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

 

**FORM10-K**

 
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
| ** ** | **For the  Fiscal Year Ended December 31, 2004**                                              |
|       |                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File No. 1-14316**

 

**HERBST GAMING, INC.**

(Exact name of Registrant as specified in its charter)

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

 

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

 

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

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

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. oNot Applicable

 

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

 

The aggregate market value of the shares of voting and non-votingcommon equity held by non-affiliates of the Registrant as of December 31, 2004,based on the price at which the common equity was sold, was approximately $0.

 

Indicate the number of shares outstanding of each of the Registrant’sclasses of common stock, as of December 31, 2004.

 

Common Stock, no par value, 300 outstanding shares.

 

**Documents Incorporated byReference**

 

None.

 

 

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**TABLE OF CONTENTS**

 
| PART I   |     |                                                                                                               |
|----------|----------|--------------------------------------------------------------------------------------------------------------------|
|     | Item 1.  | Business                                                                                                           |   |
|     | 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**

 

## **Item1**.           Business.

 

**General**

 

We are a diversified gaming company that focuses on two business lines,slot route operations and casino operations. Our slot route operations involvethe exclusive installation and operation of slot machines in certain strategic,high traffic, non-casino locations, such as grocery stores, drug stores,convenience stores, bars and restaurants. We currently own and operateapproximately 6,800 slot machines in our slot route business and are one of thelargest slot machine operators in Nevada. Our casino operations in Nevadaconsist of five casinos that focus on local gaming patrons, and include theownership and operation of Terrible’s Hotel & Casino in Las Vegas, Nevadaand four other small casinos in southern Nevada operated under the Terrible’sname. Our Nevada casinos contain an aggregate of approximately 1,600 slotmachines and 15 table games. As a result of the acquisition on February 1, 2005of assets from Grace Entertainment, Inc. described below, or the GraceAcquisition, as of that date our casino operations also include the St. JoFrontier Casino in St. Joseph, Missouri, or St. Jo, the Mark Twain Casino inLaGrange, Missouri, or Mark Twain, and the Lakeside Casino Resort in Osceola,Iowa, or Lakeside Iowa. These three properties have added approximately 1,900slot machines and 63 table games to our casino business.

 

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

 

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

 

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

 

**Available Information**

 

Our Internet address is *www.herbstgaming.com*.  We make available free of charge on orthrough our Internet website our annual report on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K, and amendments to those reportsfiled or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission, or SEC.

 

**Recent Developments**

 

*The GraceAcquisition*

* *

On February 1, 2005, we consummated the purchase of assets consistingof three casinos from Grace Entertainment, Inc. for an amended aggregate cashpurchase price of approximately $266.8 million (the “Grace Acquisition”). TheGrace Acquisition allows us to expand our casino operations segment to stableand relatively protected markets outside of southern Nevada with casinos thatwe believe have significant upside potential. The Grace assets consist of theLakeside Casino Resort, located in Osceola, Iowa, or Lakeside Iowa, whichcontains 921 slot machines, 31 table games and an adjacent 60 room all-suitehotel, the Mark Twain Casino, located in LaGrange, Missouri, or Mark Twain,which contains 505 slot machines and 17 table games, and the St. Jo FrontierCasino, located in St. Joseph, Missouri, or St. Jo, which contains 487 slotmachines and 15 table games. We used proceeds from a $170.0 million 7% seniorsubordinated notes offering along with borrowings under our amended andrestated credit facility to fund the purchase price of the Grace Acquisition. Thepurchase price for Lakeside Iowa was approximately $160.8 million, which waschanged on January 25, 2005 as a result of lower than expected recent operatingresults at Lakeside Iowa, for Mark Twain was approximately $56.5 million, andfor St. Jo was approximately $49.5 million.

 

*New ParkingStructure and Casino Expansion at Terrible’s Hotel and Casino*

* *

We plan to begin construction of a three-level, 450-space parkingstructure, a casino expansion and general property renovation at Terrible’sHotel & Casino in Las Vegas in spring 2005 at a cost of betweenapproximately $15.0 to $20.0 million. Completion of the project is expected inlate 2005. The parking structure will be connected to the casino and willprovide needed additional parking for our guests, as the current surface lot isat capacity during peak hours. We believe that

 

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the availability of covered parking adjacent to the casino will drawadditional customers to the property. The casino expansion will addapproximately 200 slot machines to the casino floor.

 

*Term Loanunder Amended Credit Facility*

* *

On October 8, 2004, we and our subsidiaries entered into an amended andrestated secured credit facility, or the amended credit facility, whichconsisted initially of a $175.0 million revolving credit facility.  Pursuant to the terms of the amended creditfacility, on January 31, 2005, we incurred an additional $100.0 million termloan in order to partially fund the Grace Acquisition. The maturity date of theterm loan is January 31, 2011.

 

**Narrative Description of Business**

 

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

 

*RouteOperations*

* *

Our route operations involve the exclusive installation and operationof slot machines in chain store and street account locations. We define chainstores as grocery stores, drug stores, merchandise stores and conveniencestores, with more than five locations. Our chain store contracts are primarilywith large, national retailers, such as Albertsons, Vons, Safeway, SavOn, Smith’s,Kmart and Rite Aid, as well as Terrible Herbst gas stations and conveniencestores. Street accounts include local bars, restaurants and non-chainconvenience stores. Nevada law limits slot route operations to certain types ofnon-casino locations including bars, taverns, convenience stores, grocerystores and drug stores. Most locations are limited to offering no more than 15slot machines.

 

We generally enter into two types of route contracts—one is a spacelease arrangement and the other is a revenue-sharing arrangement. Under spacelease arrangements, which we principally enter into with chain stores, we pay afixed monthly fee for each location in which we place slot machines. Underrevenue-sharing arrangements, which we typically enter into with streetaccounts, we pay the location owner a percentage of the revenues generated byour slot machines located at that particular street account. In order to enterinto a revenue-sharing arrangement, the location owner must hold a gaminglicense. Both space lease and revenue-sharing arrangements typically involvelong-term contracts that provide us with the exclusive right to install ourslot machines at particular locations. In the case of chain stores, ourcontracts give us the exclusive right to install slot machines at stores openedin the future.

 

*CasinoOperations*

 

Our casino operations consist of five casinos in southern Nevada and,as a result of the Grace Acquisition, as of February 1, 2005, 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 assetsafter giving effect to the Grace Acquisition as of December 31, 2004:

 

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| ** **                                                              | ** ** | ** **       | ** ** | **Number of**      | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------|------------|------------------|------------|--------------------|------------|------------------|------------|
| **Property**                                                            | ** ** | **Location**     | ** ** | **Slot  Machines** | ** ** | **Table  Games** | ** ** | **Hotel  Rooms** | ** ** | **Additional** | ** ** |
| ***Herbst Gaming’s Casino Properties (as of  December 31, 2004)*** |       |             |       |               |       |             |       |   |   |   |   |
| Terrible’s Hotel & Casino                                      |       | Las Vegas,  NV   |       | 854                |       | 9                |       | 373 |   | Race and  sports book |   |
| Terrible’s Town Casino                                             |       | Pahrump, NV      |       | 393                |       | 6                |       | — |   | Race and sports  book |   |
| Terrible’s Lakeside Casino & RV Park                           |       | Pahrump, NV      |       | 279                |       | —           |       | 159 RV  spaces |   | Race and  sports book;  232-seat bingo facility;  7 acre lake |   |
| Terrible’s Casino & Bowl                                       |       | Henderson,  NV   |       | 108                |       | —           |       | — |   | 16-lane  bowling alley |   |
| Terrible’s Searchlight Casino                                      |       | Searchlight,  NV |       | 75                 |       | —           |       | — |   | — |   |
|                                                                    |       |             |       |               |       |             |       |   |   |   |   |
| ***Grace Casino Properties (acquired as of  February 1, 2005) (1)***    |       |             |       |               |       |             |       |   |   |   |   |
| Lakeside Casino Resort                                                  |       | Osceola, IA      |       | 921                |       | 31               |       | 60  65 RV  spaces |   | 10,000 sq.  ft. conference space; convenience store & gas station; 121 acres (88  acres undeveloped); 15 acre lake |   |
| Mark Twain Casino                                                       |       | LaGrange, MO     |       | 505                |       | 17               |       | — |   | — |   |
| St. Jo Frontier Casino                                                  |       | St. Joseph,  MO  |       | 487                |       | 15               |       | — |   | 2,400 sq.  ft. conference space; 40 acres (32 acres undeveloped) |   |
| Total                                                                   |       |             |       | 3,622              |       | 78               |       |   |   |   |   |

 

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(1)          Expected to be operatedunder the Terrible’s name.

 

### *Terrible’s Hotel & Casino*

### * *

Terrible’s Hotel & Casino in Las Vegas, Nevada (“Terrible’s”),opened on December 6, 2000. Terrible’s offers a buffet and a 24-hour café.There are 373 rooms with standard amenities as well as a pool and spa. Terrible’sis conveniently located approximately one mile east of the Las Vegas Strip,which we believe appeals to locals who wish to avoid the congestion of theStrip. Terrible’s favorable location has made it popular with Strip casinoemployees. The next major locals casino east of us is approximately six milesaway on Boulder Highway. Although we are not a tourist destination, we receivea certain amount of tourist traffic through our casino due to our location nearthe airport, the Strip and the Las Vegas Convention Center.

 

### *Lakeside Casino Resort*

### * *

Lakeside Casino Resort, a riverboat casino located on West Lake inOsceola, Iowa, is a facility that opened in January 2000. Lakeside Iowa offersa 60 room, all-suite hotel, modular conference and meeting facilities which canseat up to 900 people and that are used for meetings, banquets and concerts, afitness center, an outdoor pool and a gift shop. In addition, Lakeside Iowaoffers a 50-seat steakhouse, a 200-seat buffet, a 70-seat lounge and barlocated in the main lobby, two bars located in the casino, a convenience storeand gas station that are located adjacent to the casino and 65 RV spaces withutility hookups. Lakeside Iowa owns 121 acres of land, 88 acres of which areundeveloped.

 

### *Mark Twain Casino*

### * *

The Mark Twain Casino, located in a man-made basin adjacent to theMississippi River in LaGrange, Missouri, is a facility that opened in July2001. Mark Twain offers a 165-seat restaurant, an 80-seat bar and an additionalbar in the casino. The casino has a locally popular theme based on Mark Twain,who grew up in and wrote about nearby Hannibal, Missouri.

 

### *St. Jo Frontier Casino*

### * *

The St. Jo Frontier Casino, located in a man-made basin adjacent to theMissouri 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 a 187-seatbuffet, an 80-seat steakhouse, a 72-seat bar and a private banquet room. Thereare 2,400 total square feet of modular conference and meeting space. The casinoand its amenities have a locally popular Pony Express western theme which playsoff St. Joseph’s

 

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heritage as the founding location and headquarters of the Pony Express.St. Jo owns 40 acres of land, 32 acres of which are undeveloped.

 

**Financial Information**

 

The primary source of our revenue and income is from our route andcasino operations, although we view the restaurants, bars and services to beimportant adjuncts to our casino operations. The following table sets forth the contribution to total net revenues ona dollar and percentage basis of our major activities for the years endedDecember 31, 2004, 2003 and 2002.

 
|                           |   | **Years Ended December 31,**           |       |
|--------------------------------|--------|----------------------------------------|------------|
|                           |   | **2004(1)**                            |       | **2003(1)** |   | **2002** |   |
|                           |   | **Amount**                             | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** |   |
|                           |   | **(in thousands, except percentages)** |       |
| Revenues:                      |   |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Route operations(2)            |   | $                                      | 293,244    |   | 78.1 | % | $ | 241,833 |   | 77.5 | % | $ | 183,877 |   | 73.7 | % |
| Casino operations(2)           |   | 91,254                                 |       | 24.3 |   | 78,342 |   | 25.1 |   | 72,498 |   | 29.0 |   |
| Other                          |   | 3,628                                  |       | 1.0 |   | 3,049 |   | 1.0 |   | 3,078 |   | 1.2 |   |
| Total revenues(3)              |   | 388,126                                |       | 103.4 |   | 323,224 |   | 103.6 |   | 259,453 |   | 103.9 |   |
| Less promotional allowances(2) |   | (12,514                                | )          | (3.3 | ) | (11,249 | ) | (3.6 | ) | (9,802 | ) | (3.9 | ) |
| Total net revenues             |   | $                                      | 375,612    |   | 100.0 | % | $ | 311,975 |   | 100.0 | % | $ | 249,651 |   | 100.0 | % |

 

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(1)          Calendar year 2003reflects a partial year of operation of the slot route operations purchasedfrom Anchor Coin in February 2003. As a result, the results of operations forcalendar years 2004 and 2003 may not be comparable to the results of operationsincurred in earlier years.

 

(2)          Route and casinorevenues are the net difference between gaming wins and losses.  Promotional allowances consist primarily offood and beverages furnished gratuitously to customers.  The retail value of such services is includedin the respective revenue classifications and is then deducted as promotionalallowances.  See Note 1 of Notes toConsolidated Financial Statements in “Item 8. Financial Statements andSupplementary Data.”

 

(3)          Does not includeinterest income.

 

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

 

**Marketing**

 

*Nevada Market*

* *

Our marketing efforts seek to capitalize on the strong recognition andhigh level of quality and value associated with the Terrible Herbst trade nameand its cowboy logo, which are used in 77 gasoline stations and conveniencestores in southern Nevada and 7 gasoline stations and convenience stores inCalifornia and Arizona. The Terrible Herbst brand is prominently displayed inour route and casino operations. We license the Terrible Herbst trade name fromTerrible Herbst, Inc., a related party, through 2011. Subject to mutualconsent, we may extend the term of the agreement for two successive 5-yearperiods.

 

In addition, we have implemented a unique players club that rewardscustomers with points for playing at our route and casino locations as well asfor purchases made at Terrible Herbst gas stations and convenience stores inthe Las Vegas area. Points may be redeemed for cash as well as free ordiscounted rooms, food or other goods or services provided at any suchlocation. We expect to expand our rewards club to the three casinos acquired inthe Grace Acquisition.

 

*Midwest Market*

* *

Each of Lakeside Iowa, Mark Twain and St. Jo have a highly recognizablebrand name within its respective community. In addition, each of Lakeside Iowa,Mark Twain and St. Jo has implemented a slot club that rewards customers withpoints for every coin-in. Points are redeemable for vouchers that may be usedfor food, valet or retail items. We plan on expanding the scope of the existingslot club as well as the items for which points may be redeemed. Each of thethree

 

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casinos also hosts blackjack and slot tournaments as well as otherspecial events on the casino premises that seek to recognize and cultivateregular casino patrons.

 

**Business Strategy**

 

Our business strategy focuses on attracting and fostering repeatbusiness from local gaming patrons in both our route and casino operations.Local patrons are typically sophisticated gaming customers who seek convenientlocations, high payouts and a pleasant atmosphere. Because local gaming consumersrepresent high potential repeat business, generating customer satisfaction andloyalty is a critical component of our strategy.

 

Because each of Lakeside Iowa, Mark Twain and St. Jo also focuses onattracting and fostering repeat business from local gaming patrons, the GraceAcquisition allows us to add casino operations with a business strategy andcustomer profile that is consistent with our own.

 

*Route Operations*

* *

We believe that route patrons choose to play slot machines near theirhomes. We attract and retain these players by installing state-of-the-art slotmachines with popular games, offering a high level of customer service andproviding an attractive, comfortable atmosphere at our route locations. Weactively manage our route locations as if they were casinos. For example, weextend patrons’ slot play by offering free snacks and beverages at some of ourroute locations. We place our gaming machines in locations where they willreceive maximum customer traffic, generally near a store’s entrance. Inaddition, we utilize a game tracking system and other technology to monitor theplay of our patrons. Upon reviewing and analyzing our customer play, we adjustthe types of games available. By providing the most desirable mix of games atour locations, we have been able to increase the win per day at our routelocations.

 

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

 

*Casino Operations*

 

Our casino operations strategy is to offer high quality gaming, hoteland dining experiences at affordable prices. Our primary target market consistsof value oriented local middle market gaming patrons who gamble frequently. Webelieve that we attract our targeted customers and that they return to ourcasinos because of our convenient locations, great food, ample parking and highslot machine payout rates. Because locals demand variety and quality in theirslot and video poker machine play, our casino properties offer the latest inslot and video poker technology. Although perceived value initially attracts acustomer to our casino properties, actual value generates customer satisfactionand loyalty.

 

As part of our commitment to providing a quality entertainmentexperience for our patrons, we are dedicated to ensuring a high level ofcustomer satisfaction and loyalty by providing attentive customer service in afriendly, casual atmosphere. We recognize that consistent quality and acomfortable atmosphere stem from the collective care and friendliness of eachemployee.

 

### *Nevada Market*

### * *

Since we believe that a vast majority of our patrons are locals, ourmarketing efforts are primarily focused on the local population of ClarkCounty, Nevada. Based on official state estimates, Clark County’s populationhas increased from just over 741,400 residents in 1990 to approximately1,715,337 residents in 2004. In addition, Clark County’s population is expectedto increase by almost 370,000 residents, or an additional 22%, by 2010. Overthe past decade, Nevada has been one of the fastest growing states in thenation, with a majority of that growth found in Clark County, and the 2000Census ranked Nevada as the nation’s fastest growing state. Management expectsto benefit from the continued strong growth in the population of Clark County.

 

Gaming revenues have increased significantly along with populationgrowth in Clark County. According to the Center for Business and EconomicResearch at the University of Nevada Las Vegas, gaming revenues increased by2.62% during 2003 and were expected to increase 3.4% in 2004. With lowunemployment rates and a steady increase in available

 

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jobs, Clark County enjoys a per capita income higher than the nationalaverage. In 2002, the median household income in Clark County was $45,607compared with the national median of $42,409.

 

### *Midwest Market*

### * *

Lakeside Iowa, Mark Twain and St. Jo focus on locals, and each uses amix of billboard, television, radio and print advertising in both local andregional markets. Lakeside Iowa is located along Interstate 35, approximately40 miles south of Des Moines, Iowa, which has a metropolitan area with apopulation of approximately 476,000 people. Mark Twain is the only casino innortheast Missouri and is approximately 15 miles from Quincy, Illinois, whichhas an approximate population of 40,000 people and approximately 25 miles fromHannibal, Missouri, which has an approximate population of 18,000 people. St.Jo is the only casino in St. Joseph, Missouri, which has an approximatepopulation of 73,000 people, and is approximately 50 miles north of KansasCity, Missouri.

 

Our business strategy for the three casinos acquired from GraceEntertainment includes continued focus on local gaming patrons with the goal ofdriving additional customer visitation through enhanced incentive programs andimproved food and beverage operations. We intend to replace and improve theslot product offerings at the properties including replacing older, “coin-in,coin-out” slot machines with newer, “ticket-in, ticket-out” slot machines. Webelieve these machines are drivers of revenue growth and operatingefficiencies. We plan to operate each of Lakeside Iowa, Mark Twain and St. Jounder the Terrible’s name. In addition, over time we will install new signageat the properties and make general improvements and upgrades to the casinofloors.

 

**Competition**

 

*Nevada Market*

* *

Our slot route operations are subject to substantial direct competitionfor our revenue-sharing and fixed space lease locations from one large routeoperator and numerous small operators, located principally in Las Vegas,Nevada. The principal method of competition for slot route operators includesthe economic terms of the revenue-sharing or space lease arrangement, theservices provided and the reputation of the route operator. Price competitionfor revenue-sharing or space lease arrangements is intense and we believe thatprice competition among slot route operators will continue. We are one of thelargest route operators with approximately 6,800 slot machines situated inlocations outside of our casinos as of December 31, 2004.

 

With respect to our casino operations in Las Vegas, Terrible’s Hotel& Casino competes for local gaming customers with other locals-orientedcasino-hotels in Las Vegas. We do not believe that we are in direct competitionwith many of the resort-casino properties on the Las Vegas Strip, which focusprimarily on attracting tourist players. Rather, we believe that our principalcompetitors in our casino operations are the two other local casinos locatedwithin a one mile radius. We compete with these properties on the basis of thedesirability of location, payout rates, personalized approach, casinopromotions, comfort and value of restaurants and hotel rooms and the varietyand value of entertainment. The construction of new casinos or the expansion ofexisting casinos near our casinos could have a negative impact on our casinooperations.

 

Our casino operations in Pahrump, Henderson, and Searchlight, Nevadaface competition from other casinos located in the vicinity of theseproperties.

 

*Midwest Market*

* *

Each of the casinos acquired from Grace Entertainment competes forlocal gaming customers with other casinos in their respective markets.

 

Lakeside Iowa is located 40 miles southwest of Des Moines, Iowa. Theprimary competitors of Lakeside Iowa are Prairie Meadows racino and theMeskwaki Bingo Casino Hotel. The Prairie Meadows racino is locatedapproximately 60 miles from Lakeside Iowa east of Des Moines. The MeskwakiBingo Casino Hotel is located in Tama, Iowa and is approximately 110 miles fromLakeside Iowa.

 

The closest casino to Mark Twain is the Catfish Bend Casino, whichspends the summer docked in Fort Madison, Iowa and spends the winter docked inBurlington, Iowa, which are approximately 55 miles and 75 miles, respectively,from LaGrange.

 

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St. Jo primarily targets residents of St. Joseph, Missouri and is theonly casino in St. Joseph. However, St. Jo competes indirectly with fourriverboats in Kansas City, Missouri, which is approximately 50 miles to thesouth of St. Joseph, and to a lesser extent with several Native Americancasinos, none of which is closer than 45 miles from St. Joseph. Two NativeAmerican tribes are currently in negotiations with state officials in Kansas toopen an additional casino in the Kansas City market.

 

Certain states have recently legalized, and other states areconsidering legalizing, casino gaming in certain areas. In addition, statessuch as Illinois and Missouri have recently considered awarding additionalgaming licenses, and in June 2004, the Iowa Racing and Gaming Commission votedto lift a cap on casino licenses in Iowa and is currently considering newcasino license applicants. Each of the casinos to be acquired from GraceEntertainment may compete with future casino licensees.

 

**Seasonality**

 

We do not believe that our business as a whole is seasonal to anysignificant degree.

 

**Environmental Laws**

 

Compliance with federal, state and local laws enacted for theprotection of the environment to date had no material effect upon our capitalexpenditures, earnings or competitive position and we do not anticipate anymaterial adverse effects in the future based on the nature of our operations.

 

**Employees**

 

As of December 31, 2004, we employed approximately 2,200employees, and as a result of the Grace Acquisition, as of February 1, 2005, weemployed an additional approximately 1,500 employees. None of our currentemployees nor any employee hired as a result of the Grace Acquisition is orwill be covered by a collective bargaining agreement. We believe that our relationshipwith our employees is good.

 

**Regulation And Licensing**

 

*Nevada*

* *

The ownership and operation of casino gaming facilities and slot routesin Nevada are subject to the Nevada Gaming Control Act and the regulationspromulgated thereunder, or the Nevada Act, and various local regulations.

 

Our gaming operations are subject to the licensing and regulatorycontrol of the Nevada Gaming Commission, the Nevada State Gaming Control Board,the Clark County Liquor and Gaming Licensing Board, and the Cities of LasVegas, Reno, Henderson and other local regulatory authorities, or the NevadaGaming Authorities.

 

The laws, regulations and supervisory procedures of the Nevada GamingAuthorities are based upon declarations of public policy which are concernedwith, among other things:

 

•                  theprevention of unsavory or unsuitable persons from having a direct or indirectinvolvement with gaming at any time or in any capacity;

 

•                  theestablishment and maintenance of responsible accounting practices andprocedures;

 

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

 

•                  theprevention of cheating and fraudulent practices; and

 

•                  providinga source of state and local revenues through taxation and licensing fees.

 

Changes in these laws, regulations and procedures could have an adverseeffect on our gaming operations.

 

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Corporations and other entities that operate casinos or slot routes inNevada are required to be licensed by the Nevada Gaming Authorities. A gaminglicense for such activities requires the periodic payment of fees and taxes andis not transferable. Herbst Gaming is registered by the Nevada GamingCommission as a publicly traded corporation (a “registered corporation”). As aregistered corporation, we are required periodically to submit detailedfinancial and operating reports to the Nevada Gaming Commission and furnish anyother information that the Nevada Gaming Commission may require. Herbst Gaminghas been found suitable by the Nevada Gaming Commission to own the stock ofE-T-T, Inc., which is licensed by the Nevada Gaming Commission as a casino andslot route operator, Market Gaming, Inc., which is licensed as a slot routeoperator, and Flamingo Paradise Gaming, LLC, which is licensed as a casino operator.E-T-T, Inc., 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, andCorral Coin, Inc., all of which are licensed by the Nevada Gaming Authoritiesas slot route operators (all of the foregoing, including Market Gaming, Inc.,and Flamingo Paradise Gaming, LLC, are referred to as the “Gaming Subsidiaries”).No person may become a stockholder of, or receive any percentage of the profitsfrom, the Intermediary Company or any of the Gaming Subsidiaries without firstobtaining licenses and approvals from the Nevada Gaming Authorities. HerbstGaming, the Intermediary Company, and all of the Gaming Subsidiaries haveobtained from the Nevada Gaming Authorities the various registrations,approvals, permits and licenses required in order to engage in gamingactivities in Nevada.

 

The Nevada Gaming Authorities may investigate any individual who has amaterial relationship to, or material involvement with, Herbst Gaming, theIntermediary Company or the Gaming Subsidiaries in order to determine whethersuch individual is suitable or should be licensed as a business associate of agaming licensee. Officers, directors and certain key employees of HerbstGaming, the Intermediary Company, and the Gaming Subsidiaries must fileapplications with the Nevada Gaming Authorities and are required to be licensedby the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny anapplication for licensing for any cause that they deem reasonable. A finding ofsuitability is comparable to licensing, and both require submission of detailedpersonal and financial information followed by a thorough investigation.Changes in licensed positions must be reported to the Nevada GamingAuthorities, and, in addition to their authority to deny an application for afinding of suitability or licensure, the Nevada Gaming Authorities havejurisdiction to disapprove a change in a corporate position.

 

If the Nevada Gaming Authorities were to find an officer, director orkey employee unsuitable for licensing or unsuitable to continue having arelationship with us, we would have to sever all relationships with thatperson. In addition, the Nevada Gaming Commission may require us to terminatethe employment of any person who refuses to file appropriate applications.Determinations of suitability or of questions pertaining to licensing are notsubject to judicial review in Nevada.

 

Herbst Gaming, the Intermediary Company, and the Gaming Subsidiariesare required to submit detailed financial and operating reports to the NevadaGaming Commission. Substantially all material loans, leases, sales ofsecurities and similar financing transactions by Herbst Gaming, theIntermediary Company and the Gaming Subsidiaries must be reported to the NevadaGaming Commission.

 

If it were determined that Herbst Gaming, the Intermediary Company orthe Gaming Subsidiaries violated the Nevada gaming laws, our gaming licensesand registrations with the Nevada Gaming Commission could be limited,conditioned, suspended or revoked, subject to compliance with certain statutoryand regulatory procedures. In addition, Herbst Gaming, the IntermediaryCompany, the Gaming Subsidiaries and the persons involved could be subject tosubstantial fines for each separate violation of the Nevada laws at thediscretion of the Nevada Gaming Commission. Further, the Nevada GamingCommission could appoint a supervisor to operate our gaming properties and,under certain circumstances, earnings generated during the supervisor’sappointment (except for the reasonable rental value of our gaming properties)could be forfeited to the State of Nevada. Limitation, conditioning orsuspension of any gaming license or the appointment of a supervisor could (andrevocation of any gaming license would) materially adversely affect ouroperations.

 

Any beneficial holder of Herbst Gaming’s voting securities, regardlessof the number of shares owned, may be required to file an application, beinvestigated, and have his suitability as a beneficial holder of Herbst Gaming’svoting securities determined if the Nevada Gaming Commission has reason tobelieve that such ownership would otherwise be inconsistent with the declaredpolicies of the State of Nevada. The applicant must pay all costs ofinvestigation incurred by the Nevada Gaming Authorities in conducting suchinvestigation.

 

Although we do not intend to register or sell any equity securities,Nevada law requires any person who acquires more than 5% of a registeredcorporation’s voting securities to report the acquisition to the Nevada GamingCommission. Nevada law requires that beneficial owners of more than 10% of aregistered corporation’s voting securities apply to the Nevada GamingCommission for a finding of suitability within 30 days after the Chairman ofthe Nevada State Gaming Control Board mails the written notice requiring thefiling for a finding of suitability. Under certain circumstances, an

 

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“institutional investor,” as defined in the regulations of the NevadaGaming Commission, which acquires more than 10%, but not more than 15%, of ourvoting securities may apply to the Nevada Gaming Commission for a waiver ofsuch finding 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 theNevada Gaming Commission finds to be inconsistent with holding our votingsecurities for investment purposes only. Activities which are not deemed to beinconsistent with holding voting securities for investment purposes onlyinclude:

 

•                  votingon all matters 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 consistent withsuch investment intent.

 

If the beneficial holder of voting securities who must be foundsuitable is a corporation, partnership or trust, it must submit detailedbusiness and financial information including a list of beneficial owners. Theapplicant is required to pay all costs of investigation.

 

Any person who fails or refuses to apply for a finding of suitabilityor a license within 30 days after being ordered to do so by the Nevada GamingCommission or the Chairman of the Nevada State Gaming Control Board, may befound unsuitable. The same restrictions apply to a record owner if the recordowner, after request, fails to identify the beneficial owner. Any stockholderfound unsuitable and who holds, directly or indirectly, any beneficialownership of the common stock of a registered corporation beyond the period oftime as may be prescribed by the Nevada Gaming Commission may be guilty of acriminal offense. Herbst Gaming, the Intermediary Company or the GamingSubsidiaries may become subject to disciplinary action if, after receipt ofnotice that a person is unsuitable to be a stockholder or to have any otherrelationship with Herbst Gaming, the Intermediary Company or the GamingSubsidiaries, Herbst Gaming:

 

•                  paysthat person any dividend or interest upon voting securities;

 

•                  allowsthat person to exercise, directly or indirectly, any voting right conferredthrough securities held by that person;

 

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

 

•                  failsto pursue all lawful efforts to require the unsuitable person to relinquish hisvoting securities for cash at fair market value.

 

Additionally, the Clark County Liquor and Gaming Licensing Board hastaken the position that it has the authority to approve all persons owning orcontrolling the stock of any corporation controlling a gaming license.

 

Herbst Gaming may be required to disclose to the Nevada State GamingControl Board and the Nevada Gaming Commission the identities of all holders ofits debt securities. The Nevada Gaming Commission may, in its discretion,require the holder of any debt security of a registered corporation to fileapplications, be investigated and be found suitable to own the debt security ofa registered corporation. If the Nevada Gaming Commission determines that aperson is unsuitable to own a debt security, then pursuant to Nevada law, theregistered corporation can be sanctioned, including the loss of its approvals,if without the prior approval of the Nevada Gaming Commission, it:

 

•                  paysto the unsuitable person any dividend, interest, or any distributionwhatsoever;

 

•                  recognizesany voting right by the unsuitable person in connection with debt securities;

 

•                  paysthe unsuitable person remuneration in any form; or

 

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

 

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Herbst Gaming is required to maintain a current ledger in Nevada, whichmay be examined by the Nevada Gaming Authorities at any time. If any securitiesare held in trust by an agent or by a nominee, the record holder may berequired to disclose the identity of the beneficial holder to the Nevada GamingAuthorities. A failure to make such disclosure may be grounds for finding therecord holder unsuitable. We are also required to render maximum assistance indetermining the identity of the beneficial owner. The Nevada Gaming Commissionhas the power to require our securities to bear a legend indicating that thesecurities are subject to the Nevada Act. However, to date, the Nevada GamingCommission has not imposed such a requirement on Herbst Gaming.

 

Herbst Gaming may not make a public offering of securities without theprior approval of the Nevada Gaming Commission if the securities or proceedsfrom the securities are intended to be used to construct, acquire or financegaming facilities in Nevada, or to retire or extend obligations incurred forthe purposes of constructing, acquiring or financing gaming facilities.Furthermore, any approval, if granted, does not constitute a finding, recommendationor approval by the Nevada Gaming Commission or the Nevada State Gaming ControlBoard as to the accuracy or adequacy of the prospectus or the investment meritsof the securities offered. Any representation to the contrary is unlawful.

 

Changes in the control of Herbst Gaming through merger, consolidation,stock or asset acquisitions, management or consulting agreements, or any act orconduct by a person whereby that person obtains control (including foreclosureon the pledged shares), may not occur without the prior approval of the NevadaGaming Commission. Entities seeking to acquire control or ownership of aregistered corporation must satisfy the Nevada State Gaming Control Board andNevada Gaming Commission in a variety of stringent standards prior to assumingcontrol of such registered corporation. The Nevada Gaming Commission may alsorequire the stockholders, officers, directors and other persons having amaterial relationship or involvement with the entity proposing to acquirecontrol, to be investigated and licensed as part of the approval processrelating to the transaction.

 

License fees and taxes, computed in various ways depending on the typeof gaming or activity involved, are payable to the State of Nevada and to thecounties and cities in which the Nevada licensee’s respective operations areconducted. Depending upon the particular fee or tax involved, these fees andtaxes are payable either monthly, quarterly or annually and are based uponeither:

 

•                  apercentage of the gross revenues received;

 

•                  thenumber of gaming devices operated; or

 

•                  thenumber of table games operated.

 

Any person who is licensed, required to be licensed, registered,required to be registered, or is under common control with such persons, orLicensees, and who is or who proposes to become involved in a gaming ventureoutside of Nevada, is required to deposit with the Nevada State Gaming ControlBoard, and thereafter maintain, a revolving fund in the amount of $10,000 topay the expenses of investigation by the Nevada State Gaming Control Board ofthe Licensees’ participation in foreign gaming. The revolving fund is subjectto increase or decrease in the discretion of the Nevada Gaming Commission.Thereafter, Licensees are also required to comply with certain reportingrequirements imposed by the Nevada gaming laws. Licensees are also subject todisciplinary action by the Nevada Gaming Commission if they knowingly violateany laws of the foreign jurisdiction pertaining to a foreign gaming operation,fail to conduct the foreign gaming operation in accordance with the standardsof honesty and integrity required of Nevada gaming operations, engage inactivities or enter into associations that are harmful to the State of Nevadaor its ability to collect gaming taxes and fees, or employ, contract with orassociate with a person in the foreign operation who has been denied a licenseor a finding of suitability in Nevada on the ground of personal unsuitability.

 

*Missouri*

* *

On November 3, 1992, a statewide referendum authorized gaming in theState of Missouri on the Missouri and the Mississippi Rivers. On April 29,1993, Missouri enacted revised legislation (as amended, the “Missouri GamingLaw”) which amended the existing legislation. In a decision handed down onJanuary 25, 1994, the Missouri Supreme Court held that games of chance wereprohibited under the Missouri constitution. In a statewide election held onNovember 8, 1994, Missouri voters approved the adoption of an amendment to theMissouri Constitution which permits the legislature to allow games of chance tobe conducted on excursion boats and floating facilities on the MississippiRiver and the Missouri River. As a result of the amendment, games of chance arealso permitted, subject to Missouri Gaming Law. Pursuant to the Missouri GamingLaw, there

 

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are eleven operating riverboat gaming facility sites in Missouri: onein Caruthersville; one in Boonville; three in the St. Louis area; four in theKansas City area; one in LaGrange; and one in St. Joseph.

 

Opponents of gaming in Missouri have brought several legal challengesto gaming in the past and may possibly bring similar challenges in the future.On November 25, 1997, the Missouri Supreme Court overturned a state lower courtand held that a portion of the Missouri Gaming Law that authorized excursiongaming facilities in “artificial basins” up to 1,000 feet from the Mississippior Missouri rivers was unconstitutional. This ruling created uncertainty as tothe legal status of several excursion gaming riverboat facilities in the state.On November 3, 1998, a statewide referendum was held, whereby the votersamended the constitution to allow “artificial basins” for existing facilities,effectively overturning the above Missouri Supreme Court decision. There can beno assurances that any future challenges, if brought, would not furtherinterfere with gaming operations in Missouri, including the operations of St.Jo and Mark Twain.

 

Under the Missouri Gaming Law, the ownership and operation of riverboatgaming facilities in Missouri are subject to extensive state and localregulation. Herbst Gaming, HGI—St. Jo, the subsidiary of Herbst Gaming thatowns St. Jo and the current licensee and HGI—Mark Twain, the subsidiary ofHerbst Gaming that owns Mark Twain and the current licensee, any subsidiaries,and some of their officers and employees are and will be subject to specificregulations, including ongoing licensing requirements. As part of theapplication 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 Missouri Gaming Commission) must submit PersonalDisclosure Forms, which include detailed financial information, and are subjectto thorough investigations. In addition, some officers and directors of HerbstGaming, as well as Herbst Gaming itself, have submitted Personal DisclosureForms and applications to the Missouri Gaming Commission. All gaming employeesmust obtain an occupational license issued by the Missouri Gaming Commission.Suppliers are also subject to licensing requirements of the Missouri GamingCommission.

 

The operators’ licenses (or “Class A” gaming licenses) are issued throughapplication to the Missouri Gaming Commission, which requires, among otherthings:

 

•                  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;

 

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

 

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

 

•                  anaffirmative action plan for the hiring and training of minorities and women;and

 

•                  aneconomic development or impact report.

 

License fees cover all related costs of the Missouri Gaming Commissioninvestigation and are a minimum of $50,000 for the initial application and$25,000 annually thereafter. Each of Herbst Gaming, HGI—St. Jo and HGI—MarkTwain has undergone a full licensing investigation and hearing in connectionwith its licensing.

 

The Missouri Gaming Law and implementing regulations imposerestrictions on the use of and do not permit the transfer of the gaminglicenses as well as limitations on transactions engaged in by licensees. Thelicenses issued by the Missouri Gaming Commission may not be transferred norpledged as collateral. The Missouri Gaming Law regulations bar a licensee fromtaking any of the following actions without prior notice to, and approval by,the Missouri Gaming Commission:

 

•                  anytransfer or issuance of an ownership interest in a gaming licensee that is nota publicly held company;

 

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•                  anytransfer or issuance of an ownership interest of five percent or more of theissued and outstanding ownership interest of Herbst Gaming which is publiclytraded and is a holding company;

 

•                  anyprivate incurrence of debt by the licensee or any holding company of $1,000,000or more;

 

•                  anypublic issuance of debt by a licensee or its holding company; and

 

•                  defined“significant related party transactions.”

 

In addition, the licensee must notify the Missouri Gaming Commission ofother transactions that include the transfer of five percent or more of anownership interest in the licensee or holding company if publicly held and anytransaction of at least $1,000,000.

 

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

 

Missouri statutes and administrative rules contain detailedrequirements and conditions concerning the operation of a licensed excursiongaming boat facility, including but not limited to the following:

 

•                  acharge of two dollars per gaming customer per excursion that licensees musteither collect from each customer or pay itself to the Missouri GamingCommission;

 

•                  minimumpayouts;

 

•                  thepayment of a 20% tax on adjusted gross receipts;

 

•                  prohibitionsagainst providing credit to gaming customers;

 

•                  theuse of credit 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;

 

•                  thereceipt of liquor licenses from the Missouri Gaming Commission and localjurisdictions; and

 

•                  theadoption of minimum control standards for the conduct of gaming and theoperation of the facility approved by the Missouri Gaming Commission.

 

The Missouri Gaming Commission has the power, as well as broaddiscretion in exercising this power, to revoke or suspend gaming oroccupational licenses and impose other penalties for violations of the MissouriGaming Law and the rules and regulations promulgated thereunder, including withoutlimitation, forfeiture of all gaming equipment used for improper gaming andfines of up to three times a licensee’s highest daily gross receipts during thepreceding twelve months.

 

Although the Missouri Gaming Law provides no limit on the amount ofriverboat space that may be used for gaming, the Missouri Gaming Commission isempowered to impose space limitations through the adoption of rules andregulations. In addition, the Missouri Gaming Law imposes as to each customer a$500 loss limit per two-hour period established by each licensee with theapproval of the Missouri Gaming Commission. In order to establish an excursionschedule, which allows patrons to enter and exit the gaming floor during theexcursion the licensee must prove to the satisfaction of the Missouri GamingCommission that it can enforce the $500 loss limit.

 

In addition, the Missouri Gaming Commission is empowered to determineon a city and county-specific basis where “dockside” or permanently-dockedgaming is appropriate and may be permitted. The Missouri Gaming Commission hasauthorized all eleven licensed sites to operate all or a portion of theirfacilities on a continuously docked basis. On February 23, 2000, the MissouriGaming Commission granted Mark Twain Casino, L.L.C., from which Herbst Gamingis purchasing Mark Twain, the authority to permanently dock the excursiongambling riverboat facility known as the “Mark Twain Casino.” On

 

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February 15, 1996, the Missouri Gaming Commission granted St. JosephRiverboat Partners, from which Herbst Gaming is purchasing St. Jo, theauthority to permanently dock the excursion gambling riverboat facility knownas the “Biloxi Bell, II.”

 

*Iowa*

* *

In 1989, the State of Iowa legalized riverboat gaming on theMississippi River and other waterways located in Iowa. Under Iowa law, alicense to conduct gaming may be issued in a county only if the countyelectorate has approved gaming. The electorate of Clarke County, Iowa, approvedgaming on February 28, 1995 by referendum. Gaming conducted by the LakesideCasino Resort was approved by referendum on November 18, 1997. In addition, areferendum must be held every eight years in each of the counties wheregambling games are conducted and the proposition to continue to allow gamblinggames in such counties must be approved by a majority of the county electoratevoting on the proposition. Such a referendum took place on November 5, 2002with approximately 80% of the electorate voting on the proposition favoringcontinued gaming on riverboats in Clarke County. The next referendum isscheduled for 2010. If any reauthorization referendum is defeated, 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 granting of licenses to non-profitcorporations that, in turn, are permitted to enter into operating agreementswith qualified persons who also actually conduct riverboat gaming operations.Such operators must likewise be approved and licensed by the Iowa Racing andGaming Commission (the “Iowa Gaming Commission”).

 

In July 1997, Clarke County Development Corporation, a non-profitcorporation organized for the purpose of facilitating riverboat gaming inOsceola, Iowa, entered into an operator’s contract, since amended, for LakesideIowa for a term of up to 50 years. Under the operator’s contract, as amended,Clarke County Development Corporation is to be paid a monthly fee equal to 1.5%of the adjusted gross gaming revenue of Lakeside Iowa. Further, pursuant to adock site agreement executed in August 1997 (which also has a term of up to 45years), Lakeside Iowa is required to pay a monthly fee to the City of Osceolaand the Water Works Board of Trustees equal to 1.25% of the adjusted grossgaming revenue of Lakeside Iowa and an annual fee, to be paid in equal monthlyinstallments, equal to approximately $160,000, with such amount to increaseeach year by 1% until termination of the lease. In September 2004, we enteredinto an agreement whereby upon the later of our obtaining approval from theIowa Gaming Commission or our closing the transactions contemplated withSouthern Iowa Gaming Company, Southern Iowa will immediately pay $3.2 millionto the City of Osceola. Beginning eight years from the date of such payment andcontinuing for so long as the operator’s contract, as amended, remains ineffect, we will pay the City of Osceola an additional 1% of annual adjustedgross receipts from Lakeside Iowa. We may, however, offset up to 50% of this 1%annual payment with any expenditures we have made for capital improvements(excluding gaming devices and improvements to the gaming facility, casinofloor, development of a truck stop and general repairs and maintenance).

 

Iowa law permits gaming licensees to offer unlimited stakes gaming ongames approved by the Iowa Gaming Commission on a 24-hour basis. Docksidecasino gaming is authorized by the Iowa Gaming Commission and the IowaLegislature, subject to certain limitations not applicable to Lakeside Iowa,eliminated the requirement that gaming licensees cruise, effective May 6, 2004.The legal age for gaming is 21.

 

All Iowa licenses were approved for renewal at the March 4, 2004 IowaGaming Commission meeting. These licenses are not transferable and will need tobe renewed in March 2005 and prior to the commencement of each subsequentannual renewal period.

 

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

 

Gaming licenses granted to individuals must be renewed every year, andlicensing authorities have broad discretion with regard to such renewals.Licenses are not transferable. The Iowa gaming operations must submit detailedfinancial and

 

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operating reports to the Iowa Gaming Commission. Certain contracts oflicensees in excess of $100,000, that exceed three years in term or thatinvolve related parties must be submitted to and approved by the Iowa GamingCommission.

 

Certain officers, directors, managers and key employees of the Iowagaming operations are required to be licensed by the Iowa Gaming Commission.Employees associated with gaming must obtain work permits that are subject toimmediate suspension under specific circumstances. In addition, anyone having amaterial relationship or involvement with the Iowa gaming operations may berequired to be found suitable or to be licensed, in which case those personswould be required to pay the costs and fees of the Iowa Gaming Commission inconnection with the investigation. The Iowa Gaming Commission may deny anapplication for a license for any cause deemed reasonable. In addition to itsauthority to deny an application for license, the Iowa Gaming Commission hasjurisdiction to disapprove a change in position by officers or key employeesand the power to require the Iowa gaming operations to suspend or dismissofficers, directors or other key employees or sever relationships with otherpersons who refuse to file appropriate applications or whom the Iowa GamingCommission finds unsuitable to act in such capacities.

 

The Iowa Gaming Commission may revoke a gaming license if the licensee:

 

•                  hasbeen suspended from operating a gaming operation in another jurisdiction by aboard or commission of that jurisdiction;

 

•                  hasfailed to demonstrate financial responsibility sufficient to meet adequatelythe requirements of the gaming enterprise;

 

•                  isnot the true owner of the enterprise;

 

•                  hasfailed to disclose ownership of other persons in the enterprise;

 

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

 

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

 

•                  failsto meet a monetary obligation in connection with an excursion gaming boat;

 

•                  pleadsguilty to, or is convicted of a felony;

 

•                  loansto any person, money or other thing of value for the purpose of permitting thatperson to wager on any game of chance;

 

•                  isdelinquent in the payment of property taxes or other taxes or fees or a paymentof any other contractual obligation or debt due or owed to a city or county; or

 

•                  assigns,grants or turns over to another person the operation of a licensed excursionboat (this provision does not prohibit assignment of a management contractapproved by the Iowa Gaming Commission) or permits another person to have ashare of the money received for admission to the excursion boat.

 

If it were determined that the Iowa Gaming Laws were violated by alicensee, the gaming licenses held by a licensee could be limited, madeconditional, suspended or revoked. In addition, the licensee and the personsinvolved could be subject to substantial fines for each separate violation ofthe Iowa Gaming Laws in the discretion of the Iowa Gaming Commission.Limitations, conditioning or suspension of any gaming license could (and revocationof any gaming license would) have a material adverse effect on operations.

 

The Iowa Gaming Commission may also require any individual who has amaterial relationship with the Iowa gaming operations to be investigated andlicensed or found suitable. The Iowa Gaming Commission, prior to theacquisition, must approve any person who acquires 5% or more of a licensee’sequity securities in the event that approval by the Iowa Gaming Commission isnot otherwise contemplated by the operative acquisition document. The applicantstockholder is required to pay all costs of this investigation.

 

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Gaming taxes approximating 22% of the adjusted gross receipts above$3,000,000 will be payable by each licensee on its operations to the State ofIowa. In addition, there will be two prepaid assessments due on June 1, 2005and June 1, 2006 in an amount equal to 2.152% of each licensee’s estimatedadjusted gross receipts for fiscal year 2004. These assessments will be offsetby future state gaming taxes paid by each licensee with a credit for 20% of theassessments paid allowed each year beginning July 1, 2010 for five consecutiveyears. The state of Iowa is also reimbursed by the licensees for all costsassociated with monitoring and enforcement by the Iowa Gaming Commission andthe Iowa Department of Criminal Investigation.

 

**Risk Factors**

 

The following risk factors, among others, could cause our financialperformance to differ significantly from the goals, plans, objectives,intentions and expectations expressed in this report. If any of the followingrisks and uncertainties or other risks and uncertainties not currently known tous or not currently considered to be material actually occur, our business,financial condition or operating results could be harmed substantially.

 

*Risks Related to Our Company*

* *

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

* *

We conduct our route operations under contracts with third parties.Both contracts with chain and street customers are renewable at the option ofthe owner of the respective chain store or street account. As our routecontracts expire, we are required to compete for renewals. All of the contractswill expire prior to maturity of the notes. Although we have historically beenable to renew our contracts, if we are unable to renew a material portion ofour route contracts because our competitors offer more favorable terms or forany other reason, our business, financial condition and results of operationswould be adversely affected. We cannot assure you that our current chain orstreet contracts will be renewed.  If weare unable to renew any of these contracts, our business, financial conditionand results of operations could be materially affected.

 

*We mayexperience a loss of market share.*

* *

The gaming industry is highly competitive. Our slot-route operationsare subject to substantial direct competition for our revenue-sharing and fixedspace lease locations from one large route operator and numerous smalloperators, located principally in Las Vegas, Nevada. With respect to our casinooperations in Nevada, we compete for local gaming customers with other locals-orientedcasino-hotels and other casinos located in the vicinity of these properties.The three casinos that we acquired pursuant to the Grace Acquisition 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 expansion ofroute operations or casino gaming in or near any geographic area from which weattract or expect to attract a significant number of our customers could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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

* *

We pay substantial taxes and fees in connection with our operations asa gaming company. From time to time, federal, state and local legislators andother government officials have proposed and adopted changes in tax laws, or inthe administration of those laws affecting the gaming industry. It is notpossible to determine the likelihood of changes in tax laws or in theadministration of those laws. If adopted, changes to applicable tax laws couldhave a material adverse effect on our business, financial condition and resultsof operations. For example, during the 2003 Nevada state legislative session,there was an increase in the payroll taxes to 0.7% of payroll, an increase ofthe gross casino gaming taxes from 6.25% to 6.75% and a 33% increase in feesimposed on the operation of slot machines located in a restricted location (15machines or less). In addition, in April 2004, the Iowa state legislature approvedan increase on the maximum tax rate on gaming revenues of riverboat casinosfrom 20% to 22%, effective July 1, 2004.

 

*Our operationscould be adversely affected due to the adoption of certain anti-smokingregulations.*

* *

There are currently two competing initiative petitions in the State ofNevada which have obtained the requisite number of signatures to be certifiedby the Nevada Secretary of State, but which have not yet been certified. Thefirst initiative would prohibit smoking in indoor places of employmentincluding, but not limited to, bars, taverns, grocery stores, drug stores andconvenience stores, as well as give future control over smoking regulation toindividual counties or municipalities. The second initiative bans smoking inrestaurants and other locations frequented by minors and vests all futuresmoking regulation with the Nevada State Legislature.

 

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After certification by the Nevada Secretary of State, each petitionwill be submitted to the Nevada State Legislature which will then have 40 daysto consider, amend, reject or pass either petition in its entirety. If theNevada State Legislature passes either measure, such measure will immediatelybecome law. However, each measure certified by the Nevada Secretary of State,whether or not passed by the Nevada Secretary Legislature, will be subject to apublic referendum in 2006. The measure that garners the most votes in 2006 willbecome law, assuming that such measure wins a majority of votes cast.

 

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

 

*We faceextensive regulation from gaming and other government authorities.*

* *

As owners and operators of gaming facilities, we are subject toextensive state and local regulations in Nevada, and as a result of the GraceAcquisition, Iowa and Missouri. State and local government authorities in suchjurisdictions, including the Nevada Gaming Commission, the Iowa Racing andGaming Commission and the Missouri Gaming Commission, require us and oursubsidiaries to obtain gaming licenses and require our officers, key employeesand business entity affiliates to demonstrate suitability to hold gaminglicenses, and such state and local government authorities may limit, condition,suspend or revoke a license for any cause deemed reasonable by the respectivelicensing agency. They may also levy substantial fines against us or oursubsidiaries or the individuals involved in violating any gaming laws orregulations. The violation of any such state and local regulations could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

In Nevada, the Nevada Gaming Commission could request that a statecourt appoint a supervisor to operate any non-restricted gaming establishmentoperated by us if the licenses held by us are revoked, suspended or otherwiselapse. In such extraordinary circumstances, earnings generated by gamingoperations during a supervisor’s appointment (except for reasonable rentalvalue) could be forfeited to the State of Nevada. The occurrence of any of theseevents could have a material adverse effect on our business, financialcondition and results of operations.

 

Any future public offering of debt or equity securities by HerbstGaming will require review of and prior approval by the Nevada Gaming Commission,the Iowa Racing and Gaming Commission and the Missouri Gaming Commission. TheMissouri Gaming Commission also requires notice of the intended incurrence ofany private debt exceeding $1,000,000 and reserves the right to elect to haveprior review and approval.

 

We are subject to a variety of other rules and regulations, includingzoning, environmental, construction and land-use laws, regulations and permitsthat govern the serving of alcoholic beverages. Any changes to these laws couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

From time to time, legislators and special interest groups haveproposed legislation that would expand, restrict or prevent gaming operationsin the jurisdictions in which we operate. Any such change to the regulatoryenvironment or the adoption of new federal, state or local governmentlegislation could have a material adverse effect on our business.

 

For a more complete summary of regulations that affect our business,see “Item 1.  Business–Regulation andLicensing.”

 

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

* *

Our success is substantially dependent upon the efforts and skills ofEdward J. Herbst, our chairman of the board, chief executive officer andpresident, and Mary E. Higgins, our chief financial officer. We have enteredinto employment agreements with Mr. Herbst and Ms. Higgins through 2006. 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 executives andother employees that we need. An inability to hire quality employees could havea material adverse effect on our business, financial condition and results ofoperations.

 

*Our executiveofficers and members of our board of directors own 100% of the company andconflicts of interests could arise.*

* *

Edward, Timothy and Troy Herbst own all of the outstanding stock ofHerbst Gaming. This concentration of ownership gives them the power to controlthe outcome of all matters requiring stockholder approval, including theelection of all directors, and will give them the power to hinder or delay achange of control of Herbst Gaming. In addition, Edward,

 

16

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Timothy and Troy Herbst are all officers and directors of TerribleHerbst, Inc., a company owned by parties related to us. We currently engage intransactions with Terrible Herbst, Inc. and plan to continue to do so in thefuture. These related-party transactions could lead to potential conflicts ofinterest. See “Item 13.  CertainRelationships and Related Transactions.”

 

*Our businessrelies heavily on certain markets and an economic downturn in these marketscould have a material adverse effect on our results.*

* *

Our Nevada properties depend on our customers living principally insouthern Nevada, an area that has recently experienced significant populationgrowth. However, we cannot be certain that this growth will continue. Inaddition, our Nevada properties are dependent on Nevada’s economy, particularlythe economy of southern Nevada. An economic downturn in southern Nevada couldhave a material adverse effect on our operating results, and we cannot assureyou that the economy in southern Nevada will continue to grow.

 

Lakeside Iowa, Mark Twain and St. Jo, which we took possession of atthe closing of the Grace Acquisition, depend on customers living principally insouth central Iowa and northeast and northwest Missouri, respectively, and onthe economy of those areas. An economic downturn in such areas could have amaterial adverse effect on our operating results.

 

Our properties use significant amounts of electricity, natural gas andother forms of energy. While no shortages of energy have been experienced, thesubstantial increases in the cost of electricity, natural gas and gasoline inthe United States in general, and in southern Nevada, south central Iowa andnortheast and northwest Missouri in particular, may negatively affect ouroperating results. In addition, further energy price increases in such areascould result in a decline in disposable income of potential customers and acorresponding decrease in visitation and spending at our route and casinooperations, which could negatively impact revenues.

 

Gaming industry revenues are sensitive to general economic conditionsand are influenced by consumer confidence in the economy and other factors. Theterrorist attacks of September 11, 2001, ongoing terrorist and war activitiesin the United States and elsewhere generally have had a negative impact onleisure expenditures, including gaming. An extended period of reduceddiscretionary spending could significantly harm our operations and we may notbe able to lower our costs rapidly enough, or at all, to offset a decrease inrevenues.

 

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

* *

We currently primarily rely on International Game Technology, Inc. forour supply of slot machines and related technology, which are only availablefrom a limited number of suppliers. We cannot assure you that we can obtainslot machines or related technology on a cost-effective basis. As a result, wemay be forced to incur significant unanticipated costs to secure alternativethird party suppliers or adjust our operations.

 

*Risks Related to the GraceAcquisition*

* *

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

* *

As a result of the Grace Acquisition, we own and operate riverboat anddockside casino facilities. Dockside and riverboat facilities are subject torisks in addition to those associated with land-based casinos, including lossof service due to casualty, mechanical failure, extended or extraordinarymaintenance, flood or other severe weather. Reduced patronage and the loss of adockside or riverboat casino from service for any period of time couldadversely affect our results of operations.

 

Although not required to cruise, to the extent that the casino boat ofthe Lakeside Iowa, the USS Osceola, cruises, it and the gaming and supportfacilities located on board must comply with U.S. Coast Guard requirements asto boat design, on-board facilities, equipment, personnel and safety orrequirements of state and local law, including the requirements of state gamingauthorities, or both. If the USS Osceola fails to meet these requirements, wemight be forced to stop operating the Lakeside Iowa. The USS Osceola must holda Certificate of Inspection or must be approved by the American Bureau ofShipping for stabilization and flotation, and may also be subject to localzoning and building codes, as well as additional requirements mandated by statelaw or by the gaming regulatory authority with jurisdiction over thefacilities. The U.S. Coast Guard requirements establish design standards, setlimits on the operation of the cruising vessels and require individuallicensing of all personnel involved with the operation of the cruising vessels.Loss of a Certificate of Inspection or American Bureau of Shipping approval orother approval mandated by state law or by the gaming regulatory authority withrespect to the USS Osceola would preclude its use as a floating casino.

 

17

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*The failure toachieve the anticipated benefits of the Grace Acquisition could adverselyimpact our business.*

* *

Taken as a whole, the Grace Acquisition is the largest acquisition wehave completed and is our first acquisition of casino properties locatedoutside of Nevada. The complex process of integrating each of Lakeside Iowa,Mark Twain and St. Jo into our operations will require significant resourcesand failure to achieve the anticipated benefits of any of the purchases or tosuccessfully integrate any of the operations could harm our business andresults of operations.

 

We will incur significant capitalized costs and commit significantmanagement time in integrating operations, information, communications andother systems, among other items. The integration of these businesses willcause us to incur cash outflows in completing the integration process, such asfees and expenses of professionals and consultants involved in completing theintegration process, integrating technology, and other transaction costsassociated with the purchase, including financial advisor, attorney, accountantand other fees.

 

*Difficultiesin integrating past or future acquisitions could adversely affect our business.*

* *

We have spent and may continue to spend significant resourcesidentifying businesses to acquire. The efficient and effective integration ofany businesses we acquire into our organization is critical to our growth. Ouracquisitions of Lakeside Iowa, Mark Twain and St. Jo, and any futureacquisitions or mergers, involve numerous risks including difficulties inintegrating the operations, technologies and personnel of the acquired companies,the diversion of management’s attention from other business concerns and thepotential loss of key employees of the acquired companies and businesses.Additional risks include:

 

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

 

•                  difficultiesattracting key personnel;

 

•                  lossof customers; and

 

•                  unanticipatedincompatibility of logistics, marketing and administration methods.

 

Failure to achieve the anticipated benefits of any of our past, pendingand future acquisitions or mergers or to successfully integrate the operationsof the companies we acquire could also harm our business, results of operationsand cash flows. Additionally, we cannot assure you that we will not incurmaterial charges in future quarters to reflect additional costs associated withany future acquisitions we may make.

 

*As we expandour casino operations into states other than Nevada, we will, among otherthings, incur additional management costs, face different regulatoryrequirements and be affected by different economic environments and tax laws,any of which could adversely affect our business.*

* *

Historically, our route and casino operations were located exclusivelyin Nevada. However, the Grace Acquisition has resulted in casino operations inIowa and Missouri. In addition, in the future we may consummate additionalacquisitions outside of Nevada. As we begin to expand our operations in otherstates, we will face risks that we would not have faced had our operationsremained solely in Nevada. Certain aspects inherent in maintaining operationsin multiple jurisdictions could negatively impact our business results,including:

 

•                  costsand difficulties in staffing and managing operations outside of Nevada;

 

•                  regulatoryrequirements and changes in regulatory requirements;

 

•                  localpolitical and economic conditions; and

 

•                  changesto applicable tax laws.

 

18

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*Risks Related to Our OutstandingIndebtedness*

* *

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

* *

We have a significant amount of indebtedness.  The following chart shows certain importantstatistics and is presented on a pro forma basis for the Grace Acquisition andthe borrowings related thereto.

 
| ** **                                | ** ** | **Pro Forma as of and for the  Twelve Months ended  December 31, 2004** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands, except ratio)**                                             | ** ** |
| Long-term debt, including current portion |       | $                                                                            | 519,400    |   |
| Stockholders’ deficiency             |       | $                                                                            | 30,800     |   |
| Ratio of earnings to fixed charges(1)     |       | 2.4                                                                          | x          |

 

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(1)          For purposes of determiningthe ratio of earnings to fixed charges, earnings are defined as earnings beforefixed charges and loss on early retirement of debt (other than capitalizedinterest). Fixed charges consist of interest expensed and capitalized.

 

Our substantial indebtedness could have important consequences. Forexample, it could:

 

•                  makeit more difficult to satisfy our obligations with respect to the instrumentsgoverning our outstanding indebtedness;

 

•                  increaseour vulnerability to general adverse economic and industry conditions;

 

•                  requireus to dedicate 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;

 

•                  limitour flexibility in planning for, or reacting to, competitive pressures andchanges in our business and the industry in which we operate;

 

•                  placeus at a competitive disadvantage compared to our competitors that have lessdebt; and

 

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

 

Furthermore, all of our indebtedness under our amended credit facilitywill bear interest at variable rates. If these rates were to increasesignificantly, our ability to borrow additional funds may be reduced and therisks related to our substantial indebtedness would intensify.

 

*If interestrates rise, the amount of interest paid by us under our amended credit facilitywill increase.*

* *

On October 8, 2004 we entered into an amendment and restatement of ourcredit facility and on January 31, 2005 we consummated the borrowing of a$100.0 million dollar term loan under our amended credit facility. The intereston revolving borrowings and on the additional term loan under our amendedcredit facility is based on a floating rate (a base rate or LIBOR, at ouroption), plus a leverage grid-based variable amount. At December 31, 2004 wehad no floating rate debt outstanding. However, immediately after the closingof the Grace Acquisition in February 2005, the principal amount of the relatedborrowings under our amended credit facility was approximately $189.0 million.We cannot predict the interest rate environment or guarantee that interestrates will not rise in the near future. At the above level of borrowings, ahypothetical 1.0% increase in LIBOR would result in an approximately $1.9million annual increase in interest expense. Should interest rates risesignificantly, our ability to satisfy our obligations under the instrumentsgoverning our outstanding indebtedness will be adversely affected.

 

19

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*Despite our significantindebtedness, we and our subsidiaries may still be able to incur substantiallymore debt, which could further exacerbate the risks described above.*

* *

We will have the right to incur substantial additional indebtedness inthe future. The terms of our amended credit facility and the indenturesgoverning our indebtedness restrict our ability to incur additionalindebtedness, but do not prohibit us from doing so. Subject to satisfying theconditions for borrowing under our amended credit facility, we could borrow upto the committed amount in full. If new debt is added to our current debtlevels, the related risks that we now face could intensify.

 

*We willrequire a significant amount of cash to service our indebtedness. Our abilityto generate cash depends on many factors beyond our control.*

* *

Our ability to make payments on and to refinance our indebtedness, andto fund our operations will depend upon our ability to generate cash in thefuture. This, to a certain extent, is subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond ourcontrol. We cannot assure you that our business will generate sufficient cashflow from operations or that future borrowings will be available to us inamounts sufficient to enable us to pay our indebtedness, or to fund our otherliquidity needs. In addition, if we consummate significant acquisitions in thefuture, our cash requirements may increase significantly. If we are unable togenerate sufficient cash flow and are unable to refinance or extend outstandingborrowings, we may have to:

 

•                  reduceor delay planned expansion and capital expenditures;

 

•                  sellassets;

 

•                  restructuredebt; or

 

•                  raiseadditional capital.

 

Furthermore, we may need to refinance all or a portion of our debt onor before maturity. We cannot assure you that we will be able to refinance anyof our debt on commercially reasonable terms or at all.

 

*Ourindebtedness imposes restrictive covenants on us.*

* *

Our amended credit facility and the indentures governing our 8 1/8% senior subordinated notes due 2012 and our 7%senior subordinated notes due 2014 impose operational and financialrestrictions on us and our subsidiaries. The restrictions imposed under thesedebt instruments include, among other obligations, limitation on our and oursubsidiaries’ ability to:

 

•                  incuradditional debt;

 

•                  makepayments on subordinated obligations;

 

•                  makedividends or distribution and repurchase stock;

 

•                  makeinvestments;

 

•                  grantliens on our property to secure debt;

 

•                  enterinto certain transactions with affiliates;

 

•                  sellassets or enter into mergers or consolidations;

 

•                  sellequity interests in our subsidiaries;

 

•                  createdividend and other payment restrictions affecting subsidiaries;

 

•                  changethe nature of our lines of business;

 

20

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•                  makecapital expenditures; and

 

•                  designaterestrictions and unrestricted subsidiaries.

 

Our amended credit facility imposes various customary affirmativecovenants on us and our subsidiaries, including among others, reportingcovenants, covenants to maintain insurance, comply with laws, maintainproperties and other covenants customary in senior credit financings of thistype. In addition, our amended credit facility will require us to comply withvarious restrictive financial covenants, including interest coverage and debtto operating cash flow ratios, and capital spending limits.

 

Our ability to comply with these provisions may be affected by generaleconomic conditions, industry conditions, and other events beyond our control.As a result, we cannot assure you that we will be able to comply with thesecovenants. Our failure to comply with the covenants contained in theinstruments governing our indebtedness, including our amended credit facilityand the indentures governing our outstanding senior subordinated notes,including failure as a result of events beyond our control, could result in anevent of default, which could materially and adversely affect our operationresults and our financial condition.

 

If there were an event of default under one of our debt instruments,the holders of the defaulted debt could cause all amounts outstanding withrespect to that debt to be due and payable, subject to applicable graceperiods. This could trigger cross-defaults under our other debt instruments. Wecannot assure you that our assets or cash flow would be sufficient to fullyrepay borrowings under our outstanding debt instruments if accelerated upon anevent of default, or that we would be able to repay, refinance or restructurethe payments on any of those debt instruments.

 

## **Item2**.           Properties.

 

Including properties acquired as a result of the Grace Acquisition, ourprincipal properties consist of the following:

 

**Nevada**

 

*Company Headquarters andWarehouse.*

* *

We lease a four-acre site in Las Vegas and own the 50,000 square footbuilding where our executive offices and operational headquarters are located.This facility houses our executive and administrative offices and is used forsub-assembly and warehouse space for our slot route operations. The leasebetween the Herbst Family Limited Partnership II, a Nevada limited partnership,and us ends on June 30, 2017, with options to renew the lease for fiveadditional successive terms of ten years each.

 

*Office Space and ConvenienceStore.*

* *

We lease a three-acre site and a 50,000 square foot building where ouremployment center and purchasing department are located. The lease between theHerbst Grandchildren’s Trust, a trust governed under the laws of the State ofNevada and a related party, and us ends on November 27, 2012, with options torenew the lease for five additional successive terms of ten years each.

 

*Terrible’s Searchlight Casino.*

* *

We lease the land on which Terrible’s Searchlight Casino is located inSearchlight, Nevada. The lease ends on June 30, 2022, with options to renew thelease for five additional successive terms of ten years each.

 

*Terrible’s Hotel & Casino.*

* *

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

 

*Terrible’s Town Casino.*

* *

Terrible’s Town Casino in Pahrump, Nevada, which is approximately 60miles from Las Vegas, comprises an approximately 30,000 square foot building onapproximately three acres. We lease the land from the Herbst Family Limited

 

21

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Partnership I, a Nevada limited partnership and a related party. Thelease expires on June 30, 2006. We also have an option to further extend thelease for four additional successive terms of five years each.

 

*Terrible’s Lakeside Casino &RV Park.*

* *

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

 

*Terrible’s Town Casino &Bowl.*

* *

We lease the land and building on which our Terrible’s Town Casino& Bowl is located in Henderson, Nevada. The lease ends on February 9, 2014,with options to renew the lease for five additional successive terms of tenyears each. We own a 0.8-acre lot adjacent to Terrible’s Town Casino & Bowlthat we are holding for possible future development.

 

**Midwest**

 

*Lakeside Casino Resort.*

* *

As of February 1, 2005, 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 West Lakeand 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 further extend thelease for seven additional successive terms of five years each.

 

*Mark Twain Casino.*

* *

As of February 1, 2005, we own the land in LaGrange, Missouri on whichcertain facilities of Mark Twain are located, and own an additional 14 acres ofland adjacent to or nearby the casino.

 

*St. Jo Frontier Casino.*

* *

 As of February 1, 2005, we ownthe land in St. Joseph, Missouri on which certain facilities of St. Jo arelocated, and own an additional 72 acres of land adjacent to or nearby thecasino.

 

## **Item3**.           Legal Proceedings.

 

From time to time, we are a party to various claims arising in thenormal course of business. Management believes, however, that there are noproceedings pending or threatened against us which, if determined adversely,would have a material adverse effect on our financial condition, results ofoperations or liquidity.

 

## **Item4**.           Submission of Matters to a Vote of SecurityHolders.

 

Not applicable.

 

# **PARTII**

 

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

 

(a)           MarketInformation

 

There is no established public trading market for any class of ourcommon equity.  No class of our capitalstock has been registered under the Securities Act of 1933, as amended or underSection 12 of the Exchange Act.  All300 shares of our outstanding common stock are owned by Edward, Timothy and TroyHerbst.

 

(b)           Holders

 

Edward, Timothy and Troy Herbst own all of the outstanding shares ofour common stock.

 

22

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(c)           Dividends

 

Dividends of $5.4 million and $23.6 million were paid in respect of ouroutstanding common stock in fiscal 2003 and 2004, respectively.

 

Our amended credit facility and the indentures governing our 8 1/8% Senior Subordinated Notes due 2012 and our 7%Senior Subordinated Notes due 2014 restrict our ability to declare or makedistributions on our capital shares.  Todate, the only distributions that we have made on our common stock aredistributions permitted by the instruments governing our outstandingindebtedness.  Subject to contractualrestrictions contained in our amended credit facility and these indentures, anyfuture determinations as to the payment of dividends will be at the discretionof our board of directors, and will depend on our financial condition, resultsof operations, capital requirements, and such other factors as the board ofdirectors deems relevant.  See “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Liquidity and Capital Resources”and “Item 8.  Financial Statementsand Supplementary Data — Notes to Consolidated Financial Statements.”

 

## **Item6**.           Selected Financial Data.

 

We derived the selected consolidated financial data as of and for eachof the five years ended December 31, 2004 from our audited consolidatedfinancial statements, as of and for each of the three years ended December 31,2004, which are included elsewhere in this report.  In November 2000, we purchased Jackpot’sroute operations, and in December 2000, we opened Terrible’s Hotel &Casino. In February 2003, we acquired the slot route assets of AnchorCoin.  As a result, the periods beginningon or after January 1, 2001 may not be comparable to prior years.  The following table summarizes certainselected consolidated financial data, which you should read in conjunction withour consolidated financial statements and the related notes contained elsewherein this report and under “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.”

 

We have elected to be taxed under the provisions of Subchapter S of theInternal Revenue Code of 1986. Under those provisions, the owners of ourcompany pay income taxes on our taxable income. Accordingly, a provision forincome taxes is not included in our financial data.

 

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| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2000**                    | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(in thousands)**          | ** ** |
| Income statement data:              |       |                        |       |   |   |   |   |   |   |   |   |
| Revenues                            |       |                        |       |   |   |   |   |   |   |   |   |
| Route operations                    |       | $                           | 86,109     |   | $ | 170,893 |   | $ | 183,877 |   | $ | 241,833 |   | $ | 293,244 |   |
| Casino operations                   |       | 25,315                      |       | 67,831 |   | 72,498 |   | 78,342 |   | 91,254 |   |
| Other                               |       | 2,979                       |       | 2,878 |   | 3,078 |   | 3,049 |   | 3,628 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Total revenues                      |       | 114,403                     |       | 241,602 |   | 259,453 |   | 323,224 |   | 388,126 |   |
| Promotional allowances—route   |       | (218                        | )          | (143 | ) | (305 | ) | (371 | ) | (376 | ) |
| Promotional allowances—casino  |       | (2,182                      | )          | (8,267 | ) | (9,497 | ) | (10,878 | ) | (12,138 | ) |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Net revenues                        |       | 112,003                     |       | 233,192 |   | 249,651 |   | 311,975 |   | 375,612 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Costs of revenues:                  |       |                        |       |   |   |   |   |   |   |   |   |
| Route operations                    |       | 74,321                      |       | 141,535 |   | 150,781 |   | 192,757 |   | 227,929 |   |
| Casino operations                   |       | 17,322                      |       | 46,686 |   | 48,635 |   | 51,142 |   | 56,331 |   |
| General and administrative          |       | 4,782                       |       | 10,168 |   | 10,812 |   | 12,514 |   | 14,366 |   |
| Depreciation and amortization       |       | 5,318                       |       | 14,198 |   | 15,741 |   | 24,382 |   | 26,667 |   |
| Pre-opening expenses                |       | 2,361                       |       | — |   | — |   | — |   | — |   |
| Loss on lease termination           |       | —                      |       | — |   | — |   | — |   | 600 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Total costs and expenses            |       | 104,104                     |       | 212,587 |   | 225,969 |   | 280,795 |   | 325,893 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Income from operations              |       | 7,899                       |       | 20,605 |   | 23,682 |   | 31,180 |   | 49,719 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Interest income                     |       | 82                          |       | 407 |   | 336 |   | 228 |   | 353 |   |
| Interest expense                    |       | (4,643                      | )          | (19,952 | ) | (18,785 | ) | (22,932 | ) | (20,849 | ) |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Loss on early retirement of debt(1) |       | —                      |       | (13,024 | ) | — |   | (267 | ) | (37,991 | ) |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Net income (loss)                   |       | $                           | 3,338      |   | $ | (11,964 | ) | $ | 5,233 |   | $ | 8,209 |   | $ | (8,768 | ) |

 

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| ** **                                           | ** ** | **Year Ended December 31,**       | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2000**                          | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands, except ratios)** | ** ** |
| Other data:                                          |       |                              |       |   |   |   |   |   |   |   |   |
| Route EBITDA(2)                                      |       | $                                 | 11,570     |   | $ | 29,215 |   | $ | 32,791 |   | $ | 48,705 |   | $ | 64,939 |   |
| Casino EBITDA(2)                                     |       | 5,811                             |       | 12,878 |   | 14,366 |   | 16,322 |   | 22,785 |   |
| Net cash provided by operating activities            |       | $                                 | 14,881     |   | $ | 14,945 |   | $ | 19,323 |   | $ | 34,997 |   | $ | 50,010 |   |
| Net cash used in investing activities                |       | (44,939                           | )          | (2,778 | ) | (8,700 | ) | (74,724 | ) | (17,009 | ) |
| Net cash provided by (used in) financing  activities |       | 47,999                            |       | 3,010 |   | (338 | ) | 38,722 |   | 51,141 |   |
| Capital expenditures                                 |       | 10,036                            |       | 3,226 |   | 8,442 |   | 15,117 |   | 15,229 |   |
| Ratio of earnings to fixed charges(3)                |       | 1.0                               | x          | 1.1 | x | 1.3 | x | 1.3 | x | 2.4 | x |

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **2000**               | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(in thousands)**     | ** ** |
| Balance sheet data:                    |       |                   |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |       | $                      | 29,573     |   | $ | 44,750 |   | $ | 55,035 |   | $ | 54,030 |   | $ | 138,172 |   |
| Total assets                           |       | 171,132                |       | 180,183 |   | 183,713 |   | 237,068 |   | 318,431 |   |
| Total debt(4)                          |       | 133,138                |       | 167,319 |   | 167,941 |   | 215,269 |   | 333,412 |   |
| Stockholders’ equity (deficiency) |       | 6,972                  |       | (6,468 | ) | (1,235 | ) | 1,554 |   | (30,764 | ) |
|                                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Consists of (a) a charge of$13.0 million in August 2001 related to the write-off of unamortized financingfees and other costs due to the repayment of $143.8 million of our long-termdebt in conjunction with the issuance of $170.0 million senior secured notes,(b) a premium of $267,000 paid in conjunction with the repurchase of $2.0million of our senior secured notes in 2003 and (c) a loss on early retirementof debt in June 2004 which consisted of $31.3 million in a debt prepaymentpenalty and $6.7 million in unamortized loan fees.

 

(2)          Route and Casino EBITDA areused by management to measure segment profits and losses in accordance withSFAS 131, “Disclosures about Segments of an Enterprise and Related Information,”and are calculated before allocation of overhead.  See Note 11 to the accompanying consolidatedfinancial statements.

 

(3)          For purposes of determiningthe ratio of earnings to fixed charges, earnings are defined as earnings beforefixed charges and loss on early retirement of debt (other than capitalizedinterest). Fixed charges consist of interest expensed and capitalized.

 

(4)          Total debt consists of thecurrent and long-term portions for all periods presented.

 

25

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

 

The following discussion and analysis should be read in conjunctionwith “Item 6.  Selected Financial Data”and with “Item 8.  Financial Statementsand Supplementary Data.”

 

**Overview**

 

We are a gaming company that owned and operated approximately 8,500slot machines throughout the State of Nevada as of December 31, 2004. Our routeoperations involve the exclusive installation and operation of approximately6,800 slot machines as of December 31, 2004 in strategic, high traffic,non-casino locations, such as grocery stores, drug stores, convenience stores,bars and restaurants. We also own and operate Terrible’s Hotel & Casino inLas Vegas, as well as four other small casinos.

 

On February 1, 2005, we consummated the purchase of assets consistingof three casinos from Grace Entertainment, Inc. for an amended aggregate cashpurchase price of approximately $266.8 million. The Grace Acquisition allows usto expand our casino operations segment to stable and relatively protectedmarkets outside of southern Nevada with casinos that we believe havesignificant upside potential. The Grace assets consist of the Lakeside CasinoResort, located in Osceola, Iowa, or Lakeside Iowa, which contains 921 slotmachines, 31 table games and an adjacent 60 room all-suite hotel, the MarkTwain Casino, located in LaGrange, Missouri, or Mark Twain, which contains 505slot machines and 17 table games, and the St. Jo Frontier Casino, located inSt. Joseph, Missouri, or St. Jo, which contains 487 slot machines and 15 tablegames. We used proceeds from a $170.0 million 7% senior subordinated notesoffering along with borrowings under our amended and restated credit facilityto fund the purchase price of the Grace Acquisition. The purchase price forLakeside Iowa was approximately $160.8 million, which was changed on January25, 2005 as a result of lower than expected recent operating results atLakeside Iowa, for Mark Twain was approximately $56.5 million, and for St. Jowas approximately $49.5 million.

 

We generally enter into two types of route contracts. With chain storecustomers, such as Albertsons, Vons, Safeway, SavOn, Smith’s, Kmart, TerribleHerbst and Rite Aid, we pay a fixed monthly fee for each location in which weplace slot machines. With our street accounts, such as bars, restaurants andnon-chain convenience stores, we share in the revenues on a percentage basiswith the location owner.

 

Our revenues are primarily derived from gaming revenues, which includerevenues from slot machines and table games. Gaming revenues is generallydefined as gaming wins less gaming losses. Our largest component of revenues isfrom our slot machines. Promotional allowances consist primarily of food andbeverages furnished gratuitously to customers. The retail value of suchservices is included in the respective revenue classifications and is then deductedas promotional allowance. We calculate income from operations as net revenuesless total 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 have elected to be taxed under the provisions of Subchapter S of theInternal Revenue Code of 1986. Under those provisions, the owners of ourcompany pay income taxes on our taxable income. Accordingly, a provision forincome taxes is not included in our financial data.

 

**Year 2004 Compared to Year 2003**

 

*RouteOperations*

* *

Route operations accounted for 76% of total revenues during the yearended December 31, 2004. This was an increase from 75% of total revenues forthe year ended December 31, 2003. Total revenues from route operations were$293.2 million for the year ended December 31, 2004, an increase of $51.4million, or 21%, from $241.8 million for the year ended December 31, 2003. AtDecember 31, 2004, we were operating approximately 6,800 slot machines, whichis unchanged since 2003. The increase in route revenue was a result of a fullyear of operations of the locations that were acquired in the Anchor Coinacquisition that occurred in February of 2003, as well as revenue growth fromthe strong Las Vegas market during 2004.

 

Route operating costs were $227.9 million, or 78%, of route revenuesfor the year ended December 31, 2004. This compares to $192.8 million and 80%of route revenues for the same period in 2003. The dollar increase in routeoperating

 

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expenses was primarily associated with the full year results of theAnchor Coin acquisition as well as increases in participation expensesassociated with that revenue growth and scheduled space lease increases to ourexisting slot route contracts.

 

Route EBITDA for the year ended December 31, 2004 was $64.9 million, anincrease of $16.2 million, or 33%, from $48.7 million for the year endedDecember 31, 2003. The increase in EBITDA was a direct result of revenueincreases from both our existing locations and the results of the full year ofthe Anchor Coin locations.

 

*CasinoOperations*

* *

Casino operations accounted for 23% of total revenues for the year endedDecember 31, 2004 and 24% of revenues for the year ended December 31, 2003.Total revenues derived from casino operations were $91.3 million for the yearended December 31, 2004, an increase of $13.0 million, or 17%, from $78.3million for the year ended December 31, 2003. This increase in revenue wasprimarily due to increased customer play at Terrible’s Hotel & Casino inLas Vegas and our two casinos in Pahrump. In late 2003, one of the maincompetitors in Pahrump, Nevada closed due to a fire, and this location remainedclosed during most of 2004. This closure helped our Pahrump properties achievehigher revenues during 2004. The competitor reopened in late 2004, but this hasnot had a significant impact on revenues since reopening.

 

Casino operating costs were $56.3 million, or 62%, of casino revenuesfor the year ended December 31, 2004, compared to $51.1 million, or 65%, ofcasino revenues 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, or40%, from $16.3 million from the year ended December 31, 2003.

 

*Other Revenue*

* *

Other revenue consists of revenue items such as ATM fees, pay phonecharges, rental income and other miscellaneous items unrelated to route andcasino operations. Other revenues were $3.6 million for the year ended December31, 2004 compared to $3.0 million for the year ended December 31, 2003.

 

*PromotionalAllowances*

* *

Promotional allowances were $12.5 million, or 3.2% of total revenues,for the year ended December 31, 2004, an increase of $1.3 million, or 12%, from$11.2 million, or 3.5% of total revenues for the year ended December 31, 2003.The increase was primarily due to heavier promotional spending at the casinos.

 

*Other Costs*

* *

General and administrative, or G&A, expenses were $14.4 million forthe year 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 was primarilydue to the full year of overhead associated with the purchase of the slot routeassets of Anchor Coin in February 2003. G&A costs also increased due tocosts associated with an increase in insurance expenses. G&A expenses as apercentage of revenue were 3.7% of the revenue for the year ended December 31,2004, down from 3.9% of revenue during fiscal year ended December 31, 2003.

 

Depreciation and amortization expense was $26.7 million for the yearended December 31, 2004, an increase of $2.3 million, or 9%, from $24.4 millionfor the year ended December 31, 2003. The increase was due primarily to theamortization expenses associated with the acquired slot route contracts anddepreciation expenses associated with new fixed assets.

 

We incurred $0.6 million in costs associated with the termination ofthe lease with McDonald’s at Terrible’s Hotel in Las Vegas. This space will beused as a portion of the expansion and parking garage planned at Terrible’s.

 

*Income fromOperations*

* *

As a result of the factors discussed above, income from operations was$49.7 million for the year ended December 31, 2004, an increase of $18.5million,  from $31.2 million for the yearended December 31, 2003. This was a 59% increase. As a percentage of totalrevenues, income from operations increased from 9.6% during 2003 to 12.8%during the same period in 2004.

 

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*Other Expenses*

* *

Other expense was $58.5 million for the year ended December 31, 2004,an increase of $35.5 million from the year ended December 31, 2003. Theincrease in expenses was due to a one-time charge of $38.0 million relating tothe early retirement of our 10 3/4%senior secured notes.

 

*Net Income*

* *

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

 

**Year 2003 Compared to Year 2002**

 

*RouteOperations*

* *

Route operations accounted for 75% of total revenues during the yearended December 31, 2003. This was an increase from 71% of total revenues forthe year ended December 31, 2002. Total revenues from route operations were$241.8 million for the year ended December 31, 2003, an increase of $57.9million, or 31%, from $183.9 million for the year ended December 31, 2002. AtDecember 31, 2003, we were operating approximately 6,800 slot machines, anincrease of 1,400 machines from  2002.The increase in machines was primarily associated with the purchase of the slotroute assets of Anchor Coin. The increase in route revenue was a result of theabsorption of these new assets as well as the continued replacement andrefurbishment of existing slot machines during 2003.

 

Route operating costs were $192.8 million, or 80%, of route revenuesfor the year ended December 31, 2003. This compares to $150.8 million and 82%of route revenues for the same period in 2002. The increase in route operatingexpenses was primarily associated with the purchase of the slot route assets ofAnchor Coin as well as increases in some participation expenses and scheduledspace lease increases to our existing slot route contracts.

 

Route EBITDA for the year ended December 31, 2003 was $48.7 million, anincrease of $15.9 million, or 48%, from $32.8 million for the year endedDecember 31, 2002. The increase in EBITDA was a direct result of revenueincreases as well as lower operating costs due to the cost savings of combiningthe Anchor Coin locations with our existing route operations.

 

*CasinoOperations*

* *

Casino operations accounted for 24% of total revenues for the yearended December 31, 2003 and 28% of revenues for the year ended December 31,2002. Total revenues derived from casino operations were $78.3 million for theyear ended December 31, 2003, an increase of $5.8 million, or 8%, from $72.5million for the year ended December 31, 2002. This increase in revenue wasprimarily due to increased customer play at Terrible’s Hotel & Casino inLas Vegas and our two casinos in Pahrump. During 2003 one of the maincompetitors in Pahrump, Nevada closed due to a fire. This closure helped ourPahrump properties achieve higher revenues in the last two quarters of 2003.The competitor is currently reconstructing its facilities.

 

Casino operating costs were $51.1 million, or 65%, of casino revenuesfor the year ended December 31, 2003, compared to $48.6 million, or 67%, ofcasino revenues for the year ended December 31, 2002. Operating expensesincreased primarily in the areas of promotions and taxes. The increase inexpenses were generally in areas that helped to drive the increase in revenue,such as comps, slot club and participation game fees. Casino EBITDA was $16.3million for the year ended December 31, 2003, an increase of $1.9 million, or13%, from $14.4 million from the year ended December 31, 2002.

 

*Other Revenue*

* *

Other revenue consists of revenue items such as ATM fees, pay phonecharges, rental income and other miscellaneous items unrelated to route andcasino operations. Other revenues were $3.0 million for the year ended December31, 2003 compared to $3.1 million for the year ended December 31, 2002.

 

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*PromotionalAllowances*

* *

Promotional allowances were $11.2 million, or 3.5% of total revenues,for the year ended December 31, 2003, an increase of $1.4 million, or 14%, from$9.8 million, or 3.8% of total revenues for the year ended December 31, 2002.The increase was primarily due to heavier promotional spending at the casinos.

 

*Other Costs*

* *

G&A expenses were $12.5 million for the year ended December 31,2003, an increase of $1.7 million, or 16%, from $10.8 million for the yearended December 31, 2002. The increase was primarily due to overhead associatedwith the purchase of the slot route assets of Anchor Coin in February 2003.G&A costs also increased due to costs associated with an increase ininsurance expenses. G&A expenses as a percentage of revenue were 3.9% ofthe revenue for the year ended December 31, 2003, down from 4.2% of revenueduring the year ended December 31, 2002.

 

Depreciation and amortization expense was $24.4 million for the yearended December 31, 2003, an increase of $8.7 million, or 55%, from $15.7million for the year ended December 31, 2002. The increase was due primarily tothe amortization expenses associated with the acquired slot route contracts anddepreciation expenses associated with new fixed assets.

 

*Income fromOperations*

* *

As a result of the factors discussed above, income from operations was$31.2 million for the year ended December 31, 2003, an increase of $7.5 millionfrom $23.7 million for the year ended December 31, 2002. As a percentage oftotal revenues, income from operations increased from 9.1% during 2002 to 9.6%during the same period in 2003.

 

*Other Expenses*

* *

Other expense was $22.9 million for the year ended December 31, 2003,an increase of $4.5 million from the year ended December 31, 2002. The increasein expenses was primarily due to higher interest expensed as a result of the$47.0 million additional offering of senior secured notes done in conjunctionwith the acquisition of the slot route assets of Anchor Coin completed inFebruary 2003. Additionally, we expensed a small bond premium of approximately$.27 million that we paid to repurchase approximately $2.0 million of our 10 3/4% senior secured notes in  2003.

 

*Net Income*

* *

Net income for the year ended December 31, 2003 was $8.2 million. Thisis an improvement of $3.0 million, or 58%, from a net income figure of $5.2million recorded for the year ended December 31, 2002.

 

**Liquidity and Capital Resources**

 

*Cash Flows*

* *

At December 31, 2004, we had cash and cash equivalents of approximately$138.2 million on hand and approximately $175.0 million available under ourrevolving credit facility. The cash on hand reflects the proceeds of the 7%senior subordinated debt issue received in November of 2004. The proceeds ofthat debt issuance, along with the anticipated $100.0 million term loan andadditional revolving borrowings under our amended credit facility, were used tofund our acquisition of the gaming assets of Grace Entertainment, Inc. whichclosed in February of 2005. Based upon our anticipated future operations, webelieve that cash on hand, available cash flow, borrowings under our revolvingcredit facility and proceeds from our anticipated $100.0 million term loanunder our amended credit facility will be adequate to meet our anticipatedworking capital requirements, capital expenditures, Grace Acquisition purchaseprice obligations and scheduled payments of interest on our outstanding indebtednessfor at least the next 12 months. We cannot assure you, however, that thesesources will be sufficient for that purpose or that additional financing, ifrequired, will be available or, if available, will be on terms favorable to us.

 

*OperatingActivities*

* *

During the year ended December 31, 2004, operating activities provided$50.0 million in cash flows on a net loss of $8.8 million. Net loss for theyear ended December 31, 2004 included non-cash expenses (depreciation andamortization) of $26.7 million and a charge of $38.0 million relating to theearly retirement of debt.

 

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*InvestingActivities and Capital Expenditures*

* *

For the year ended December 31, 2004, we had net cash used forinvesting activities of $17.0 million of which $15.2 million related tothe net cash used to purchase new equipment including gaming devices.

 

In February of 2005 we used $266.8 million to fund the GraceAcquisition. This was funded through the use of our revolving line of credit, a$100.0 million term loan completed in January 2005 and the cash on hand thatwas a result of the $170.0 million 7% senior subordinated notes due in 2014that were issued in November 2004.

 

The construction of a new parking structure, casino expansion andgeneral property renovations at Terrible’s Hotel & Casino in Las Vegas areanticipated to cost between approximately $15.0 to $20.0 million over the nexttwelve months. Additionally, we intend to spend approximately $15.0 million toadd new and update existing slot machines at the acquired Grace properties and$15.0 million for general maintenance and capital expenditures.

 

*FinancingActivities*

* *

Cash flows used by financing activities were $51.1 million during theyear ended December 31, 2004. This was the result of the refinancing ofsubstantially all of our debt including a prepayment penalty of $31.3 millionon the repurchase of approximately $211.0 million principal amount of our 10 3/4% senior secured notes due 2008. In connection with ourpurchase of the 10 3/4% senior secured notes, weobtained the consent to amend the underlying indenture to eliminatesubstantially all restrictive covenants and certain events of default. Afterthe repurchase, approximately $4.1 million of our 10 3/4%senior secured notes remain outstanding. We intend to redeem such notes at theearliest optional redemption date, September 1, 2005, at a redemption price of105.375% of the outstanding principal amount. In 2004, we made distributions toour stockholders of $23.6 million, including $15.0 million in connection withthe debt refinancing.

 

On October 8, 2004, we amended and restated the credit facility weentered into on June 10, 2004. The amended credit facility originally consistedof a $175.0 million senior revolving credit facility. Our debt now includes a$175.0 million senior revolving credit facility due June 30, 2009, of which$175.0 million is available for future borrowings at December 31, 2004. Inaddition, pursuant to the terms of our amended credit facility, on January 31,2005, we incurred an additional $100.0 million term loan in order to fund theGrace Acquisition. Interest accrues on borrowings under our amended creditfacility based on a floating rate.

 

At December 31, 2004, our debt included approximately $4.1 million ofindebtedness consisting of untendered 10 3/4%senior secured notes, approximately $158.9 million of indebtedness consistingof our 8 1/8% senior subordinated notesdue 2012 and $170.0 million of indebtedness consisting of our 7% senior subordinatednotes due 2014.

 

During the first two months of 2005, we utilized the proceeds of the$100.0 million term loan allowed under our amended credit facility and a drawdown on our revolving credit facility to pay the purchase price for the GraceAcquisition and related fees and expenses. After giving effect to the termloan, the Grace Acquisition and the other related borrowings under our amendedcredit facility, our total debt will be approximately $519.4 million.

 

We may from time to time seek to retire our outstanding debt throughcash purchases, in open market purchases, privately negotiated transactions orotherwise. Such repurchases, if any, will depend on prevailing marketconditions, our liquidity requirements, contractual restrictions and otherfactors. The amounts involved may be material.

 

*Free Cash Flow*

* *

The following table summarizes our operating cash flow after deductingnon-financed capital expenditures for the years ended December 31, 2003 and2004:

 
| ** **                                             | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **2003**                     | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(in thousands)**           | ** ** |
| Cash flow from operations                              |       | $                            | 34,997     |   | $ | 50,010 |   |
| Cash paid for capital expenditures                     |       | 15,117                       |       | 15,229 |   |
| Operating cash less non-financed capital  expenditures |       | $                            | 19,613     |   | $ | 34,781 |   |

 

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Our ability to service our debt will be dependent on our futureperformance, which will be affected by, among other things, prevailing economicconditions and financial, business and other factors, certain of which arebeyond our control.

 

*ContractualObligations*

* *

The following table summarizes our contractual obligations as ofDecember 31, 2004 pro forma for the Grace Acquisition and the related term loanand revolving borrowings under our amended credit facility.

 
| ** **                         | ** ** | **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                     |       | $                          | 519,412    |   | $ | 1,154 |   | $ | 2,218 |   | $ | 6,105 |   | $ | 509,935 |   |
| Operating leases                   |       | 335,713                    |       | 69,548 |   | 135,361 |   | 80,341 |   | 50,463 |   |
| Total contractual cash obligations |       | $                          | 855,125    |   | $ | 70,702 |   | $ | 137,579 |   | $ | 86,446 |   | $ | 560,398 |   |

 

Other significant operating uses of cash in 2004 include interest anddistributions made to stockholders for payment of S corporation taxes anddiscretionary distributions.  Our cashpayments for interest were $25.9 million for the year ended December 31,2004 and cash distributions to stockholders were $23.6 million for the yearended December 31, 2004. The distributions to stockholders included aone-time distribution at our refinancing of $15 million, $3.3 million indistributions for S corporation taxes and the recurring annual distributions ofapproximately $5.3 million.

 

We would expect higher cash payments for interest in 2005 due to theadditional debt incurred in relation to the Grace Acquisition and slightlyhigher stockholder distributions for S corporation taxes in 2005 due to theabsence in 2005 of the tax losses associated with the debt restructuringcharges that occurred in 2004. Recurring stockholder distributions in 2005should be approximately the same as 2004.

 

**Critical Accounting Policies**

 

The preparation of our financial statements requires our management toadopt accounting policies and make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States of America. Our business and industry is highly regulated. Themajority of our revenue is counted in the form of cash, chips and tokens andtherefore, is not subject to any significant or complex estimation procedures.

 

We have determined that the following accounting policies and relatedestimates are critical to the preparation of our consolidated financialstatements:

 

*Long-LivedAssets*

* *

We have a significant investment in long-lived property and equipmentand lease acquisition costs. Significant accounting policies that affect thereported amounts for these assets include the determination of the assets’estimated useful life, evaluation of the assets’ recoverability and thelikelihood of technological obsolescence. We estimate useful lives for propertyand equipment based on historical experience and estimates of products’commercial lives. Significant incremental costs associated with the acquisitionof location leases are capitalized and amortized using the straight-line methodover the term of the related leases, including expected renewals, which rangefrom 1 to 20 years. Should the actual useful life of an asset differ from theestimated useful life, future operating results could be positively ornegatively affected. We review useful lives, obsolescence, and assess commercialviability of these assets periodically.

 

We assess the recoverability of long-lived assets when circumstancesindicate that the carrying amount of an asset may not be fully recoverable. Ifundiscounted expected cash flows to be generated by a long-lived asset or assetgroup are less than its carrying amount, we record an impairment to write downthe long-lived asset or asset group to its estimated fair value. Fair value isdetermined based on undiscounted expected future cash flows. An adverse changeto the estimate of these undiscounted future cash flows could necessitate animpairment charge that could adversely affect operating results.

 

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**Recently Issued and Adopted AccountingStandards**

 

The adoption of the following recent accounting pronouncements did nothave any impact on our results of operations or financial condition:

 

•                  FASBInterpretation No. 45:  “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others – an interpretation of FASB Statements No.5, 57, and 107 and rescission of FASB interpretation No. 34;”

 

•                  FASBInterpretation No. 46(R):  “Consolidationof Variable Interest Entities – an interpretation of ARB No. 51;”

 

•                  FASBStatement No. 146, “Accounting for Costs Associated with Exit or DisposalActivities;”

 

•                  FASBStatement No. 149:  “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities;” and

 

•                  FASBStatement No. 150:  “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”

 

The following pronouncements on accounting policies issued during 2004are not expected to have any impact on our results of operations or financialcondition:

 

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

 

•                  FASBStatement No. 153, “Exchanges of Nonmonetary Assets – an amendment of APBOpinion No. 29;” and

 

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

 

**Statement on Forward-Looking Information**

 

We make statements in this report that relate to matters that are nothistorical facts that we refer to as “forward-looking statements” regarding,among other things, our business strategy, our prospects and our financialposition. These statements may be identified by the use of forward-lookingterminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,”“should” or “anticipates” or the negative or other variation of these orsimilar words, or by discussions of strategy or risks and uncertainties.Forward-looking statements in this report include, among other things,statements concerning:

 

•                  projectionsof future results of operations or financial condition;

 

•                  expectationsfor our route operations and our casino properties; and

 

•                  expectationsof the continued availability of capital resources.

 

Any forward-looking statement made by us necessarily is based upon anumber of estimates and assumptions that, while considered reasonable by us, isinherently subject to significant business, economic and competitiveuncertainties and contingencies, many of which are beyond our control, and aresubject to change. Actual results of our operations may vary materially fromany forward-looking statement made by or on our behalf. Forward-looking statementsshould not be regarded as a representation by us or any other person that theforward-looking statements will be achieved. Undue reliance should not beplaced on any forward-looking statements. Some of the contingencies anduncertainties to which any forward-looking statement contained herein issubject include, but are not limited to, the following:

 

•                  Oursubstantial indebtedness could adversely affect our financial health andprevent us from fulfilling our obligations under the instruments governing ouroutstanding indebtedness.

 

•                  Wewill require a significant amount of cash to service our indebtedness. Ourability to generate cash depends on many factors beyond our control.

 

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

 

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•                  Ourindebtedness imposes restrictive covenants on us.

 

•                  Wemay not be able to successfully integrate the operations of the three casinosacquired pursuant to the Grace Acquisition into our business.

 

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

 

•                  Weface extensive regulation from gaming and other government authorities.

 

•                  Changesto applicable tax laws could have a material adverse effect on our financial condition.

 

•                  Ouroperations could be adversely affected due to the adoption of anti-smokingregulations.

 

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

 

•                  Ourexecutive officers and members of our board of directors own 100% of theCompany and could have interests that conflict with yours.

 

•                  Ourbusiness relies heavily on certain markets and an economic downturn in thesemarkets could have a material adverse effect on our results.

 

For additional contingencies and uncertainties, see “Item 1.  Business—Risk Factors.”

 

**Industry andMarket Data**

 

This report includes market and industry data that we obtained from ourown research, studies conducted by third party sources that we believe to bereliable and industry and general publications published by third parties and,in some cases, management estimates based on industry and other knowledge. Wehave not independently verified any of the data from third party sources, andwe make no representation as to the accuracy of such information. While webelieve internal company estimates are reliable and market definitions areappropriate, they have not been verified by any independent sources, and wemake no representations as to the accuracy of such estimates.

 

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

 

Market risk is the risk of loss arising from adverse changes in marketrates and prices, such as interest rates, foreign currency exchange rates, andcommodity prices. We do not have any cash or cash equivalents as of December31, 2004 that are subject to market risk based on changes in interest rates.Upon closing of our amended credit facility in October 2004, we were exposed tosome market risk due to floating or variable interest rates. The interest onrevolving borrowings and on the additional term loan under our amended creditfacility is based on a floating rate (a base rate or LIBOR, at our option),plus a leverage grid-based variable amount. At December 31, 2004 we had nofloating rate debt outstanding. However, immediately after the closing of theacquisition of the Grace assets in February 2005, the principal amount of therelated borrowings under our amended credit facility was approximately $189.0million.  At the above level of borrowings,a hypothetical 1.0% increase in LIBOR would result in an approximately $1.9million annual increase in interest expense.

 

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## **Item8**.           Financial Statements and Supplementary Data.

 
| **Report of Independent Registered Public  Accounting Firm**                                                             | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** |
| **Consolidated Financial Statements**                                                                                    | ** ** |
| Consolidated Balance Sheets  As of December 31, 2003 and 2004                                                            |       |
| Consolidated Statements of Operations  For the years ended December 31, 2002, 2003 and 2004                              |       |
| Consolidated Statements of Stockholders’  Equity (Deficiency)  For the years ended December 31, 2002, 2003 and 2004 |       |
| Consolidated Statements of Cash Flows  For the years ended December 31, 2002, 2003 and 2004                              |       |
|                                                                                                                     |       |
| **Notes to Consolidated Financial Statements**                                                                           | ** ** |

 

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**REPORT OFINDEPENDENT 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, 2003 and 2004,and the related consolidated statements of operations, stockholders’deficiency, and cash flows for each of the three years in the period endedDecember 31, 2004. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial 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 about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Herbst Gaming, Inc. andsubsidiaries as of December 31, 2003 and 2004, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with accounting principles generally acceptedin the United States of America.

 

Deloitte & Touche LLP

 

Las Vegas, NevadaMarch 29, 2005

 

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**Herbst Gaming, Inc.**ConsolidatedBalance Sheets(in thousands)

 
| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                               | ** ** | **2003**        | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | ** **      | ** ** | ** ** | ** ** |
| **Assets**                                                                               |       |            |       |   |   |
| Current assets                                                                           |       |            |       |   |   |
| Cash and cash equivalents                                                                |       | $               | 54,030     |   | $ | 138,172 |   |
| Accounts receivable, net                                                                 |       | 1,216           |       | 1,281 |   |
| Notes and loans receivable                                                               |       | 706             |       | 411 |   |
| Prepaid expenses                                                                         |       | 4,070           |       | 5,182 |   |
| Inventory                                                                                |       | 1,039           |       | 1,080 |   |
| Total current assets                                                                     |       | 61,061          |       | 146,126 |   |
| Property and equipment, net                                                              |       | 106,824         |       | 107,205 |   |
| Lease acquisition costs, net                                                             |       | 59,620          |       | 51,394 |   |
| Due from related parties                                                                 |       | 563             |       | 161 |   |
| Other assets, net                                                                        |       | 9,000           |       | 13,545 |   |
| Total assets                                                                             |       | $               | 237,068    |   | $ | 318,431 |   |
| ** **                                                                               |       |            |       |   |   |
| **Liabilities and stockholders’ equity  (deficiency)**                              |       |            |       |   |   |
| Current liabilities                                                                      |       |            |       |   |   |
| Current portion of long-term debt                                                        |       | $               | 170        |   | $ | 154 |   |
| Accounts payable                                                                         |       | 5,727           |       | 5,733 |   |
| Accrued expenses                                                                         |       | 13,599          |       | 8,896 |   |
| Due to related parties                                                                   |       | —          |       | 36 |   |
| Total current liabilities                                                                |       | 19,496          |       | 14,819 |   |
| Long-term debt, less current portion                                                     |       | 215,099         |       | 333,258 |   |
| Other liabilities                                                                        |       | 919             |       | 1,118 |   |
| Commitments and contingencies (Note 9)                                                   |       |            |       |   |   |
| Stockholders’ equity (deficiency)                                                   |       |            |       |   |   |
| 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                                                                      |       | (2,445          | )          | (34,763 | ) |
| Total stockholders’ equity (deficiency)                                             |       | 1,554           |       | (30,764 | ) |
| Total liabilities and stockholders’ equity  (deficiency)                            |       | $               | 237,068    |   | $ | 318,431 |   |

 

See notes to consolidated financialstatements.

 

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**Herbst Gaming, Inc.**ConsolidatedStatements of Operations(in thousands)

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2002**                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenues                                       | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Route operations                               |       | $                           | 183,877    |   | $ | 241,833 |   | $ | 293,244 |   |
| Casino operations                              |       | 72,498                      |       | 78,342 |   | 91,254 |   |
| Other—non gaming                          |       | 3,078                       |       | 3,049 |   | 3,628 |   |
| Total revenues                                 |       | 259,453                     |       | 323,224 |   | 388,126 |   |
| Less promotional allowances                    |       | (9,802                      | )          | (11,249 | ) | (12,514 | ) |
| Net revenues                                   |       | 249,651                     |       | 311,975 |   | 375,612 |   |
| Costs and expenses                             |       |                        |       |   |   |   |   |
| Route operations                               |       | 150,781                     |       | 192,757 |   | 227,929 |   |
| Casino operations                              |       | 48,635                      |       | 51,142 |   | 56,331 |   |
| Depreciation and amortization                  |       | 15,741                      |       | 24,382 |   | 26,667 |   |
| General and administrative                     |       | 10,812                      |       | 12,514 |   | 14,366 |   |
| Loss on lease termination                      |       | —                      |       | — |   | 600 |   |
| Total costs and expenses                       |       | 225,969                     |       | 280,795 |   | 325,893 |   |
| Income from operations                         |       | 23,682                      |       | 31,180 |   | 49,719 |   |
| Other income (expense)                         |       |                        |       |   |   |   |   |
| Interest income                                |       | 336                         |       | 228 |   | 353 |   |
| Interest expense, net of capitalized  interest |       | (18,785                     | )          | (22,932 | ) | (20,849 | ) |
| Loss on early retirement of debt               |       | —                      |       | (267 | ) | (37,991 | ) |
| Total other expense                            |       | (18,449                     | )          | (22,971 | ) | (58,487 | ) |
| Net income (loss)                              |       | $                           | 5,233      |   | $ | 8,209 |   | $ | (8,768 | ) |

 

See notes to consolidated financialstatements.

 

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

 
| **Balance**                      | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained Earning  (Accumulated  Deficit)** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------------------------|------------|-----------|------------|
| Balance, January 1, 2002         |       | 2,368             |       | 1,631                            |       | (10,467                                      | )          | (6,468    | )          |
| Net income                       |       | —            |       | —                           |       | 5,233                                        |       | 5,233     |       |
| Balance, December 31, 2002       |       | 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 | ) |
|                                  |            |                   |            |                                  |            |                                              |            |           |            |  |  |  |  |

 

See notes to consolidated financialstatements.

 

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

 
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **2002**                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating activities                                                     |       |                        |       |   |   |   |   |
| Net income (loss)                                                                        |       | $                           | 5,233      |   | $ | 8,209 |   | $ | (8,768 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities |       |                        |       |   |   |   |   |
| Depreciation and amortization                                                            |       | 15,741                      |       | 24,382 |   | 26,667 |   |
| Debt discount amortization                                                               |       | 424                         |       | 83 |   | 100 |   |
| Gain (loss) on sale of property and  equipment                                           |       | (129                        | )          | (119 | ) | 41 |   |
| Loss on early retirement of debt                                                         |       | —                      |       | 267 |   | 37,991 |   |
| Decrease (increase) in:                                                                  |       |                        |       |   |   |   |   |
| Accounts receivable                                                                      |       | 7                           |       | 173 |   | (6 | ) |
| Prepaid expenses                                                                         |       | (561                        | )          | (343 | ) | (1,112 | ) |
| Inventory                                                                                |       | (370                        | )          | 104 |   | (41 | ) |
| Due from related parties                                                                 |       | (94                         | )          | (17 | ) | 402 |   |
| Other assets                                                                             |       | —                      |       | — |   | (84 | ) |
| Increase (decrease) in:                                                                  |       |                        |       |   |   |   |   |
| Accounts payable                                                                         |       | 170                         |       | 630 |   | (712 | ) |
| Accrued expenses                                                                         |       | (688                        | )          | 2,314 |   | (4,703 | ) |
| Due to related parties                                                                   |       | (544                        | )          | (430 | ) | 36 |   |
| Other liabilities                                                                        |       | 134                         |       | (256 | ) | 199 |   |
| Net cash provided by operating activities                                                |       | 19,323                      |       | 34,997 |   | 50,010 |   |
| Cash flows from investing activities                                                     |       |                        |       |   |   |   |   |
| Net cash paid for acquisition of Anchor’s  Slot Route                               |       | —                      |       | (57,171 | ) | — |   |
| Additions to notes receivable                                                            |       | (860                        | )          | (619 | ) | (914 | ) |
| Collection on notes receivable                                                           |       | 870                         |       | 689 |   | 699 |   |
| Proceeds from sale of property and  equipment                                            |       | 395                         |       | 577 |   | 260 |   |
| Purchases of property and equipment                                                      |       | (8,442                      | )          | (15,117 | ) | (15,229 | ) |
| Lease acquisition costs                                                                  |       | (663                        | )          | (3,083 | ) | (1,825 | ) |
| Net cash used in investing activities                                                    |       | (8,700                      | )          | (74,724 | ) | (17,009 | ) |
|                                                                                          |            |                             |            |  |  |  |  |  |  |  |

 

See notes to consolidated financialstatements.

 

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| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **2002**                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from financing activities                                   |       |                        |       |   |   |   |   |
| Proceeds from long term debt                                           |       | —                      |       | 49,115 |   | 428,022 |   |
| Reduction of long term debt                                            |       | (104                        | )          | (2,153 | ) | (310,098 | ) |
| Loan origination fees                                                  |       | (234                        | )          | (2,553 | ) | (11,904 | ) |
| Prepayment penalty on retired debt                                     |       | —                      |       | (267 | ) | (31,329 | ) |
| Stockholders’ distributions                                       |       | —                      |       | (5,420 | ) | (23,550 | ) |
| Net cash provided by (used in) financing  activities                   |       | (338                        | )          | 38,722 |   | 51,141 |   |
|                                                                   |       |                        |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                  |       | 10,285                      |       | (1,005 | ) | 84,142 |   |
| Cash and cash equivalents                                              |       |                        |       |   |   |   |   |
| Beginning of year                                                      |       | 44,750                      |       | 55,035 |   | 54,030 |   |
| End of year                                                            |       | $                           | 55,035     |   | $ | 54,030 |   | $ | 138,172 |   |
|                                                                   |       |                        |       |   |   |   |   |
| Supplemental cash flow information:                                    |       |                        |       |   |   |   |   |
| Cash paid during the period for interest                               |       | $                           | 18,637     |   | $ | 21,198 |   | $ | 25,918 |   |
| Supplemental schedule of non cash investing  and financing activities: |       |                        |       |   |   |   |   |
| Purchase of property and equipment financed  through accounts payable  |       | 271                         |       | 661 |   | 1,343 |   |
| Purchase of assets through direct financing                            |       | 302                         |       | 283 |   | 119 |   |
| Acquisition of Anchor Coin’s Slot Route:                          |       |                        |       |   |   |   |   |
| Fair value of assets and liabilities  acquired:                        |       |                        |       |   |   |   |   |
| Current assets, other than cash                                        |       |                        |       | $ | 717 |   |   |   |
| Property and equipment                                                 |       |                        |       | 5,200 |   |   |   |
| Lease acquisition costs                                                |       |                        |       | 50,532 |   |   |   |
| Other long term assets                                                 |       |                        |       | 1,300 |   |   |   |
| Other liabilities                                                      |       |                        |       | (578 | ) |   |   |
| Cash paid, net of cash acquired                                        |       |                        |       | $ | 57,171 |   |   |   |

 

See notes to consolidated financialstatements.

 

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**Herbst Gaming, Inc.**

 

**Notes to consolidated financial statements**

 

**1.             Descriptionof Business and Summary of Significant Accounting Policies**

 

***Description ofBusiness and Principles of Consolidation***—Theaccompanying consolidated financial statements of Herbst Gaming, Inc. (“Herbst”or the “Company”) include the accounts of Herbst and its subsidiaries: E-T-T,Inc. and Subsidiaries (“E-T-T”), Market Gaming, Inc. (“MGI”), E-T-T Enterprises L.L.C. (“E-T-TEnterprises”), and Flamingo Paradise Gaming, LLC (“FPG”). The financialstatements of E-T-T are consolidated and include the following wholly-ownedsubsidiaries: Cardivan Company, Corral Coin, Inc., and Corral Country Coin,Inc.

 

All significant intercompany balances and transactions between Herbst,E-T-T, MGI, E-T-T Enterprises, and FPG have been eliminated in the consolidatedfinancial statements.

 

Herbst Gaming, Inc. was incorporated in Nevada on January 21, 1997. InAugust of 2001, a restructuring occurred, wherein E-T-T, MGI, FPG and E-T-TEnterprises became wholly-owned subsidiaries of Herbst. This restructuringoccurred in conjunction with the $170.0 million offering of senior securednotes that was used to retire the majority of the existing debt of theconsolidated entities. Prior to August of 2001, the newly consolidated entitieswere combined for presentation purposes.

 

E-T-T and MGI conduct business in the gaming industry and generaterevenue principally from gaming machine route operations and casino operations.Gaming machine route operations involve the installation, operation, andservice of gaming machines owned by the Company that are located in licensed,leased, or subleased space in retail stores (supermarkets, convenience stores,etc.), bars, and restaurants throughout the State of Nevada. The Company operatesTerrible’s Town Casino & Bowl (Henderson) in Henderson, Nevada, Terrible’sSearchlight Casino in Searchlight, Nevada, and Terrible’s Town Casino andTerrible’s Lakeside Casino & RV Park, both of which are located in Pahrump,Nevada, a community 60 miles west of Las Vegas.

 

E-T-T Enterprises develops and leases real estate to E-T-T.

 

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

 

The gaming industry in the State of Nevada is subject to extensivestate and local government regulation. The Company’s gaming operations aresubject to the licensing and regulatory control of the Nevada GamingCommission, the Nevada Gaming Control Board, and 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.

 

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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).

 

***Cash and Cash Equivalents***—Cashand cash equivalents include highly liquid investments with a maturity at thedate of purchase of three months or less. The carrying value of theseinvestments approximates their fair value due to their short maturities.

 

***Fair Value of Financial Instruments***—Thecarrying value of the Company’s cash, notes and loans receivable, and tradepayables approximates fair value primarily because of the short maturities ofthese instruments. The fair value of the Company’s long-term debt is estimatedbased on the quoted market prices for the same or similar issues or on thecurrent rates offered to the Company for debt of the same remaining maturities.Based on the borrowing rates currently available to the Company for debt withsimilar terms and average maturities, the estimated fair value of long-termdebt outstanding is approximately $352,987,692 as of December 31, 2004.

 

***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. At December 31, 2003 and2004, an allowance for potential credit losses was $310,629 and $450,978,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, made forbuild-outs, tenant improvements, and initial operating expenses, are generallysecured by the personal guarantees of the operators and the locations’ assets.The majority of the loans are non-interest bearing and are expected to berepaid within one year from the locations’ share of net gaming win.

 

On a regular basis, the Company evaluates the collectibility of theloans by individually evaluating each location’s operating results and cashflows. Management provides for the carrying value of loans that are determinedto be uncollectible. At December 31, 2003 and 2004, an allowance for potentialcredit losses was not deemed necessary.

 

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

 

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

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

 

***Lease Acquisition Costs***—Significantincremental costs associated with the acquisition of location leases arecapitalized and amortized using the straight-line method over the term of therelated leases, including expected renewals, which range from 1 to 20 years.Lease acquisition costs are stated at cost less accumulated amortization of$16,601,000 and $26,635,000 at December 31, 2003 and 2004, respectively.

 

***Debt Issuance Costs***—Debtissuance costs incurred in connection with the issuance of long-term debt arecapitalized and amortized over the terms of the related debt agreements. Debtissuance costs are included in other assets on the balance sheets (see Note 5).

 

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***Long-Lived Assets***—Inaccordance with the provisions of SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” the Company evaluates the potentialimpairment of long-lived assets when events or changes in circumstancesindicate that the carrying amount of a long-lived asset may not be recoverable.If it is determined that the carrying value of long-lived assets may not berecoverable based upon the relevant facts and circumstances, the Companyestimates the future undiscounted cash flows expected to result from the use ofthe asset and its eventual disposition. If the sum of the expected undiscountedfuture cash flows is less than the carrying value of the asset, the Companywill recognize an impairment loss for the difference between the carrying valueof the asset and its fair value. The Company believes that no impairment oflong-lived assets exists at December 31, 2004.

 

***Revenue and Promotional Allowances***—Inaccordance with industry practice, the Company recognizes as gaming revenuesthe net win from route operations, which is the difference between gaming winsand losses. The Company recognizes total net win from gaming devices asrevenues from gaming routes that operate under revenue-sharing arrangements.Revenue-sharing payments to route locations are recorded as costs of routeoperations. Revenues from casino operations are gaming wins less losses.Revenues from casino operations include the retail value of food and beverage,and goods and services provided to customers on a complimentary basis. Suchamounts are then deducted as promotional allowances. The estimated cost ofproviding these promotional allowances is as follows:

 
| ** **        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **2002**                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **        | ** ** | **(dollars in thousands)**  | ** ** |
| Room              |       | $                           | 597        |   | $ | 498 |   | $ | 502 |   |
| Food and Beverage |       | 4,507                       |       | 4,798 |   | 5,677 |   |
| Other             |       | 2,049                       |       | 3,538 |   | 4,299 |   |
| Total             |       | $                           | 7,153      |   | $ | 8,834 |   | $ | 10,478 |   |

 

These costs are reclassified out of the respective department into thecasino department.

 

***Location Rent Expense***—Fixedrental payments (including scheduled increases) are recorded on a straight-linebasis over the agreement term, including any optional extension periods thatare expected to be exercised. Contingent payments are expensed in the periodincurred. Renewal agreements are considered new agreements and are accountedfor as described 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 of each companyare liable for income tax on the taxable income of the Company as it affectsthe owners’ individual income tax returns. Therefore, a provision for incometaxes has not been included in the accompanying consolidated financialstatements. E-T-T Enterprises and FPG are treated as partnerships for federalincome tax purposes and, therefore, do not incur income taxes. Instead, theirearnings and losses are included in the personal returns of the members and aretaxed depending on their personal tax situations. Accordingly, the accompanyingfinancial statements do not reflect a provision for income taxes.

 

***Concentrations of Credit Risk***—TheCompany maintains cash balances at certain financial institutions located insouthern Nevada. The balances are insured by the Federal Deposit InsuranceCorporation (“FDIC”) up to $100,000. At times, cash balances may be in excessof FDIC limits. As of December 31, 2004, the Company does not consider itselfto have any significant concentrations of credit risk.

 

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***Recently Issued andAdopted Accounting Standards***—The adoption of thefollowing recent accounting pronouncements did not have any impact on theCompany’s results of operations or financial condition:

 

•                  FASBInterpretation No. 45:  “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including Indirect Guaranteesof Indebtedness of Others – an interpretation of FASB Statements No. 5, 57, and107 and rescission of FASB interpretation No. 34;”

 

•                  FASBInterpretation No. 46(R):  “Consolidationof Variable Interest Entities – an interpretation of ARB No. 51;”

 

•                  FASBStatement No. 146, “Accounting for Costs Associated with Exit or DisposalActivities;”

 

•                  FASBStatement No. 149:  “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities;” and

 

•                  FASBStatement No. 150:  “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.”

 

The following pronouncements on accounting policies issued during 2004are not expected to have any impact on the Company’s results of operations orfinancial condition:

 

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

 

•                  FASBStatement No. 153, “Exchanges of Nonmonetary Assets – an amendment of APBOpinion No. 29;” and

 

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

 

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**2.             Acquisitions**

 

In February 2003, the Company completed its acquisition of the routeassets of Anchor Coin, Inc., a subsidiary of IGT (“Anchor Coin”). Anchor Coinwas a leading route operator in Nevada. The acquisition, which was recordedunder the purchase method of accounting, included the purchase of all of theassets of Anchor Coin’s slot route for an initial purchase price of$61,000,000. A portion of the purchase price has been allocated to assetsacquired and liabilities assumed based on estimated fair market value at thedate of acquisition with the remaining balance of $50,532,000 recorded as leaseacquisition costs for the route contracts acquired. Such intangible asset isbeing amortized on a straight-line basis over the remaining lives of thecontracts.

 

The table below reflects unaudited pro forma consolidated results ofthe Company and Anchor Coin as if the acquisition had taken place at thebeginning of the year (dollars in thousands):

 
| ** **     | ** ** | **Year Ended  December 31, 2003** | ** ** |
|----------------|------------|-----------------------------------|------------|
| ** **     | ** ** | ** **                        | ** ** |
| Gross Revenues |       | $                                 | 329,393    |   |
| Net Income     |       | $                                 | 7,239      |   |

 

Included in the pro forma net income are approximately $453,000 ofinterest expense and $953,000 of depreciation and amortization expense for theyear ended 2003. In management’s opinion, these unaudited pro forma amounts arenot necessarily indicative of what the actual consolidated results ofoperations might have been if the acquisition had been effective at thebeginning of 2003.

 

On February 1, 2005, the Company consummated the purchase of assetsconsisting of three casinos from Grace Entertainment, Inc. for an aggregateamended cash purchase price of approximately $266.8 million (the “GraceAcquisition”). The purchase price does not include approximately $10.0 millionin fees associated with the consummation of the Grace Acquisition that areincluded in the table below. The Grace Acquisition allows 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 Grace assets consist of the Lakeside Casino Resort,located in Osceola, Iowa, or Lakeside Iowa, which contains 921 slot machines,31 table games and an adjacent 60 room all-suite hotel, the Mark Twain Casino,located in LaGrange, Missouri, or Mark Twain, which contains 505 slot machinesand 17 table games, and the St. Jo Frontier Casino, located in St. Joseph,Missouri, or St. Jo, which contains 487 slot machines and 15 table games. TheCompany used proceeds from a $170.0 million 7% senior subordinated notesoffering along with borrowings under its amended and restated credit facilityto fund the purchase price of the Grace Acquisition. The purchase price forLakeside Iowa was approximately $160.8 million, which was changed on January25, 2005 as a result of lower than expected recent operating results atLakeside Iowa, for Mark Twain was approximately $56.5 million, and for St. Jowas approximately $49.5 million. The Grace Acquisition was recorded under the purchasemethod of accounting and the results of operations of the Grace assets will beincluded in the Company’s consolidated results as of the date of acquisition.

 

The following are the estimated fair value of the assets acquired andliabilities assumed as of February 1, 2005 (in thousands), which is subject tochange based on a final valuation of such acquired assets and assumedliabilities(1):

 
| Assets:                      |   |    |    |
|------------------------------|--------|---------|---------|
| Cash                         |   | $       | 7,226   | (2) |
| Inventory                    |   | 300     |    |
| Property plant and equipment |   | 62,453  |    |
| Intangibles                  |   | 208,547 | (3)     |
| Total assets acquired        |   | $       | 278,526 |   |
|                         |   |    |    |
| Liabilities:                 |   |    |    |
| Accrued expenses             |   | 1,726   | (2)     |
| Total Cash Purchase Price    |   | $       | 276,800 |   |
|                              |        |         |         |  |  |

 

----

(1)           Theamounts reflect the elimination of assets and liabilities of Southern IowaGaming Co., Mark Twain Casino, L.L.C. and St. Joseph Riverboat Partners whichare excluded from the Grace Acquisition.

 

45

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(2)           Cashis adjusted for $5,500 in cash on hand pursuant to the Grace asset purchaseagreements and an amount equal to assumed liabilities for player’s club,progressive jackpots and outstanding chips and tokens. The liabilities assumedat Southern Iowa Gaming Co. were $798, at Mark Twain Casino, L.L.C. were $444and at St. Joseph Riverboat Partners Casino were $489.

 

(3)           TheCompany estimates the majority of intangibles represents goodwill, which is theexcess of purchase price over the estimated fair value of assets andliabilities assumed.

 

**3.             Propertyand Equipment**

 

Property and equipment consist of the following (dollars in thousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2003**         | ** ** | **2004** | ** ** |
| Building                           |       | $                | 53,779     |   | $ | 54,398 |   |
| Gaming equipment                   |       | 63,821           |       | 70,695 |   |
| Furniture, fixtures, and equipment |       | 23,312           |       | 26,223 |   |
| Leasehold improvements             |       | 1,690            |       | 1,808 |   |
| Land                               |       | 15,925           |       | 15,925 |   |
| Construction in progress           |       | 204              |       | 2,806 |   |
|                               |       | 158,731          |       | 171,855 |   |
| Less accumulated depreciation      |       | (51,907          | )          | (64,650 | ) |
|                               |       | $                | 106,824    |   | $ | 107,205 |   |

 

**4.             LeaseAcquisition Costs**

 
| ** **              | ** ** | **As of December 31, 2003** | ** ** | **As of December 31, 2004**   | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **              | ** ** | **(dollars  in thousands)** | ** ** |
| Lease Acquisition Costs |       | $                           | 76,221     |                          | $          | 16,601 |   | $ | 78,029 |   | $ | 26,635 |   |
|                         |            |                             |            |                               |            |  |  |  |  |  |  |  |  |

 

The aggregate amortization expense for the years ended December 31,2002, 2003 and 2004 was $2,930,000, $9,134,000 and $10,036,000, respectively.

 

Estimated amortization expense for the twelve months ended 2005, 2006,2007, 2008 and 2009 is $9,927,000, $9,703,000, $9,562,000, $8,813,000 and$6,409,000, respectively.

 

46

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**5.             OtherAssets**

 

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

 
| ** **                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **2003**         | ** ** | **2004** | ** ** |
| Debt issuance costs, net of accumulated  amortization of $3,158 and $533, respectively |       | $                | 7,468      |   | $ | 11,449 |   |
| Other assets                                                                           |       | 1,532            |       | 2,096 |   |
| Total                                                                                  |       | $                | 9,000      |   | $ | 13,545 |   |
|                                                                                        |            |                  |            |  |  |  |  |  |

 

**6.             AccruedExpenses**

 

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

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------|------------|
| ** **                      | ** ** | **2003**         | ** ** | **2004** | ** ** |
| Accrued interest                |       | $                | 7,833      |   | $ | 2,664 |   |
| Progressive jackpot liabilities |       | 1,593            |       | 1,657 |   |
| Other accrueds                  |       | 4,173            |       | 4,575 |   |
| Total                           |       | $                | 13,599     |   | $ | 8,896 |   |
|                                 |            |                  |            |  |  |  |  |  |  |

 

**7.             Long-TermDebt**

 

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

 
| ** **                                                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | **2003**         | ** ** | **2004** | ** ** |
|                                                                                                                                                                                                            |       |             |       |   |   |
| 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 |       | 214,798          |       | 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 |   |
| 7% senior subordinated notes due November  1, 2014 with interest paid semi-annually on May 15 and November 15                                                                                                   |       | —           |       | 170,000 |   |
| Notes payable to leasing company secured by  vehicles, payable in monthly installments of $4, including interest ranging  from 4.9% to 5.3%, due April 2004                                                     |       | 471              |       | 409 |   |
| Total debt                                                                                                                                                                                                      |       | 215,269          |       | 333,412 |   |
| Less current portion                                                                                                                                                                                            |       | 170              |       | 154 |   |
| Total long-term debt                                                                                                                                                                                            |       | $                | 215,099    |   | $ | 333,258 |   |
|                                                                                                                                                                                                                 |            |                  |            |  |  |  |  |

 

*10*3/4*% Senior SecuredNotes*

 

On August 24, 2001, the Company issued (under a private placement)$170.0 million in 103/4%senior secured notes due September 1, 2008 (the “2001 103/4% notes”). The 2001 103/4%notes mature on September 1, 2008. Interest is payable in cash at a rate of 10 3/4% per annum on March 1 and September 1.

 

The 2001 103/4%notes mature on September 1, 2008. Interest is payable in cash at a rate of 10 3/4% per annum on March 1 and September 1.

 

47

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In February 2003, the Company issued $47.0 million in additional notesunder the indenture governing the 2001 103/4% notes (the “2003 103/4%notes”, and together with the 2001 103/4%notes, collectively, the “103/4%notes”). The proceeds of the issuance of the 2003 103/4%notes were used to purchase the slot route assets of Anchor Coin.  The 2003 103/4%notes mature on August 24, 2008. Interest is payable in cash at a rate of 10 3/4% per annum on March 1 and September 1.

 

In 2004, the Company successfully completed the tender offer for $210.9million principal amount of the 103/4% notes, and in connection with the tender offersuccessfully solicited consents to eliminate substantially all of therestrictive covenants and certain events of default from the indenturegoverning the 103/4%notes.  The Company is in compliance withthe remaining covenants as of December 31, 2004.

 

*8**1/8% SeniorSubordinated Notes*

 

On June 11, 2004, the Company issued (under a private placement) $160million in 81/8%senior subordinated notes due June 1, 2012 (the “81/8%notes”).

 

The proceeds from the 81/8%notes, along with the amended credit facility were used to retire 97% of itsoutstanding 103/4% notes for $242.1million and to pay a $15.0 million dividend to shareholders. Fees of $5.9million associated with the 81/8%notes and amended credit facility are included in other assets at December 31,2004 and are being amortized over the life of the indebtedness. In connectionwith the retirement of 97% of the 103/4%notes, the Company recorded a loss on the early retirement of debt of $38.0million. The loss consisted of $31.3 million in debt prepayment premiums and$6.7 million in unamortized loan fees.

 

The 81/8%notes mature on June 1, 2012. Interest is payable in cash at a rate of 81/8% per annum on June 1 and December 1 of each year,beginning on December 1, 2004. The indenture under which the 81/8% notes were issued contains various limitations andrestrictions including (i) change in control provisions, (ii) limitations onindebtedness and (iii) limitations on certain payments such as dividends. TheCompany is in compliance with these covenants as of December 31, 2004.

 

In August 2004, the Company filed a Form S-4 registration statementwith the SEC for the purpose of effecting the exchange of the 81/8% notes for identical notes registered for resale underthe federal securities laws. This registration statement became effective inNovember 2004 and the exchange offer was consummated in December 2004.

 

*7% Senior Subordinated Notes*

 

On November 22, 2004, the Company issued (under 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 acquisition of the Grace Entertainmentassets in February 2005. Estimated fees of $5.8 million associated with the 7%notes and amended credit facility are included in other assets at December 31,2004 and 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 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, 2004.

 

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 and subsequent exchange ofthe notes is pending approval by the Securities and Exchange Commission.

 

48

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The Company’s senior notes are guaranteed by E-T-T, Inc., CardivanCompany, Corral Coin, Inc., Corral Country Coin, Inc., Corral Coin, Inc., E-T-TEnterprises L.L.C., Market Gaming, Inc., and Flamingo Paradise Gaming, LLC (100percent-owned subsidiaries of Herbst Gaming, Inc.) (collectively, the “subsidiaryguarantors”). Condensed consolidating financial information with respect to thesubsidiary guarantors is not provided because the Company has no independentassets or operations, the subsidiary guarantees are full and unconditional andjoint and several, and there are no other material subsidiaries of the Companyother than the subsidiary guarantors.

 

*Credit Facilities*

 

On October 8, 2004, the Company amendedand restated the senior secured credit facility it entered into on June 10,2004 (the “amended credit facility”). The amendment provided for a $175 millionrevolving credit facility and included the ability to issue $100 million undera term facility for the acquisition of the Grace Entertainment assets.  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 0.25% and 1.75% and, if determined byreference to Eurodollar, between 1.5% and 3.0%. As of December 31, 2004,using the one-month Eurodollar option, the premium over Eurodollar was 2.0%.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 0.30% and 0.50% per annum. As of December 31,2004, the fee was 0.40% per annum times the average unused portion of thefacility.

 

The amended credit facility contains variouslimitations and restrictions, including with respect to leverage covenants(both senior and total) as well as a minimum fixed charge coverage ratio. TheCompany is in compliance with these covenants as of December 31, 2004.

 

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

 
| ** ** | ** ** | **December 31,  2004** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2005       |       | $                           | 154        |   |
| 2006       |       | 117                         |       |
| 2007       |       | 101                         |       |
| 2008       |       | 4,101                       |       |
| 2009       |       | 4                           |       |
| Thereafter |       | 328,935                     |       |
| Total      |       | $                           | 333,412    |   |

 

**8.****                                      Related-PartyTransactions**

 

*General.*

 

Edward Herbst, Timothy Herbst and Troy Herbstare brothers and are the officers and directors of Herbst Gaming, Inc. and itswholly-owned subsidiaries. In addition, they are officers and directors ofTerrible Herbst, Inc. There is no cross ownership between Herbst Gaming, Inc.and Terrible Herbst, Inc. Terrible Herbst, Inc. is owned solely by Jerry andMaryanna Herbst, the parents of the Herbst brothers. Sean Higgins, the Company’sgeneral counsel, is also the general counsel of Terrible Herbst, Inc.

 

*Slotroute contract with Terrible Herbst, Inc.*

 

The Company rents space for certain slotmachine route operations in convenience stores owned by Terrible Herbst, Inc. (“TerribleHerbst”), a corporation in which the owners of the Company are officers andwhich is owned by the father of the Company’s owners. Rent expense of$4,132,800, $4,754,400 and $5,599,500 was incurred under this agreement for theyears ended December 31, 2002, 2003 and 2004, respectively, for theexclusive placement of slot machines in Terrible Herbst convenience storelocations. This contract expires in 2010 but may be extended at the option ofthe Company for two additional terms of five years.

 

49

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*Otherarrangements with Terrible Herbst, Inc.*

* *

The Company has entered into a servicingarrangement with Terrible Herbst pursuant to which it provides accounting andadministrative services related to the collection of daily deposits fromTerrible Herbst convenience stores. The Company also provides personnel toTerrible Herbst to count, maintain and safeguard large amounts of coin andcurrency. Terrible Herbst reimburses the Company’s expenses in providing theseservices. Under this servicing arrangement, the Company was paid approximately$205,800, for services rendered for each of the years ended December 31,2002, 2003 and 2004.

 

The Company has entered into a nonexclusivetrademark and license agreement with Terrible Herbst for the use of theTerrible Herbst brand name and its cowboy logo which extends through 2011.Subject to mutual consent, the agreement provides for the ability to renew theagreement for two additional successive terms of five years each.  Pursuant to this trademark and licenseagreement, the Company paid approximately $1,200,000, $1,301,000 and $1,345,000to Terrible Herbst in the years ended December 31, 2002, 2003 and 2004,respectively.

 

*Leaseagreements.*

 

Pursuant to a lease agreement that expires in2067, including renewal periods, the Company leases the real property on whichits corporate headquarters is located from The Herbst Family LimitedPartnership II, or Herbst FLP II. The general partners of the Herbst FLP II areJerry and Maryanna Herbst. The lease requires monthly rental payments of$14,416. In each of 2002, 2003 and 2004, the Company paid $172,992 under thislease.

 

Pursuant to a lease agreement that expires in2026, including renewal periods, the Company leases the real property on whichTerrible’s Town Casino in Pahrump is located from The Herbst Family LimitedPartnership. The lease requires monthly rental payments of $12,500. In each of2002, 2003 and 2004, the Company paid $150,000 under this lease.

 

The Company leases land and office space incertain of its facilities to Terrible Herbst under noncancelable leaseagreements with terms ranging from 10 to 20 years. Monthly rental income is$63,500. Rental income from these leases was $662,000, $642,000 and $642,000for 2002, 2003 and 2004, respectively.

 

The Company leases the real property on whichTerrible’s Searchlight Casino in Searchlight is located from Terrible Herbstfor $15,000 per month, pursuant to a lease agreement entered into on June 30,2002 that expires in 2022, with options to renew the lease for five additionalsuccessive terms of ten years each. Terrible Herbst leases that real propertyfrom an unrelated third party, pursuant to a lease agreement entered into on June 30,2002 that expires in 2042, including renewal periods. Amounts paid under thislease were $90,000 in 2002, $180,000 in 2003 and $180,000 in 2004.

 

The Company leases a warehouse located in LasVegas, Nevada for its employment center and purchasing departments from theHerbst’s Grandchildren’s Trust. The lease began in November 2002 andrequires payments of $43,525 per month through November 2012. Rent expenseincurred under this lease arrangement was $43,525, $522,300 and $522,300 forthe years ended December 31, 2002, 2003 and 2004, respectively.

 

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

 
| 2005       |   | $     | 642    |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 652   |   |
| 2007       |   | 663   |   |
| 2008       |   | 663   |   |
| 2009       |   | 525   |   |
| Thereafter |   | 2,779 |   |
| Total      |   | $     | 5,924  |   |

 

50

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*Related-partytransactions.*

 

Edward Herbst, an owner of the Company, owedthe Company approximately $434,000 represented by certain notes receivable at December 31,2003. These notes were repaid in full in the first quarter of 2004. Interestincome related to the notes receivable was $26,000, $26,000 and $0 for 2002,2003 and 2004, respectively.

 

Mr. Higgins is the Company’s General Counsel,the General Counsel of Terrible Herbst, Inc. and the brother of Mary E.Higgins, the Company’s Chief Financial Officer. Mr. Higgins received a salaryfor services rendered to the Company in 2002, 2003 and 2004 of $260,674,$295,708 and $339,394, respectively.

 

In 2003, the Company entered into a slotroute contract to install, operate and service slot machines at a tavern ownedby HIGCO, Inc., a company owned and operated by Mr. Higgins and two of hisbrothers, G. Michael Higgins and Kevin J. Higgins. Pursuant to this revenue-sharingcontract, HIGCO paid the Company $27,097 in 2003 and $118,756 in 2004. At December 31,2003, HIGCO, Inc. had a note outstanding of $20,000, which was repaid in fullon September 24, 2004.

 

In 2004, E-T-T, Inc. entered into a slotroute contract with SamCon, Inc., a company owned and operated by Mr. Higgins,to install, operate and service slot machines at a new location which has notyet opened. Terms of this revenue-sharing contract are similar to the terms ofthe contract the Company entered into with HIGCO in 2003. Pursuant to thisrevenue-sharing contract, SamCon, Inc. paid E-T-T, Inc. $0 in 2004.

 

John N. Brewer, a member of the Company’sboard of directors, is a partner with Kummer Kaempfer Bonner & Renshaw. TheCompany retained Kummer Kaempfer Bonner & Renshaw as outside legal counselthrough December 31, 2004, and Kummer Kaempfer Bonner & Renshaw hasreceived fees for legal services in the amount of $234,309, $251,188 and$274,310 for 2002, 2003 and 2004, respectively.

 

John D. Gaughan, a former member of theCompany’s board of directors who resigned on August 12, 2004, is thePresident and Chief Executive Officer of Las Vegas Dissemination, Inc., whichprovides services related to the race and sports books at Terrible’s Hotel& Casino and Terrible’s Town. Las Vegas Dissemination, Inc. received feesfor services in the amount of $239,111 in 2002, $366,526 in 2003 and $290,112in 2004.

 

Due from related parties at December 31,2003 includes $434,000 in notes receivable from an owner. The notes boreinterest at rates from 5 to 6 percent and were repaid in full in the firstquarter of 2004. Due from related parties also includes receivables of $107,000and $160,000 at December 31, 2003 and 2004, respectively, from TerribleHerbst, which are non-interest bearing. Interest income related to the notesreceivable was $26,000, $26,000 and $0 for the years ended December 31,2002, 2003 and 2004, respectively.

 

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

 

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**9.****                                      Commitmentsand Contingencies**

 

At December 31, 2004, the Company hasnoncancelable location license agreements for space leases at groups of affiliatedstores that expire on various dates from 2005 through 2011, with certainoptions for renewal. Revenues from gaming machines in these stores accountedfor approximately 44 percent of the Company’s total revenues for the year endedDecember 31, 2004.

 

Future minimum lease payments undernoncancelable operating leases and location license agreements are as follows(dollars in thousands):

 
|       |   |   |    |
|------------|--------|--------|---------|
| 2005       |   | $      | 69,925  |   |
| 2006       |   | 67,059 |    |
| 2007       |   | 67,162 |    |
| 2008       |   | 49,068 |    |
| 2009       |   | 30,533 |    |
| Thereafter |   | 50,290 |    |
| Total      |   | $      | 334,037 |   |

 

Rent expense related to noncancelable leaseswith terms exceeding one year was $55,998,000, $67,111,000 and $72,227,583 forthe years ended December 31, 2002, 2003 and 2004, respectively.

 

The Company incurred $0.6 million in costsassociated with the termination of the lease with McDonald’s at Terrible’sHotel in Las Vegas. This space will be used as a portion of the expansion andparking garage planned at Terrible’s Hotel.

 

The Company is a party to certain claims,legal actions, and complaints arising in the ordinary course of business orasserted by way of defense or counterclaim in actions filed by the Company.Management believes that its defenses are substantial in each of these mattersand that the Company’s legal position can be successfully defended withoutmaterial adverse effect on its consolidated financial statements.

 

**10.****                               RevenueDerived From Major Locations**

 

Route operations revenues at three groups ofaffiliated store chains in the years ended December 31, 2003 and 2004 andtwo groups of affiliated store chains in the year ended December 31, 2002each accounted for more than 10 percent of the Company’s total route revenues.The total of such revenues were approximately $87,299,000, $117,692,000 and$137,468,000 in the years ended December 31, 2002, 2003 and 2004,respectively. Each individual store chain included in an affiliated group ofstore chains has a separate lease with the Company.

 

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**11.****                               BusinessSegments**

 

The Company has adopted SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.” SFAS No. 131established standards for the way public companies are to report informationabout operating segments in annual financial statements and requires thoseenterprises to report selected information about operating segments in interimfinancial reports issued to stockholders. It also established standards forrelated disclosures about products and services, geographic areas, and majorcustomers. The Company’s management does not use segment information on assetsto manage its business.

 

The Company operates through two businesssegments—slot route operations and casino operations. The slot route operationsinvolve the installation, operation, and service of slot machines at strategic,high traffic non-casino locations, such as grocery stores, drug stores,convenience stores, bars, and restaurants. Casino operations consist of thefollowing five casinos: Terrible’s Town Casino (Henderson) in Henderson, Nevada,Terrible’s Searchlight Casino in Searchlight, Nevada and Terrible’s Town Casinoand Terrible’s Lakeside Casino, both of which are located in Pahrump, Nevada,and Terrible’s Hotel & Casino in Las Vegas, Nevada.

 

Revenues and income for these segments are asfollows (dollars in thousands):

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                    |       |                             |       |   |   |   |   |
| Slot route  operations                          |       | $                                | 183,572    |   | $ | 241,462 |   | $ | 292,868 |   |
| Casino  operations                              |       | 63,001                           |       | 67,464 |   | 79,116 |   |
| Other—non  gaming                          |       | 3,078                            |       | 3,049 |   | 3,628 |   |
| Total net revenues                              |       | $                                | 249,651    |   | $ | 311,975 |   | $ | 375,612 |   |
| Depreciation  and amortization                  |       |                             |       |   |   |   |   |
| Slot route  operations                          |       | $                                | 9,464      |   | $ | 17,893 |   | $ | 20,177 |   |
| Casino  operations                              |       | 5,864                            |       | 6,039 |   | 6,091 |   |
| Other                                           |       | 413                              |       | 450 |   | 399 |   |
| Total  depreciation and amortization            |       | $                                | 15,741     |   | $ | 24,382 |   | $ | 26,667 |   |
| Segment  EBITDA(2)                              |       |                             |       |   |   |   |   |
| Slot route  operations                          |       | $                                | 32,791     |   | $ | 48,705 |   | $ | 64,939 |   |
| Casino  operations                              |       | 14,366                           |       | 16,322 |   | 22,785 |   |
| Total  segment EBITDA(2)                        |       | 47,157                           |       | 65,027 |   | 87,724 |   |
| Other and  corporate(1)                         |       | (7,398                           | )          | (9,237 | ) | (10,985 | ) |
| Depreciation  and amortization                  |       | (15,741                          | )          | (24,382 | ) | (26,667 | ) |
| Interest  expense, net of capitalized interests |       | (18,785                          | )          | (22,932 | ) | (20,849 | ) |
| Loss on  early retirement of debt               |       | —                           |       | (267 | ) | (37,991 | ) |
| Net income  (loss)                              |       | $                                | 5,233      |   | $ | 8,209 |   | $ | (8,768 | ) |

 

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(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.

 

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**12.****                               SubsequentEvents**

 

Pursuant to the terms of the amended creditfacility the Company and its subsidiaries entered into on October 8, 2004,on January 31, 2005, the Company incurred an additional $100.0 millionterm loan in order to partially fund the Grace Acquisition. The maturity dateof the term loan is January 31, 2011.

 

The Company plans to begin construction of athree-level, 450-space parking structure, a casino expansion and generalproperty renovation at Terrible’s Hotel & Casino in Las Vegas in spring2005 at a cost of between approximately $15.0 to $20.0 million. Completion ofthe project is expected in late 2005. The parking structure will be connectedto the casino and will provide needed additional parking for the casino’sguests, as the current surface lot is at capacity during peak hours. TheCompany believes that the availability of covered parking adjacent to thecasino will draw additional customers to the property. The casino expansionwill add approximately 200 slot machines to the casino floor.

 

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**Selected QuarterlyFinancial Information (Unaudited)(in thousands)**

 
| ** **                             | ** ** | **Mar.  31** | ** ** | **June 30** | ** ** | **Sept.  30** | ** ** | **Dec. 31** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|--------------|------------|------------------|------------|---------------|------------|-------------|------------|-----------|------------|
| **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                      |       | 11,227       |       | 13,436           |       | 11,523        |       | 13,533      |       | 49,719    |       |
| Net income  (loss)                     |       | 5,486        |       | (29,831          | )(1)       | 7,163         |       | 8,414       |       | (8,768    | )          |
| **Year  Ended December 31, 2003** |       |         |       |             |       |          |       |        |       |      |       |
| Net  revenues—Route operations    |       | $            | 53,680     |             | $          | 61,344        |       | $           | 62,178     |      | $          | 64,260 |   | $ | 241,462 |   |
| Net  revenues—Casino operations   |       | 16,885       |       | 16,383           |       | 16,701        |       | 17,495      |       | 67,464    |       |
| Net  revenues—Other               |       | 724          |       | 725              |       | 863           |       | 737         |       | 3,049     |       |
| Operating  income                      |       | 8,579        |       | 9,335            |       | 6,193         |       | 7,073       |       | 31,180    |       |
| Net income                             |       | 3,336        |       | 3,561            |       | 351           |       | 961         |       | 8,209     |       |

 

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**(**1)                                  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.

 

55

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## **Item 9**.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.

 

None.

 

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

 

We maintain disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of the end of the period covered by thisreport (the “Evaluation Date”), we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures.  Based on the foregoing, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the Evaluation Date,our disclosure controls and procedures were effective at the reasonableassurance level.

 

There has been no change in our internalcontrols over financial reporting during the year ended December 31, 2004that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reports.

 

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

 

None.

 

# **PART III**

 

## **Item 10.  Directorsand Executive Officers of the Registrant.**

 

The following information is furnished withrespect to each member of the board of directors, each of whom, unlessotherwise indicated, has served as a director continuously since the year setforth below.  Directors are electedannually.  Each director serves until hissuccessor has been elected and qualified. Similar information is provided for our executive officers.

 

**Directors and Officers**

 

The following is a list of our directors andexecutive officers:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                  | ** ** |
|-----------------------|------------|---------|------------|---------------------------------------------------------------|------------|
| Edward J.  Herbst     |       | 43      |       | Chairman of the Board, Chief Executive  Officer and President |       |
|                  |       |    |       |                                                          |       |
| Timothy P.  Herbst    |       | 41      |       | Executive Vice President and Director                         |       |
|                  |       |    |       |                                                          |       |
| Troy D.  Herbst       |       | 38      |       | Executive Vice President, Secretary,  Treasurer and Director  |       |
|                  |       |    |       |                                                          |       |
| Mary E.  Higgins      |       | 47      |       | Chief Financial Officer                                       |       |
|                  |       |    |       |                                                          |       |
| John N.  Brewer       |       | 47      |       | Director                                                      |       |
|                  |       |    |       |                                                          |       |
| John F. O’Reilly |       | 59      |       | Director                                                      |       |

 

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

 

*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

 

56

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gaming route operations, casinooperations, new business initiatives and the solicitation of new contracts.Edward also serves as a Vice President of Terrible Herbst, Inc. and sits as amember of U.S. Bank of Nevada’s advisory board 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 wasthe Chief Financial Officer of Camco, Inc., a Las Vegas based specialty financecompany. From August 1987 to October 1996, Ms. Higgins was theCommercial Lending Division Manager of Southern Nevada for Wells Fargo Bank inLas Vegas.

 

*John N. Brewer* hasserved as a Director of our company since December 2001. Mr. Brewer isalso a member of our Audit Committee. Mr. Brewer is a partner with the law firmof Kummer Kaempfer Bonner & Renshaw in Las Vegas, Nevada, where he haspracticed principally in corporate and securities law since its inception in1994.

 

*John F. O’Reilly* hasserved as a Director of our company since November 2004. Mr. O’Reilly isthe Chairman and Chief Executive Officer of the law firm of O’Reilly &Ferrario, LLC, in Las Vegas, Nevada, a position which he has held since 1999and where he has practiced since its inception in 1977 and also serves as theChairman and Chief Executive Officer of the O’Reilly Gaming Group, in LasVegas, Nevada, which he has served since its inception in 1999.  Mr. O’Reilly is also Chairman and an officerand/or Director of various family-owned business entities and relatedinvestments.  Mr. O’Reilly has served asa Director of Nevada Power Company since 1995 and Sierra Pacific Resources andSierra Pacific Power Company since 1999.

 

**Code of Ethics**

 

We have adopted a Code of Ethics for ourChief Executive Officer and President, and our Chief Financial Officer andChief Accounting Officer.  This Code ofEthics is reasonably 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 Committeeand an Executive Committee. 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;

 

•                  toconsider selection of independent public accountants;

 

57

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•                  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 John Brewer. Mr. Brewer is the Chairman of the AuditCommittee.  Our board of directors hasdetermined that Mr. Brewer is qualified as an audit committee financial expertas 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 toreview and make recommendations to our board of directors with respect to thesalaries and bonuses of our executive officers and key employees. DirectorsEdward Herbst, Timothy Herbst and Troy Herbst serve on the Executive Committee.

 

## **Item 11.  ExecutiveCompensation.**

 

**Executive Compensation**

 

The following table lists all compensation wepaid or accrued for services rendered by our executive officers whose aggregatecash compensation exceeded $100,000 for the last three fiscal years:

 
| ** **                                | ** ** | ** **       | ** ** | **Annual Compensation** | ** ** | **Compensation($ )—** | ** ** |
|-------------------------------------------|------------|------------------|------------|-------------------------|------------|---------------------------------|------------|
| **Name and Principal Position**           | ** ** | **Fiscal  Year** | ** ** | **Salary**              | ** ** | **Bonus**                       | ** ** | **Other Annual  Compensation(2)** | ** ** | **Stockholder Tax  Distribution(3)** | ** ** |
| Edward J.  Herbst(1),                     |       | 2004             |       | $                       | 512,663    |                            | $          | — |   | $ | 6,752,769 |   | 1,100,000 |   |
| *Chairman of the Board, Chief Executive*  |       | 2003             |       | 488,250                 |       | —                          |       | 1,323,347 |   | 489,000 |   |
| *Officer and President*                   |       | 2002             |       | 465,000                 |       | —                          |       | 1,412 |   | — |   |
|                                      |       |             |       |                    |       |                            |       |   |   |   |   |
| Timothy P.  Herbst,                       |       | 2004             |       | 165,375                 |       | —                          |       | 6,753,126 |   | 1,100,000 |   |
| *Executive Vice President*                |       | 2003             |       | 157,500                 |       | —                          |       | 1,323,483 |   | 489,000 |   |
| * *                                  |       | 2002             |       | 150,000                 |       | —                          |       | 1,300 |   | — |   |
|                                      |       |             |       |                    |       |                            |       |   |   |   |   |
| Troy D.  Herbst,                          |       | 2004             |       | 165,375                 |       | —                          |       | 6,753,130 |   | 1,100,000 |   |
| *Executive Vice President, Secretary and* |       | 2003             |       | 157,500                 |       | —                          |       | 1,323,746 |   | 489,000 |   |
| *Treasurer*                               |       | 2002             |       | 150,000                 |       | —                          |       | 1,296 |   | — |   |
|                                      |       |             |       |                    |       |                            |       |   |   |   |   |
| Mary E.  Higgins(1),                      |       | 2004             |       | 269,052                 |       | 153,000                         |       | 3,262 |   | — |   |
| *Chief Financial Officer*                 |       | 2003             |       | 262,500                 |       | 3,000                           |       | — |   | — |   |
|                                      |       | 2002             |       | 250,000                 |       | 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 intoemployment agreements with Edward J. Herbst, our Chairman, Chief ExecutiveOfficer and President, and Mary E. Higgins, our Chief Financial Officer, inwhich we agreed to pay them annual base compensation of $465,000 and $250,000,respectively, which may be increased annually by five percent. These agreementscommenced on August 1, 2001 and terminate on July 31, 2006. Theseagreements automatically renew for successive one-year periods unless soonerterminated or unless either party to the respective agreements notifies theother in writing at least 60 days prior to the date the respective agreement isscheduled to expire. Each employment agreement provides that if the executive’semployment is terminated for Cause (as defined in the employment agreement),such executive will receive no severance payment of any kind. If the executivevoluntarily terminates employment, the executive will receive no severancepayment of any kind. In the event that we choose to terminate the executive’semployment for any reason other than Cause, the executive will receive aseverance payment equal to one year’s salary. The employment agreements withthese executives also contain a covenant to protect confidential information.

 

58

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**Executive Compensation and Bonus Plan**

 

The board of directors has adopted theExecutive Compensation and Bonus Plan for our executive officers who are alsostockholders. Any payments to be made under this plan must be approved by ourindependent directors. Commencing with calendar year 2003 and each succeedingcalendar year, the maximum aggregate amount of annual compensation and cashbonuses increases by 5%. Commencing with calendar year 2003, the independentdirectors began establishing the financial targets that we need to meet priorto our making a cash bonus to a participant.

 

**Executive Committee Interlocks and Insider Participation**

 

During the fiscal year ended December 31,2004, Edward, Timothy and Troy Herbst were members of the Executive Committeeof our board of directors.  Our executivecompensation is determined by the Executive Committee, all members of which areofficers, and the owners, of Herbst Gaming.

 

**Compensation of Directors**

 

Our directors do not receive any compensationfor serving on our board of directors or attending meetings thereof, exceptthat our independent directors will receive compensation in the amount of$1,000 per meeting attended.

 

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

 

Not Applicable.

 

## **Item 12.  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

 

The securities entitled to vote consist ofshares of our common stock, no par value, with each share entitling its ownerto one vote. Common stock is the only outstanding class of voting securitiesauthorized by our articles of incorporation. The number of outstanding sharesof common stock as of December 31, 2004 was 300.

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

 

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(1)                                  The address of eachsuch person is c/o Herbst Gaming, Inc., 3440 West Russell Road, Las Vegas,Nevada 89118.

 

## **Item 13.  CertainRelationships and Related Transactions.**

 

We believe that all of the transactionsmentioned below are on terms at least as favorable to us as would have beenobtained from an unrelated third party.

 

*General.*  Edward Herbst, Timothy Herbst and Troy Herbstare brothers and are the officers and directors of Herbst Gaming, Inc. and itswholly-owned subsidiaries. In addition, they are officers and directors ofTerrible Herbst, Inc. There is no cross ownership between Herbst Gaming, Inc.and Terrible Herbst, Inc. Terrible Herbst, Inc. is owned solely by Jerry andMaryanna Herbst, the parents of the Herbst brothers. Sean Higgins, our generalcounsel, is also the general counsel of Terrible Herbst, Inc.

 

*Slot route contract with Terrible Herbst,Inc.*  We rentspace for certain slot machine route operations in convenience stores owned byTerrible Herbst, Inc., a corporation in which our owners are officers and whichis owned by the father of our owners. Rent expense of $4,132,800, $4,754,400and $5,599,500 was incurred under this agreement for the years ended

 

59

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December 31, 2002, 2003and 2004, respectively, for the exclusive placement of slot machines in theTerrible Herbst convenience store locations. This contract expires in 2010 butmay be extended at our option for two additional terms of five years.

 

*Other arrangements with Terrible Herbst, Inc.*  We have also entered into a servicingarrangement with Terrible Herbst, Inc. pursuant to which we provide accountingand administrative services related to the collection of daily deposits from theTerrible Herbst, Inc. convenience stores. We also provide personnel to TerribleHerbst, Inc. to count, maintain and safeguard large amounts of coin andcurrency. Terrible Herbst, Inc. reimburses our expenses in providing theseservices. Under this servicing arrangement, we were paid approximately$205,800, for services rendered for each of the years ended December 31,2002, 2003 and 2004.

 

We have entered into a nonexclusive trademarkand license agreement with Terrible Herbst, Inc. for the use of the TerribleHerbst brand name and its cowboy logo which extends through 2011. Subject tomutual consent, the agreement provides for the ability to renew the agreementfor two additional successive terms of five years each.  Pursuant to this trademark and licenseagreement, we paid approximately $1,200,000, $1,301,000 and $1,345,000 toTerrible Herbst, Inc. in the years ended December 31, 2002, 2003 and 2004,respectively.

 

*Lease agreements.*  Pursuant to a lease agreement that expires in2067, including renewal periods, we lease the real property on which ourcorporate headquarters is located from The Herbst Family Limited PartnershipII, or Herbst FLP II. The general partners of the Herbst FLP II are Jerry andMaryanna Herbst. In each of 2002, 2003 and 2004, we paid $172,992 under thislease.

 

Pursuant to a lease agreement that expires in2026, including renewal periods, we lease the real property on which Terrible’sTown Casino in Pahrump is located from The Herbst Family Limited Partnership.The lease requires monthly rental payments of $12,500. In each of 2002, 2003and 2004, we paid $150,000 under this lease.

 

We lease land and office space in certain ofour facilities to Terrible Herbst, Inc. under noncancelable lease agreementsranging from 10 to 20 years. Monthly rental income is $63,500. Rental incomefrom these leases was $662,000, $642,000 and $642,000 for 2002, 2003 and 2004,respectively.

 

We lease the real property on which Terrible’sSearchlight Casino in Searchlight is located from Terrible Herbst, Inc. for$15,000 per month, pursuant to a lease agreement entered into on June 30,2002 that expires in 2022, with options to renew the lease for five additionalsuccessive terms of ten years each. Terrible Herbst, Inc. leases that realproperty from an unrelated third party, pursuant to a lease agreement enteredinto on June 30, 2002 that expires in 2042, including renewal periods.Amounts paid under this lease were $90,000 in 2002, $180,000 in 2003 and$180,000 in 2004.

 

We lease a warehouse located in Las Vegas,Nevada for our employment center and purchasing departments from the Herbst’sGrandchildren’s Trust. The lease began in November 2002 and requirespayments of $43,525 per month through November 2012. Rent expense incurredunder this lease arrangement was $43,525, $522,300 and $522,300 for the yearsended December 31, 2002, 2003 and 2004, respectively.

 

*Related-party transactions.*  Edward Herbst, an owner, owed usapproximately $434,000 represented by certain notes receivable at December 31,2003. These notes were repaid in full in the first quarter of 2004. Interestincome related to the notes receivable was $26,000, $26,000 and $0 for 2002,2003 and 2004, respectively.

 

Mr. Higgins is our General Counsel, theGeneral Counsel of Terrible Herbst, Inc. and the brother of Mary E. Higgins,our Chief Financial Officer. Mr. Higgins received a salary for servicesrendered to us in 2002, 2003 and 2004 of $260,674, $295,708 and $339,394,respectively.

 

In 2003, we entered into a slot routecontract to install, operate and service slot machines at a tavern owned byHIGCO, Inc., a company owned and operated by Mr. Higgins and two of hisbrothers, G. Michael Higgins and Kevin J. Higgins. Pursuant to this revenue-sharingcontract, HIGCO, Inc. paid us $27,097 in 2003 and $118,756 in 2004.

 

In 2004, E-T-T, Inc. entered into a slotroute contract with SamCon, Inc., a company owned and operated by Mr. Higgins,to install, operate and service slot machines at a new location which has notyet opened. Terms of this revenue-sharing contract are similar to the terms ofthe contract we entered into with HIGCO in 2003. Pursuant to this revenue-sharingcontract, SamCon, Inc. paid E-T-T, Inc. $0 in 2004.

 

60

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John N. Brewer, a member of our board ofdirectors, is a partner with Kummer Kaempfer Bonner & Renshaw. We retainedKummer Kaempfer Bonner & Renshaw as outside legal counsel through December 31,2004, and Kummer Kaempfer Bonner & Renshaw has received fees for legalservices in the amount of $234,309, $251,188 and $274,310 for 2002, 2003 and2004, respectively.

 

John D. Gaughan, a former member of our boardof directors who resigned on August 12, 2004, is the President and ChiefExecutive Officer of Las Vegas Dissemination, Inc., which provides servicesrelated to the race and sports books at Terrible’s Hotel & Casino andTerrible’s Town. Las Vegas Dissemination, Inc. received fees for services inthe amount of $366,526 in 2003 and $290,112 in 2004.

 

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

 

Insofar as indemnification for liabilitiesarising under the Securities Act may be permitted to directors, officers orcontrolling persons of the registrants pursuant to the foregoing provisions, wehave been informed that in the opinion of the SEC such indemnification isagainst public policy as expressed in the Securities Act and is, therefore,unenforceable.

 

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

 

The aggregate accounting fees billed andservices provided by our principal accountants for the years ended December 31,2003 and 2004 are as follows:

 
| ** **             | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |
| Audit  fees(1)         |       | $        | 151,335    |     | $          | 157,000 |   |
| Audit-related  fees(2) |       | 8,200    |       | 246,952  |       |
| Tax fees               |       | —   |       | —   |       |
| All other  fees        |       | —   |       | —   |       |
|                   |       |     |       |     |       |
| Total fees             |       | $        | 159,535    |     | $          | 403,952 |   |

 

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(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 GraceAcquisition.

 

It is our practice that all services providedto us by our independent auditors be pre-approved either by the Audit Committeeor by the Chairman of the Audit Committee pursuant to authority delegated bythe Audit Committee.  No part of theindependent auditor services related to the Audit Related Fees, Tax Fees, orAll Other Fees listed in the table above was approved by the Audit Committeepursuant to the exemption from pre-approval provided byparagraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

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# **PART IV**

 

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

 
| (a)    |       | Financial  Statements                                                                                                        |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                         |
| **1.** | ** ** | **List of Financial  Statements**                                                                                            |
|   |       |                                                                                                                         |
|   |       | Included in Part II of this report:                                                                                          |
|   |       |                                                                                                                         |
|   |       | Report of Independent Registered Public  Accounting Firm                                                                     |
|   |       |                                                                                                                         |
|   |       | Consolidated Financial Statements                                                                                            |
|   |       |                                                                                                                         |
|   |       | Consolidated Balance Sheets As of December 31, 2003 and 2004                                                            |
|   |       |                                                                                                                         |
|   |       | Consolidated Statements of Operations for  the years ended December 31, 2002, 2003 and 2004                             |
|   |       |                                                                                                                         |
|   |       | Consolidated Statements of Stockholders’  Equity (Deficiency) for the years ended December 31, 2002, 2003 and 2004 |
|   |       |                                                                                                                         |
|   |       | Consolidated Statements of Cash Flows for  the years ended December 31, 2002, 2003 and 2004                             |
|   |       |                                                                                                                         |
|   |       | Notes to Consolidated Financial Statements                                                                                   |
|   |       |                                                                                                                         |
| **2.** | ** ** | **Financial  Statements Schedules**                                                                                          |

 

All schedulesare omitted given the absence of conditions under which they are required to beincluded or because the required information is included in the financialstatements 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. |

 

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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. |
|           |       |            |   |
|           | 4.5(1)     |            | Indenture dated as of August 24,  2001 between Herbst Gaming, Inc., certain guarantors and The Bank of New York  relating to Series A and Series B 10 3/4% Senior  Secured Notes due 2008. |
|           |       |            |   |
|           | 4.6(2)     |            | First Supplemental  Indenture dated as of August 23, 2002 between Herbst Gaming, Inc.,  certain guarantors and The Bank of New York. |
|           |       |            |   |
|           | 4.7(5)     |            | Second Supplemental  Indenture dated as of January 23, 2003 between Herbst Gaming, Inc.,  certain guarantors and The Bank of New York. |
|           |       |            |   |
|           | 4.8(5)     |            | Third Supplemental  Indenture dated as of February 6, 2003 between Herbst Gaming, Inc.,  certain guarantors and The Bank of New York. |
|           |       |            |   |
|           | 4.9(6)     |            | Fourth Supplemental  Indenture dated as of May 24, 2004 between Herbst Gaming, Inc., certain  guarantors and The Bank of New York. |
|           |       |            |   |
|           | 10.1(1)    |            | Escrow Agreement dated August 24,  2001 among Herbst Gaming, Inc., E-T-T, Inc., Edward Herbst, Timothy Herbst  and Troy Herbst and Wilmington FSB, as escrow agent, and The Bank of New  York, as trustee. |
|           |       |            |   |
|           | 10.2(1)    |            | Hazardous Substances  Indemnity Agreement dated August 24, 2001 by Herbst Gaming, Inc. and  certain guarantors in favor of The Bank of New York, as trustee. |
|           |       |            |   |
|           | 10.3(1)    |            | Trademark License Agreement  dated August 24, 2001 by and between Herbst Gaming, Inc. and Terrible  Herbst, Inc. |
|           |       |            |   |
|           | 10.4(1)    |            | Security Agreement dated August 24,  2001, among Herbst Gaming, Inc., certain guarantors and The Bank of New York,  as trustee. |
|           |       |            |   |
|           | 10.5(2)    |            | First Amendment to Security  Agreement dated as of August 23, 2002 among Herbst Gaming, Inc. and its  subsidiaries and The Bank of New York. |

 

63

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| **Index  No.** | ** ** | **Description** |
|----------------|------------|-----------------|
|           |       |            |   |
|           | 10.6(5)    |            | Second Amendment to  Security Agreement dated as of February 6, 2003 among Herbst Gaming,  Inc. and its subsidiaries and The Bank of New York (included as part of the  Third Supplemental Indenture at Exhibit 4.4). |
|           |       |            |   |
|           | 10.7(1)    |            | Collateral Assignment of  Contracts and Documents dated August 24, 2001 by Herbst Gaming, Inc. and  certain guarantors in favor of The Bank of New York, as trustee. |
|           |       |            |   |
|           | 10.8(1)    |            | Pledge and Security  Agreement (Herbst Gaming, Inc.) dated August 24, 2001 by Herbst Gaming,  Inc. in favor of The Bank of New York, as trustee. |
|           |       |            |   |
|           | 10.9(1)    |            | Pledge and Security  Agreement (E-T-T, Inc.) dated August 24, 2001 by E-T-T, Inc. in favor of  The Bank of New York, as trustee. |
|           |       |            |   |
|           | 10.10(1)   |            | Pledge and Security  Agreement (Edward, Tim and Troy Herbst) dated August 24, 2001 by Edward  J. Herbst, Timothy P. Herbst, and Troy D. Herbst in favor of The Bank of New  York, as trustee. |
|           |       |            |   |
|           | 10.11(1)   |            | Deed of Trust, Assignment  of Leases and Rents, Security Agreement and Fixture Filing (4100 Paradise  Road) dated August 24, 2001, and made by Flamingo Paradise Gaming, LLC  to National Title Co., as trustee, for the benefit of The Bank of New York,  as beneficiary. |
|           |       |            |   |
|           | 10.12(2)   |            | First Amendment to Deed of  Trust dated as of August 23, 2002 among Flamingo Paradise Gaming, LLC  and The Bank of New York. |
|           |       |            |   |
|           | 10.13(5)   |            | Second Amendment to Deed of  Trust dated as of February 6, 2002 among Flamingo Paradise Gaming, LLC  and The Bank of New York (included as part of the Third Supplemental  Indenture at Exhibit 4.4). |
|           |       |            |   |
|           | 10.14(1)   |            | Deed of Trust, Assignment  of Leases and Rents, Security Agreement and Fixture Filing (Terrible’s Casino &  Bowl) dated August 24, 2001, and made by Market Gaming, Inc. to National  Title Co., as trustee, for the benefit of The Bank of New York, as  beneficiary. |
|           |       |            |   |
|           | 10.15(5)   |            | First Amendment to Deed of  Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing  (Terrible’s Casino & Bowl) dated February 6, 2003 (included as  part of the Third Supplemental Indenture at Exhibit 4.4). |
|           |       |            |   |
|           | 10.16(1)   |            | Deed of Trust, Assignment  of Leases and Rents, Security Agreement and Fixture Filing (5870 S. Homestead  Road) dated August 24, 2001, and made by E-T-T Enterprises L.L.C. to  National Title Co., as trustee, for the benefit of The Bank of New York, as  beneficiary. |
|           |       |            |   |
|           | 10.17(5)   |            | First Amendment to Deed of  Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing  (5870 S. Homestead Road) dated February 6, 2003 (included as part of the  Third Supplemental Indenture at Exhibit 4.4). |
|           |       |            |   |
|           | 10.18(1)   |            | Leasehold Deed of Trust,  Security Agreement and Fixture Filing (Warehouse Property) dated August 24,  2001, and made by E-T-T Enterprises L.L.C. to National Title Co., as trustee,  for the benefit of The Bank of New York, as beneficiary. |
|           |       |            |   |
|           | 10.19(5)   |            | First Amendment to  Leasehold Deed of Trust, Security Agreement and Fixture Filing (Warehouse  Property) dated February 6, 2003 (included as part of the Third  Supplemental Indenture at Exhibit 4.4). |

 

64

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| **Index  No.** | ** ** | **Description**                                                                                                                |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                           |   |
|           | 10.20(1)   |                                                                                                                           | Leasehold Deed of Trust,  Assignment of Leases and Rents, Security Agreement and Fixture Filing  (Terrible’s Casino & Bowl) dated August 24, 2001, and made by  Market Gaming, Inc. to National Title Co., as trustee, for the benefit of The  Bank of New York, as beneficiary. |
|           |       |                                                                                                                           |   |
|           | 10.21(5)   |                                                                                                                           | First Amendment to Leasehold  Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture  Filing (Terrible’s Casino & Bowl) dated February 6, 2003  (included as part of the Third Supplemental Indenture at Exhibit 4.4). |
|           |       |                                                                                                                           |   |
|           | 10.22(1)   |                                                                                                                           | Leasehold Deed of Trust,  Assignment of Leases and Rents, Security Agreement and Fixture Filing (771 S.  Nevada Highway) dated August 24, 2001, and made by E-T-T, Inc. to  National Title Co., as trustee, for the benefit of The Bank of New York, as  beneficiary. |
|           |       |                                                                                                                           |   |
|           | 10.23(5)   |                                                                                                                           | First Amendment to  Leasehold Deed of Trust, Assignment of Leases and Rents, Security Agreement  and Fixture Filing (771 S. Nevada Highway) dated February 6, 2003  (included as part of the Third Supplemental Indenture at Exhibit 4.4). |
|           |       |                                                                                                                           |   |
|           | 10.24(5)   |                                                                                                                           | Leasehold Deed of Trust,  Assignment of Leases and Rents, Security Agreement and Fixture Filing  (Terrible’s Searchlight Casino) dated February 7, 2003, and made by E-T-T,  Inc. to National Title Co., as trustee, for the benefit of The Bank of New  York, as beneficiary. |
|           |       |                                                                                                                           |   |
| 10.25++ (7)    |       | Gaming Devices License  Agreement dated October 26, 2004 by and between The Vons Companies, Inc.  and Market Gaming, Inc. |
|           |       |                                                                                                                           |   |
|           | 10.26+(1)  |                                                                                                                           | License Agreement (Gaming  Devices) dated September 16, 1998 by and between Albertson’s, Inc. and  Cardivan Company. |
|           |       |                                                                                                                           |   |
|           | 10.27+(1)  |                                                                                                                           | Settlement Agreement dated November 18,  1999 among Cardivan Company, Corral United, Inc., Jackpot Enterprises Inc.  and Albertson’s Inc. |
|           |       |                                                                                                                           |   |
|           | 10.28+(1)  |                                                                                                                           | First Amendment to  Settlement Agreement dated December 22, 1999 among Cardivan Company,  Corral United, Inc., Jackpot Enterprises Inc. and Albertson’s, Inc. |
|           |       |                                                                                                                           |   |
|           | 10.29+(1)  |                                                                                                                           | License Agreement dated April 24,  1997 between American Drug Stores, Inc. and Cardivan Company. |
|           |       |                                                                                                                           |   |
|           | 10.30+(1)  |                                                                                                                           | License Agreement dated April 24,  1997 between American Drug Stores, Inc. and Corral United, Inc. |
|           |       |                                                                                                                           |   |
|           | 10.31+(1)  |                                                                                                                           | License Agreement dated March 12,  1999 between Rite Aid Corporation and Cardivan Company. |
|           |       |                                                                                                                           |   |
|           | 10.32+(1)  |                                                                                                                           | First Amendment to Cardivan  License Agreement dated March 27, 2000 between Rite Aid Corporation and  Cardivan Company. |
|           |       |                                                                                                                           |   |
|           | 10.33+(1)  |                                                                                                                           | License Agreement dated March 12,  1999 between Rite Aid Corporation and Corral Coin, Inc. |
|           |       |                                                                                                                           |   |
|           | 10.34+(1)  |                                                                                                                           | First Amendment to Corral  Coin License Agreement dated March 27, 2000 between Rite Aid Corporation  and Corral Coin, Inc. |

 

65

----

 
| **Index  No.** | ** ** | **Description** |
|----------------|------------|-----------------|
|           |       |            |   |
|           | 10.35+(1)  |            | Gaming Devices License  Agreement dated December 20, 1999 by and between Terrible Herbst, Inc.  and E-T-T, Inc. |
|           |       |            |   |
|           | 10.36(1)   |            | Amendment to Gaming Device  License Agreement dated May 2001 by and between E-T-T, Inc. and Terrible  Herbst, Inc. |
|           |       |            |   |
|           | 10.37+(1)  |            | Agreement dated May 1,  1998 by and between Kmart Corporation and Cardivan Company. |
|           |       |            |   |
|           | 10.38+(1)  |            | License Agreement dated April 24,  1997 between Lucky Stores, Inc. and Cardivan Company. |
|           |       |            |   |
|           | 10.39+(5)  |            | Lease and Sublease  Agreement dated July 28, 1993, by and between Smith’s Food &  Drug Centers, Inc. and Anchor Coin, as amended. |
|           |       |            |   |
|           | 10.40(5)   |            | Hold Harmless Agreement  dated as of September 2, 1993 executed by Anchor Coin in favor of Smith’s  Food & Drug Centers, Inc. |
|           |       |            |   |
|           | 10.41+(5)  |            | Letter Agreement and  Consent to Assignment dated January 16, 2003. |
|           |       |            |   |
|           | 10.42(1)   |            | Lease Agreement dated July 1,  1997 by and between The Herbst Family Limited Partnership II and E-T-T  Enterprises, L.L.C. |
|           |       |            |   |
|           | 10.43(1)   |            | Lease Agreement dated July 1,  1996 by and between The Herbst Family Limited Partnership and E-T-T, Inc. |
|           |       |            |   |
|           | 10.44(1)   |            | Lease extension dated April 30,  2001 between The Herbst Family Limited Partnership and E-T-T, Inc. |
|           |       |            |   |
|           | 10.45(1)   |            | Lease dated September 3,  1993 between The 1993 Samuel Josephson Revocable Family Trust and Phoenix  Associates. |
|           |       |            |   |
|           | 10.46(1)   |            | Agreement for Sale dated August 1,  1995 between Phoenix Associates and Market Gaming, Inc. |
|           |       |            |   |
|           | 10.47(5)   |            | Lease Agreement dated November 27,  2002 by and between Herbst Grandchildren’s Trust and Herbst Gaming, Inc. |
|           |       |            |   |
|           | 10.48(5)   |            | Lease dated June 2002 by  and between Centennial Acquisitions, LLC and Terrible Herbst, Inc. |
|           |       |            |   |
|           | 10.49(5)   |            | Amendment to Lease dated July 30,  2002 by and between Centennial Acquisitions, LLC and Terrible Herbst, Inc. |
|           |       |            |   |
|           | 10.50(5)   |            | Lease Agreement dated July 1,  2002 by and between Terrible Herbst, Inc. and E-T-T, Inc. |
|           |       |            |   |
|           | 10.51(1)   |            | Employment Agreement with  Edward J. Herbst dated August 1, 2001. |
|           |       |            |   |
|           | 10.52(1)   |            | Employment Agreement with  Mary E. Higgins dated August 1, 2001. |
|           |       |            |   |
|           | 10.53(1)   |            | Form of Executive  Compensation and Bonus Plan. |
|           |       |            |   |
|           | 10.56(5)   |            | Code of Ethics. |

 

66

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| **Index  No.** | ** ** | **Description** |
|----------------|------------|-----------------|
|           |       |            |   |
|           | 10.57(7)   |            | Purchase Agreement dated as  of November 5, 2004 by and among Herbst Gaming, Inc., the guarantors  identified therein and Lehman Brothers Inc. |
|           |       |            |   |
|           | 10.58(7)   |            | Amended and Restated Credit  Agreement dated as of October 8, 2004 by and among Herbst Gaming, Inc.,  Bank of America, N.A., as administrative agent and the other lending parties  thereto. |
|           |       |            |   |
|           | 10.59(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. |
|           |       |            |   |
|           | 10.60(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. |
|           |       |            |   |
|           | 10.61(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. |
|           |       |            |   |
|           | 10.62(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. |
|           |       |            |   |
|           | 10.63(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. |
|           |       |            |   |
|           | 10.64(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. |
|           |       |            |   |
|           | 10.65(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. |
|           |       |            |   |
|           | 10.66(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. |
|           |       |            |   |
|           | 10.67(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. |
|           |       |            |   |
|           | 10.68(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. |
|           |       |            |   |
|           | 10.69(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. |
|           |       |            |   |
|           | 10.70(7)   |            | Guaranty, dated June 10,  2004, made by Flamingo Paradise Gaming, LLC in favor of Bank of America,  N.A., for the benefit of each lender party to the Credit Agreement. |

 

67

----

 
| **Index  No.** | ** ** | **Description** |
|----------------|------------|-----------------|
|           |       |            |   |
|           | 10.71(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. |
|           |       |            |   |
|           | 10.72(7)   |            | Guaranty, dated June 10,  2004, made by E-T-T, Inc. in favor of Bank of America, N.A., for the benefit  of each lender party to the Credit Agreement. |
|           |       |            |   |
|           | 10.73(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 of each lender party to the Credit Agreement. |
|           |       |            |   |
|           | 10.74(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 of each lender party  to the Credit Agreement. |
|           |       |            |   |
|           | 10.75(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. |
|           |       |            |   |
|           | 10.76(7)   |            | Form of Swing Line Note,  dated June 10, 2004, made by Herbst Gaming, Inc. to lenders with respect  to swing line loans made under the Credit Agreement. |
|           |       |            |   |
|           | 10.77(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. |
|           |       |            |   |
|           | 10.79(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. |
|           |       |            |   |
|           | 10.81(7)   |            | Deposit Escrow Agreement,  dated July 20, 2004, made by and between St. Joseph Riverboat Partners,  Herbst Gaming, Inc. and Lawyers Title of Arizona. |
|           |       |            |   |
|           | 10.83(7)   |            | Deposit Escrow Agreement,  dated July 20, 2004, made by Southern Iowa Gaming Company, Herbst  Gaming, Inc. and Lawyers Title of Arizona. |
|           |       |            |   |
|           | 10.84(7)   |            | Form of Indemnity Escrow  Agreement 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. 85*    |            | 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. |
|           |       |            |   |
|           | 10.86*     |            | 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. |
|           |       |            |   |
|           | 10.87*     |            | 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 Twin to Todd W.  Griffee, Esq., as trustee, for the benefit of Bank of America, N.A., as  beneficiary. |
|           |       |            |   |
|           | 10.88*     |            | 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. |
|           |       |            |   |
|           | 10.89*     |            | 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. |

 

68

----

 
| **Index  No.** | ** ** | **Description** |
|----------------|------------|-----------------|
|           |       |            |   |
|           | 10.90*     |            | 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. |
|           |       |            |   |
|           | 10.91*     |            | 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. |
|           |       |            |   |
|           | 10.92*     |            | First Amendment dated January 31,  2005 to Leasehold Deed of Trust with Assignment of Rents, Security Agreement  and Fixture Filing (Russell Avenue Lease) 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. |
|           |       |            |   |
|           | 10.93*     |            | First Amendment dated January 31,  2005 to Leasehold Deed of Trust with Assignment of Rents, Security Agreement  and Fixture Filing (Terrible Lakeside Casino) made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary. |
|           |       |            |   |
|           | 10.94*     |            | First Amendment dated January 31,  2005 to Leasehold Deed of Trust with Assignment of Rents, Security Agreement  and Fixture Filing (Terrible’s Town Pahrump) made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary. |
|           |       |            |   |
|           | 10.95*     |            | First Amendment dated January 31,  2005 to Leasehold Deed of Trust with Assignment of Rents, Security Agreement  and Fixture Filing (Searchlight, Nevada Casino) made by E-T-T, Inc. to PRLAP,  Inc., as trustee, for the benefit of Bank of America, N.A., as beneficiary. |
|           |       |            |   |
|           | 10.96*     |            | 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. |
|           |       |            |   |
|           | 10.97*     |            | 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. |
|           |       |            |   |
|           | 10.98*     |            | 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. |
|           |       |            |   |
|           | 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. |
|           |       |            |   |
|           | 31.2*      |            | Certification of Mary E.  Higgins under Section 302 of the Sarbanes-Oxley Act of 2002. |

 

69

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

 

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

 

(1)                                                          Incorporated herein by reference from ourregistration statement on Form S-4 (SEC No. 333-71094), 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)                                                          Incorporated herein by reference from our annualreport on Form 10-K/A filed with the SEC on April 9, 2002.

 

(4)                                                          Incorporated herein by reference from our current reporton 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)                                                          Incorporated herein by reference from ourregistration statement on Form S-4 (SEC No. 333-118068-05).

 

(8)                                                          Incorporated herein by reference from our currentreport on Form 8-K filed with the SEC on November 23, 2004.

 

(9)                                                          Incorporated herein by reference from ourregistration statement on Form S-4 (SEC No. 333-122837).

 

*                                                                 Filed herewith.

 

70

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**SIGNATURES**

 

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

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

 

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

 
| **NAME**                   | ** ** | **TITLE**                         | ** **                                            | **DATE**   |
|----------------------------|------------|-----------------------------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                        | ** **                                            | ** ** |
| /s/ Edward  J. Herbst      |       |                              | Chairman of the Board, Chief Executive                |       | March 30,  2005 |
| Edward J. Herbst           |       |                              | Officer and President (Principal  Executive  Officer) |       |   |
|                       |       |                              |                                                  |       |
| /s/ Mary E.  Higgins       |       |                              |                                                  |       | March 30,  2005 |
| Mary E. Higgins            |       |                              | Chief Financial Officer (Principal                    |       |   |
|                       |       | Financial and Accounting Officer) |                                                  |       |
|                       |       |                              |                                                  |       |
| /s/ Timothy  P. Herbst     |       |                              | Executive Vice President and Director                 |       | March 30,  2005 |
| Timothy P. Herbst          |       |                              |                                                  |       |   |
|                       |       |                              |                                                  |       |
| /s/ Troy D.  Herbst        |       |                              | Executive Vice President, Secretary,                  |       | March 30,  2005 |
| Troy D. Herbst             |       |                              | Treasurer and Director                                |       |   |
|                       |       |                              |                                                  |       |
| /s/ John N.  Brewer        |       |                              | Director                                              |       | March 30,  2005 |
| John N. Brewer             |       |                              |                                                  |       |   |
|                       |       |                              |                                                  |       |
| /s/ John F.  O’Reilly |       |                              | Director                                              |       | March 30,  2005 |
| John F. O’Reilly      |       |                              |                                                  |       |   |

 

S-1

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