does not include $2.4 million infees associated with the consummation of the Grace Acquisition that areincluded in the table below. The Grace Acquisition allowed the Company to expandits casino operations segment to stable and relatively protected marketsoutside of southern Nevada with casinos that it believes have significantupside potential. The acquired assets consist of Terrible’s Lakeside CasinoResort, located in Osceola, Iowa, or Lakeside Iowa, which contains 921 slotmachines, 31 table games and an adjacent 60 room all-suite hotel, Terrible’sMark Twain Casino, located in LaGrange, Missouri, or Mark Twain, which contains505 slot machines and 17 table games, and Terrible’s St. Jo Frontier Casino,located in St. Joseph, Missouri, or St. Jo, which contains 487 slot machinesand 15 table games. The Company used proceeds from a $170.0 million 7% seniorsubordinated notes offering along with borrowings under its amended and restatedcredit facility to fund the purchase price of the Grace Acquisition. The GraceAcquisition was recorded under the purchase method of accounting and theresults of operations of the Grace assets will be included in the Company’sconsolidated results as of the date of acquisition.

 

The allocation of the purchase price is asfollows:

 
| Estimated Fair Market Value of assets acquired (in thousands) net of  cash: |   |    |    |
|-----------------------------------------------------------------------------|--------|---------|---------|
|                                                                        |   |    |    |
| Inventory                                                                   |   | $       | 170     |   |
| Receivables                                                                 |   | 57      |    |
| Prepaid                                                                     |   | 1,032   |    |
| Property, plant and equipment                                               |   | 62,409  |    |
| Intangibles                                                                 |   | 204,055 |    |
| Total                                                                       |   | $       | 267,723 |   |
|                                                                        |   |    |    |
| Estimated Fair Market Value of liabilities  assumed (in thousands):         |   |    |    |
|                                                                        |   |    |    |
| Accrued expenses                                                            |   | (3,266  | )       |
| Net cash purchase price                                                     |   | $       | 264,457 |   |

 

The table below reflectsunaudited pro forma consolidated results of the Company as if the GraceAcquisition had taken place at January 1, 2004 (dollars in thousands). 

 
| ** **                       | ** ** | **Year ended  December 31, 2004  Pro Forma** | ** ** | **Year ended  December 31, 2005  Pro Forma** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
|                             |       |                                              |       |                                              |       |
| Net Revenues                     |       | $                                                 | 491,263    |                                              | $          | 543,927 |   |
| Loss on retirement of assets     |       | —                                            |       | (3,360                                            | )          |
| Income from operations           |       | 84,469                                            |       | 88,699                                            |       |
| Loss on early retirement of debt |       | (37,991                                           | )          | (221                                              | )          |
| Net income                       |       | 7,598                                             |       | 51,259                                            |       |
|                                  |            |                                                   |            |                                                   |            |  |  |

 

In management’s opinion, these unaudited proforma amounts are not necessarily indicative of what the actual combinedresults of operations might have been if the acquisition had been effective atthe beginning of the earliest period presented.

 

A third-party valuation firm was engaged bythe Company to value the assets acquired pursuant to this acquisition and toassist in the allocation of the purchase price. These tasks included theidentification and valuation of any intangible assets acquired and resulted inthe recognition of certain intangible assets, such as gaming licenses, customerlists and an executive non-competition agreement, as well as goodwill. TheCompany allocated approximately $200.8 million to intangible assets acquiredpursuant to the Grace Acquisition. For a description of the nature of theintangibles acquired, as well as whether they are amortizable, and if so, overwhat period of time, see “Note 5. Goodwill and other intangibles”.

 

The Company has currently allocated $3.3million to goodwill, which the Company believes is attributable to the strongcash flows generated by these properties as well as the enhancement anddiversification of the Company’s base businesses outside the state of Nevada.

 

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

 

Property and equipment consist of thefollowing (in thousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Building                           |       | $                     | 54,398     |   | $ | 84,972 |   |
| Gaming equipment                   |       | 70,695                |       | 101,074 |   |
| Furniture, fixtures, and equipment |       | 26,223                |       | 33,871 |   |
| Leasehold improvements             |       | 1,808                 |       | 1,929 |   |
| Land                               |       | 15,925                |       | 19,425 |   |
| Barge                              |       | —                |       | 16,886 |   |
| Construction-in-progress           |       | 2,806                 |       | 17,004 |   |
|                               |       | 171,855               |       | 275,161 |   |
| Less accumulated depreciation      |       | (64,650               | )          | (85,513 | ) |
|                               |       | $                     | 107,205    |   | $ | 189,648 |   |

 

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

 
| ** **              | ** ** | **December 31, 2004**  | ** ** | **December 31, 2005**    | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **              | ** ** | **(dollars in thousands )** | ** ** |
| Lease Acquisition Costs |       | $                           | 78,029     |                          | $          | 26,635 |   | $ | 77,754 |   | $ | 35,833 |   |
|                         |            |                             |            |                               |            |  |  |  |  |  |  |  |  |

 

The aggregate amortization expense for theyears ended December 31, 2003, 2004 and 2005 was $9,134,000, $10,036,000and $10,011,000, respectively.

 

Estimated amortization expense for the yearsended 2006, 2007, 2008, 2009 and 2010 is $9,885,000, $9,690,000, $8,939,000,$6,530,000 and 6,360,000, respectively.

 

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

 

During 2005 we acquired the casino assets ofGrace Entertainment, Inc. pursuant to the Grace Acquisition. In connectionwith this transaction, we recorded significant amounts of intangible assets andgoodwill during the year ended December 31, 2005 that are included in thetable below.

 

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Intangible assets consist of the following(dollars in thousands):

 
| ** **                    | ** ** | **December 31, 2004**  | ** ** | **December 31, 2005**    | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                    | ** ** | ** **                  | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **(dollars in thousands )** | ** ** |
| Amortized intangible assets   |       |                        |       |                          |       |   |   |   |   |
| Customer List                 |       | $                           | —     |                          | $          | — |   | $ | 2,900 |   | $ | 664 |   |
| Non-Competition Agreement     |       | —                      |       | —                        |       | 1,100 |   | 202 |   |
| Total                         |       | $                           | —     |                          | $          | — |   | $ | 4,000 |   | $ | 866 |   |
| Unamortized intangible assets |       |                        |       |                          |       |   |   |   |   |
| Gaming License Rights         |       | $                           | —     |                          | $          | — |   | $ | 196,800 |   | $ | — |   |
| Total                         |       | $                           | —     |                          | $          | — |   | $ | 196,800 |   | $ | — |   |

 

The changes in the carrying amount ofgoodwill for the year ended December 31, 2005 are as follows:

 
| Balance as of January 1, 2005 |   | $     | — |   |
|------------------------------------|--------|-------|--------|--------|
| Goodwill acquired during the year  |   | 3,255 |   |
| Total                              |   | $     | 3,255  |   |

 

License rights are intangible assets acquiredfrom the purchase of gaming entities that operate in gaming jurisdictions wherecompetition is limited, such as states where only a certain number of operatorsare allowed by law. Intangible license rights are not currently subject toamortization as we have determined they have an indefinite useful life.

 

Customer lists are being ratably amortizedover a four year period.

 

Non-competition agreements were entered withthe previous owners and management and are amortized over five years.

 

Goodwill represents the excess of totalacquisition costs over the fair market value of net assets acquired in abusiness combination. Goodwill has been determined to have an indefinite lifeand is therefore not amortized.

 

For the year ended December 31, 2005,amortization expense of intangibles was $866,250. The expected annualamortization of those assets for the years ended December 31, 2006 through2008 will be $945,000 and for the years ended December 31, 2009 and 2010,the amortization costs will be $280,417 and $18,333, respectively.

 

During 2005, we had a third party valuationcompleted on all intangible assets acquired from Grace Entertainment.Additionally, we prepared a direct value method valuation to test forimpairment of all of those indefinite lived assets. There was no impairmentnoted for the year ended December 31, 2005.

 

Pursuant to the Grace Acquisition, theCompany also acquired two lease agreements with the City of LaGrange, Missouriand the City of Osceola, Iowa (see “Note 10. Commitments and Contingencies”). However,because such agreements are not material to our business operations and areessentially a payment obligation to each such locality, the Company believessuch leases have no value. As a result, such leases are not subject toamortization.

 

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**6.****             Other Assets**

 

Other assetsconsist of the following (dollars in thousands):

 
| ** **                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Debt issuance costs, net of accumulated  amortization of $533 and $2,334, respectively |       | $                     | 11,449     |   | $ | 11,730 |   |
| Other assets                                                                           |       | 2,096                 |       | 3,242 |   |
| Total                                                                                  |       | $                     | 13,545     |   | $ | 14,972 |   |

** **

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

 

Accrued expenses consist of the following(dollars in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Accrued interest                |       | $                     | 2,664      |   | $ | 3,373 |   |
| Progressive jackpot liabilities |       | 1,657                 |       | 2,047 |   |
| Accrued payroll and related     |       | 2,278                 |       | 3,678 |   |
| Other accrueds                  |       | 2,297                 |       | 4,863 |   |
| Total                           |       | $                     | 8,896      |   | $ | 13,961 |   |

 

50

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** **

**8.****             Long-TermDebt**

 

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

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **2004**         | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |       |   |   |
| 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 December 31,  2005 was 5.69%. The revolving credit facility matures on June 10, 2009                                                                                                                         |       | $                | —     |   | $ | 72,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |       |   |   |   |   |
| Term loan secured by 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 $250 principal payments  due quarterly for the first five years of the term loan, with the balance  payable at maturity. The average rate at December 31, 2005 was 6.20%. The  term loan matures on January 31, 2011 |       | —           |       | 99,250 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |       |   |   |
| Senior notes secured by assets of the Company.  The notes bear interest at 10 3⁄4% per annum, payments are due on March 1 and  September 1, commencing on March 1, 2003. The notes mature on September 1,  2008                                                                                                                                                                                                                                                                      |       | 4,068            |       | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |       |   |   |
| 8 1/8% senior subordinated notes  due June 1, 2012 with interest paid semi-annually on June 1 and December 1,  including original issue discount of $1,065                                                                                                                                                                                                                                                                                                                              |       | 158,935          |       | 159,078 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |       |   |   |
| 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%                                                                                                                                                                                                                                                                                                                                |       | 409              |       | 265 |   |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 333,412          |       | 500,593 |   |
| Less current  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | (154             | )          | (1,117 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |       |   |   |
| Total  long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | $                | 333,258    |   | $ | 499,476 |   |

 

51

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*8**1/**8% SeniorSubordinated Notes*

 

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

 

The proceeds from the 8 1/8% notes, along with theamended credit facility, were used to retire 97% of its outstanding 10 3/4% notes for $242.1 million and to pay a$15.0 million dividend to shareholders. Fees of $4.3 million associated withthe 8 1/8% notes and $3.5 millionassociated with the amended credit facility are included in other assets atDecember 31, 2005 and are being amortized over the life of the indebtedness. Inconnection with the retirement of 97% of the 10 3/4% notes in 2004, the Company recorded a loss on theearly retirement of debt of $38.0 million. The loss consisted of $31.3 millionin debt prepayment premiums and $6.7 million in unamortized loan fees.

 

The 8 1/8%  notes mature on June 1, 2012. Interest ispayable in cash at a rate of 8 1/8% per annum on June 1 andDecember 1 of each year, beginning on December 1, 2004. The indenture underwhich the 8 1/8% notes were issued containsvarious limitations and restrictions including (i) change in controlprovisions, (ii) limitations on indebtedness and (iii) limitations on certainpayments such as dividends. The Company is in compliance with these covenantsas of December 31, 2005.

 

In August 2004, the Company filed a Form S-4 registration statementwith the SEC for the purpose of effecting the exchange of the 8 1/8% notes for identical notesregistered for resale under the federal securities laws. This registrationstatement became effective in November 2004 and the exchange offer wasconsummated in December 2004.

 

*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 amendedcredit facility were used to finance the Grace Acquisition in February 2005.(see “Note 2. Acquisitions”) Fees of $6.2 million associated with the 7% notesand amended credit facility are included in other assets at December 31, 2005and are being amortized over the life of the indebtedness.

 

The 7% notes mature on November 15, 2014. Interest is payable in cashat a rate of 7% per annum on May 15 and November 15 of each year, beginning onMay 15, 2005. The indenture under which the 7% notes were issued contains variouslimitations and restrictions including (i) change in control provisions, (ii)limitations on indebtedness and (iii) limitations on certain payments such asdividends. The Company is in compliance with these covenants as of December 31,2005.

 

In February 2005, the Company filed a Form S-4 registration statementwith the Securities and Exchange Commission for the purpose of effecting theexchange of the 7% notes for identical notes registered for resale under thefederal securities laws. This registration statement became effective in April2005 and the exchange offer was consummated in May 2005.

 

The Company’s senior notes are guaranteed by ETT, Cardivan Company,Corral Coin, Inc., Corral Country Coin, Inc., Corral Coin, Inc., E-T-TEnterprises L.L.C., Market Gaming, Inc., and Flamingo Paradise Gaming, LLC,HGI-Lakeside, HGI-St Jo and HGI-Mark Twain (100 percent-owned subsidiaries ofHerbst Gaming, Inc.) (collectively, the “subsidiary guarantors”). Condensedconsolidating financial information with respect to the subsidiary guarantorsis not provided because the Company has no independent assets or operations,the subsidiary guarantees are full and unconditional and joint and several, andthere are no other material subsidiaries of the Company other than thesubsidiary guarantors. There are no significant restrictions on the ability ofthe Company’s subsidiary guarantors to transfer funds to the Company in theform of cash dividends, loans or advances.

 

On September 1, 2005, the Company retired the remaining balance of $4.1million of its 103⁄4% senior secured notes due 2008 at a redemption price of105.375% per $1,000 principal amount of such notes.

 

52

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*Credit Facilities*

 

On October 8, 2004, the Company amended and restated the senior securedcredit facility it entered into on June 10, 2004 (the “amended credit facility”).The amendment provided for a $175 million revolving credit facility andincluded the ability to issue $100 million under a term facility for theacquisition of the Grace Entertainment assets. The facility was further amendedin August of 2005 to revise pricing. Borrowings under the senior secured creditfacility bear interest, selected monthly at the Company’s option, at a premiumover the base rate or the one-, two-, three-, or six-month Eurodollar Rate (“Eurodollar”).The premium depends on a leverage ratio and can vary, if determined byreference to the base rate, between 0.0% and 1.125% and, if determined byreference to Eurodollar, between .875% and 2.375%. As of December 31, 2005,using the one-month Eurodollar option, the premium over Eurodollar was 1.75%.The Company incurs a commitment fee, payable quarterly in arrears, on theunused portion of the senior secured credit facility. This fee varies dependingon a leverage ratio and can vary between 0.25% and 0.40% per annum. As ofDecember 31, 2005, the fee was 0.35% per annum times the average unusedportion of the facility.

 

The amended credit facility contains various limitations and restrictions,including with respect to distributions by the Company, the Company’s leverageratios (both senior and total) and the Company’s fixed charge coverage ratio.The Company is in compliance with these covenants as of December 31, 2005.

 

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

 
| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|------------------|------------|
| ** ** | ** ** | **2005**         | ** ** |
| ** ** | ** ** | ** **       | ** ** |
| 2006       |       | $                | 1,117      |   |
| 2007       |       | 1,107            |       |
| 2008       |       | 1,036            |       |
| 2009       |       | 73,005           |       |
| 2010       |       | 1,000            |       |
| Thereafter |       | 423,328          |       |
|       |       |             |       |   |
| Total      |       | $                | 500,593    |   |

 

**9.****             Related-PartyTransactions**

 

*General.*

* *

Edward Herbst, Timothy Herbst and Troy Herbst are brothers and are theofficers and directors of Herbst Gaming, Inc. and its wholly-ownedsubsidiaries. In addition, they are officers and directors of Terrible Herbst,Inc. There is no cross ownership between Herbst Gaming, Inc. and TerribleHerbst, Inc. Terrible Herbst, Inc. is owned solely by Jerry and MaryannaHerbst, the parents of the Herbst brothers. Sean Higgins, the Company’s generalcounsel, is also the general counsel of Terrible Herbst, Inc.

 

*Slot route contract with TerribleHerbst, Inc.*

* *

The Company rents space for certain slot machine route operations inconvenience stores owned by Terrible Herbst, Inc. (“Terrible Herbst”), acorporation in which the owners of the Company are officers and which is ownedby the father of the Company’s owners. Rent expense of $4,754,400, $5,599,500and $5,909,000 was incurred under this agreement for the years ended December31, 2003, 2004 and 2005, respectively, for the exclusive placement of slotmachines in Terrible Herbst convenience store locations. This contract expiresin 2010 but may be extended at the option of the Company for two additionalterms of five years.

 

53

----

 

*Other arrangements with TerribleHerbst, Inc.*

* *

The Company has entered into a servicing arrangement with TerribleHerbst pursuant to which it provides accounting and administrative servicesrelated to the collection of daily deposits from Terrible Herbst conveniencestores. The Company also provides personnel to Terrible Herbst to count,maintain and safeguard large amounts of coin and currency. Terrible Herbstreimburses the Company’s expenses in providing these services. Under thisservicing arrangement, the Company was paid approximately $205,800 for servicesrendered for each of the years ended December 31, 2003, 2004 and 2005.

 

The Company has entered into a nonexclusive trademark and licenseagreement with Terrible Herbst for the use of the Terrible Herbst brand nameand its cowboy logo which extends through 2011. 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 licenseagreement, the Company paid approximately $1,301,000, $1,345,000 and $1,412,000to Terrible Herbst in the years ended December 31, 2003, 2004 and 2005,respectively.

 

*Lease agreements.*

* *

Pursuant to a lease agreement that expires in 2067, including renewalperiods, the Company leases the real property on which its corporateheadquarters is located from The Herbst Family Limited Partnership II, orHerbst FLP II. The general partners of the Herbst FLP II are Jerry and MaryannaHerbst. The lease requires monthly rental payments of $14,416. In each of 2003,2004 and 2005, the Company paid $172,992 under this lease.

 

Pursuant to a lease agreement that expires in 2026, including renewalperiods, the Company leases the real property on which Terrible’s Town Casinoin Pahrump is located from The Herbst Family Limited Partnership. The leaserequires monthly rental payments of $12,500. In each of 2003, 2004 and 2005,the Company paid $150,000 under this lease.

 

The Company leases land and office space in certain of its facilitiesto Terrible Herbst under various lease agreements with terms ranging frommonthly to 20 years. Monthly rental income is $63,500. In each of 2003, 2004and 2005, the Company received rental income of $762,000 under these leases.

 

The Company leases the real property on which Terrible’s SearchlightCasino in Searchlight is located from Terrible Herbst for $15,000 per month,pursuant to a lease agreement entered into on June 30, 2002 that expires in2022, with options to renew the lease for five additional successive terms often years each. Terrible Herbst leases that real property from an unrelatedthird party, pursuant to a lease agreement entered into on June 30, 2002 thatexpires in 2042, including renewal periods. In each of 2003, 2004 and 2005,amounts paid under this lease was $180,000.

 

The Company leases a warehouse located in Las Vegas, Nevada for itsemployment center and purchasing departments from the Herbst’s Grandchildren’sTrust. The lease began in November 2002 and requires payments of $43,525 permonth through November 2012. Rent expense incurred under this lease arrangementwas $522,300 for each of the years ended December 31, 2003, 2004 and 2005,respectively.

 

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

 
| 2006       |   | $     | 652    |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 663   |   |
| 2008       |   | 663   |   |
| 2009       |   | 525   |   |
| 2010       |   | 348   |   |
| Thereafter |   | 2,431 |   |
| Total      |   | $     | 5,282  |   |

* *

*Related-party transactions.*

* *

Mr. Higgins is the Company’s General Counsel, the General Counsel ofTerrible Herbst, Inc. and the brother of Mary E. Higgins, the Company’s ChiefFinancial Officer. Mr. Higgins received a salary for services rendered to theCompany in 2003, 2004 and 2005 of $295,708, $339,394 and $426,763,respectively.

 

54

----

 

In 2003, the Company entered into a slot route contract to install,operate and service slot machines at a tavern owned by HIGCO, Inc., a companyowned and operated by Mr. Higgins and two of his brothers. Pursuant to thisrevenue-sharing contract, HIGCO paid the Company $27,097 in 2003, $118,756 in2004 and $155,804 in 2005.

 

In 2004, ETT entered into a slot route contract with SamCon, Inc., acompany owned and operated by Mr. Higgins, to install, operate and service slotmachines at a new location. Terms of this revenue-sharing contract are similarto the terms of the contract the Company entered into with HIGCO in 2003.Pursuant to this revenue-sharing contract, SamCon, Inc. paid ETT $0 in 2004 and$40,800 in 2005.

 

In March 2006, ETT entered into a slot route contract to install,operate and service slot machines at a tavern owned by Prescott’s Bar LLC, acompany owned and operated by Mr. Todd Sosey, the brother in law of Troy D.Herbst, one of the owners of the Company. To date, the Company has received norevenue under this contract.

 

John N. Brewer, a member of our board of directors, is a partner withKummer Kaempfer Bonner & Renshaw. We retained Kummer Kaempfer Bonner &Renshaw as outside legal counsel through December 31, 2004, and KummerKaempfer Bonner & Renshaw has received fees for legal services in theamount of $251,188, $274,310, and $3,500 for 2003, 2004 and 2005, respectively

 

Due from related parties includes receivables of $160,000 and $164,000at December 31, 2004 and 2005, respectively, from Terrible Herbst, which arenon-interest bearing.

 

Interest income related to shareholder notes receivable was $26,000, $0and $0 for the years ended December 31, 2003, 2004 and 2005, respectively.There are no balances owed by shareholders for either 2004 or 2005.

 

Obligations due to related parties at December 31, 2004 and 2005consisted of balances due to Terrible Herbst for expenditures made on behalf ofthe Company, accrued rent, and accrued management fees. The balances arenon-interest bearing and payable on demand.

 

55

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**10.****          Commitmentsand Contingencies**

 

At December 31, 2005, the Company has non-cancelable location licenseagreements for space leases at groups of affiliated stores that expire onvarious dates from 2006 through 2011, with certain options for renewal.Revenues from gaming machines in these stores accounted for approximately 33.5%of the Company’s total revenues for the year ended December 31, 2005.

 

Pursuant to the Grace Acquisition, HMT assumed a franchise and leaseagreement for a river dock entered into by the predecessor of Mark Twain CasinoL.L.C., the previous owner of Mark Twain, with the City of LaGrange, Missouriin May 1995. The five-year lease agreement requires $200,000 in annual payments.HMT has the option to renew this lease for up to four additional five-yearterms. Total lease expense under this lease for the twelve months endedDecember 31, 2005 was approximately $183,326.

 

Pursuant to the Grace Acquisition, HL assumed an agreement and leaseentered into by Southern Iowa Gaming Company, the previous owner of LakesideIowa, with the City of Osceola, Iowa and the Osceola Water Works Board ofTrustees (the “Board”), relating to certain real estate surrounding West Lakeand the use of West Lake in the operation of Lakeside Iowa’s excursion gamblingboat. The agreement and lease is for five years commencing May 20, 1999 withnine options to extend for additional five year terms. The initial lease termexpired in May 2004, and was renewed for an additional five-year term. Thelease requires HL to pay the Board $12,500 per month. The monthly installmentswill increase each year by 1 percent until termination of the lease. Totalwater rights expense for the twelve months ended December 31, 2005 was$145,566.

 

Future minimum lease payments under non-cancelable operating leases andlocation license agreements are as follows (dollars in thousands):

 
| 2006       |   | $      | 74,709  |   |
|------------|--------|--------|---------|--------|
| 2007       |   | 73,217 |    |
| 2008       |   | 51,784 |    |
| 2009       |   | 31,402 |    |
| 2010       |   | 30,833 |    |
| Thereafter |   | 22,209 |    |
| Total      |   | $      | 284,154 |   |

 

Rent expense related to non-cancelable leases with terms exceeding oneyear was $67,111,000, $72,227,583 and $74,377,566 for the years endedDecember 31, 2003, 2004 and 2005, respectively.

 

At December 31, 2005, the Company had unused outstanding letters of creditin the amount of $600,000 required by the Iowa Racing and Gaming Commission.

 

On February 17, 2006, the Clark County Circuit Court entered judgmentof a jury verdict delivered on January 14, 2006 against ETT for $4.2 million incompensatory damages and $10.0 million in punitive damages. The jury verdictwas delivered in connection with an action brought by the family of anindividual,  that alleged that ETThad negligently retained and negligently supervised a temporary employee whoin 2001 stole a truck from ETT and, while drunk, hit and killed the individual.The Company believes the award of compensatory and punitive damages againstETT, the liability of ETT, and the amount thereof, is not supportable in eitherlaw or in fact and plans to vigorously pursue all appropriate post-trial andother remedies, including exercising its right to appeal.

 

The Company is a party to certain other claims, legal actions, andcomplaints arising in the ordinary course of business or asserted by way ofdefense or counterclaim in actions filed by the Company. Management believesthat its defenses are substantial in each of these matters and that the Company’slegal position can be successfully defended without material adverse effect onits consolidated financial position, results of operations or cash flows.

 

**11.****          RevenueDerived From Major Locations**

 

Route operations revenues at three groups of affiliated store chains inthe years ended December 31, 2003, 2004 and 2005 each accounted for more than10 percent of the Company’s total route revenues. The total of such revenueswere approximately $117,692,000, $137,468,000 and $150,933,000 in the yearsended December 31, 2003, 2004 and 2005, respectively. Each individual storechain included in an affiliated group of store chains has a separate lease withthe Company.

 

56

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**12.****          BusinessSegments**

 

The Company operates through two business segments—slot routeoperations and casino operations. The slot route operations involve the installation,operation, and service of slot machines at strategic, high traffic non-casinolocations, such as grocery stores, drug stores, convenience stores, bars, andrestaurants. Casino operations consist of two geographic areas, Nevada andOther States. The Nevada locations include the following five casinos: Terrible’sTown Casino (Henderson) in Henderson, Nevada, Terrible’s Searchlight Casino inSearchlight, Nevada and Terrible’s Town Casino and Terrible’s Lakeside Casino,both of which are located in Pahrump, Nevada, and Terrible’s Hotel & Casinoin Las Vegas, Nevada. Casinos located in other states are Terrible’s LakesideCasino in Osceola, Iowa, Terrible’s St Jo Frontier Casino in St. Joseph,Missouri and Terrible’s Mark Twain Casino in La Grange, Missouri.

 

Revenues and income for these segments are as follows (dollars inthousands):

 
| ** **                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                | ** ** | **2003**                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                                                              |       |                        |       |   |   |   |   |
| Slot route operations                                                                                     |       | $                           | 241,462    |   | $ | 292,868 |   | $ | 338,376 |   |
| Casino operations                                                                                         |       |                        |       |   |   |   |   |
| Nevada                                                                                                    |       | 67,464                      |       | 79,116 |   | 82,872 |   |
| Other States                                                                                              |       | —                      |       | — |   | 108,569 |   |
| Other—non gaming                                                                                     |       | 3,049                       |       | 3,628 |   | 6,024 |   |
|                                                                                                      |       |                        |       |   |   |   |   |
| Total net  revenues                                                                                       |       | $                           | 311,975    |   | $ | 375,612 |   | $ | 535,841 |   |
| Depreciation  and amortization                                                                            |       |                        |       |   |   |   |   |
| Slot route operations                                                                                     |       | $                           | 16,894     |   | $ | 19,362 |   | $ | 20,114 |   |
| Casino operations                                                                                         |       |                        |       |   |   |   |   |
| Nevada                                                                                                    |       | 5,577                       |       | 5,727 |   | 6,359 |   |
| Other States                                                                                              |       | —                      |       | — |   | 7,150 |   |
|                                                                                                      |       |                        |       |   |   |   |   |
| Other                                                                                                     |       | 318                         |       | 318 |   | 318 |   |
|                                                                                                      |       |                        |       |   |   |   |   |
| Total depreciation and amortization                                                                       |       | $                           | 22,789     |   | $ | 25,407 |   | $ | 33,941 |   |
| Segment  EBITDA(2)                                                                                        |       |                        |       |   |   |   |   |
| Slot route operations                                                                                     |       | $                           | 48,705     |   | $ | 64,939 |   | $ | 80,262 |   |
| Casino operations                                                                                         |       |                        |       |   |   |   |   |
| Nevada                                                                                                    |       | 16,322                      |       | 22,785 |   | 23,747 |   |
| Other states                                                                                              |       | —                      |       | — |   | 29,330 |   |
| Other and corporate(1)                                                                                    |       | (9,237                      | )          | (10,985 | ) | (11,813 | ) |
| Depreciation and amortization                                                                             |       | (22,789                     | )          | (25,407 | ) | (33,941 | ) |
| Interest expense, net of capitalized  interest (capitalized interest of $0, $0 and $101, respectively)(3) |       | (24,525                     | )          | (22,109 | ) | (36,532 | ) |
| Loss on early retirement of debt                                                                          |       | (267                        | )          | (37,991 | ) | (221 | ) |
|                                                                                                      |       |                        |       |   |   |   |   |
| Net income (loss)                                                                                         |       | $                           | 8,209      |   | $ | (8,768 | ) | $ | 50,832 |   |

 

----

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

 

57

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

 
| ** **                           | ** ** | **Mar. 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------|------------|-------------|------------|--------------|------------|-------------|------------|-----------|------------|
| **Year  Ended December 31, 2005**    |       |        |       |        |       |         |       |        |       |      |       |
| Net  revenues—Route operations  |       | $           | 81,481     |        | $          | 85,043       |       | $           | 83,512     |      | $          | 88,340 |   | $ | 338,376 |   |
| Net  revenues—Casino operations |       |        |       |        |       |         |       |        |       |      |       |
| Nevada                               |       | 21,600      |       | 20,877      |       | 19,425       |       | 20,970      |       | 82,872    |       |
| Other states                         |       | 21,138      |       | 29,312      |       | 29,492       |       | 28,627      |       | 108,569   |       |
| Net  revenues—Other             |       | 1,337       |       | 1,390       |       | 1,528        |       | 1,769       |       | 6,024     |       |
| Operating  income                    |       | 24,175      |       | 23,466      |       | 17,065       |       | 22,139      |       | 86,845    |       |
| Net income                           |       | 16,147      |       | 14,236      |       | 7,574        | (1)        | 12,875      |       | 50,832    |       |
| **Year  Ended December 31, 2004**    |       |        |       |        |       |         |       |        |       |      |       |
| Net  revenues—Route operations  |       | 68,835      |       | 72,674      |       | 73,472       |       | 77,887      |       | 292,868   |       |
| Net  revenues—Casino operations |       | 19,985      |       | 19,699      |       | 19,460       |       | 19,972      |       | 79,116    |       |
| Net  revenues—Other             |       | 823         |       | 1,003       |       | 847          |       | 955         |       | 3,628     |       |
| Operating  income                    |       | 11,632      |       | 13,805      |       | 11,766       |       | 13,776      |       | 50,979    |       |
| Net income  (loss)                   |       | 5,486       |       | (29,831     | )(2)       | 7,163        |       | 8,414       |       | (8,768    | )          |
|                                      |            |             |            |             |            |              |            |             |            |           |            |  |  |  |  |  |

 

----

(1)           Amountincludes $3.4 million loss on retirement of assets.

 

(2)           Amountincludes a loss on early retirement of debt consisting of $31.3 million in adebt prepayment penalty and $6.7 million in unamortized loan fees.

 

58

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## **Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.**

## ** **

None.

 

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

## ** **

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

As of the end of the period covered by this report (the “EvaluationDate”), we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures. Based on the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

There has been no change in our internal controls over financialreporting during the fourth quarter ended December 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reports.

 

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

## ** **

None.

 

# **PART III**

# ** **

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

 

The following information is furnished with respect to each member ofthe board of directors, each of whom, unless otherwise indicated, has served asa director continuously since the year set forth below. Directors are electedannually. Each director serves until his successor has been elected andqualified. Similar information is provided for our executive officers.

 

**Directors and Executive Officers**

 

The following is a list of our directors and executive officers:

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                  | ** ** |
|------------------------|------------|---------|------------|---------------------------------------------------------------|------------|
| Edward J.  Herbst      |       | 44      |       | Chairman of  the Board, Chief Executive Officer and President |       |
| Timothy P.  Herbst     |       | 42      |       | Executive  Vice President and Director                        |       |
| Troy D.  Herbst        |       | 39      |       | Executive  Vice President, Secretary, Treasurer and Director  |       |
| Mary E.  Higgins       |       | 48      |       | Chief  Financial Officer                                      |       |
| John N.  Brewer        |       | 48      |       | Director                                                      |       |
| John F.  O’Reilly |       | 60      |       | Director                                                      |       |

 

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

 

*Edward J. Herbst* hasserved as the Chief Executive Officer, President and Chairman of the Board ofDirectors of our company and its predecessors since their inception in 1987.Edward oversees all aspects of our business, including 

 

59

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gaming route operations, casino operations, new business initiativesand the solicitation of new contracts. Edward also serves as a Vice Presidentof Terrible Herbst, Inc. and sits as a member of U.S. Bank of Nevada’s advisoryboard of directors.

 

*Timothy P. Herbst*has served as Executive Vice President and a Director of our company and itspredecessors since their inception in 1987. Timothy is a member of ourExecutive Committee. He also serves as a Vice President of Terrible Herbst,Inc. and sits on the Board of Directors of Nevada First Bank.

 

*Troy D. Herbst* hasserved as Executive Vice President, Secretary, Treasurer and a Director of ourcompany and its predecessors since their inception in 1987. Troy is a member ofour Executive and Audit Committees. He also serves as a Vice President ofTerrible Herbst, Inc.

 

*Mary E. Higgins* hasbeen the Chief Financial Officer of our company since May 2000. Prior tojoining our company, from March 1997 to June 2000, Ms. Higgins was the ChiefFinancial Officer of Camco, Inc., a Las Vegas based specialty finance company.From August 1987 to October 1996, Ms. Higgins was the Commercial LendingDivision Manager of Southern Nevada for Wells Fargo Bank in Las Vegas.

 

*John N. Brewer* hasserved as a Director of our company since December 2001. Mr. Brewer is also amember of our Audit Committee. Mr. Brewer is a partner with the law firm ofKummer Kaempfer Bonner Renshaw & Ferrario in Las Vegas, Nevada, where hehas practiced principally in corporate and securities law since its inceptionin 1994.

 

*John F. O’Reilly* hasserved as a Director of our company since November 2004. Mr. O’Reilly is theChairman and Chief Executive 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 hehas practiced since its inception in 1977 and also serves as the Chairman andChief Executive Officer of the O’Reilly Gaming Group, in Las Vegas, Nevada,which he has served since its inception in 1999. Mr. O’Reilly is also Chairmanand an officer and/or Director of various family-owned business entities andrelated investments. Mr. O’Reilly has served as a Director of Nevada PowerCompany since 1995 and Sierra Pacific Resources and Sierra Pacific PowerCompany since 1999.

 

**Code of Ethics**

** **

We have adopted a Code of Ethics for the senior management of theCompany including the Chief Executive Officer and President, and our ChiefFinancial Officer and Chief Accounting Officer. This Code of Ethics isreasonably designed to deter wrongdoing and to promote:

 

•      honestand ethical conduct, including the ethical handling of actual or apparentconflicts of interest between personal and professional relationships;

 

•      full,fair, accurate, timely, and understandable disclosure in reports and documentsthat a registrant files with, or submits to, the SEC and in other publiccommunications made by us;

 

•      compliancewith applicable governmental laws, rules and regulations;

 

•      theprompt internal reporting of violations of the code to an appropriate person orpersons identified in the Code of Ethics; and

 

•      accountabilityfor adherence to the Code of Ethics.

 

**Committees of our Board of Directors**

** **

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

 

•      toreview reports of our independent public accountants;

 

•      toreview our financial practices, internal controls and policies with officersand key employees;

 

•      toreview such matters with our auditors to determine scope of compliance with anydeficiencies;

 

60

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•      toconsider selection of independent public accountants;

 

•      toreview related party transactions; and

 

•      tomake periodic reports on such matters to the board of directors.

 

Our Audit Committee is comprised of Messrs. Troy Herbst and JohnBrewer. Mr. Brewer is the Chairman of the Audit Committee. Our board ofdirectors has determined that Mr. Brewer is qualified as an audit committee financialexpert as defined by Item 401(h) of Regulation S-K of the Exchange Act and isindependent under the listing standards of the New York Stock Exchange.

 

The Executive Committee’s function is to review and makerecommendations to our board of directors with respect to the salaries andbonuses of our executive officers and key employees. Directors Edward Herbst,Timothy Herbst and Troy Herbst serve on the Executive Committee.

 

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

## ** **

**Executive Compensation**

** **

The following table lists all compensation we paid or accrued forservices rendered by our executive officers whose aggregate cash compensationexceeded $100,000 for the last three fiscal years:

 
| ** **                                | ** ** | ** **       | ** ** | **Annual Compensation** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------|------------|-------------------------|------------|------------|------------|
| **Name and Principal Position**           | ** ** | **Fiscal  Year** | ** ** | **Salary**              | ** ** | **Bonus**  | ** ** | **Other Annual  Compensation(2)** | ** ** | **Compensation($)—  Stockholder Tax  Distribution(3)** | ** ** |
| Edward J. Herbst(1),                      |       | 2005             |       | $                       | 538,296    |       | $          | — |   | $ | 1,857,693 |   | 2,179,250 |   |
| *Chairman of the Board, Chief Executive*  |       | 2004             |       |                    | 512,663    |       |       | — |   |   | 6,752,769 |   | 1,100,000 |   |
| *Officer and President*                   |       | 2003             |       |                    | 488,250    |       |       | — |   |   | 1,323,347 |   | 489,000 |   |
| Timothy P. Herbst,                        |       | 2005             |       | 173,644                 |       | —     |       | 1,852,519 |   | 2,179,250 |   |
| *Executive Vice President*                |       | 2004             |       | 165,375                 |       | —     |       | 6,753,126 |   | 1,100,000 |   |
|                                      |       | 2003             |       | 157,500                 |       | —     |       | 1,323,483 |   | 489,000 |   |
| Troy D. Herbst,                           |       | 2005             |       | 173,644                 |       | —     |       | 1,856,874 |   | 2,179,250 |   |
| *Executive Vice President, Secretary and* |       | 2004             |       | 165,375                 |       | —     |       | 6,753,130 |   | 1,100,000 |   |
| *Treasurer*                               |       | 2003             |       | 157,500                 |       | —     |       | 1,323,746 |   | 489,000 |   |
| Mary E. Higgins(1),                       |       | 2005             |       | 330,625                 |       | 50,000     |       | 3,699 |   | 0 |   |
| *Chief Financial Officer*                 |       | 2004             |       | 269,052                 |       | 153,000    |       | 3,262 |   | — |   |
|                                      |       | 2003             |       | 262,500                 |       | 3,000      |       | — |   | — |   |

 

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(1)   We have entered intoemployment agreements with Edward J. Herbst and Mary E. Higgins.

 

(2)   Includes stockholders’distributions and fringe benefits, such as automobiles.

 

(3)   We are an S corporation andtaxes on our income are paid by the stockholders.

 

**Employment Agreements**

** **

On August 1, 2001, we entered into an employment agreement with EdwardJ. Herbst, our Chairman, Chief Executive Officer and President, in which weagreed to pay him annual base compensation of $465,000, which may be increasedannually by five percent. This agreement commenced on August 1, 2001 andterminates on July 31, 2006. In January of 2005, we entered into an a newemployment agreement with Mary E. Higgins, our Chief Financial Officer, inwhich we agreed to pay her an annual base salary of $325,625 plus anon-discretionary bonus of $50,000 per year. That agreement terminates onDecember 31, 2008. Both of these agreements automatically renew for successiveone-year periods unless sooner terminated or unless either party to therespective agreements notifies the other in writing at least 60 days prior tothe date the respective agreement is scheduled to expire. Each employmentagreement provides that if the executive’s employment is terminated for Cause(as defined in the employment agreement), such executive will receive noseverance payment of any kind. If the executive voluntarily terminatesemployment, the executive will receive no severance payment of any kind. In theevent that we choose to terminate the executive’s employment for any reasonother than Cause, the executive will receive a severance payment equal to oneyear’s salary. The employment agreements with these executives also contain acovenant to protect confidential information.

 

61

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**Executive Compensation and Bonus Plan**

** **

The board of directors has adopted the Executive Compensation and BonusPlan for our executive officers who are also stockholders. Any payments to bemade under this plan must be approved by our independent directors. Commencingwith calendar year 2003 and each succeeding calendar year, the maximumaggregate amount of annual compensation and cash bonuses increases by 5%. Todate, there have been no cash bonuses paid to the executive officers. If anycash bonus plan is implemented it will be administered by the independentdirectors.

 

**Executive Committee Interlocks and Insider Participation**

** **

During the fiscal year ended December 31, 2005, Edward, Timothyand Troy Herbst were members of the Executive Committee of our board ofdirectors. Our executive compensation is determined by the Executive Committee,all members of which are officers, and the owners, of Herbst Gaming.

 

**Compensation of Directors**

** **

Our independent directors will receive compensation in the amount of$25,000 per year for serving on our board and in addition will receive $5,000per board meeting attended and $1,500 per committee meeting attended.

 

**Section 16(a) Beneficial Ownership Reporting Compliance**

** **

Not Applicable.

 

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

## ** **

The securities entitled to vote consist of shares of our common stock,no par value, with each share entitling its owner to one vote. Common stock isthe only outstanding class of voting securities authorized by our articles ofincorporation. The number of outstanding shares of common stock as of December31, 2005 was 300.

 
| **Name and   Address(1)**                                         | ** ** | **Number of Shares of  Common Stock  Beneficially Owned** | ** ** | **Percentage of  Outstanding Shares** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| Edward J.  Herbst                                                 |       | 100                                                       |       | 33 1/3                      | %          |
| Timothy P.  Herbst                                                |       | 100                                                       |       | 33 1/3                           | %          |
| Troy D.  Herbst                                                   |       | 100                                                       |       | 33 1/3                           | %          |
| 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 eachsuch person is c/o Herbst Gaming, Inc., 3440 West Russell Road, Las Vegas,Nevada 89118.

 

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

## ** **

We believe that all of the transactions mentioned below are on terms atleast as favorable to us as would have been obtained from an unrelated thirdparty.

 

*General.*EdwardHerbst, Timothy Herbst and Troy Herbst are brothers and are the officers anddirectors of Herbst Gaming, Inc. and its wholly-owned subsidiaries. Inaddition, they are officers and directors of Terrible Herbst, Inc. There is nocross ownership between Herbst Gaming, Inc. and Terrible Herbst, Inc. TerribleHerbst, Inc. is owned solely by Jerry and Maryanna Herbst, the parents of theHerbst brothers. Sean Higgins, our general counsel, is also the general counselof Terrible Herbst, Inc.

 

*Slot route contract with Terrible Herbst, Inc.*We rent space for certain slot machine routeoperations in convenience stores owned by Terrible Herbst, Inc., a corporationin which our owners are officers and which is owned by the father of ourowners. Rent expense of $4,754,400, $5,599,500 and $5,909,000 was incurredunder this agreement for the years ended 

 

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December 31, 2003, 2004 and 2005, respectively, for the exclusiveplacement of slot machines in the Terrible Herbst convenience store locations.This contract expires in 2010 but may be extended at our option for twoadditional terms of five years.

 

*Other arrangements 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 provide personnel to Terrible Herbst to count,maintain and safeguard large amounts of coin and currency. Terrible Herbstreimburses our expenses in providing these services. Under this servicingarrangement, we were paid approximately $205,800 for services rendered for eachof the years ended December 31, 2003, 2004 and 2005.

 

We have entered into a nonexclusive trademark and license agreementwith Terrible Herbst for the use of the Terrible Herbst brand name and itscowboy logo which extends through 2011. 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 licenseagreement, we paid approximately $1,301,000, $1,345,000 and $1,412,000 toTerrible Herbst in the years ended December 31, 2003, 2004 and 2005,respectively.

 

*Lease agreements.*Pursuantto a lease agreement that expires in 2067, including renewal periods, we leasethe real property on which our corporate headquarters is located from TheHerbst Family Limited Partnership II, or Herbst FLP II. The general partners ofthe Herbst FLP II are Jerry and Maryanna Herbst. In each of 2003, 2004 and2005, we paid $172,992 under this lease.

 

Pursuant to a lease agreement that expires in 2026, including renewalperiods, we lease the real property on which Terrible’s Town Casino in Pahrumpis located from The Herbst Family Limited Partnership. The lease requiresmonthly rental payments of $12,500. In each of 2003, 2004 and 2005, we paid$150,000 under this lease.

 

We lease land and office space in certain of our facilities to TerribleHerbst under various lease agreements with terms ranging from month-to-month to20 years. Monthly rental income is $63,500. In each of 2003, 2004 and 2005, wereceived rental income of $762,000 under these leases.

 

We lease the real property on which Terrible’s Searchlight Casino inSearchlight is located from Terrible Herbst for $15,000 per month, pursuant toa lease agreement entered into on June 30, 2002 that expires in 2022, withoptions to renew the lease for five additional successive terms of ten yearseach. Terrible Herbst leases that real property from an unrelated third party,pursuant to a lease agreement entered into on June 30, 2002 that expires in2042, including renewal periods. In each of 2003, 2004 and 2005, we paid$180,000 under this lease.

 

We lease a warehouse located in Las Vegas, Nevada for our employmentcenter and purchasing departments from the Herbst’s Grandchildren’s Trust. Thelease began in November 2002 and requires payments of $43,525 per month throughNovember 2012. In each of 2003, 2004 and 2005, we incurred rent expense of$522,300 under this lease.

 

*Related-party transactions.*Mr.Higgins is our General Counsel, the General Counsel of Terrible Herbst and thebrother of Mary E. Higgins, our Chief Financial Officer. Mr. Higgins received asalary for services rendered to us in 2003, 2004 and 2005 of $295,708, $339,394and $426,763, respectively.

 

In 2003, we entered into a slot route contract to install, operate andservice slot machines at a tavern owned by HIGCO, Inc., a company owned andoperated by Mr. Higgins and two of his brothers, G. Michael Higgins and KevinJ. Higgins. Pursuant to this revenue-sharing contract, HIGCO, Inc. paid us$27,097 in 2003, $118,756 in 2004 and $155,804 in 2005.

 

In 2004, ETT entered into a slot route contract with SamCon, Inc., acompany owned and operated by Mr. Higgins, to install, operate and serviceslot 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 $0 in 2004 and$40,800 in 2005.

 

In 2005, ETT entered into a slot route contract to install, operate andservice slot machines at a tavern owned by Prescott’s Bar LLC, a company ownedand operated by Mr. Todd Sosey, the brother in law of Troy D. Herbst, one ofthe owners of the Company. To date, the Company has received no revenue underthis contract.

 

63

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John N. Brewer, a member of our board of directors, is a partner withKummer Kaempfer Bonner & Renshaw. We retained Kummer Kaempfer Bonner &Renshaw as outside legal counsel through December 31, 2004, and KummerKaempfer Bonner & Renshaw has received fees for legal services in theamount of $251,188, $274,310, and $3,500 for 2003, 2004 and 2005, respectively.

 

*Indemnification of Directors and Officers.*Section78.7502 of the Nevada Revised Statutes, Article VIII of our articles ofincorporation and Article IX of our by-laws contain provisions forindemnification of our officers, directors, employees and agents. Our articlesrequire us to indemnify such persons to the full extent permitted by Nevadalaw. Each person will be indemnified in any proceeding if he acted in goodfaith and in a manner that he reasonably 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 as indemnification for liabilities arising under the SecuritiesAct may be permitted to directors, officers or controlling persons of theregistrants pursuant to the foregoing provisions, we have been informed that inthe opinion of the SEC such indemnification is against public policy asexpressed in the Securities Act and is, therefore, unenforceable.

 

## **Item 14. Principal Accountant Fees and Services.**

 

The aggregate accounting fees billed and services provided by ourprincipal accountants for the years ended December 31, 2004 and 2005 areas follows:

 
| ** **             | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Audit  fees(1)         |       | $          | 157,000    |       | $          | 210,100 |   |
| Audit-related  fees(2) |       | 246,952    |       | 80,870     |       |
| Tax fees               |       | —     |       | —     |       |
| All other  fees        |       | —     |       | —     |       |
|                   |       |       |       |       |       |
| Total fees             |       | $          | 403,952    |       | $          | 290,970 |   |

 

----

(1)           Represents theaggregate fees Deloitte & Touche LLP billed us in each of the last twofiscal years for professional services for the audits of our annual financialstatements and review of financial statements included in our Reports of Form10-Q or services that are normally provided by Deloitte & Touche LLP inconnection with those filings.

 

(2)           Represents theaggregate fees Deloitte & Touche LLP billed us in each of the last twofiscal years for assurance and related services that are reasonably related tothe performance of the audit, including audit-related services in conjunctionwith the acquisition of Anchor Coin, our debt offerings and the Grace Acquisition.

 

It is our practice that all services provided to us by our independentauditors be pre-approved either by the Audit Committee or by the Chairman ofthe Audit Committee pursuant to authority delegated by the Audit Committee. Nopart of the independent auditor services related to the Audit Related Fees, TaxFees, or All Other Fees listed in the table above was approved by the AuditCommittee pursuant to the exemption from pre-approval provided byparagraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

64

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# **PART IV**

 

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

 

(a)           Financial Statements

 

**1.**             List of Financial Statements

** **

Included in Part II of this report:

 

Report of Independent Registered PublicAccounting Firm

 

Consolidated Financial Statements

 

Consolidated Balance Sheets As of December31, 2004 and 2005

 

Consolidated Statements of Operations For theyears ended December 31, 2003, 2004 and 2005

 

Consolidated Statements of Stockholders’ Equity (Deficiency) For theyears ended December 31, 2003, 2004 and 2005

 

Consolidated Statements of Cash Flows For theyears ended December 31, 2003, 2004 and 2005

 

Notes to Consolidated Financial Statements

 

**2.**             Financial Statements Schedules

** **

All schedules are omitted given the absenceof conditions under which they are required to be included or because therequired information is included in the financial statements or notes thereto.

 

(c)           Exhibits

 
| **Index No.** | ** ** | **Description**                                                                                                                                                       |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **    | ** ** | ** **                                                                                                                                                            |
| 2.1(4)        |       | 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(4)        |       | 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(7)        |       | 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(7)        |       | Asset  Purchase and Sale Agreement, dated July 20, 2004, made by and between St.  Joseph Riverboat Partners and Herbst Gaming, Inc.                              |
|          |       |                                                                                                                                                                  |
| 2.5(7)        |       | Asset  Purchase and Sale Agreement, dated July 20, 2004, made by and between  Southern Iowa Gaming Company and Herbst Gaming, Inc.                               |
|          |       |                                                                                                                                                                  |
| 2.6(9)        |       | Amendment to  Asset Purchase and Sale Agreement, made by and between Mark Twain Casino,  L.L.C. and Herbst Gaming, Inc. dated as of December 2004.                    |
|          |       |                                                                                                                                                                  |
| 2.7(9)        |       | 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(9)        |       | Amendment to  Asset Purchase and Sale Agreement, made by and between Southern Iowa Gaming  Company and Herbst Gaming, Inc. dated as of December 2004.                 |

 

65

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                  |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                                                             |
| 2.9(9)        |       | 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.                                                  |
|          |       |                                                                                                                                                                                                             |
| 3.1(1)        |       | Articles of  Incorporation of Herbst Gaming, Inc.                                                                                                                                                                |
|          |       |                                                                                                                                                                                                             |
| 3.2(2)        |       | By-laws of  Herbst Gaming, Inc.                                                                                                                                                                                  |
|          |       |                                                                                                                                                                                                             |
| 4.1(8)        |       | 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(8)        |       | Specimen  Form of 7% Senior Subordinated Notes due 2014 (included as part of the  Indenture at Exhibit 4.1).                                                                                                |
|          |       |                                                                                                                                                                                                             |
| 4.3(8)        |       | Registration  Rights Agreement dated as of November 22, 2004 by and among Herbst Gaming,  Inc., the guarantors identified therein and Lehman Brothers, Inc.                                                      |
|          |       |                                                                                                                                                                                                             |
| 4.4(7)        |       | 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 8 1/8% 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++ (7)    |       | Gaming  Devices License Agreement dated October 26, 2004 by and between The Vons  Companies, Inc. and Market Gaming, Inc.                                                                                   |
|          |       |                                                                                                                                                                                                             |
| 10.3+(1)      |       | License  Agreement (Gaming Devices) dated September 16, 1998 by and between  Albertson’s, Inc. and Cardivan Company.                                                                                   |
|          |       |                                                                                                                                                                                                             |
| 10.4+(1)      |       | Settlement  Agreement dated November 18, 1999 among Cardivan Company, Corral United,  Inc., Jackpot Enterprises Inc. and Albertson’s Inc.                                                              |
|          |       |                                                                                                                                                                                                             |
| 10.5+(1)      |       | First  Amendment to Settlement Agreement dated December 22, 1999 among Cardivan  Company, Corral United, Inc., Jackpot Enterprises Inc. and Albertson’s, Inc.                                          |
|          |       |                                                                                                                                                                                                             |
| 10.6+(1)      |       | License  Agreement dated April 24, 1997 between American Drug Stores, Inc. and  Cardivan Company.                                                                                                           |
|          |       |                                                                                                                                                                                                             |
| 10.7+(1)      |       | License  Agreement dated April 24, 1997 between American Drug Stores, Inc. and  Corral United, Inc. II-13                                                                                                   |
|          |       |                                                                                                                                                                                                             |
| 10.8+(1)      |       | License  Agreement dated March 12, 1999 between Rite Aid Corporation and Cardivan  Company.                                                                                                                 |
|          |       |                                                                                                                                                                                                             |
| 10.9+(1)      |       | First Amendment  to Cardivan License Agreement dated March 27, 2000 between Rite Aid  Corporation and Cardivan Company.                                                                                     |
|          |       |                                                                                                                                                                                                             |
| 10.10+(1)     |       | License  Agreement dated March 12, 1999 between Rite Aid Corporation and Corral  Coin, Inc.                                                                                                                 |
|          |       |                                                                                                                                                                                                             |
| 10.11+(1)     |       | First  Amendment to Corral Coin License Agreement dated March 27, 2000 between  Rite Aid Corporation and Corral Coin, Inc.                                                                                  |

 

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| **Index No.** | ** ** | **Description**                                                                                                                                      |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                 |
| 10.12+(1)     |       | Gaming  Devices License Agreement dated December 20, 1999 by and between  Terrible Herbst, Inc. and E-T-T, Inc.                                 |
|          |       |                                                                                                                                                 |
| 10.13(1)      |       | Amendment to  Gaming Device License Agreement dated May , 2001 by and between E-T-T,  Inc. and Terrible Herbst, Inc.                            |
|          |       |                                                                                                                                                 |
| 10.14+(1)     |       | Agreement  dated May 1, 1998 by and between Kmart Corporation and Cardivan Company.                                                             |
|          |       |                                                                                                                                                 |
| 10.15+(1)     |       | License  Agreement dated April 24, 1997 between Lucky Stores, Inc. and Cardivan  Company.                                                       |
|          |       |                                                                                                                                                 |
| 10.16+(5)     |       | Lease and  Sublease Agreement dated July 28, 1993, by and between Smith’s  Food & Drug Centers, Inc. and Anchor Coin, as amended. |
|          |       |                                                                                                                                                 |
| 10.17(5)      |       | Hold  Harmless Agreement dated as of September 2, 1993 executed by Anchor Coin  in favor of Smith’s Food & Drug Centers, Inc.     |
|          |       |                                                                                                                                                 |
| 10.18+(5)     |       | Letter  Agreement and Consent to Assignment dated January 16, 2003.                                                                             |
|          |       |                                                                                                                                                 |
| 10.19(1)      |       | Lease Agreement  dated July 1, 1997 by and between The Herbst Family Limited Partnership  II and E-T-T Enterprises, L.L.C.                      |
|          |       |                                                                                                                                                 |
| 10.20(1)      |       | Lease  Agreement dated July 1, 1996 by and between The Herbst Family Limited  Partnership and E-T-T, Inc.                                       |
|          |       |                                                                                                                                                 |
| 10.21(1)      |       | Lease extension  dated April 30, 2001 between The Herbst Family Limited Partnership and  E-T-T, Inc.                                            |
|          |       |                                                                                                                                                 |
| 10.22(1)      |       | Lease dated  September 3, 1993 between The 1993 Samuel Josephson Revocable Family  Trust and Phoenix Associates.                                |
|          |       |                                                                                                                                                 |
| 10.23(1)      |       | Agreement  for Sale dated August 1, 1995 between Phoenix Associates and Market  Gaming, Inc.                                                    |
|          |       |                                                                                                                                                 |
| 10.24(5)      |       | Lease  Agreement dated November 27, 2002 by and between Herbst Grandchildren’s  Trust and Herbst Gaming, Inc.                              |
|          |       |                                                                                                                                                 |
| 10.25(5)      |       | Lease dated  June 2002 by and between Centennial Acquisitions, LLC and Terrible Herbst,  Inc.                                                        |
|          |       |                                                                                                                                                 |
| 10.26(5)      |       | Amendment to  Lease dated July 30, 2002 by and between Centennial Acquisitions, LLC  and Terrible Herbst, Inc.                                  |
|          |       |                                                                                                                                                 |
| 10.27(5)      |       | Lease  Agreement dated July 1, 2002 by and between Terrible Herbst, Inc. and  E-T-T, Inc.                                                       |
|          |       |                                                                                                                                                 |
| 10.28(1)      |       | Employment  Agreement with Edward J. Herbst dated August 1, 2001.                                                                               |
|          |       |                                                                                                                                                 |
| 10.29(11)     |       | Employment  Agreement with Mary E. Higgins dated January 1, 2005.                                                                                    |
|          |       |                                                                                                                                                 |
| 10.30(1)      |       | Form of  Executive Compensation and Bonus Plan.                                                                                                      |
|          |       |                                                                                                                                                 |
| 10.31(5)      |       | Code of Ethics.                                                                                                                                      |

 

67

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                                                                               |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                                                                                                                          |
| 10.32(7)      |       | Purchase  Agreement dated as of November 5, 2004 by and among Herbst Gaming, Inc., the  guarantors identified therein and Lehman Brothers Inc.                                                                                                                                |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.33(7)      |       | Amended and  Restated Credit Agreement dated as of October 8, 2004 (“Amended and  Restated Credit Agreement”) by and among Herbst Gaming, Inc., Bank of  America, N.A., as administrative agent and the other lending parties thereto.                         |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.34(7)      |       | Security Agreement dated as  of June 10, 2004 by and among Herbst Gaming, Inc, the grantors  identified therein and Bank of America, N.A.                                                                                                                                |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.35(7)      |       | Deed of Trust with  Assignment of Rents, Security Agreement and Fixture Filing (Las Vegas  Hotel/Casino Facility) dated June 10, 2004, and made by Flamingo  Paradise Gaming, LLC to PRLAP, Inc., as trustee, for the benefit of Bank of  America, N.A., as beneficiary. |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.36(7)      |       | Deed of Trust with  Assignment of Rents, Security Agreement and Fixture Filing (Henderson  Facility) dated June 10, 2004, and made by Market Gaming, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.                         |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.37(7)      |       | Deed of Trust with  Assignment of Rents, Security Agreement and Fixture Filing (Terrible’s  Lakeside Casino) dated June 10, 2004, and made by E-T-T Enterprises  L.L.C. to PRLAP, Inc., as trustee, for the benefit of Bank of America, N.A.,  as beneficiary.      |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.38(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Russell  Avenue Sublease) dated June 10, 2004, and made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.                  |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.39(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Russell  Avenue Lease) dated June 10, 2004, and made by E-T-T Enterprises L.L.C.  to PRLAP, Inc., as trustee, for the benefit of Bank of America, N.A., as  beneficiary.       |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.40(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Terrible  Lakeside Casino) dated June 10, 2004, and made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.                 |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.41(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Terrible’s  Town Pahrump) dated June 10, 2004, and made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.             |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.42(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Searchlight,  Nevada Casino) dated June 10, 2004, and made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.               |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.43(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Henderson  Facility) dated June 10, 2004, and made by Market Gaming, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.               |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.44(7)      |       | Leasehold Deed of Trust  with Assignment of Rents, Security Agreement and Fixture Filing (Training  Center Lease) dated June 10, 2004, and made by Herbst Gaming, Inc. to  PRLAP, Inc., as trustee, for the benefit of Bank of America, N.A., as  beneficiary.           |
|          |       |                                                                                                                                                                                                                                                                          |
| 10.45(7)      |       | Guaranty, dated  June 10, 2004, made by Flamingo Paradise Gaming, LLC in favor of Bank of  America, N.A., for the benefit each lender party to the Credit Agreement.                                                                                                     |

 

68

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                                                                                           |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.46(7)      |       | Guaranty, dated  June 10, 2004, made by Market Gaming, Inc. in favor of Bank of America,  N.A., for the benefit of each lender party to the Credit Agreement.                                                                                                                        |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.47(7)      |       | Guaranty, dated  June 10, 2004, made by E-T-T, Inc. in favor of Bank of America, N.A.,  for the benefit each lender party to the Credit Agreement.                                                                                                                                   |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.49(7)      |       | Guaranty, dated  June 10, 2004, made by E-T-T Enterprises L.L.C. in favor of Bank of  America, N.A., for the benefit each lender party to the Credit Agreement.                                                                                                                      |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.49(7)      |       | Guaranty, dated  June 10, 2004, made by Cardivan Company, Corral Coin, Inc., and Corral  Country Coin, Inc. in favor of Bank of America, N.A., for the benefit each  lender party to the Credit Agreement.                                                                           |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.50(7)      |       | Form of Term Note, dated  June 10, 2004, made by Herbst Gaming, Inc. to lenders with respect to  the term commitments under the Credit Agreement.                                                                                                                                    |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.51(7)      |       | Form of Swing Line Note,  dated June 10, 2004, made by Herbst Gaming, Inc. to lender with respect  to swing line loans made under the Credit Agreement.                                                                                                                              |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.52(7)      |       | Form of Revolving Note,  dated June 10, 2004, made by Herbst Gaming, Inc. to lenders with respect  to the revolving commitment under the Credit Agreement.                                                                                                                           |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.53(7)      |       | Deposit Escrow Agreement,  dated July 20, 2004, made by and between Mark Twain Casino, L.L.C.,  Herbst Gaming, Inc. and Lawyers Title of Arizona.                                                                                                                                    |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.54(7)      |       | Deposit Escrow Agreement,  dated July 20, 2004, made by and between St. Joseph Riverboat Partners,  Herbst Gaming, Inc. and Lawyers Title of Arizona.                                                                                                                                |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.55(7)      |       | Deposit Escrow Agreement,  dated July 20, 2004, made by Southern Iowa Gaming Company, Herbst  Gaming, Inc. and Lawyers Title of Arizona.                                                                                                                                             |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.56(7)      |       | Form of Indemnity Escrow  Agreement, Exhibit E, dated July , 2004, made by and between Southern  Iowa Gaming Company, St. Joseph Riverboat Partners, Mark Twain Casino,  L.L.C., Herbst Gaming, Inc. and Lawyers Title of Arizona.                                                   |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.57(10)     |       | Term Joinder Agreement  dated as of January 31, 2005, among Herbst Gaming, Inc., Bank of America,  N.A., as administrative agent and the other lending parties thereto.                                                                                                                   |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.58(10)     |       | Deed of Trust with  Assignment of Rents, Security Agreement and Fixture Filing (Buchanan County,  MO) dated January 31, 2005, and made by HGI—St. Jo to Todd W. Griffee, Esq.,  as trustee, for the benefit of Bank of America, N.A., as beneficiary.                                |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.59(10)     |       | Fee and Leasehold Deed of  Trust with Assignment of Rents, Security Agreement and Fixture Filing (Lewis  County, MO) dated January 31, 2005, and made by HGI—Mark Twain to Todd W.  Griffee, Esq., as trustee, for the benefit of Bank of America, N.A., as  beneficiary.            |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.60(10)     |       | Mortgage, Assignment of  Rents and Fixture Filing (Clarke County, IA) dated January 31, 2005, and  made by HGI—Lakeside to Bank of America, N.A.                                                                                                                                |
|          |       |                                                                                                                                                                                                                                                                                      |
| 10.61(10)     |       | First Amendment dated  January 31, 2005 to Deed of Trust with Assignment of Rents, Security  Agreement and Fixture Filing (Las Vegas Hotel/Casino Facility) made by  Flamingo Paradise Gaming, LLC to PRLAP, Inc., as trustee, for the benefit of  Bank of America, N.A., as beneficiary. |

 

69

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| **Index No.** | ** ** | **Description**                                                                                                                                                                                                                                                                          |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.62(10)     |       | First Amendment dated  January 31, 2005 to Deed of Trust with Assignment of Rents, Security  Agreement and Fixture Filing (Terrible’s Lakeside Casino) made by E-T-T  Enterprises L.L.C. to PRLAP, Inc., as trustee, for the benefit of Bank of  America, N.A., as beneficiary.     |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.63(10)     |       | First Amendment dated  January 31, 2005 to Leasehold Deed of Trust with Assignment of Rents,  Security Agreement and Fixture Filing (Russell Avenue Sublease) made by  E-T-T, Inc. to PRLAP, Inc., as trustee, for the benefit of Bank of America,  N.A., as beneficiary.                |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.64(10)     |       | First Amendment to  Leasehold Deed of Trust with Assignment of Rents, Security Agreement and  Fixture Filing (Russell Avenue Lease) dated January 31, 2005, and made by  E-T-T Enterprises L.L.C. to PRLAP, Inc., as trustee, for the benefit of Bank  of America, N.A., as beneficiary. |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.65(10)     |       | First Amendment to  Leasehold Deed of Trust with Assignment of Rents, Security Agreement and  Fixture Filing (Terrible Lakeside Casino) dated January 31, 2005, and made by  E-T-T, Inc. to PRLAP, Inc., as trustee, for the benefit of Bank of America,  N.A., as beneficiary.          |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.66(10)     |       | First Amendment to  Leasehold Deed of Trust with Assignment of Rents, Security Agreement and  Fixture Filing (Terrible’s Town Pahrump) dated January 31, 2005, and made by  E-T-T, Inc. to PRLAP, Inc., as trustee, for the benefit of Bank of America,  N.A., as beneficiary.      |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.67(10)     |       | First Amendment to  Leasehold Deed of Trust with Assignment of Rents, Security Agreement and  Fixture Filing (Searchlight, Nevada Casino) dated January 31, 2005, and made  by E-T-T, Inc. to PRLAP, Inc., as trustee, for the benefit of Bank of  America, N.A., as beneficiary.        |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.68(10)     |       | First Amendment dated January  31, 2005 to Deed of Trust with Assignment of Rents, Security Agreement and  Fixture Filing (Henderson Facility) made by Market Gaming, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary.                        |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.69(10)     |       | First Amendment dated  January 31, 2005 to Leasehold Deed of Trust with Assignment of Rents,  Security Agreement and Fixture Filing (Training Center Lease) made by Herbst  Gaming, Inc. to PRLAP, Inc., as trustee, for the benefit of Bank of America,  N.A., as beneficiary.          |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.70(10)     |       | First Amendment dated  January 31, 2005 to Leasehold Deed of Trust with Assignment of Rents,  Security Agreement and Fixture Filing (Training Center Lease) made by Market  Gaming, Inc. to PRLAP, Inc., as trustee, for the benefit of Bank of America,  N.A., as beneficiary.          |
|          |       |                                                                                                                                                                                                                                                                                     |
| 10.71(11)     |       | Amendment No. 1 to Amended  and Restated Credit Agreement dated as of August 30, 2005.                                                                                                                                                                                              |
|          |       |                                                                                                                                                                                                                                                                                     |
| 12.1*         |       | Computation of Ratio of  Earnings to Fixed Charges.                                                                                                                                                                                                                                      |
|          |       |                                                                                                                                                                                                                                                                                     |
| 21.1(9)       |       | Subsidiaries of Herbst  Gaming, Inc.                                                                                                                                                                                                                                                     |
|          |       |                                                                                                                                                                                                                                                                                     |
| 31.1*         |       | Certification of Edward J.  Herbst under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                  |

 

70

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

 

----

+                      Confidential Treatment for a portion of thisdocument has been granted pursuant to Rule 406 under the Securities Act.The omitted portions have been separately filed with the Commission.

 

++                   ConfidentialTreatment for a portion of this document has been requested pursuant toRule 406 under the Securities Act. The omitted portions have beenseparately filed with the Commission.

 

(1)                   Incorporatedherein by reference from our registration statement on Form S-4 (SECNo. 33-71094), Part II, Item 21.

 

(2)                   Incorporated herein by reference from our quarterlyreport on Form 10-Q filed with the SEC on November 14, 2002.

 

(3)                   Incorporatedherein by reference from our annual report on Form 10-K/A filed with theSEC on April 9, 2002.

 

(4)                   Incorporated herein by reference from our currentreport on Form 8-K filed with the SEC on March 10, 2003.

 

(5)                   Incorporated herein by reference from our annualreport on Form 10-K filed with the SEC on March 24, 2003.

 

(6)                   Incorporated herein by reference from our annualreport on Form 10-K/A filed with the SEC on May 20, 2004.

 

(7)                   Incorporatedherein by reference from our registration statement on Form S-4 (SEC No. 333-118068-05).

 

(8)                   Incorporatedherein by reference from our current report on Form 8-K filed with the SEC onNovember 23, 2004.

 

(9)                   Incorporatedherein by reference from our registration statement on Form S-4 (SEC No.333-122837).

 

(10)                 Incorporatedherein by reference from our annual report on Form 10-K filed with the SEC onMarch 30, 2005.

 

(11)                 Incorporatedherein by reference from our current report on Form 8-K filed with the SEC onMarch 15, 2006.

 

*                      Filed herewith.

 

71

----

 

**SIGNATURES**

 

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

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

 

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

 
| **NAME**                   | ** ** | **TITLE**                                             | ** ** | **DATE**             |
|----------------------------|------------|-------------------------------------------------------|------------|----------------------|
| ** **                 | ** ** | ** **                                            | ** ** | ** **           |
|                       |       |                                                  |       |                 |
| /s/ Edward J. Herbst       |       | Chairman of the Board, Chief Executive                |       | March 31, 2006  |
| Edward J.  Herbst          |       | Officer and President (Principal Executive   Officer) |       |                 |
|                       |       |                                                  |       |                 |
| /s/ Mary E. Higgins        |       | Chief Financial Officer (Principal                    |       | March 31, 2006  |
| Mary E.  Higgins           |       | Financial and Accounting Officer                      |       |                 |
|                       |       |                                                  |       |                 |
| /s/ Timothy P. Herbst      |       | Executive Vice President and Director                 |       | March 31, 2006  |
| Timothy P.  Herbst         |       |                                                  |       |                 |
|                       |       |                                                  |       |                 |
| /s/ Troy D.  Herbst        |       | Executive  Vice President, Secretary,                 |       |                 |
| Troy  D. Herbst            |       | Treasurer  and Director                               |       | March 31,  2006 |
|                       |       |                                                  |       |                 |
| /s/ John N.  Brewer        |       | Director                                              |       | March 31,  2006 |
| John  N. Brewer            |       |                                                  |       |                 |
|                       |       |                                                  |       |                 |
| /s/ John F.  O’Reilly |       | Director                                              |       | March 31,  2006 |
| John  F. O’Reilly     |       |                                                  |       |                 |

 

S-1

----