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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For theFiscal Year Ended December 31, 2008**

 

**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile No. 1-14316**

 

**HERBSTGAMING, INC.**

 (Exact name of Registrant as specified in itscharter)

 

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

 

Registrant’stelephone number:**(702) 889-7695**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

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

 

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

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.  Applicable o  Not Applicable x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company (as defined in Rule 12b-2of the Act):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

The aggregate marketvalue of the shares of voting and non-voting common equity held bynon-affiliates of the registrant as of March 31, 2009 was $0.

 

**ApplicableOnly to Registrants Involved in Bankruptcy Proceedings During the PrecedingFive Years:**

 

Indicate by checkmark whether the registrant has filed all documents and reports required to befiled by Section 12, 13 or 15(d) of the Securities Exchange Act of1934 subsequent to the distribution of securities under a plan confirmed by acourt.  Yes o  No o Not Applicablex

 

Indicate the number ofshares outstanding of each of the Registrant’s classes of common stock, as of December 31,2008.

 

Common Stock, no parvalue, 300 outstanding shares.

 

**DocumentsIncorporated by Reference**

None.

 

 

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**TABLE OF CONTENTS**

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

 

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**PART I**

 

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

 

**General**

 

We are a diversified gaming company that focuses on two business lines:slot route operations and casino operations.  Our slot route operationsinvolve the exclusive installation and operation of slot machines in certainstrategic, high traffic, non-casino locations, such as grocery stores, drugstores, convenience stores, bars and restaurants.  We currently haveapproximately 6,700 slot machines in our slot route business and are one of thelargest slot machine operators in Nevada.  As of December 31, 2008,our casino operations in Nevada consisted of 12 casinos.  Five of thesecasinos focus on local gaming patrons in Southern Nevada, and include theownership and operation of Terrible’s Hotel & Casino in Las Vegas,Nevada and four other small casinos in Southern Nevada operated under theTerrible’s name.  We also operate the following four casinos in NorthernNevada, all of which were acquired by the Company in January 2007:Terrible’s Rail City Casino in Sparks, Nevada (“Rail City”); the Sands RegencyCasino Hotel in downtown Reno, Nevada (“Sands”); Terrible’s Gold Ranch Casinoand RV Resort in Verdi, Nevada (“Gold Ranch”) and Terrible’s Dayton DepotCasino (“Dayton Casino” and together with Rail City, Sands and Gold Ranch, the “SandsRegent Casinos”) in Dayton, Nevada.  Inaddition, we operate the following three casinos in Primm, Nevada, all of whichwere acquired by the Company in April 2007: Buffalo Bill’s Hotel andCasino (“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley”) andWhiskey Pete’s Hotel and Casino (“Whiskey Pete’s”, and together with BuffaloBill’s and Primm Valley, the “Primm Casinos”). As of December 31, 2008, these casinos in Nevada contained anaggregate of approximately 6,600 slot machines and 125 table games.  Ourcasino operations outside of Nevada consist of Terrible’s St. Jo FrontierCasino in St. Joseph, Missouri (“St. Jo”), Terrible’s Mark TwainCasino in LaGrange, Missouri (“Mark Twain”), and Terrible’s Lakeside CasinoResort in Osceola, Iowa (“Lakeside Iowa”).  As of December 31, 2008,these three properties contained an aggregate of approximately 2,230 slotmachines and 45 table games.

 

Herbst Gaming, Inc. was incorporated in Nevada on January 21,1997.  It commenced business operations as a holding company ofsubsidiaries conducting slot 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 anS corporation.

 

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

 

**AvailableInformation**

 

Our Internet address is*www.herbstgaming.com*.  We make available free of charge on orthrough our Internet website our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934, as amended, or the Exchange Act, as soonas reasonably practicable after we electronically file such material with, orfurnish it to, the Securities and Exchange Commission (“SEC”).

 

**PlannedReorganization**

 

The Company and certain of itssubsidiaries (the “Subsidiary Guarantors”)**haveentered into an agreement (the “LockupAgreement”) with (i) lenders holding, in the aggregate,approximately 68% in amount of all of the outstanding claims under our $860.0 million senior creditfacility (the “amended Credit Agreement”); (ii) Messrs. Edward J.Herbst, Timothy P. Herbst and Troy D. Herbst, in their capacities as equityholders of the Company; and (iii) Terrible Herbst, Inc. and certainof its affiliates, in their capacities as parties to agreements with theCompany and/or the Subsidiary Guarantors(the “THI Parties”).  Pursuant to the Lockup Agreement, the partiesthereto are contractually obligated to support the following restructuring ofthe Company and the Subsidiary Guarantors (the “Restructuring”) pursuant to ajoint plan of reorganization (the “Proposed Plan”) under Chapter 11 of the United StatesBankruptcy Code (the “Bankruptcy Code”), 11 U.S.C. §§ 101-1532:

 

·                  A separation of the Company’s casino andslot machine route businesses into two holding companies (thepost-Restructuring casino business is referred to herein as “Reorganized HerbstGaming” and the post-Restructuring slot machine route business is referred toherein as “Slot Co”).

 

·                  Conversion of all outstanding obligationsunder the amended Credit Agreement into debt and equity of the reorganizedcompanies, with the lenders under the amended Credit Agreement (the “Lenders”)receiving 100% of the new equity of Reorganized Herbst Gaming, and withReorganized Herbst Gaming owning 10% of the new equity of Slot Co.

 

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·                  Termination of all outstandingobligations under our 8 1/8%senior subordinated notes due 2012 (“81/8% Notes”) and our 7% senior subordinated notes due2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”).

 

·                  Payment in full of all allowed generalunsecured claims.

 

·                  Cancellation of 100% of the existingequity in the Company.

 

·                  Amendments or modifications to, orassumptions and assignments of, the Company’s related party agreements, or newagreements to be entered into, with the THI Parties and settlements of claimswith the THI Parties in connection with the related party agreements.

 

·                  Receipt by certain of the THI Parties of90% of the new equity of Slot Co in exchange for the contribution of a newgaming device license agreement.

 

On March 22, 2009 (the “Petition Date”), the Company and theSubsidiary Guarantors (collectively, the “Debtors”) filed voluntary petitionsfor relief under chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”) inthe United States Bankruptcy Court for the District of Nevada, NorthernDivision (the “Bankruptcy Court”) under case numbers 09-50746-gwz through09-50763-gwz.  On the Petition Date, theDebtors filed several emergency motions with the Bankruptcy Court, including amotion to have the Chapter 11 Cases jointly administered.  On March 23, 2009, the Bankruptcy Courtconducted hearings on the motion, including the motion for jointadministration.  The Bankruptcy Courtgranted the motions either on a final basis or an interim basis with acontinued hearing date regarding the interim orders on April 30, 2009. Thejoint administration motion was granted with the lead case being “Zante Inc”being case number 09-50746-gwz.  TheDebtors plan to continue to operate their businesses and manage theirproperties as “debtors in possession” under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court.  Forconvenience, XRoads Court Management Services has established a webpage foraccess to all pleadings filed in the Chapter 11 Cases.  The web address ishttp://www.xroadscms.net/zante.

 

The Restructuring is subject to various regulatory, Bankruptcy Court andthird party approvals.  We cannot assureyou that we will be successful in implementing the Restructuring in the formcontemplated by the Lockup Agreement or at all. Please refer to our discussion under “Liquidity and CapitalResources—Cash Flows; Restructuring” for a more detailed discussion of the Chapter11 Cases and the Restructuring.

 

**NarrativeDescription of Business**

 

Our business focuses on attracting and fostering repeat business fromlocal gaming patrons in both our route and casino operations.  Localpatrons are typically sophisticated gaming customers who seek convenientlocations, high payouts and a pleasant atmosphere.

 

*RouteOperations*

 

Our route operations involve the exclusive installation and operationof slot machines in chain store and street account locations.  At December 31,2008, we operated approximately 6,700 slot machines throughout the state ofNevada.  We define chain stores as grocery stores, drug stores,merchandise stores and convenience stores, each with more than fivelocations.  Our chain store contracts are primarily with large, nationalretailers such as Albertsons, Vons, Safeway, CVS and Smith’s, as well asTerrible Herbst gas stations and convenience stores.  Street accountsinclude local bars, restaurants and non-chain convenience stores.  Nevadalaw limits slot route operations to certain types of non-casino locationsincluding bars, taverns, convenience stores, grocery stores and drugstores.  Most locations are limited to offering no more than 15 slotmachines.

 

We generally enter into two types of route contracts: space leasearrangements and revenue-sharing arrangements.  Under space leasearrangements, which we principally enter into with chain stores, we pay a fixedmonthly 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 toenter into a revenue-sharing arrangement, the location owner must hold a gaminglicense.  Both space lease and revenue-sharing arrangements typicallyinvolve long-term contracts that provide us with the exclusive right to installour slot machines at particular locations.  In the case of chain stores, ourcontracts give us the exclusive right to install slot machines at stores openedin the future.

 

*CasinoOperations*

 

Our casino operations consist of 16 casinos in Northern and SouthernNevada.  We also own three casinos in Missouri and Iowa.  All of ourcasino properties focus on local customers, with an emphasis on slotplay.  The following table summarizes our casino assets as of December 31,2008:

 

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| ** **                                                          | ** ** | ** **          | ** ** | **Number of**             | ** ** | ** **                   |
|---------------------------------------------------------------------|------------|---------------------|------------|--------------------------------|------------|------------------------------|
| **Property**                                                        | ** ** | **Location**        | ** ** | **Slot******** Machines** | ** ** | **Table******** Games** | ** ** | **Hotel******** Rooms** | ** ** | **Additional** |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| **Herbst  Gaming Casino Properties** (as of December 31, 2008) |       |                |       |                           |       |                         |   |   |   |   |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| **Southern Nevada**                                                 | ** ** | ** **          | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s  Hotel & Casino                            |       | Las Vegas, NV       |       | 998                            |       | 12                           |   | 330 |   | Race and sports book  196 seat bingo facility |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Town Casino                                         |       | Pahrump, NV         |       | 396                            |       | 6                            |   | — |   | Race and sports book;  120 seat bingo facility |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Lakeside  Casino & RV Park                 |       | Pahrump, NV         |       | 200                            |       | 0                            |   | 159 RV spaces |   | Race and sports book;  192-seat bingo facility;  7 acre lake |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s  Casino & Bowl                             |       | Henderson, NV       |       | 146                            |       | —                       |   | — |   | 16-lane bowling alley |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Searchlight  Casino                                 |       | Searchlight, NV     |       | 75                             |       | —                       |   | — |   | — |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Buffalo Bill’s                                                 |       | Primm, NV           |       | 1,024                          |       | 34                           |   | 1,242 |   | 12,000 sq. ft.  conference space, including the 6,000 seat “Star of the Desert” arena;  rollercoaster |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Whiskey Pete’s                                                 |       | Primm, NV           |       | 834                            |       | 25                           |   | 779 |   | 8,000 sq. ft.  convention space |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Primm Valley Resort and  Casino                                     |       | Primm, NV           |       | 957                            |       | 34                           |   | 625 |   | 21,000 sq.ft conference  space |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| **Northern Nevada**                                                 |       |                |       |                           |       |                         |   |   |   |   |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Rail City                                           |       | Sparks, NV          |       | 941                            |       | 5                            |   | — |   | Sports book |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Sands Regency                                                       |       | Reno, NV            |       | 553                            |       | 8                            |   | 833 |   | Sports book;  12,000 sq. ft. conference space |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Gold Ranch                                          |       | Verdi, NV           |       | 237                            |       | —                       |   | 105 RV spaces |   | Sports book; California  lottery station |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Dayton Depot  Casino                                |       | Dayton, NV          |       | 255                            |       | 2                            |   | — |   | Sports book |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| **Midwest**                                                         |       |                |       |                           |       |                         |   |   |   |   |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Lakeside  Casino Resort                             |       | Osceola, IA         |       | 1,010                          |       | 20                           |   | 60  65 RV spaces |   | 10,000 sq. ft.  conference space;convenience store and gas station; 121 acres (88 acres  un-developed; 15 acre lake) |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s Mark Twain  Casino                                  |       | LaGrange, MO        |       | 663                            |       | 14                           |   | — |   | — |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| Terrible’s St. Jo  Frontier Casino                        |       | St. Joseph, MO |       | 556                            |       | 11                           |   | — |   | 2,400 sq. ft.  conference space; 40 acres (32 acres undeveloped) |
|                                                                |       |                |       |                           |       |                         |   |   |   |   |
| **Total**                                                           |       |                |       | 8,846                          |       | 171                          |   | 3,869 rooms |   | 329 RV spaces |

 

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*SouthernNevada Casinos*

 

Terrible’sHotel & Casino

 

Terrible’s Hotel & Casino in Las Vegas, Nevada (“Terrible’s”)opened on December 6, 2000.  Terrible’s offers a buffet and a 24-hourcafé.  There are currently 330 rooms with standard amenities. Terrible’s is conveniently located approximately one mile east of the Las VegasStrip, which we believe appeals to locals who wish to avoid the congestion ofthe Strip.  Terrible’s favorable location has made it popular with Stripcasino employees.  Although we are not a tourist destination, we receive acertain amount of tourist traffic through our casino due to our location nearthe airport, the Strip and the Las Vegas Convention Center.

 

Terrible’sSearchlight Casino

 

Terrible’s Searchlight Casino is located in Searchlight, Nevada andoffers approximately 75 slot machines, a full-service truck stop and 24-hourcafé.

 

Terrible’sTown Casino

 

Terrible’s Town Casino in Pahrump, Nevada, which is approximately 60miles from Las Vegas, offers approximately 395 slot machines, six table games,a race and sports book, a 120-seat bingo facility and a restaurant with buffet.

 

Terrible’sLakeside Casino & RV Park

 

Terrible’s Lakeside Casino & RV Park is located in Pahrump,Nevada and offers approximately 200 slot machines, a race and sports book, a192-seat bingo facility, 159 RV spaces and a restaurant with buffet.

 

Terrible’sTown Casino & Bowl

 

Terrible’s Town Casino & Bowl is located in Henderson, Nevadaand offers approximately 145 slot machines, a 16-lane bowling alley and 24-hourcafé.

 

*Primm Casinos*

 

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

 

Buffalo Bill’s Hotel andCasino

 

Buffalo Bill’s offers approximately 1,020 slot machines and 20 tablegames. In addition to a 1,242-room hotel, Buffalo Bill’s has a full servicerestaurant and buffet as well as a “Tony Roma’s” restaurant. The western themedproperty also has extensive entertainment amenities including the 6,000 seat “Starof the Desert” arena that hosts big name entertainers throughout theyear.  Buffalo Bill’s has a world class roller coaster as well as waterpark log rides, two movie theaters and a midway style arcade.

 

Whiskey Pete’s Hotel andCasino

 

Whiskey Pete’s offers approximately 830 slot machines and 25 tablegames, a sports book and two full service bars.  Additionally Whiskey Pete’shas a 779 room hotel , a gourmet steakhouse, a full service coffee shop andbuffet, a McDonald’s restaurant, an 8,000 square feet special events andconcert venue, a swimming pool and a midway style arcade.

 

Primm Valley Resort andCasino

 

Primm Valley offers approximately 960 slot machines, 35 table games, asports book and keno.  Additionally Primm Valley has a 625 room hotel and21,000 square feet of convention space. Primm Valley has a full service coffeeshop and buffet as well as the GP Steakhouse. The resort has a swimming pool,and a full service spa is currently under construction.  The Primm Valley Resort is 

 

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connected to the “FashionOutlets of Las Vegas,” a retail complex owned by a third party that houses over150 designer outlet stores, including a Neiman Marcus “Last Call,” a WilliamSonoma Outlet store and DKNY, Tommy Bahama, Banana Republic and Gap factoryoutlet stores.

 

*Northern Nevada / Sands Regent Casinos*

 

Terrible’sRail City Casino

 

Terrible’s Rail City Casino in Sparks, Nevada has approximately 30,000square feet of gaming space housing approximately 940 slots, five table games,including keno, a sports book operated by an independent party, a 24-hourfamily-style restaurant and an ale house and brew pub. Rail City’s customerbase comes primarily from Northern Nevada and a majority of its customersreside in close proximity to the casino.

 

Sands Regency Casino Hotel

 

Sands Regency Casino Hotel in Downtown Reno, Nevada has approximately29,000 square feet of gaming space and a full selection of gaming alternatives,including approximately 550 slot machines and eight table games, as well askeno, bingo, live poker and a sports book operated by an independent party.Additionally, the Sands resort complex has 833 hotel rooms, including 29suites, a health spa, and a large outdoor swimming pool. Dining options at theSands include Cabana Café, a coffee house/deli-style restaurant, The Buffet atthe Sands, and Fuzio’s, an Italian restaurant. The property also has a Mel’s,the Original, diner style restaurant, and an Arby’s restaurant, both of whichare operated by third parties. The facility also includes an entertainmentcabaret, three cocktail lounges, a comedy club operated by a third party andapproximately 12,000 square feet of convention and meeting space. Third partieslease space from the Sands and operate a wedding chapel, a bicycle and skirental shop, and a beauty shop. The Sands facility contains multiple parkingareas, including a parking garage, with total combined capacity forapproximately 1,100 vehicles. A substantial portion of the Sands’ business,particularly our hotel customer base, is arranged through travel groups, bothair and motor coach wholesalers, which offer economy rates, and are primarilyfrom Western Canada, the Pacific Northwest and Northern California.

 

Terrible’sGold Ranch Casino and RV Resort

 

Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada offersapproximately 237 slot machines in an 8,370 square foot casino, a sports bookoperated by a third party, a family-style restaurant, a Jack-in-the-Boxrestaurant leased to and operated by a third-party, a bar, a 105-space RV park,a California lottery station, a gas station and a convenience store. Gold Ranch’sguests include both tourists and local residents, with local residentsgenerating over half of the property’s casino patronage, and attempts toattract local residents through mid-week promotions geared toward enhancinglocal play mainly through lottery, casino, and restaurant programs. Touristprograms emphasize the RV Park, casino and restaurant cross-promotions. GoldRanch attempts to attract as much traffic as possible off Interstate 80, themajor Nevada/California thoroughfare.  We lease the real property on whichthe Gold Ranch is located. The real property lease has a twenty-year term withfour five-year extension options ending in 2042.  We possess the option to purchase the realproperty on which the Gold Ranch business assets are located.

 

Terrible’sDayton Depot Casino

 

Terrible’s Dayton Depot Casino is located in Dayton, Nevada.  Weown the building that houses the Dayton Casino and the 4.5 acres of realproperty on which the Dayton Casino is located, as well as a building and 0.5acres of real property directly across the street which housed a small tavernthat is not currently operating.  DaytonCasino has approximately 16,000 square feet of casino space, a family-stylerestaurant, two bars, approximately 255 slot machines, four poker games, twotable games and a sports book operated by a third party.

 

*Casinos**Outside Nevada*

 

Terrible’sLakeside Casino Resort

 

Lakeside Iowa, a riverboat casino located on West Lake in Osceola,Iowa, opened in January 2000.  The casino offers 1,010 slot machinesand 20 table games.  Lakeside Iowa offersa 60 room, all-suite hotel, modular conference and meeting facilities thatcan seat up to 900 people and that are used for meetings, banquets andconcerts, a fitness center, an outdoor pool and a gift shop.  In addition,Lakeside Iowa offers a 280-seat restaurant/buffet and lounge located in themain lobby, two bars located in the casino, a convenience store and gas stationthat are located adjacent to the casino and 65 RV spaces with utilityhookups.  Lakeside Iowa owns 121 acres of land, 88 acres of which areundeveloped.

 

Terrible’sMark Twain Casino

 

Mark Twain, located in a man-made basin adjacent to the MississippiRiver in LaGrange, Missouri, is a facility that opened in July 2001. The casino offers approximately 660 slot machines and 14 table games.  Mark Twain offers a 153-seat restaurant/bar 

 

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and an additionalbar in the casino.  The casino has a locally popular theme based on MarkTwain, who grew up in and wrote about nearby Hannibal, Missouri.

 

Terrible’s St. JoFrontier Casino

 

St. Jo, located in a man-made basin adjacent to the Missouri Riverin St. Joseph, Missouri, opened in May 1998 as a successor to acasino that opened in June 1994.  The casino offers approximately 560slot machines and 11 table games. St. Jo offers a bar, a buffet and over 2,400 total square feet ofmodular conference and meeting space.  The casino and its amenities have alocally popular Pony Express western theme that plays off St. Joseph’sheritage as the founding location and headquarters of the Pony Express. St. Jo owns 40 acres of land, 32 acres of which are undeveloped.

 

**FinancialInformation**

 

The primary source of our revenue and income is from our route andcasino operations, although we view the restaurants, bars and services on ourpremises to be important adjuncts to our casino operations.  The followingtable sets forth the contribution to total net revenues on a dollar andpercentage basis of our major activities for the years ended December 31,2006, 2007 and 2008.

 
| ** **                      | ** ** | **Years Ended December 31,**           | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **2006(1)**                                           | ** ** | **2007(1)** | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **Amount**                                            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Revenues:                       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Route  operations(2)            |       | $                                                     | 347,041    |   | 61.7 | % | $ | 276,946 |   | 35.3 | % | $ | 243,635 |   | 31.6 | % |
| Casino  operations(2)           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Nevada                          |       | 95,614                                                |       | 17.0 |   | 331,517 |   | 42.2 |   | 337,006 |   | 43.7 |   |
| Other states                    |       | 141,435                                               |       | 25.1 |   | 141,731 |   | 18.0 |   | 137,188 |   | 17.8 |   |
| Other                           |       | 10,676                                                |       | 2.0 |   | 98,987 |   | 12.6 |   | 116,609 |   | 15.2 |   |
| Total revenues                  |       | $                                                     | 594,766    |   | 105.8 |   | $ | 849,181 |   | 108.2 |   | $ | 834,438 |   | 108.2 |   |
| Less promotional  allowances(2) |       | (32,703                                               | )          | (5.8 | ) | (64,241 | ) | (8.2 | ) | (63,349 | ) | (8.2 | ) |
| Total net  revenues             |       | $                                                     | 562,063    |   | 100.0 | % | $ | 784,940 |   | 100.0 | % | $ | 771,089 |   | 100.0 | % |

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(1)   Calendar year 2006 does not include, andcalendar year 2007 reflects a partial year of, operations of the Sands RegentCasinos, which were acquired in January 2007, and the Primm Casinos, whichwere acquired in April 2007.  As a result, the results of operationsfor calendar years 2006 and 2007 may not be comparable to the results ofoperations in 2008.

 

(2)   Route and casino revenues are the netdifference between gaming wins and losses.  Promotional allowances consistprimarily of food and beverages furnished gratuitously to customers.  Theretail value of such services is included in the respective revenueclassifications and is then deducted as promotional allowances.  See “Note 2. Description of Business and Summary of Significant Accounting Policies” to theaccompanying Notes to consolidated financial statements in “Item 8. Financial Statements and Supplementary Data”.

 

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

 

**Marketing**

 

*Nevada Market*

 

Since we believe that a vast majority of our patrons at our casinos inSouthern Nevada are locals, our marketing efforts are primarily focused on thelocal population of Clark County and Nye County, Nevada. These marketingefforts seek to capitalize on the strong recognition and high level of qualityand value associated with the Terrible Herbst trade name and its cowboy logo,which are used in over 85 gasoline stations and convenience stores in SouthernNevada and nine gasoline stations and convenience stores in California andArizona. The Terrible Herbst brand is prominently displayed in our route andcasino operations. We license the Terrible Herbst trade name from TerribleHerbst, Inc., a related party, through 2011. Subject to mutualconsent, we may extend the term of the agreement for five successive5-year periods.  The proposedRestructuring provides for this agreement to be extended through 2016 with noextension options.  As the TerribleHerbst brand is important to our operations in Southern Nevada, any loss ofthis license could adversely affect our business.  See “Item 13. Certain Relationships andRelated Transactions” for a further discussion of this licenseagreement.

 

In addition, we have implemented a unique players club that rewardscustomers with points for playing at all of our casino locations. Pointsmay be redeemed for cash as well as free or discounted rooms, food orother goods or services provided at any such location.

 

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The customer base of the Sands Regent Casinos ranges from locals livingin Northern Nevada, in the case of Rail City, to customers from Western Canada,the Pacific Northwest and Northern California, in the case of the Sands. The marketing efforts for the Sands Regent Casinos are primarily focused onattracting locals and value-minded out-of-market visitors through aggressivepromotions and customer loyalty programs.  We expect to continue thisfocus through the adoption of a new player’s club points program that issimilar to those that have proven successful at our other casinos.

 

The customer base of the Primm Casinos consists primarily of valueoriented tourists living in the inland empire of Southern California such asSan Bernardino, Victorville and Barstow. The marketing efforts of the PrimmCasinos prior to our acquisition were primarily focused on attractingvalue-minded out-of-market visitors through aggressive promotions and specialevents.  While continuing this focus, we have begun expanding themarketing of these casinos into the Southern Nevada locals market.  Wehave installed a state of the art player’s club loyalty program, “the one card”,that has been combined with the loyalty programs at all of our other Nevadacasinos and rewards can be accumulated and used across all our Nevadaproperties.  The Primm Casinos alsomanage a 36-hole golf course and are in the process of constructing a new spaand exercise facility at the Primm Valley Casino that is expected to becompleted by the second quarter of 2009.

 

*MidwestMarket*

 

Each of Lakeside Iowa, Mark Twain and St. Jo have a highlyrecognizable brand name within its respective community.  In addition,each of Lakeside Iowa, Mark Twain and St. Jo operates a slot club thatrewards customers with points for every coin-in.  Points are redeemablefor free play as well as points that may be used for food, valet or retailitems.  Each of the three casinos also hosts blackjack and slottournaments as well as other special events on the casino premises that seek torecognize and cultivate regular casino patrons.

 

**Business Strategy**

 

Our business strategy for the route business primarily focuses onattracting and fostering repeat business from local gaming patrons. Localpatrons are typically sophisticated gaming customers who seek convenientlocations, high payouts and a pleasant atmosphere.  Because local gamingconsumers represent high potential repeat business, generating customersatisfaction and loyalty is a critical component of our strategy.  Withrespect to the casino businesses, our business strategy focuses on the value oriented,high repeat, business patron from both local and drive in tourist gamingmarkets.

 

*RouteOperations*

 

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

 

We also maximize profitability through cost-saving technologies. For example, our multi-denominational, multi-game machines, which allow patronsto tailor their gaming experience to their preferences, may be upgraded byexchanging a computer chip instead of replacing the entire machine. Recent technologies also allow patron jackpot payments on site and help toreduce the need for slot route technicians to drive to locations to fill slotmachines with coins or to pay jackpots.

 

*CasinoOperations*

 

Our casino operations strategy is to offer high quality gaming, hoteland dining experiences at affordable prices.  Our primary target marketconsists of value oriented local middle market gaming patrons who gamblefrequently.  We believe that we attract our targeted customers and thatthey return to our casinos because of our high value orientation, as well asconvenient locations, great food, ample parking and high slot machine payoutrates.  Because locals demand variety and quality in their slot and videopoker machine play, our locals casino properties offer the latest in slot andvideo poker technology.  Although perceived value initially attracts acustomer to our casino properties, actual value generates customer satisfactionand loyalty.  For our drive-in tourist market casinos many of the samestrategies apply as this market is heavily focused on repeat business and high value. There is very little, if any, non-drive-in tourist market.  Aspart of our commitment to providing a quality entertainment experience forour patrons, we are dedicated to ensuring a high level of customer satisfactionand loyalty by providing attentive customer service in a friendly, casualatmosphere.  We recognize that consistent quality and a comfortableatmosphere stem from the collective care and friendliness of each employee.

 

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**Competition**

 

*Nevada Market*

 

Our slot route operations are subject to substantial direct competitionfor our revenue-sharing and fixed space lease locations from one large route operatorand numerous small operators, located principally in Las Vegas, Nevada. The principal method of competition for slot route operators includes theeconomic terms of the revenue-sharing or space lease arrangement, the servicesprovided and the reputation of the route operator.  Price competition forrevenue-sharing or space lease arrangements is intense and we believe thatprice competition among slot route operators will continue.  We are one ofthe largest route operators with approximately 6,700 slot machines situated inlocations outside of our casinos as of December 31, 2008.

 

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 directcompetition with many of the resort-casino properties on the Las Vegas Strip,which focus primarily on attracting tourist players.  Instead, we believethat our principal competitors in our casino operations are the two other localcasinos located within a one mile radius.  We compete with theseproperties on the basis of the desirability of location, payout rates,personalized approach, casino promotions, comfort and value of restaurants andhotel rooms and the variety and value of entertainment.  The constructionof new casinos or the expansion of existing casinos near our casinos could havea negative impact on our casino operations.

 

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

 

Competition among casinos in the markets in which the Sands RegentCasinos are located, particularly the Reno/Sparks market, is intense. Theexpansion and maturation of Native American gaming in Northern California, thePacific Northwest, and British Columbia has had an adverse impact on totalgaming revenues of the greater Reno area. Over the last few years, existingNative American casinos in Northern California have undergone significant expansionsand now offer most of the amenities that casinos in Reno offer, including bigname entertainment and hotel rooms. In addition, Thunder Valley, on theInterstate-80 corridor in California, has grown to be one of the country’sbusiest and most profitable casinos. More Native American casinos andexpansions to existing casinos are planned in Northern California and many arepartnering with existing gaming companies that have financial resources topromote their facilities.  Many of our direct competitors in the Renomarket have greater financial and other resources than we do.

 

Primm Casinos face competition from Native American gaming in SouthernCalifornia, other casinos outside of Las Vegas, such as casinos located inLaughlin and Mesquite, Nevada, as well as value oriented casinos located in theLas Vegas market.

 

*MidwestMarket*

 

Each of Lakeside Iowa, Mark Twain and St. Jo competes for localgaming customers with other casinos in their respective markets.

 

Lakeside Iowa is located along Interstate 35, approximately 40 milessouthwest of Des Moines, Iowa.  The primary competitors of Lakeside Iowaare Prairie Meadows racino, the Riverside Casino and Golf Resort and theMeskwaki Bingo Casino Hotel.  The Prairie Meadows racino is located approximately60 miles from Lakeside Iowa east of Des Moines.  Riverside Casino and GolfResort is located in Riverside, Iowa, approximately 175 miles fromOsceola.  The Meskwaki Bingo Casino Hotelis located in Tama, Iowa and is approximately 110 miles from Lakeside Iowa.

 

Mark Twain is the only casino in northeast Missouri and isapproximately 15 miles from Quincy, Illinois and approximately 25 miles fromHannibal, Missouri. The closest casino to Mark Twain is the Catfish BendCasino, located in Burlington, Iowa, which is approximately 75 miles fromLaGrange.

 

St. Jo is approximately 50 miles north of Kansas City, Missouri.St. Jo primarily targets residents of St. Joseph, Missouri and is theonly casino in St. Joseph.  However, St. Jo competes indirectlywith four riverboats in Kansas City, Missouri and to a lesser extent withseveral Native American casinos, none of which is closer than 45 miles fromSt. Joseph.

 

Certain states have recently legalized, and other states areconsidering legalizing, casino gaming in certain areas.  In addition,states such as Illinois, Missouri, Iowa and Kansas have recently consideredawarding additional gaming licenses or expanding permitted gaming.

 

**Seasonality**

 

We do not believe that our business as a whole is seasonal to anysignificant degree.  However, our casinos in the Midwest and in NorthernNevada do experience some business interruption during the winter months.

 

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**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, 2008, we employed approximately 6,450employees.  None of our current employees is covered by a collectivebargaining agreement.  We believe that our relationship with our employeesis 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 (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:

 

·                  the prevention of unsavory or unsuitable persons from having a director indirect involvement with gaming at any time or in any capacity;

 

·                  the establishment and maintenance of responsibleaccounting practices and procedures;

 

·                  the maintenance of effective controls over thefinancial practices of licensees, including the establishment of minimumprocedures for internal fiscal affairs and the safeguarding of assets andrevenues, providing reliable record keeping and requiring the filing ofperiodic reports with the Nevada Gaming Authorities;

 

·                  the prevention of cheating and fraudulent practices;and

 

·                  providing a source of state and local revenues throughtaxation and licensing fees.

 

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

 

Corporations and other entities that operate casinos or slot routes inNevada are required to be licensed by the Nevada Gaming Authorities.  Agaming license for such activities requires the periodic payment of fees andtaxes and is not transferable.  Herbst Gaming is registered by the NevadaGaming Commission as a publicly traded corporation (a “registered corporation”). As a registered corporation, we are required periodically to submit detailedfinancial and operating reports to the Nevada Gaming Commission and furnish anyother information that the Nevada Gaming Commission may require. Herbst Gaming has been found suitable by the Nevada Gaming Commission to ownthe stock or the membership interests of various licensed corporations andlimited liability companies that own and operate casinos or slot machineoperating routes licensed by the Nevada Gaming Commission (all of which arecollectively  referred to as the “Gaming Subsidiaries”).  No personmay become a stockholder  or member of, or receive any percentage ofthe profits from,  any of the Gaming Subsidiaries without first obtaininglicenses and approvals from the Nevada Gaming Authorities.  Herbst Gamingand all of its Gaming Subsidiaries have obtained from the Nevada GamingAuthorities the various registrations, approvals, permits and licenses requiredin order to engage in the various gaming businesses that each respectivelyoperates in Nevada.

 

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

 

 

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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 toterminate the 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 and the Gaming Subsidiaries are required to submitdetailed financial and operating reports to the Nevada GamingCommission. Substantially all material loans, leases, sales of securitiesand similar financing transactions by Herbst Gaming and its Gaming Subsidiariesmust be reported to the Nevada Gaming Commission.

 

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

 

As a privately owned company, any beneficial holder of Herbst Gaming’svoting securities, regardless of the number of shares owned, is required tofile an application, be investigated and have his or her suitability as abeneficial holder of Herbst Gaming’s voting securities determined beforeacquiring an equitable interest in the company. The applicant must pay allcosts of investigation incurred by the Nevada Gaming Authorities in connectionwith conducting such investigation.

 

If Herbst Gaming decided to register any of its voting equitysecurities under the federal securities laws, it would first have to obtain theapproval of the Nevada Gaming Commission to do so and, once such approval isobtained, Nevada law would require any person who acquires more than 5% of aregistered corporation’s voting securities to report the acquisition to theNevada Gaming Commission.  Nevada law requires that beneficial owners ofmore than 10% of a registered corporation’s voting securities apply to theNevada Gaming Commission for a finding of suitability within 30 days after theChairman of the Nevada State Gaming Control Board mails the written noticerequiring the filing for a finding of suitability.  Under certaincircumstances, an “institutional investor,” as defined in the regulations ofthe Nevada Gaming Commission, that acquires more than 10%, but not more than15%, of our voting securities may apply to the Nevada Gaming Commissionfor a waiver of such finding of suitability if that institutional investorholds the voting securities for investment purposes only.  Aninstitutional investor will not be deemed to hold voting securities forinvestment purposes unless the voting securities were acquired and are held inthe ordinary course of business as an institutional investor and not for thepurpose of causing, directly or indirectly, the election of a majority of themembers of our board of directors, any change in our corporate charter, bylaws,management, policies or operations, or any of our gaming affiliates or anyother action which the Nevada Gaming Commission finds to be inconsistent with holdingour voting securities for investment purposes only.  Activities which arenot deemed to be inconsistent with holding voting securities for investmentpurposes only include:

 

·                  voting on all matters voted on by stockholders;

 

·                  making financial and other inquiries of management ofthe type normally made by securities analysts for informational purposes andnot to cause a change in its management, policies or operations; and

 

·                  other activities as the Nevada Gaming Commissionmay determine to be consistent with such 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. The applicant 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 by the Chairman of the Nevada State Gaming Control Board,may be found unsuitable.  The same restrictions apply to a recordowner if the record owner, after request, fails to identify the beneficialowner.  Any stockholder found unsuitable and who holds, directly orindirectly, any beneficial ownership of the common stock of a registeredcorporation beyond the period of time as may be prescribed by the NevadaGaming Commission may be guilty of a criminal offense.  Herbst Gamingand the Gaming Subsidiaries may become subject to disciplinary actionif, after receipt of notice that a person is unsuitable to be a stockholder orto have any other relationship with Herbst Gaming or the Gaming Subsidiaries,Herbst Gaming:

 

·                  pays that person any dividend or interest upon votingsecurities;

 

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

 

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

 

 

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·                  fails to pursue all lawful efforts torequire the unsuitable person to relinquish his voting securities for cash atfair 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 thata person 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:

 

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

 

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

 

·                  pays the unsuitable person remunerationin any form; or

 

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

 

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

 

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,recommendation or approval by the Nevada Gaming Commission or the Nevada StateGaming Control Board as to the accuracy or adequacy of the prospectus or theinvestment merits of the securities offered.  Any representation to thecontrary 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 Commissionmay also require the stockholders, officers, directors and other personshaving a material relationship or involvement with the entity proposing toacquire control, to be investigated and licensed as part of the approvalprocess relating to the transaction.

 

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 feesand taxes are payable either monthly, quarterly or annually and are based uponeither:

 

·                  a percentage of the gross revenuesreceived;

 

·                  the number of gaming devices operated; or

 

·                  the number 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 issubject to increase or decrease in the discretion of the Nevada GamingCommission.  Thereafter, Licensees are also required to comply withcertain reporting requirements imposed by the Nevada gaming laws. Licensees are also subject to disciplinary action by the Nevada GamingCommission if they knowingly violate any laws of the foreign jurisdictionpertaining to a foreign gaming operation, fail to conduct the foreign gamingoperation in accordance with the standards of honesty and integrity required ofNevada gaming operations, engage in activities or enter into associations thatare harmful to the State of Nevada or its 

 

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ability to collectgaming taxes and fees, or employ, contract with or associate with a person inthe foreign operation who has been denied a license or a finding of suitabilityin Nevada on the ground of personal unsuitability.

 

*Missouri*

 

On November 3, 1992, a statewide referendum authorized gaming inthe State 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 downon January 25, 1994, the Missouri Supreme Court held that games of chancewere prohibited under the Missouri constitution.  In a statewide electionheld on November 8, 1994, Missouri voters approved the adoption of anamendment to the Missouri Constitution which permits the legislature to allowgames of chance to be conducted on excursion boats and floating facilities onthe Mississippi River and the Missouri River.  As a result of theamendment, games of chance are also permitted, subject to Missouri GamingLaw.  Pursuant to the Missouri Gaming Law, there are twelve operatingriverboat gaming facility sites in Missouri: one in Caruthersville; one in Boonville;four in the St. Louis area; four in the Kansas City area; one in LaGrange; andone in St. Joseph.

 

Opponents of gaming in Missouri have brought several legal challengesto gaming in the past and may possibly bring similar challenges in thefuture.  On November 25, 1997, the Missouri Supreme Court overturneda state lower court and held that a portion of the Missouri Gaming Law thatauthorized excursion gaming facilities in “artificial basins” up to 1,000 feetfrom the Mississippi or Missouri rivers was unconstitutional.  This rulingcreated uncertainty as to the legal status of several excursion gamingriverboat facilities in the state.  On November 3, 1998, a statewidereferendum was held, whereby the voters amended the constitution to allow “artificialbasins” for existing facilities, effectively overturning the above MissouriSupreme Court decision.  There can be no assurances that any futurechallenges, if brought, would not further interfere with gaming operations inMissouri, 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, Inc., the subsidiary ofHerbst Gaming that owns St. Jo and the current licensee and HGI—Mark Twain, Inc.,the subsidiary of Herbst Gaming that owns Mark Twain and the current licensee,any subsidiaries, and some of their officers and employees are and will besubject to specific regulations, including ongoing licensingrequirements.  As part of the application and licensing process for agaming license, the applicant must submit detailed financial, operating andother reports to the Missouri Gaming Commission.  Each applicant has anongoing duty to update the information provided to the Missouri GamingCommission in the application, usually within seven days of a material changein the information on file with the Missouri Gaming Commission.  Each ofSt. Jo and Mark Twain has frequently updated its application materialssince it was initially licensed.  In addition to the information requiredof the applicant, directors, officers, affiliated business entities and otherdefined “key persons” (which include individuals and companies designated bythe Missouri Gaming Commission) must submit Personal Disclosure Forms, whichinclude detailed financial information, and are subject to thoroughinvestigations.  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 gamingemployees must obtain an occupational license issued by the Missouri GamingCommission.  Suppliers are also subject to licensing requirements of theMissouri Gaming Commission.  Aninstitutional investor holding an interest of 20% or less in Herbst Gaming foronly passive investment purposes, may be exempted from these licensurerequirements by the Missouri Gaming Commission.

 

Effective May 30, 2008, certain amendments were made to Missouri’sgaming regulations that provide for the division of Missouri gaming licensesinto Class A and Class B Licenses. Herbst Gaming now holds a Class ALicense which allows Herbst Gaming to operate the HGI-St. Jo and HGI-Mark Twainbusiness entities. HGI-St. Jo and HGI-Mark Twain now hold Class B Licensesallowing them to operate the respective riverboat gaming operations inMissouri. Based on these amended regulations, HGI-St. Jo as operator ofTerrible’s Frontier Casino facility and HGI-Mark Twain as operator of the MarkTwain Casino facility became Class B license holders.  Herbst Gaming, as the holding and parentcompany of HGI-St. Jo and HGI-Mark Twain, holds a Class A license.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

·                  an economic 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 andHGI—Mark Twain has undergone a full licensing investigation and hearing inconnection with its licensing.

 

The Missouri Gaming Law and implementing regulations imposerestrictions on the use of and do not permit the transfer of the gaming licensesas well as limitations on transactions engaged in by licensees.  Thelicenses issued by the Missouri Gaming Commission may not be transferrednor pledged as collateral.  The Missouri Gaming Law regulations bar alicensee from taking any of the following actions without prior notice to, andapproval by, the Missouri Gaming Commission:

 

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

 

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

 

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

 

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

 

·                  defined “significant related partytransactions.”

 

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.  Gamingequipment may not be pledged.  Corporate stock of some licenseesmay not be pledged except in narrow circumstances and subject toregulatory 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:

 

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

 

·                  minimum payouts;

 

·                  the payment of a 21% tax on adjustedgross receipts;

 

·                  prohibitions against providing credit togaming customers;

 

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

 

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

 

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

 

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

 

The Missouri 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, includingwithout limitation, forfeiture of all gaming equipment used for improper gamingand fines of up to three times a licensee’s highest daily gross receipts duringthe preceding twelve months.

 

Although the Missouri Gaming Law provides no limit on the amount ofriverboat space that may be used for gaming, the Missouri GamingCommission is empowered to impose space limitations through the adoption of rules andregulations.

 

 

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Previously, the Missouri Gaming Law imposed as to each customer a $500loss limit per two-hour period established by each licensee with the approvalof the Missouri Gaming Commission. However, by vote of Missouri registered voters on November 8, 2008,the Missouri Gaming Law was amended to provide that the Missouri GamingCommission shall not establish any regulations or policies that limit theamount of wagers, losses or buy-in amounts.

 

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 GamingCommission has authorized all twelve licensed sites to operate all or a portionof their facilities on a continuously docked basis.

 

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

 

*Iowa*

 

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

 

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

 

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

 

The Company’s Iowa excursion gambling boat license was approved for renewalat a March 5, 2009 meeting of the Iowa Gaming Commission.  Thislicense is not transferable and will need to be renewed annually and prior tothe commencement of each subsequent annual 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 gamingoperations.  Iowa Gaming Laws seek to:  (1) prevent unsavory orunsuitable persons from having direct or indirect involvement with gaming atany time or in any capacity; (2) establish and maintain responsibleaccounting practices and procedures; (3) maintain effective control overthe financial practices of licensees (including the establishment of minimumprocedures for internal fiscal affairs, the safeguarding of assets andrevenues, the provision of reliable record keeping and the filing of periodicreports with the Iowa Gaming Commission); 

 

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(4) prevent cheatingand fraudulent practices; and (5) provide a source of state and localrevenues through taxation and licensing fees.  Changes in Iowa Gaming Lawscould have a material adverse effect on the Iowa gaming operations.

 

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 submitdetailed financial and operating reports to the Iowa Gaming Commission.  Certaincontracts of licensees in excess of $100,000, that exceed three years in termor that involve related parties must be submitted to and approved by the IowaGaming Commission.

 

Officers, directors, managers and employees of the Iowa gamingoperations are required to be licensed by the Iowa Gaming Commission. Employees associated with gaming must obtain a license and these licenses aresubject to immediate suspension under specific circumstances.  Inaddition, anyone having a material relationship or involvement with the Iowagaming operations may be required to be found suitable or to be licensed,in which case those persons would be required to pay the costs and fees of theIowa Gaming Commission in connection with the investigation.  The IowaGaming Commission may deny an application for a license for any causedeemed reasonable.  In addition to its authority to deny an applicationfor license, the Iowa Gaming Commission has jurisdiction to disapprove a changein position by officers or key employees and the power to require the Iowagaming operations to suspend or dismiss officers, directors or other keyemployees or sever relationships with other persons who refuse to fileappropriate applications or whom the Iowa Gaming Commission finds unsuitable toact in such capacities.

 

The Iowa Gaming Commission may revoke a gaming license if thelicensee:

 

·                  has been suspended from operating a gaming operation in anotherjurisdiction by a board or commission of that jurisdiction;

 

·                  has failed to demonstrate financial responsibility sufficient to meetadequately the requirements of the gaming enterprise;

 

·                  is not the true owner of the enterprise;

 

·                  has failed to disclose ownership of other persons in the enterprise;

 

·                  is a corporation 10% of the stock of which is subject to a contract oroption to purchase at any time during the period for which the license wasissued, unless the contract or option was disclosed to the Iowa GamingCommission and the Iowa Gaming Commission approved the sale or transfer duringthe period of the license;

 

·                  knowingly makes a false statement of a material fact to the Iowa GamingCommission;

 

·                  fails to meet a monetary obligation in connection with an excursiongaming boat;

 

·                  pleads guilty to, or is convicted of, a felony;

 

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

 

·                  is delinquent in the payment of property taxes or other taxes or feesor a payment of any other contractual obligation or debt due or owed to a cityor county; or

 

·                  assigns, grants or turns over to another person the operation of alicensed excursion boat (this provision does not prohibit assignment of amanagement contract approved by the Iowa Gaming Commission) or permits anotherperson to have a share of the money received for admission to the excursionboat.

 

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 thepersons involved could be subject to substantial fines for each separateviolation of the Iowa Gaming Laws in the discretion of the Iowa GamingCommission.  Limitations, conditioning or suspension of any gaming licensecould (and revocation of any gaming license would) have a material adverseeffect on operations.

 

The Iowa Gaming Commission may also require any individual who hasa material 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.  Theapplicant stockholder 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 was a prepaid assessment due on June 1,2005 and another prepaid assessment paid on June 1, 2006, in an aggregateamount equal to 2.152% of each licensee’s estimated adjusted gross receipts forfiscal year 2004.  These assessments will be offset by future state gamingtaxes paid by each licensee with a credit for 20% of the assessments paidallowed each year beginning July 1, 2010 for five consecutive years. The state of Iowa is also reimbursed by the licensees for all costs associatedwith monitoring and enforcement by the Iowa Gaming Commission and the IowaDepartment of Criminal Investigation.

 

**Item 1A.  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 thefollowing risks and uncertainties or other risks and uncertainties notcurrently known to us or not currently considered to be material actuallyoccur, our business, financial condition or operating results could be harmedsubstantially.

 

*Weare currently in default under**the amended Credit Agreement**and the indenturesunder which**the Subordinated Notes**were issued.  The Company andthe Subsidiary Guarantors have entered into the Lockup Agreement and have filedthe Chapter 11 Cases with the Bankruptcy Court.*

 

Under the Restructuring, all outstanding obligations under theindentures governing the Subordinated Notes will be terminated and 100% of theexisting equity in the Company will be cancelled.  Further, the Company will separate its casinoand slot machine route businesses into two holding companies.  It is uncertain how the separation of ourbusinesses may impact our operations. Please refer to our discussion under “Liquidity and CapitalResources—Cash Flows; Restructuring” for a more detailed discussion of theRestructuring and the Chapter 11 Cases. The Restructuring will be subject to various regulatory, BankruptcyCourt and third party approvals.  Wecannot assure you that we will be successful in implementing the Restructuringin the form contemplated by the Lockup Agreement or at all.

 

*Weare undergoing a restructuring under Chapter 11 of the Bankruptcy Code andit is uncertain whether we will emerge from bankruptcy or achieve a viableoperation.*

 

We are currently operating as debtors-in-possession underChapter 11 of the Bankruptcy Code, and our continuation as a going concernis contingent upon, among other things, our ability to gain approval of theplan of reorganization by the requisite parties under the Bankruptcy Code, havea plan of reorganization confirmed by the Bankruptcy Court, gain gamingauthority approvals to the extent required to effectuate a plan of reorganization,comply with terms of existing and future loan agreements, return toprofitability, generate sufficient cash flows from operations, and obtainfinancing sources to meet future obligations. Further, it is uncertain whether we will lose valuable contracts in theprocess of the Chapter 11 Cases.

 

With specific regard to the Restructuring, we may not be able toconfirm the Proposed Plan.  Even if therequisite acceptances of the Proposed Plan are received, the Bankruptcy Courtmay not confirm the Proposed Plan or the relevant gaming authorities may notapprove certain elements of the Proposed Plan. A dissenting holder of a claim against or equity interest in the Companymay challenge the balloting procedures and results as not being in compliance withthe Bankruptcy Code.  Even if theBankruptcy Court determined that the balloting procedures and results wereappropriate, the Bankruptcy Court may still decline to confirm the ProposedPlan if it finds that any of the statutory requirements of Section 1129 ofthe Bankruptcy Code for confirmation are not met.   Section 1129 of the Bankruptcy Codesets forth the requirements for confirmation and requires, among other things, (i) thatconfirmation of the Proposed Plan is not likely to be followed by a liquidationor a need for further financial reorganization and (ii) the value ofdistributions to non-accepting holders of claims within a particular classunder the Proposed Plan will not be less than the value of distributions suchholders would receive if the Company were liquidated under Chapter 7 ofthe Bankruptcy Code.  With regard to aclass of creditors or equity interest holders who vote to reject the ProposedPlan or are deemed to have rejected the Plan, the Bankruptcy Court must findthat the terms of the Proposed Plan are fair and equitable to suchnon-accepting classes.  The BankruptcyCourt may determine that the Proposed Plan does not satisfy one or more ofthese requirements, in which case it would not be confirmable by the BankruptcyCourt.

 

If the Proposed Plan is not confirmed by the Bankruptcy Court, it isunclear whether we will be able to reorganize our business and what, if any,distributions holders of claims against or equity interests in the Companyultimately would receive with respect to their claims or equity interests.  If an alternative plan of reorganizationcould not be agreed upon, it is possible that we would have to liquidate ourassets, in which case it is possible that holders of claims would receivesubstantially less favorable treatment than they would receive under theProposed Plan.

 

*Prolonged continuation of theChapter 11 Cases  may harm ourbusiness.*

 

If the Chapter 11 Cases continue for a prolonged amount of time, theproceedings could adversely affect our business and operations.  So long as the Chapter 11 Casescontinue, our senior management will be required to spend a significant amountof time and effort dealing with our reorganization instead of focusingexclusively on business operations. Prolonged continuation of the Chapter 11 Cases will also make itmore difficult to attract and retain management and other key personnelnecessary to the success 

 

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and growth of ourbusiness.  In addition, the longer theChapter 11 Cases continue, the more likely it is that our customers,suppliers and agents will lose confidence in our ability to successfullyreorganize our business and seek to establish alternative commercialrelationships.  Furthermore, so long asthe Chapter 11 Cases continue, we will be required to incur substantialcosts for professional fees and other expenses associated with the Chapter 11Cases.  Prolonged continuation of theChapter 11 Cases may also require us to seek additional financing.  It may not be possible for us to obtainadditional financing during or after the Chapter 11 Cases on commerciallyfavorable terms or at all.  If we were torequire additional financing during the Chapter 11 Cases and were unableto obtain the financing on favorable terms or at all, our chances ofsuccessfully reorganizing our business may be seriously jeopardized

 

*The volatility and disruption of thecapital and credit markets and adverse changes in the global economy havenegatively impacted our ability to access financing.*

 

Due to the existing uncertainty in the capital and credit markets andcurrent adverse changes in the global economy, our access to capital may not beavailable on terms feasible to the Company if at all.

 

*Our operations, and the gamingindustry as a whole, have been adversely affected by the general economicdownturn.  The gaming operations andcasinos owned by the Company may be further adversely impacted if the generaleconomic conditions continue to decline, which could lead to an adverse impacton the operations of the Company*.

 

The results of operations of our route and casino businesses have beennegatively impacted by the global financial recession, subprime mortgagecrisis, volatile gasoline and energy prices, and the general economic downturn,including a decrease in consumer confidence levels.  The gaming industry is currently experiencingreduced demand.  The demand for gaming ishighly sensitive to consumers’ disposable incomes, and a general decline ineconomic conditions, including businesses downsizing their workforces, may leadto our potential customers having less discretionary income with which towager.  Many of our customers have alsoexperienced significant reductions in their savings as a result of recentinvestment losses.  These developmentshave led, and are likely to continue to lead, to a reduction in our revenuesand have materially adversely affected our operating results, as there arefewer customers and our customers spend less than they historically have.  While there has been government response tothese economic hardships, there can be no assurance that this will restore theeconomy and bring back consumer confidence and spending.  Gaming industry revenues are sensitive togeneral economic conditions and are influenced by consumer confidence in theeconomy and other factors.  An extended period of reduced discretionaryspending could significantly harm our operations and we may not be able tolower our costs rapidly enough, or at all, to offset a decrease in revenues.

 

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

 

Our properties use significant amounts of electricity, natural gas andother forms of energy.  While no shortages of energy have beenexperienced, the substantial increases in the cost of electricity, natural gasand gasoline in the United States in general, and in Southern and NorthernCalifornia, Southern and Northern Nevada, south central Iowa and northeast andnorthwest Missouri in particular, may negatively affect our operatingresults.  In addition, further energy price increases in such areas couldresult 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

 

*Theincrease in the price of gasoline during portions of 2008 had an adverse impacton the results of our operations.*

 

Most of our customers drive in to our locations.  There is very little, if any, non-drive-inmarket.  As such, the increases ingasoline prices throughout the year have adversely impacted our operations asit has become more expensive for our customers to drive to our locations.  Though gasoline prices have dropped in thelast quarter, there can be no guarantee that prices will not rise again therebyadversely affecting our revenue.

 

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

 

We conduct our route operations under contracts with thirdparties.  Both contracts with chain and street customers are renewable atthe option of the owner of the respective chain store or street account. As our route contracts expire, we are required to compete for renewals. Although we have historically been able to renew our contracts, if we areunable to renew a material portion of our route contracts because ourcompetitors offer more favorable terms or for any other reason, including thegreater financial stability of our competitors, our business, financialcondition and results of operations would be adversely affected.  Wecannot assure you that our current chain or street contracts will be renewed.

 

*We may experience a loss ofmarket share.*

 

The gaming industry is highly competitive.  Our slot-routeoperations are subject to substantial direct competition for ourrevenue-sharing and fixed space lease locations from one large route operatorand numerous small operators, located principally in Las Vegas, Nevada. With respect to our casino operations in Nevada, we compete for local gamingcustomers with other locals-oriented casino-hotels and other casinos located inthe vicinity of these properties.  Our casino operations in the Midwestface competitors that include land-based casinos, dockside casinos, riverboatcasinos, casinos located on Native American reservations and 

 

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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, theexpansion of route operations or casino gaming in or near any geographic areafrom which we attract or expect to attract a significant number of ourcustomers could have a material adverse effect on our business, financialcondition and results of operations.

 

*Changes to applicable tax laws couldhave a material adverse effect on our financial condition.*

 

We pay substantial taxes and fees in connection with our operations asa gaming company.  From time to time, federal, state and local legislatorsand other government officials have proposed and adopted changes in tax laws,or in the administration of those laws affecting the gaming industry.  Itis not possible to determine the likelihood of changes in tax laws or in theadministration of those laws.  If adopted, changes to applicable tax lawscould have a material adverse effect on our business, financial condition andresults of operations.  Due to the continued pressures on the statelegislatures to address shortfalls in their budgets associated with the currentrecession, there may be more support to look to increased taxation that couldaffect all our gaming properties.  Anyincrease in taxes would adversely impact the Company’s future profitability.

 

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

 

As owners and operators of gaming facilities, we are subject toextensive state and local regulations in Nevada, Iowa and Missouri.  Stateand local government authorities in such jurisdictions, including the NevadaGaming Commission, the Iowa Racing and Gaming Commission and the MissouriGaming Commission, require us and our subsidiaries to obtain gaming licensesand require our officers, key employees and business entity affiliates to demonstratesuitability to hold gaming licenses, and such state and local governmentauthorities may limit, condition, suspend or revoke a license for anycause deemed reasonable by the respective licensing agency.  Theymay also levy substantial fines against us or our subsidiaries or theindividuals involved in violating any gaming laws or regulations.  Theviolation of any such state and local regulations could have a material adverseeffect on our business, financial condition and results of operations.

 

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 anyof these events 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 GamingCommission, the Iowa Racing and Gaming Commission and the Missouri GamingCommission.  The Missouri Gaming Commission also requires notice of theintended incurrence of any private debt exceeding $1,000,000 and reserves theright to elect to have prior review and approval.

 

We are subject to a variety of other rules and regulations,including zoning, environmental, construction and land-use laws, regulationsand permits that govern the serving of alcoholic beverages.  Any changesto these laws could have a material adverse effect on our business, financialcondition and results of 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 theregulatory environment or the adoption of new federal, state or localgovernment legislation 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 and Licensing.”

 

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

 

Our success is substantially dependent upon the efforts and skills ofTroy D. Herbst, our chief executive officer, executive vice president,secretary and treasurer, Ferenc Szony, our president and chief operatingofficer, and  Mary E. Higgins, our chief financial officer.  We haveentered into employment agreements with Mr. Herbst, Mr. Szony, and Ms. Higginsthrough 2009.  These agreements automatically renew for successiveone-year periods unless sooner terminated or unless either party to therespective agreements notifies the other in writing at least 60 days prior tothe date the respective agreement is scheduled to expire.  If we were tolose the services rendered by these employees, our operations could beadversely affected.  In addition, we compete with other potentialemployers for employees, and we may not succeed in hiring and retainingthe executives and other employees that we need.  An inability to hirequality employees could have a material adverse effect on our business,financial condition and results of operations.

 

Under the Lockup Agreement, the Company will create a new officerposition for a Chief Operating Officer — Gaming.  It is uncertain how this officer, whoseemployment is subject to prior approval under applicable gaming and bankruptcylaws, will affect the Company’s operations.

 

 

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* *

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

 

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

 

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

 

The largest sources of customers for the Sands Regent Casinos areCalifornia and the Pacific Northwest, including a large number who drive toReno from the San Francisco and Sacramento metropolitan areas, and the largestsource of customers for the Primm Casinos are from Southern California,including a large number who drive to Las Vegas from the San Bernardino andBarstow metropolitan areas.  The expansion of Native American casinos inCalifornia, Oregon and Washington continues to have an impact on casinorevenues in Nevada in general, and such impact may be significant on the marketsin which the Sands Regent Casinos and the Primm Casinos operate.

 

*SomeNative American casinos have a lower minimum age requirement for gambling,which may increase their market share at the expense of our market share.*

 

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

 

*Adverse winter weather conditions inthe Midwest, the Sierra Nevada Mountains and Reno-Lake Tahoe area could have amaterial adverse effect on the results of operations and financial condition ofour casinos, which could lead to an adverse impact on the results of operationand financial condition of the Company.*

 

Adverse winter weather conditions, particularly snowfall, can detercustomers of our Northern Nevada and Midwest Casinos from traveling or make itdifficult for them to frequent its facilities.  If these locations were toexperience prolonged adverse winter weather conditions, the results ofoperations and financial condition of these casinos could also be materiallyadversely affected, thereby adversely affecting the results of operations andfinancial condition of the Company.

 

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

 

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

 

*Wemay be unable to obtain slot machines or related technology from our thirdparty supplier on a timely, cost-effective basis.*

 

We currently primarily rely on International Game Technology, Inc.for our supply of slot machines and related technology, which are onlyavailable from a limited number of suppliers.  We cannot assure you thatwe can obtain slot machines or related technology on a cost-effectivebasis.  As a result, we may be forced to incur significantunanticipated costs to secure alternative third party suppliers or adjust ouroperations.

 

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

 

We own and operate riverboat and dockside casino facilities, which aresubject to risks in addition to those associated with land-based casinos,including loss of service due to casualty, mechanical failure, extended orextraordinary maintenance, flood or other severe weather.  Reducedpatronage and the loss of a dockside or riverboat casino from service for anyperiod of time could 

 

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adversely affectour results of operations.  Theriverboats are subject to inspection every five years and have been inspectedas recently as December 2008 in Missouri. The Company’s only cruising vessel is its boat located in Lakeside,Iowa, and this boat had its turbines removed in late 2008, as riverboats inIowa are no longer required to cruise.

 

*Risks Related to Our OutstandingIndebtedness*

 

*We are in default under ouroutstanding indebtedness.*

 

We have incurred a significant amount of indebtedness, includingindebtedness incurred under the amendedCredit Agreement to consummate the acquisitions of the Sands Regent andPrimm Casinos.  As of December 31, 2008, our long-term debt, whichwas all classified as current, totaled $1,176,330,000.  Also as of that date, we carried astockholders’ deficit of $328,155,000 and had a ratio of earnings to fixedcharges of 0.1.  For purposes ofdetermining the ratio of earnings to fixed charges, earnings are defined asearnings before fixed charges and loss on early retirement of debt (other thancapitalized interest).  Fixed charges consist of interest expensed andcapitalized and the interest component of rent expense.

 

The Company is in default under the amended Credit Agreement and theindentures pursuant to which the Subordinated Notes were issued, and has filedthe Chapter 11 Cases.  Please refer toour discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring”for a discussion of the Restructuring.

 

Our substantial indebtedness has resulted in adverse consequences forour business, including the factors listed below.  Even if the Proposed Plan is approved andimplemented, the Company will retain significant indebtedness, which could:

 

·                  make it more difficult to satisfy ourobligations with respect to the instruments governing our then outstandingindebtedness;

 

·                  increase our vulnerability to generaladverse economic and industry conditions;

 

·                  require us to dedicate a substantialportion of our cash flow from operations to debt service, thereby reducing theavailability of our cash flow to fund working capital, capital expenditures andother general corporate purposes;

 

·                  limit our flexibility in planning for, orreacting to, competitive pressures and changes in our business and the industryin which we operate;

 

·                  place us at a competitive disadvantagecompared to our competitors that have less debt; and

 

·                  limit, along with the financial and otherrestrictive covenants in our indebtedness, among other things, our ability toborrow additional funds.

 

*Our indebtedness imposes restrictivecovenants on us.*

 

The amended Credit Agreement and the indentures governing theSubordinated Notes impose operational and financial restrictions on us and oursubsidiaries.  The Company anticipates that debt issued in theRestructuring will have similar covenants. The restrictions imposed and anticipated under these debt instrumentsinclude, among other obligations, limitation on our and our subsidiaries’ability to:

 

·                  incur additional debt;

 

·                  make payments on subordinated obligations;

 

·                  make dividends or distribution andrepurchase stock;

 

·                  make investments;

 

·                  grant liens on our property to securedebt;

 

·                  enter into certain transactions withaffiliates;

 

·                  sell assets or enter into mergers orconsolidations;

 

·                  sell equity interests in oursubsidiaries;

 

·                  create dividend and other paymentrestrictions affecting subsidiaries;

 

·                  change the nature of our lines ofbusiness;

 

 

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·                  make capital expenditures; and

 

·                  designate restricted and unrestrictedsubsidiaries.

 

The amended Credit Agreement 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, the amended Credit Agreement will require us to complywith various restrictive financial covenants, including interest coverage anddebt to operating cash flow ratios, and capital spending limits.  Please refer to our discussion under “Liquidityand Capital Resources—Cash Flows; Restructuring” for a discussion of our defaults under the amended Credit Agreementand the indentures under which the Subordinated Notes were issued and the termsof the new loans contemplated by the Restructuring.

 

**Item 2.   Properties.**

 

Our principal properties consist of the following:

 

**Nevada**

 

*Company Headquarters and Warehouse.*

 

We lease a four-acre site in Las Vegas and, pursuant to that lease, ownthe 50,000 square foot building where our executive offices and operationalheadquarters are located.  This facility houses our executive andadministrative offices and is used for sub-assembly and warehouse space for ourslot route operations.  The lease between The Herbst Family LimitedPartnership II, a Nevada limited partnership, and us ends on June 30,2017, with options to renew the lease for five additional successive terms often years each.  Under the LockupAgreement, the terms of this lease, along with several other related partyagreements, would be modified.

 

*OfficeSpace and Convenience Store.*

 

We lease a three-acre site and a 50,000 square foot building where ouremployment center and purchasing department are located.  The leasebetween Herbst Grandchildren’s Trust, a trust governed under the laws of theState of Nevada and a related party, and us ends on November 27, 2012,with options to renew the lease for five additional successive terms of tenyears each.

 

*Terrible’s Searchlight Casino.*

 

We lease the space in which Terrible’s Searchlight Casino is located inSearchlight, Nevada.  The space is leased from Terrible Herbst, Inc.and the lease ends on June 30, 2022, with options to renew the lease forfive additional successive terms of ten years each, contingent on TerribleHerbst, Inc. renewing its lease of the property from an unrelated thirdparty.

 

*Terrible’sHotel & 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 255 guestrooms.

 

*Terrible’sTown 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 LimitedPartnership, a Nevada limited partnership and a related party.  The leaseexpires on June 30, 2011.  We also have an option to further extendthe lease for three additional successive terms of five years through 2026.

 

*Terrible’sLakeside 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, is located.

 

*Terrible’sTown Casino & Bowl.*

 

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

 

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*Terrible’s Gold Ranch Casino and RVPark.*

 

We lease the land on which Terrible’s Gold Ranch Casino and RV Resortis located in Sparks, Nevada from an unrelated third party.  The leaseends on January 1, 2022, with an option to renew the lease for fouradditional successive terms of five years each.

 

*Sands Regency Casino Hotel.*

 

Sands Regency Casino Hotel in Downtown Reno, Nevada has approximately853 rooms, 29,000 square feet of gaming space and approximately 12,000 squarefeet of convention and meeting space. The buildings that house the Sands sit onapproximately 10.5 acres in downtown Reno. This land is owned by the Company.

 

*Terrible’s Dayton Depot Casino.*

 

Terrible’s Dayton Depot Casino is located in Dayton, Nevada.  Weown the building that houses the Dayton Casino and the 4.5 acres of realproperty on which the Dayton Casino is located, as well as a building and 0.5acres of real property directly across the street which housed a small tavernthat is not currently operating.

 

*Terrible’s Rail City Casino.*

 

We own the land and building on which Terrible’s Rail City is locatedin Sparks, Nevada. The Rail City Casino is approximately 30,000 square feet andthe property is approximately 7.5 acres.

 

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

 

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

 

**Midwest**

 

*LakesideCasino Resort.*

 

We own the land in Osceola, Iowa on which certain facilities ofLakeside Iowa are located, including the all-suite hotel, conventionfacilities, RV park and convenience store and own an additional 121 acres ofland adjacent to or nearby the casino.  We lease the use of West Lake andcertain real estate surrounding West Lake from the City of Osceola, Iowa. The lease ends on May 19, 2009.  We have an option to extend thelease for eight additional successive terms of five years each.  We are currently negotiating the next fiveyear extension.

 

*MarkTwain Casino.*

 

We own the land in LaGrange, Missouri on which certain facilities ofMark Twain are located, and own an additional 14 acres of land adjacent to ornearby the casino.

 

*St. JoFrontier Casino.*

 

We own the land in St. Joseph, Missouri on which certainfacilities of St. Jo are located, and own an additional 72 acres of landadjacent to or nearby the casino.

 

**Item 3.    LegalProceedings.**

 

On February 17, 2006, the Clark County Circuit Court entered judgmentof a jury verdict delivered on January 14, 2006 against ETT for$4.1 million in compensatory damages and $10.1 million in punitivedamages.  The jury verdict was delivered in connection with an actionbrought by the family of an individual that alleged that ETT had negligentlyretained and negligently supervised a temporary employee who in 2001 stole atruck from ETT and, while drunk, hit and killed the individual.  Thepunitive damage award was subsequently lowered to $4.1 million in apost-trial ruling.  The Company believes the award of compensatory andpunitive damages against ETT, the liability of ETT, and the amount thereof, isnot supportable in either law or in fact and plans to vigorously pursue allappropriate post-trial and other remedies, including exercising its right toappeal.  The Company has appealed this decision.  Based on a reviewof the legal opinions and facts available to the Company at this time, theCompany believes it is adequately reserved for any potential liability relatedto this incident. 

 

The Company was party to an arbitration in 2008 in Las Vegas, Nevadainvolving the termination of an employee. The former employee, alleged he was terminated without cause and wastherefore due amounts pursuant to his employment agreement.  On March 10, 2009, the Company receivedan interim award from the arbitrator that awarded the former employee $1.3million as a 

 

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result of thisarbitration.  The award is currentlyunder appeal, however, the Company has fully recognized the award and approx$0.2 million for attorneys fees in the 2008 fiscal year.

 

The Debtors have filed the Chapter 11 Cases in the Bankruptcy Courtunder case numbers 09-50746-gwz through 09-50763-gwz.  On the Petition Date, the Debtors filedseveral emergency motions with the Bankruptcy Court, including a motion to havethe Chapter 11 Cases jointly administered. On March 29, 2009, the Bankruptcy Court conducted hearings on themotion, including the motion for joint administration.  The Bankruptcy Court granted the motionseither on a final basis or an interim basis with a continued hearing dateregarding the interim orders on April 30, 2009. The joint administrationmotion was granted with the lead case being “Zante Inc” being case number09-50746-gwz.  The Debtors plan tocontinue to operate their businesses and manage their properties as “debtors inpossession” under the jurisdiction of the Bankruptcy Court and in accordancewith the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court.  For convenience,XRoads Court Management Services has established a webpage for access toall pleadings filed in the Chapter 11 Cases. The web address is http://www.xroadscms.net/zante.  Please refer to our discussion under “Liquidityand Capital Resources—Cash Flows; Restructuring” for a further discussion ofthe Chapter 11 Cases.

 

The Company is a party to certain claims, legal actions, and complaintsarising in the ordinary course of business or asserted by way of defense orcounterclaim in actions filed by the Company.  Management believes thatits defenses are substantial in each of these matters and that the Company’slegal position can be successfully defended without material adverse effect onits consolidated financial statements.

 

**Item 4.   Submission of Matters to aVote of Security Holders.**

 

Not applicable.

 

**PART II**

 

**Item 5.    Marketfor Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities .**

 

(a)          Market Information

 

There is no established public trading market for any class of ourcommon equity.  No class of our capital stock has been registeredunder the Securities Act of 1933, as amended, or under Section 12 of theExchange Act.  All 300 shares of our outstanding common stock arebeneficially owned by Edward, Timothy and Troy Herbst.

 

(b)         Holders

 

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

 

(c)          Dividends

 

Dividends of $10.3 million were paid in respect of our outstandingcommon stock in fiscal year 2007.  Nodividends were paid in fiscal year 2008.

 

The amended Credit Agreement and the indentures governing theSubordinated Notes restrict our ability to declare or make distributions on ourcapital shares.  To date, the only distributions that we have made on ourcommon stock are distributions permitted by the instruments governing our outstandingindebtedness.  Subject to contractual restrictions contained in theamended Credit Agreement, cash dividends may be declared and paid only in anaggregate amount not to exceed the Company’s percentage of excess cash flow (asdefined in the amended Credit Agreement) for the preceding fiscal year so longas the Company is in compliance the financial covenants.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources” and “Item 8.  FinancialStatements and Supplementary Data — Notes to Consolidated Financial Statements.”

 

**Item 6.    SelectedFinancial Data.**

 

We derived the selected consolidated financial data as of and for eachof the prior five years ended December 31, 2008 from our auditedconsolidated financial statements, as of and for each of the prior three yearsended December 31, 2008, which are included elsewhere in thisreport.  In February 2005, we consummated the acquisition of LakesideIowa, and as a result the period beginning on January 1, 2005 may notbe comparable to prior years.  Similarly, in January 2007 weconsummated the acquisition of the Sands Regent Casinos and in April 2007we consummated the acquisition of the Primm Casinos, and as a result the periodbeginning January 1, 2007 may not be comparable to prior years.  Thefollowing table summarizes certain selected consolidated financial data, whichyou should read in conjunction with our consolidated financial statements andthe related notes contained elsewhere in this report and under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

 

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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 provisionfor income taxes is not included in our financial data.

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                    | ** ** |
| Income statement  data:                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                           |       | $                                          | 293,244    |   | $ | 339,401 |   | $ | 347,041 |   | $ | 276,946 |   | $ | 243,635 |   |
| Casino  operations                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                     |       | 91,254                                     |       | 95,400 |   | 95,614 |   | 331,517 |   | 337,006 |   |
| Other states                               |       | —                                     |       | 117,774 |   | 141,435 |   | 141,731 |   | 137,188 |   |
| Other operations                           |       | 3,628                                      |       | 4,923 |   | 10,676 |   | 98,987 |   | 116,609 |   |
| Total revenues                             |       | 388,126                                    |       | 557,498 |   | 594,766 |   | 849,181 |   | 834,438 |   |
| Promotional  allowances—route         |       | (376                                       | )          | (223 | ) | (86 | ) | (64 | ) | (90 | ) |
| Promotional  allowances—casino        |       | (12,138                                    | )          | (21,434 | ) | (32,617 | ) | (64,177 | ) | (63,259 | ) |
| Net revenues                               |       | 375,612                                    |       | 535,841 |   | 562,063 |   | 784,940 |   | 771,089 |   |
| Costs of  revenues:                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                           |       | 227,929                                    |       | 258,114 |   | 271,463 |   | 244,086 |   | 215,653 |   |
| Casino  operations                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                     |       | 56,331                                     |       | 59,125 |   | 64,349 |   | 245,507 |   | 262,338 |   |
| Other states                               |       | —                                     |       | 79,239 |   | 87,852 |   | 89,745 |   | 88,835 |   |
| Depreciation and  amortization             |       | 25,407                                     |       | 33,941 |   | 38,124 |   | 56,405 |   | 57,783 |   |
| General and administrative                 |       | 14,366                                     |       | 15,217 |   | 13,324 |   | 22,983 |   | 21,485 |   |
| Other operations                           |       | —                                     |       | — |   | 6,491 |   | 80,184 |   | 94,522 |   |
| Restructuring  costs                       |       | —                                     |       | — |   | — |   | — |   | 17,717 |   |
| Loss on  impairment of assets              |       | —                                     |       | 3,360 |   | — |   | 72,965 |   | 106,271 |   |
| Loss on lease  termination                 |       | 600                                        |       | — |   | — |   | — |   | — |   |
| Total costs and  expenses                  |       | 324,633                                    |       | 448,996 |   | 481,603 |   | 811,875 |   | 864,604 |   |
| Income (loss)  from operations             |       | 50,979                                     |       | 86,845 |   | 80,460 |   | (26,935 | ) | (93,515 | ) |
| Interest income                            |       | 353                                        |       | 740 |   | 734 |   | 1,481 |   | 921 |   |
| Interest expense                           |       | (22,109                                    | )          | (36,532 | ) | (39,134 | ) | (85,631 | ) | (116,832 | ) |
| Change in value  of derivative instruments |       | —                                     |       | — |   | — |   | (16,115 | ) | — |   |
| Loss on early  retirement of debt(1)       |       | (37,991                                    | )          | (221 | ) | — |   | — |   | — |   |
|                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                         |       | $                                          | (8,768     | ) | $ | 50,832 |   | $ | 42,060 |   | $ | (127,200 | ) | $ | (209,426 | ) |

 
| ** **                                           | ** ** | **Year Ended December 31,**       | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(in thousands, except ratios)** | ** ** |
| Other data:                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Route  EBITDA(2)(3)                                  |       | $                                                | 64,939     |   | $ | 79,922 |   | $ | 75,492 |   | $ | 32,796 |   | $ | 27,892 |   |
| Casino  EBITDA(2)(4)                                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Nevada(4)                                            |       | $                                                | 22,785     |   | $ | 20,281 |   | $ | 17,719 |   | $ | 43,551 |   | $ | 29,475 |   |
| Other states(4)                                      |       | —                                           |       | $ | 29,865 |   | $ | 34,512 |   | $ | 30,268 |   | $ | 30,287 |   |
| Net cash  provided by (used in) operating activities |       | $                                                | 50,010     |   | $ | 92,204 |   | $ | 81,493 |   | $ | 4,273 |   | $ | (2,498 | ) |
| Net cash used in  investing activities               |       | $                                                | (17,009    | ) | $ | (309,172 | ) | $ | (79,758 | ) | $ | (574,128 | ) | $ | (15,746 | ) |
| Net cash  provided by (used in) financing activities |       | $                                                | 51,141     |   | $ | 152,645 |   | $ | (9,944 | ) | $ | 598,495 |   | $ | 29,952 |   |
| Capital  expenditures                                |       | 15,229                                           |       | 43,893 |   | 66,622 |   | 32,418 |   | 15,578 |   |
| Ratio of  earnings to fixed charges(5)               |       | 2.3                                              | x          | 2.4 | x | 2.0 | x | 0.5 | x | 0.1 | x |

 

 

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| ** **                              | ** ** | **December 31,**   | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| **Balance  sheet data:**                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents              |       | $                       | 138,172    |   | $ | 73,849 |   | $ | 65,540 |   | $ | 94,282 |   | $ | 105,990 |   |
| Total assets                            |       | $                       | 318,431    |   | $ | 534,930 |   | $ | 568,450 |   | $ | 1,080,385 |   | $ | 934,248 |   |
| Total debt(6)                           |       | $                       | 333,412    |   | $ | 500,593 |   | $ | 522,618 |   | $ | 1,146,070 |   | $ | 1,176,330 |   |
| Stockholders’  equity (deficiency) |       | $                       | (30,764    | ) | $ | 7,981 |   | $ | 18,771 |   | $ | (118,729 | ) | $ | (328,155 | ) |

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| (1)    |   | Consists of (a) a  loss on early retirement of debt in June 2004 which consisted of  $31.3 million in a debt prepayment penalty and $6.7 million in  unamortized loan fees and (b) a premium of $221,000 paid to call the  balance of our 10 3⁄4% notes in September 2005.                                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    |   | Route and Casino  segment EBITDA are non-GAAP measures but are used by management to measure  segment profits and losses in accordance with SFAS 131, “Disclosures  about Segments of an Enterprise and Related Information”, and are calculated  before allocation of overhead.  See “Note 15.  Business  Segments” to the accompanying Notes to consolidated financial statements for  a reconciliation of these measures to net income(loss), the comparable GAAP  measure. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (3)    |   | Route segment EBITDA  consists of net income plus depreciation and amortization and interest  expense, net of capitalized interest, and is calculated before allocation of  overhead.                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (4)    |   | Casino segment EBITDA  consists of net income plus depreciation and amortization, interest expense,  net of capitalized interest, impairment charges and costs associated  with the retirement of assets.  Casino EBITDA for casinos in Nevada and  other states are calculated before allocation of overhead.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (5)    |   | For purposes of  determining the ratio of earnings to fixed charges, earnings are defined as  earnings before fixed charges and loss on early retirement of debt,  impairment charges and loss on derivatives (other than capitalized  interest).  Fixed charges consist of interest expensed and capitalized  and the interest component of rent expense.                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (6)    |   | Total debt consists of  the current and long-term portions for all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

**Item 7.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

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

 

**Overview**

 

We are a diversified gaming company that focuses on two business lines:slot route operations and casino operations.  Our route operations involvethe exclusive installation and operation of approximately 6,700 slot machinesas of December 31, 2008 in strategic, high traffic, non-casino locations,such as grocery stores, drug stores, convenience stores, bars andrestaurants.  Our casino operations consist of sixteen casinos located inNevada, Iowa and Missouri.  Other thanthe Sands and the Primm Casinos, our casinos are operated under the “Terrible’s”brand.  We are in the process of re-branding the Sands and the PrimmCasinos under the “Terrible’s” brand.

 

We generally enter into two types of route contracts.  With chainstore customers, such as Albertsons, Vons, Safeway, SavOn, Smith’s, Kmart,Terrible Herbst and Rite Aid, we pay a fixed monthly fee for each location inwhich we place slot machines.  With our street accounts, such as bars,restaurants and non-chain convenience stores, we share in the revenues on apercentage basis with the location owner.  Revenues from street accountsare recorded gross of amounts shared.

 

Our revenues are primarily derived from gaming revenues, which includerevenues from slot machines and table games.  Gaming revenues aregenerally defined as gaming wins less gaming losses.  Our largestcomponent of revenues is from our slot machines.  Promotional allowancesconsist primarily of food and beverages furnished gratuitously tocustomers.  The retail value of such services is included in the respectiverevenue classifications and is then deducted as promotional allowances. We calculate income from operations as net revenues less total operating costsand expenses.  Income from operations represents only those amounts thatrelate to our operations and excludes interest income, interest expense andother non-operating income and expenses.  Segment EBITDA consists ofincome from segment operations plus depreciation and amortization, and iscalculated before an allocation of overhead.

 

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 provisionfor income taxes is not 

 

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included in ourfinancial statements.  During the first quarter, The Sands Regent electedto be treated as a Subchapter S corporation for federal income taxpurposes.

 

The Company and theSubsidiary Guarantors**haveentered into the Lockup Agreement, pursuantto which the parties thereto are contractually obligated to support theRestructuring.  As contemplated in theLockup Agreement, the Debtors have filed the Chapter 11 Cases in the BankruptcyCourt.  The Restructuring and the Proposed Planare subject to various regulatory, court and third party approvals.  We cannot assure you that we will besuccessful in implementing the Restructuring in the form contemplated by theLockup Agreement and the Proposed Plan or at all.  Please refer to our discussion under “Liquidityand Capital Resources—Cash Flows; Restructuring” for a more detailed discussionof the Chapter 11 Cases and the Restructuring.

 

**Year 2008 Compared to Year 2007**

 

*RouteOperations*

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

 

Route operations accounted for 29% of total revenues during the yearended December 31, 2008.  This was adecrease from 33% of total revenues for the year ended December 31,2007.  Total revenues from route operations were $243.6 million for theyear ended December 31, 2008, a decrease of $33.3 million, or 12%,from $276.9 million for the year ended December 31, 2007.  At December 31,2008, we were operating approximately 6,700 slot machines, which was 500 lessthan the approximately 7,200 we were operating as of December 31,2007.  The decrease in machines reflectsthese factors, the elimination of certain underperforming route locations aswell as closures of some grocery and drug store chain clients.  These factors, coupled with general economicweakness in Nevada contributed to the decline in route revenue in 2008 comparedto 2007.

 

Route operating costs were $215.7 million, or 89%, of route revenuesfor the year ended December 31, 2008.  This compares to$244.1 million, or 88%, of route revenues for the same period in2007.  This $28.4 million decrease inroute operating expenses in 2008 was associated with a decrease ofapproximately $11.5 million in space lease expenses that were contractuallyagreed to in the prior year in connection with the enactment of a smoking banin Nevada, as well as a decrease in expenses associated with lower revenues atour participation locations, which are based on operating contracts thatprovide for a decrease in revenue share costs in proportion to revenuedecline.  Additional expense reductionsresulted from the elimination of underperforming locations referenced above.  Route operating costs include a reserve for alitigation contingency recorded in 2008. 

 

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

 

 

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*Casino Operations*

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

 

Casino operations accounted for 57% of total revenues for the yearended December 31, 2008 and 56% of total revenues for the year ended December 31,2007.  Total revenues derived from casino operations were $474.2 millionfor the year ended December 31, 2008, an increase of $0.9 million, or0.1%, from $473.2 million for the year ended December 31, 2007. Results for 2008 include the Primm Casinos for the entire year, compared tonine months in 2007.  The Primm Casinoscontributed an increase of $21.3 million in gross revenues for the full year ofoperations in 2008 as compared to the partial year of operations in 2007.  This increase, however, was offset by adecline of $15.8 million in revenues, or 8.8%, from the other Nevada Casinosand a decline of $4.5 million, or 3%, in revenues from the Midwest casinos, ineach case for the year ended December 31, 2008 as compared to the yearended December 31, 2007.

 

Overall casino expenses for the year ended December 31, 2008, ascompared to the 2007 fiscal year, increased primarily due to the inclusion ofthe Primm Casinos for the full year. Increased costs and expenses of $26.8 million were directly associatedwith a full quarter of operations in 2008 that was not included in 2007 due tothe fact that the Primm Casinos were acquired by the Company in April 2007.  This increase was offset in part by adecrease in costs and expenses of $0.9 million, and $9.9 million, respectively,for the Midwest casinos and other Nevada casinos.

 

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

 

We address the above mentioned EBITDA results more fully in the segmentdiscussions below.

 

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

 

*Casino Operations — Nevada*

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

 

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Nevada casino operations accounted for 40% of total Company revenuesfor the year ended December 31, 2008 and 39% of total revenues for theyear ended December 31, 2007.  Revenues derived from Nevada casinooperations were $337.0 million for the year ended December 31, 2008compared with $331.5 million for the year ended December 31,2007.  The net increase is primarily dueto the inclusion of revenue from the Primm Casinos for the full year in2008.  Revenues increased by $21.3million for the Primm Casinos for the year ended December 31, 2008 ascompared to the year ended December 31, 2007, when the Primm Casinos’results are included only for nine months. However, revenues decreased by $15.8 million for the other Nevadacasinos as economic pressures impacted revenues across the state.

 

Nevada casino promotional spending was up $2.7 million. This wasprimarily due to the Primm Casinos’ full year activities, offset in part bydecreases of promotional spending of $1.2 million for the other NevadaCasinos.  As a percentage of revenue,promotional allowances were 13.4% for the year ended December 31, 2008compared to 12.8% for the year ended December 31, 2007.

 

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

 

Depreciation and amortization expense was $28.5 million for the yearended December 31, 2008, an increase of $5.7 million, or 25%, from $22.8million for the year ended December 31, 2007.  The increase was primarily associated withthe acquisition of the Primm Casinos in April 2007 and reflects a finalpurchase price adjustment in the first quarter of 2008 to the estimateddepreciation and amortization expense associated with the Primm Casinos.

 

Operating results at the Primm Casinos have continued to decline aseconomic pressures have increased and competition has increased for SouthernCalifornia and Southern Nevada customers. Annual impairment testing performed in the fourth quarter of 2007 aswell as interim testing performed in the second quarter of 2008 determined thatthe fair value of goodwill associated with the Primm Casinos was less than thebook value.  Accordingly, for the yearsended December 31, 2007 and 2008 we recorded non-cash charges of $36.5million and $30.7 million, respectively, to reduce the balance of this asset tozero.  Further, annual impairment testingperformed in the fourth quarter of 2008 determined that the fair value of ourtrademark associated with the Primm Casinos was less than its book value.  Accordingly, for the year ended December 31,2008 we recorded a non-cash charge of $7.5 million to reduce the balance ofthis asset to its fair value.  As aresult of revenue declines related to our Primm properties, the Company testedthese assets for recoverability pursuant to SFAS 144 in 2008.  The test resulted in no impairment; however,we will continue to monitor the performance of the Primm properties and, ifnecessary, continue to update our asset recoverability test under SFAS144.  The total impairment chargesassociated with the Primm Casinos were $38.2 million for 2008.

 

Annual impairment testing performed in the fourth quarter of 2008determined that the fair value of goodwill associated with the Sands RegentCasinos was less than the book value. Accordingly, we recorded a non-cash charge of $48.9 million for the yearended December 31, 2008 to reduce the balance of this asset to zero.

 

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

 

*Casino Operations — Other states*

 

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

 

Casino operations in other states accounted for 16% of total companyrevenues for the year ended December 31, 2008, which is down from 17% in2007.  Total revenues derived from casino operations located in statesother than Nevada were $137.2 million, a decrease of $4.5 million, compared to$141.7 million for the year ended December 31, 2007.  Thedecline in revenue was exclusively at our Lakeside Iowa casino, which wasaffected by continued competitive pressures in the Iowa market as well 

 

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as general economicweakness in the region.  Results at thetwo Missouri properties were not impacted by these issues: 2008 results at theSt. Jo casino were in line with 2007 and the Mark Twain casino had strongerrevenue in 2008 than 2007 due primarily to a smoking ban in Illinois that wasenacted in 2008 (the Mark Twain casino’s closest customer market is Quincy,Illinois).

 

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

 

Other state casino operating costs were $88.8 million, or 65% ofrevenues, for the year ended December 31, 2008 compared to$89.7 million, or 63% of revenues, for the year ended December 31,2007.  The net decrease in operating costs was attributable to thereduction of variable costs of sales associated with lower revenues, partiallyoffset by an increase in health and dental insurance expenses.  The increase in health and dental insurancecosts resulted from an error in the placement of the stop loss policy that waspart of the self-insurance program at the three riverboat casinos in theMidwest.  The additional exposure relatedto the placement of an incorrect stop loss policy resulted in additionalexpense in 2008 of approximately $2.8 million compared to 2007.

 

Operating results at Lakeside Iowa have continued to decline aseconomic pressures have continued and competition has intensified in the Iowamarket.  Annual impairment testingperformed in the fourth quarter of 2007 and 2008, as well as interim testingperformed in the second quarter of 2008, determined that the fair value of ourLakeside Iowa license rights was less than the book value.  According, for the year ended December 31,2007 we recorded a non-cash charge of $33.3 million and for the year ended December 31,2008 we recorded non-cash charges totaling $19.2 million to reduce the balanceof this asset to its fair value.

 

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

 

*Other Operations and G&A*

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

 

Revenue from other operations consists of revenue from sources such asgasoline and convenience store sales, ATM fees, pay phone charges, rentalincome and other miscellaneous items unrelated to route and casinooperations.  Our gas station operationsinclude a gas station and convenience store located in Osceola, Iowa; a gasstation and convenience store at the Gold Ranch property in Verdi, Nevada; andthree gas stations we acquired with the Primm Casinos.  Revenues fromother operations were $116.6 million for the year ended December 31,2008 compared to $99.0 million for the year ended December 31, 2007,an increase of $17.6 million.  Thiswas primarily due to a $22.3 million increase in gas station and conveniencestore revenues at the Primm Casinos, reflecting a full year of operations.  This was offset in part by decreases of $3.0million and $2.1 million, respectively, in gas station and convenience storerevenues at the Lakeside Iowa and Gold Ranch Nevada properties.  The change is a result of volatility ingasoline prices.

 

Costs associated with other revenues were $94.5 million for theyear ended December 31, 2008 and $80.2 million for the year ended December 31,2007, an increase of $14.3 million. This was associated with a $19.7 million increase in gas station andconvenience store costs at the Primm Casinos based on a full year ofoperations.  This was offset in part bydecreases of $3.1 million and $2.2 million, respectively, in gas station andconvenience store costs at the Lakeside Iowa and Gold Ranch Nevada properties,which experienced decreased costs associated with decreased revenues.

 

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

 

Depreciation and amortization expense was $57.8 million for the yearended December 31, 2008, an increase of $1.4 million, or 2.5%, from $56.4million for the year ended December 31, 2007.  Depreciation and amortization expensereflects a final 

 

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purchase priceadjustment in the first quarter of 2008 to the estimated depreciation andamortization expense associated with the Primm Casinos and the Sands RegentCasinos.

 

During the year ended December 31, 2008, the Company also incurredcosts associated with the restructuring process described in “Liquidity andCapital Resources.”  These costs were$17.7 million for the year ended December 31, 2008 and were primarilyrelated to legal and advisory fees.

 

*ImpairmentCharges*

 

As discussed above, the Company recorded impairment charges in 2007 and2008 to reduce the value of intangible assets associated with the PrimmCasinos, the Sands Regent Casinos and Lakeside Iowa.  Annual impairment testing performed in thefourth quarter of 2007 as well as interim testing performed in the secondquarter of 2008 determined that the fair value of goodwill associated with thePrimm Casinos was less than the book value. Accordingly, for the years ended December 31, 2007 and 2008 werecorded non-cash charges of $36.5 million and $30.7 million, respectively, toreduce the balance of this asset to zero. Further, annual impairment testing performed in the fourth quarter of2008 determined that the fair value of our trademark associated with the PrimmCasinos was less than its book value. Accordingly, for the year ended December 31, 2008 we recorded anon-cash charge of $7.5 million to reduce the balance of this asset to its fairvalue.

 

Annual impairment testing performed in the fourth quarter of 2008determined that the fair value of goodwill associated with the Sands RegentCasinos was less than the book value. Accordingly, we recorded a non-cash charge of $48.9 million for the yearended December 31, 2008 to reduce the balance of this asset to zero.

 

Annual impairment testing performed in the fourth quarter of 2007 and2008, as well as interim testing performed in the second quarter of 2008,determined that the fair value of our Lakeside Iowa license rights was lessthan the book value.  According, for theyear ended December 31, 2007 we recorded a non-cash charge of $33.3million and for the year ended December 31, 2008 we recorded non-cashcharges totaling $19.2 million to reduce the balance of this asset to its fairvalue.

 

*PromotionalAllowances*

 

Promotional allowances were $63.3 million, or 7.6% of total revenues,for the year ended December 31, 2008, a decrease of $0.9 million, or1.4%, from $64.2 million, or 7.5% of total revenues, for the year ended December 31,2007.  This was primarily due to lower promotional spending of $3.7million, $0.3 million, and $0.9 million, at the Lakeside Iowa Casino, NorthernNevada casinos and Southern Nevada casinos, respectively.  The decreases were offset in part byincreased promotional spending at the Primm Casinos of $3.9 million.

 

*Lossfrom Operations*

 

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

 

*OtherExpenses*

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

 

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

 

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*Net Loss*

 

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

 

**Year 2007 Compared to Year 2006**

 
| ** **                         | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                         | ** ** | **(dollars in thousands)**         | ** ** |
| Slot route  revenue                |       | $                                            | 347,041    |                                         | 100.0      | % | $ | 276,946 |   | 100.0 | % |
| Promotional  allowances            |       | (86                                          | )          | 0.0                                          |       | (64 | ) | 0.0 |   |
| Direct expenses                    |       | (271,463                                     | )          | 77.8                                         |       | (244,086 | ) | 88.1 |   |
| EBITDA                             |       | 75,492                                       |       | 22.2                                         |       | 32,796 |   | 11.9 |   |
| Impairment of  Intangibles         |       | —                                       |       | —                                       |       | (3,165 | ) | 1.1 |   |
| Depreciation and  amortization     |       | (21,431                                      | )          | 6.2                                          |       | (21,979 | ) | 7.9 |   |
| Income from slot  route operations |       | $                                            | 54,061     |                                         | 16.0       | % | $ | 7,652 |   | 2.9 | % |
|                                    |            |                                              |            |                                              |            |  |  |  |  |  |  |  |  |

 

*RouteOperations*

 

Route operations accounted for 33% of total revenues during the yearended December 31, 2007  This was a decrease from 58% of totalrevenues for the year ended December 31, 2006.  Total revenues fromroute operations were $276.9 million for the year ended December 31, 2007,a decrease of $70.1 million, or 20%, from $347.0 million for the yearended December 31, 2006.  The decrease in route revenue primarilyreflects the impact of the passage in November 2006 in Nevada of Question5 and, in the fourth quarter of 2007, general economic weakness.  At December 31,2007 and 2006, we operated approximately 7,200 slot machines.

 

Route operating costs were $244.1 million, or 88%, of route revenuesfor the year ended December 31, 2007.  This compares to$270.1 million, or 78%, of route revenues for the same period in2006.  The decrease in route operating expenses was primarily associatedwith the lower revenues at our participation locations, which provide for adecrease in revenue share costs in conjunction with revenue decline. Wetypically enter into fixed space leases with our chain store customers, whichdo not provide for a decrease in our lease payments if revenue declines.However, many of our larger space lease contracts provided for an adjustment oflease payments if a smoking ban were to occur.  We renegotiatedsubstantially all of these larger space lease contracts in the third quarter of2007, resulting in an annual reduction of lease payments of approximately $20.0million in 2007. The reductions applicable to 2007 were approximately $8.2million. In connection with these renewals, the average duration of largerspace lease contracts was increased from approximately two years to four years.

 

As a result of the amendment to many of our space lease contracts wedetermined that there was an impairment to the intangible value associated withtwo of those lease contracts.  The Company recorded an impairment chargeof $3.3 million in 2007.

 

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

 

*Casino Operations*

 
| ** **                            | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)**         | ** ** |
|                                  |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                        |       | $                                            | 237,049    |                                         | 100.0      | % | 473,248 |   | 100.0 | % |
| Promotional  allowances               |       | (32,617                                      | )          | 13.8                                         |       | (64,177 | ) | 13.6 |   |
| Direct expenses                       |       | (152,201                                     | )          | 64.2                                         |       | (335,252 | ) | 70.8 |   |
| EBITDA                                |       | 52,231                                       |       | 22.0                                         |       | 73,819 |   | 15.6 |   |
| Impairment of  intangibles            |       | —                                       |       | —                                       |       | (69,800 | ) | 14.7 |   |
| Depreciation and  amortization        |       | (16,375                                      | )          | 6.9                                          |       | (34,081 | ) | 7.2 |   |
| Income (loss)  from casino operations |       | $                                            | 35,856     |                                         | 15.1       | % | $ | (30,062 | ) | (6.4 | )% |
|                                       |            |                                              |            |                                              |            |  |  |  |  |  |  |

 

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

 

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

 

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

 

*Casino Operations — Nevada*

 
| ** **                     | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
|                           |       |                                         |       |                                         |       |   |   |   |   |
| Casino revenue                 |       | $                                            | 95,614     |                                         | 100.0      | % | $ | 331,517 |   | 100.0 | % |
| Promotional  allowances        |       | (13,546                                      | )          | 14.2                                         |       | (42,459 | ) | 12.8 |   |
| Direct expenses                |       | (64,349                                      | )          | 67.3                                         |       | (245,507 | ) | 74.1 |   |
| EBITDA                         |       | 17,719                                       |       | 18.5                                         |       | 43,551 |   | 13.1 |   |
| Depreciation and  amortization |       | (6,408                                       | )          | 6.7                                          |       | (22,765 | ) | 6.7 |   |
| Impairment of  intangibles     |       | —                                       |       | —                                       |       | (36,500 | ) | 11.0 |   |
| Income from  casino operations |       | $                                            | 11,311     |                                         | 11.8       | % | (15,714 | ) | (4.7 | )% |
|                                |            |                                              |            |                                              |            |  |  |  |  |  |  |  |

 

Nevada casino operations accounted for 39% of total Company revenuesfor the year ended December 31, 2007 and 16% of total revenues for theyear ended December 31, 2006.  Revenues derived from Nevada casinooperations were $331.5 million for the year ended December 31, 2007compared with $95.6 million for the year ended December 31, 2006.These results reflect increases in revenue due to the Sands Regent Casinos, alllocated in Northern Nevada, and the Primm Casinos, all located in Primm,Nevada.  The new casinos accounted for substantially all of the increasein net revenues.  Revenues were flat or increased at our other casinos inNevada, except at the two casinos in Pahrump.  The decreases in therevenues at the casinos in Pahrump were due in part to refurbishments of ourprimary competitors by new owners, which made them more competitive.  Inthe aggregate, gross revenues at our casinos, other than the Sands RegentCasinos and Primm Casinos, were up approximately 2.2% in 2007 from of 2006.

 

Nevada casino operating costs for the year ended December 31, 2007were $245.5 million, up $181.8 million, from the year ended December 31,2006.  The majority of this increase represents operating costs of theSands Regent and Primm Casinos.  Nevada casino promotional spending was up$28.7 million. This increase was substantially attributable to spending atthe Sands Regent and Primm Casinos.  As a percentage of revenue,promotional allowances were 12.8% for the year ended December 31, 2007compared to 14.2% for the year ended December 31, 2006.

 

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

 

The Primm Casinos had lower than expected results in 2007 when comparedto 2006.  The Primm Casinos derive a significant amount of their businessfrom the Inland Empire region of Southern California, which is comprisedprimarily of the San Bernardino and Riverside counties, the economies of whichwere negatively impacted in 2007 due to a number of factors, including thesubprime mortgage crisis and higher gasoline costs.  For the year ended December 31,2007, the Company recognized a non- cash impairment charge of $36.5 million towrite down the carrying value of goodwill related to the estimated fair valueof the Primm assets (see Note 6 to the Notes to consolidated financialstatements).

 

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*Casino Operations — Other states*

 
| ** **                     | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
|                           |       |                                         |       |                                         |       |   |   |   |   |
| Other state  casino revenue    |       | $                                            | 141,435    |                                         | 100.0      | % | $ | 141,731 |   | 100.0 | % |
| Promotional  allowances        |       | (19,071                                      | )          | 13.5                                         |       | (21,718 | ) | 15.3 |   |
| Direct expenses                |       | (87,852                                      | )          | 62.1                                         |       | (89,745 | ) | 63.3 |   |
| EBITDA                         |       | 34,512                                       |       | 24.4                                         |       | 30,268 |   | 21.4 |   |
| Impairment of  Intangibles     |       | —                                       |       | —                                       |       | (33,300 | ) | 23.5 |   |
| Depreciation and  amortization |       | (9,967                                       | )          | 7.0                                          |       | (11,316 | ) | 8.0 |   |
| Income from  casino operations |       | $                                            | 24,545     |                                         | 17.4       | % | $ | (14,348 | ) | (10.1 | )% |

 

Casino operations in other states accounted for 17% of total companyrevenues for the year ended December 31, 2007, which is down from 24% in2006.  Total revenues derived from casino operations located in statesother than Nevada were $141.7 million in 2007, an increase of $0.3 million,compared to $141.4 million for the year ended December 31,2006.  Other state casino operating costs were $89.7 million, or 63.3% ofrevenues, for the year ended December 31, 2007, compared to$87.9 million, or 62.1% of revenues, for the year ended December 31,2006.  The increases in operating costs were associated with increases infood and beverage costs.

 

Promotional allowances for the year ended December 31, 2007 were$21.7 million compared to $19.1 million for the year ended December 31,2006, an increase of $2.6 million or 13.6%. The majority of thoseincreases were at the Lakeside Iowa property as it incurred $1.6 million morein promotional costs in 2007 than in 2006 in response to increased competitionfrom four new casinos.

 

Other state casino EBITDA was $30.3 million for the year ended December 31,2007, a decrease of $4.2 million, or 12.2%, from $34.5 million forthe year ended December 31, 2006. This decrease in EBITDA was due to theoperations of Lakeside Iowa, which was subject to significant competitivepressure from the opening of four new casinos in Iowa in and about 2007.

 

As discussed above, our operating results at Lakeside Iowa were lowerthan our expectations in 2007.  For the year ended December 31, 2007,the Company recorded a non-cash impairment charge of $33.3 million to writedown the carrying value of intangible assets related to the estimated fairvalue of the Lakeside Iowa assets (see Note 6 to the Notes to consolidatedfinancial statements).

 

*Other and G and A*

 
| ** **                            | ** ** | **Year  ended  December 31, 2006** | ** ** | **Year  ended  December 31, 2007** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **$**                                        | ** ** | **% of  Total  revenue**                | ** ** | **$** | ** ** | **% of  Total  revenue** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)**         | ** ** |
| Other revenue                         |       | $                                            | 10,676     |                                         | 2.0        | % | $ | 98,987 |   | 11.7 | % |
| Direct expense                        |       | (6,491                                       | )          | 1.1                                          |       | (80,184 | ) | 9.4 |   |
| General and  administrative expenses  |       | (13,324                                      | )          | 2.2                                          |       | (22,983 | ) | 2.7 |   |
| Depreciation and  amortization        |       | (318                                         | )          | 0                                            |       | (345 | ) | 0 |   |
| Income from  Operations Other and SGA |       | $                                            | (9,457     | )                                            | (1.6       | ) | $ | (4,474 | ) | (0.5 | ) |
| Depreciation and  amortization        |       | 318                                          |       | 0                                            |       | 345 |   | 0 |   |
| Interest Income                       |       | 734                                          |       | 0.1                                          |       | 1,481 |   | 0.2 |   |
| Other and  Corporate EBITDA           |       | $                                            | (8,405     | )                                            | (1.5       | ) | $ | (2,699 | ) | (0.3 | ) |

 

Revenue from other operations consists of revenue from sources such asATM fees, pay phone charges, rental income and other miscellaneous itemsunrelated to route and casino operations, including sales (i) at our gasstation and convenience store located in Osceola, Iowa, (ii) beginning inthe first quarter of 2007, at Terrible’s Gold Ranch, our gas station in Verdi,Nevada, which was part of the acquisition of the Sands Regent Casinos and (iii) beginningin the second quarter of 2007, at the three gas stations we acquired with thePrimm Casinos.  Revenues from other operations were $99.0 million forthe year ended December 31, 2007 compared to $10.7 million for theyear ended December 31, 2006, an increase of $88.3 million,$85.8 million of which was associated with the revenue from the gasstations and other operations at the new facilities.

 

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Costs associated with other revenues were $80.2 million for theyear ended December 31, 2007 and $6.5 million for the year ended December 31,2006, an increase of $73.7 million.  Of the increase, $71.1 millionwas costs associated with the gas station convenience store operations at thenew facilities and the remainder was associated with increased gas costs atLakeside Iowa as the facility had a significant summertime gas promotion in2007.

 

*PromotionalAllowances*

 

Promotional allowances were $64.2 million, or 7.5% of total revenues,for the year ended December 31, 2007, an increase of $31.4 million,or 96%, from $32.7 million, or 5.5% of total revenues, for the year ended December 31,2006.  Approximately $29.3 million of the increase was due to the SandsRegent and Primm Casinos.  Of the remaining $2.1 million increase over2006, $1.6 million was due to increased spending at the Lakeside Iowaproperty.  The remaining $0.5 million was growth in costs from all otherexisting properties.

 

*Income(Loss)from Operations*

 

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

 

*Other Expenses*

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

 

Other expense was $100.3 million for the year ended December 31,2007, an increase of $61.9 million from expenses of $38.4 million forthe year ended December 31, 2006.  This increase was primarily aresult of the increase in the Company’s debt. Debt grew from $522.6 million at December 31,2006 to $1,146.1 million at December 31, 2007, as a result of borrowingsincurred to complete the acquisitions of the Sands Regent and Primm Casinos.Additionally, during 2007, the Company incurred a loss on an interest rateswap, which was terminated, resulting in a $16.1 million charge to earnings.

 

*Net (Loss) Income*

 

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

 

**Liquidityand Capital Resources**

 

*CashFlows; Restructuring*

 

The Company is in defaultunder the amended Credit Agreement and the indentures pursuant to which theSubordinated Notes were issued.  TheCompany and the Subsidiary Guarantors have entered into the Lockup Agreement,which provides for the following restructuring to be implemented pursuant to ajoint plan of reorganization under Chapter 11 of the Bankruptcy Code:

 

·                  A separation of the Company’s casino andslot machine route businesses into two holding companies (Reorganized HerbstGaming and Slot Co).

 

·                  Conversion of all outstanding obligationsunder the amended Credit Agreement into debt and equity of the reorganizedcompanies, with the Lenders receiving 100% of the new equity of the reorganizedcasino business and 10% of the new equity of the reorganized slot routebusiness.

 

·                  Termination of all outstandingobligations under the Subordinated Notes.

 

·                  Payment in full of all allowed generalunsecured claims.

 

·                  Cancellation of 100% of the existingequity in the Company.

 

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·                  Amendments or modifications to, orassumptions and assignments of, the Company’s related party agreements, or newagreements to be entered into, with the THI Parties and settlements of claimswith the THI Parties in connection with the related party agreements.

 

·                  Receipt by certain of the THI Parties of90% of the new equity of Slot Co in exchange for the contribution of a newgaming device license agreement.

 

The Restructuring is subject to various regulatory, Bankruptcy Court andthird party approvals.  We cannot assureyou that we will be successful in implementing the Restructuring in the formcontemplated by the Lockup Agreement or at all.

 

On the Petition Date, theDebtors commenced their Chapter 11 Cases before the Bankruptcy Court under casenumbers 09-50746-gwz through 09-50763-gwz. On the Petition Date, the Debtors filed several emergency motions withthe Bankruptcy Court, including a motion to have the Chapter 11 Cases jointlyadministered.  On March 23, 2009,the Bankruptcy Court conducted hearings on the motion, including the motion forjoint administration.  The BankruptcyCourt granted the motions either on a final basis or an interim basis with acontinued hearing date regarding the interim orders on April 30, 2009. Thejoint administration motion was granted with the lead case being “Zante Inc”being case number 09-50746-gwz.  TheDebtors plan to continue to operate their businesses and manage theirproperties as “debtors in possession” under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court.

 

The amounts outstanding under the amended Credit Agreement and theindentures pursuant to which the Subordinated Notes were issued are classifiedas current liabilities on the Company’s balance sheet.  On November 6, 2008, we received aNotice of Acceleration (the “Notice of Acceleration”) under our amended CreditAgreement due to the occurrence and continuation of events of default under theamended Credit Agreement.  Pursuant to the Notice of Acceleration, the Lendersand the administrative agent under the Credit Agreement has declared the unpaidprincipal amount of all outstanding loans under the amended Credit Agreementimmediately due and payable, and has declared the commitment of each lender tobe immediately terminated.  In addition, since the loans under the amendedCredit Agreement have been accelerated, the Company is prohibited from resumingpayments on the Subordinated Notes.

 

                The current outstanding balanceunder the amended Credit Agreement is $846.8 million.  Pursuant to the Lockup Agreement, (i) $135million of these obligations will be allocated to Slot Co pursuant to a newfirst priority senior secured bank loan which will mature on the fifthanniversary of the “Substantial Consummation Date” (as defined in the LockupAgreement); (ii) $40 million of these obligations will be allocatedto Slot Co pursuant to a second lien secured bank facility which will mature onthe fifth anniversary of the Substantial Consummation Date; (iii) $475million of these obligations will be allocated to Reorganized Herbst Gamingpursuant to a new credit agreement comprising a first lien term loan in theamount of $350 million and a second lien term loan in the amount of $125million on terms to be negotiated; and (iv) the remaining balance of theseobligations will be exchanged for 100% of the new common equity of ReorganizedHerbst Gaming, which will own 10% of the new common equity of Slot Co.

 

The Company made interest payments totaling $8.1 million to the Lenderson March 11, 2009, as provided in the Lockup Agreement.  Based on the filing of the Chapter 11 Cases,the Company will not make interest payments under the amended Credit Agreement,other than certain adequate protection payments.  The Lockup Agreement provides for adequateprotection payments to be made to the Lenders during the period commencing onthe Petition Date and ending following the confirmation of the Proposed Plan bythe Bankruptcy Court (the “Effective Date”) in the amount of the Debtors’ cashand cash equivalents in excess of $100 million (measured as of the last day ofeach fiscal quarter and to be paid on the 30th day thereafter) reduced by certain unpaidrestructuring costs, as well as costs and expenses of the professionalsretained by the administrative agent, pursuant to the “Cash CollateralStipulation” as further explained below. The Lockup Agreement further provides that the Proposed Plan willprovide for adequate protection payments to be made to the Lenders during theperiod commencing on the Effective Date and ending on the SubstantialConsummation Date in the amount of (i) payments that would be made undernew loans to Slot Co as if those facilities were in effect as of the EffectiveDate, with certain exceptions described in the Lockup Agreement, plus (ii) theDebtors’ cash and cash equivalents in excess of a threshold to be determined(measured as of the end of every third full calendar month following theEffective Date and to be paid 30 days thereafter).

 

On the Petition Date, the Debtors filed with the Bankruptcy Court aStipulation Authorizing Use of Cash Collateral by Debtors and Granting AdequateProtection (the “Cash Collateral Stipulation”). Under the Cash Collateral Stipulation, the Debtors and theadministrative agent for the Lenders have agreed that the all disputes betweenthe administrative agent and the Debtors regarding “cash collateral” and theuse thereof as provided for by Section 363 of the Bankruptcy Court arereserved, and that Debtors may use their cash on hand and operating cash flowto fund their operations during the period commencing on the approval of theCash Collateral Stipulation by the Bankruptcy Court and ending on the EffectiveDate in accordance with the 13 week budget attached to the Cash CollateralStipulation, which budget will be updated at the end each 13 week period untilthe Effective Date, with certain exceptions described in the Cash CollateralStipulation.  Based on the Cash CollateralStipulation, we expect to fund our existing operations and capital needs duringthe Restructuring from operating cash flow and cash on hand, although that maybe insufficient.  We expect to monitor carefully our capital expenditures,and will likely delay incurring capital expenditures where possible in order toconserve cash.  We cannot assure you that our cash flow will be adequateto meet our anticipated working capital requirements and capital expendituresfor existing operations.  If cash flow isinsufficient, we would seek to obtain debtor in possession financing to supportour working capital needs.  TheBankruptcy Court approved the Cash Collateral Stipulation on an interim basison March 23, 

 

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2009, subject to afinal hearing on April 30,2009, and in so doing ordered that any paymentto the professionals retained by the administrative agent under the Cash CollateralStipulation is subject to disgorgement pursuant to later Bankruptcy Courtorder.

 

*Operating Activities*

 

During the year ended December 31, 2008, operating activities used$2.5 million in cash flows on a net loss of $209.4 million.  Our most significant use of cash foroperations in 2008 was for interest on our outstanding debt.  Our cashpayments for interest were $75.5 million for the year ended December 31,2008.

 

*InvestingActivities and Capital Expenditures*

 

For the year ended December 31, 2008, we had net cash used forinvesting activities of $15.7 million, primarily related to capitalexpenditures of $15.6 million spent for the refurbishment of our casinoproperties, completion of the purchase of a new slot accounting and playersclub system and purchase of gaming machines for our route operations.

 

Capital projects for 2009 are anticipated to be approximately $28.3million.  However, to the extent that our results of operations do notimprove, we may elect to delay some of the capital expenditures in order topreserve short-term liquidity.

 

*Financing Activities*

 

Cash flows used by financing activities were $30.0 million during theyear ended December 31, 2008.  During this period, the Company repaiddebt of $5.7 million while borrowing $35.9 million.

 

The amended Credit Agreement provides for a $860.0 million seniorcredit facility.  This facility includes a revolving credit facility inthe amount of $100.0 million and $751.8 million of term loans that matureon December 2, 2011 if we have not refinanced our 8 1/8% notes, and otherwise on January 3,2014.  Our revolving credit facility was fully drawn at December 31,2008, and the commitments of our lenders have been terminated under the amendedCredit Agreement.  Interest accrues on borrowings under the amended CreditAgreement based on a floating rate.  This floating rate is based upon avariable interest rate (a base rate or LIBOR, at our option) plus a leveragegrid-based spread.  Our average floating rate on debt incurred under theamended Credit Agreement was 12.5 % at December 31, 2008.

 

At December 31, 2008, our debt included approximately$159.5 million of our 8 1/8% Notes and $170.0 million of our 7% Notes. After giving effect to indebtedness under our Subordinated Notes and borrowingsunder our amended Credit Agreement, our total debt is approximately$1.2 billion.

 

Please refer to “Liquidity and Capital Resources—Cash Flows;Restructuring” for a discussion of the Restructuring and treatment of ouroutstanding indebtedness in the Lockup Agreement.

 

*ContractualObligations*

 

The following table summarizes our contractual obligations as of December 31,2008.

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5  years** | ** ** |
| ** **                          | ** ** | **(in thousands)**                   | ** ** |
| Contractual  Obligations:           |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                      |       | $                                         | 1,176,330  |   | $ | 1,176,330 |   | $ | — |   | $ | — |   | $ | — |   |
| Estimated  interest payments (1)    |       | 130,753                                   |       | 130,753 |   | — |   | — |   | — |   |
| Operating leases                    |       | 402,301                                   |       | 59,273 |   | 98,493 |   | 54,605 |   | 189,930 |   |
| Total  contractual cash obligations |       | $                                         | 1,709,384  |   | $ | 1,366,356 |   | $ | 98,493 |   | $ | 54,605 |   | $ | 189,930 |   |

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(1)    Estimated interest for variable rate debt is based onrates at December 31, 2008 and does not give effect to the adequateprotection payments contemplated by the Proposed Plan.

 

*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 highlyregulated.  The majority of our revenue is counted in the form ofcash, chips and tokens and therefore, is not subject to any significant orcomplex estimation procedures.

 

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

 

We assess the recoverability of long-lived assets when circumstancesindicate that the carrying amount of an asset may not be fullyrecoverable.  If undiscounted expected cash flows to be generated by along-lived asset or asset group are less than its carrying amount, we record animpairment to write down the long-lived asset or asset group to its estimatedfair value.  Fair value is determined based on undiscounted expectedfuture cash flows.  An adverse change to the estimate of theseundiscounted future cash flows could necessitate an impairment charge thatcould adversely affect operating results.

 

*Goodwilland Intangible Assets*

 

We have a significant investment in goodwill and other intangibleassets on our consolidated balance sheet as of December 31, 2008. The purchase price of an acquisition is allocated to the underlying assetsacquired and liabilities assumed based upon their estimated fair values at thedate of acquisition.  The estimated fair values of the assets acquiredpursuant to the acquisitions of Lakeside Iowa, the Sands Regent Casinos and thePrimm Casinos, a substantial portion of which consisted of intangible assetscomprised of license rights, were determined by management after consideringvarious information including an independent appraisal.  To the extentthat the purchase price exceeds the fair value of the net identifiable tangibleand intangible assets acquired, such excess is allocated to goodwill.

 

We review the investment in goodwill and license rights for impairmentannually, and between annual tests if events occur or circumstances change thatwould, more likely than not, reduce the fair value below the amount reflectedin the balance sheet.  These evaluations of goodwill and license rightsrequires the use of estimates about future operating results of each reportingunit to determine their estimated fair value.  Changes in forecastedoperations can materially affect these estimates.  Once impairment ofgoodwill or other intangible assets has been recorded, it cannot bereversed.  An adverse change to the estimate of these future cash flowscould necessitate an impairment charge that could adversely affect operatingresults.

 

Based on impairment testing in the second and fourth quarters of 2008,the Company recorded impairment charges to reduce the value of intangibleassets associated with the Primm Casinos, the Sands Regent Casinos and LakesideIowa.  Interim testing performed in thesecond quarter of 2008 determined that the fair value of goodwill associatedwith the Primm Casinos was less than the book value.  Accordingly, for the year ended December 31,2008 we recorded non-cash charges of $30.7 million to reduce the balance ofthis asset to zero.  In addition, annualimpairment testing performed in the fourth quarter of 2008 determined that thefair value of our trademark associated with the Primm Casinos was less than itsbook value.  Accordingly, for the yearended December 31, 2008 we recorded a non-cash charge of $7.5 million toreduce the balance of this asset to its fair value.

 

Annual impairment testing performed in the fourth quarter of 2008determined that the fair value of goodwill associated with the Sands RegentCasinos was less than the book value. Accordingly, we recorded a non-cash charge of $48.9 million for the yearended December 31, 2008 to reduce the balance of this asset to zero.

 

Annual impairment testing performed in the fourth quarter of 2008, aswell as interim testing performed in the second quarter of 2008, determinedthat the fair value of our Lakeside Iowa license rights was less than the bookvalue.  According, for the year ended December 31,2008 we recorded non-cash charges totaling $19.2 million to reduce the balanceof this asset to its fair value.

 

**RecentlyIssued Accounting Standards**

 

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In April 2008, the FASB issued FSP No. FAS 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP 142-3”).  FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, *Goodwill and OtherIntangible Assets*, and requires enhanced related disclosures.  FSP 142-3 must be applied prospectively toall intangible assets acquired as of and subsequent to fiscal years beginningafter December 15, 2008.  We believethat the adoption of FSP 142-3 will not have a material impact on ourconsolidated financial statements.

 

In February 2008, the FASB issued FASB Staff Position No. FAS157-2, *Effective Date of FASB Statement No. 157*,which defers the effective date of SFAS No. 157, *Fair Value Measurements*, (“SFAS 157”) tofiscal years beginning after November 15, 2008 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis. Early adoption ofSFAS 157 is permitted.  We do not believethat the adoption of SFAS 157 will have a material impact on our consolidatedfinancial statements.

 

In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements — An Amendment of ARB No. 51* (“SFAS 160”).  SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity. The amount of netincome attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement.  SFAS 160 clarifies that changes in a parent’sownership in a subsidiary that do not result in deconsolidation are equitytransactions if the parent retains its controlling financial interest.  In addition, this statement requires that aparent recognize a gain or loss in net income when a subsidiary isdeconsolidated.  Such gain or loss willbe measured using the fair value of the noncontrolling equity investment on thedeconsolidation date.  SFAS 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest.  SFAS No. 160is effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. We do not believe that the adoption of SFAS 160 will have a materialimpact on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”)*.*  SFAS 159 permits companies to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing companies with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  The fair value option established by SFAS 159permits all companies to choose to measure eligible items at fair value atspecified election dates.  At each subsequentreporting date, companies must report in earnings any unrealized gains andlosses on items for which the fair value option has been elected.  SFAS 159 is effective as of the beginning ofa company’s first fiscal year that begins after November 15, 2007.  Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007,provided the company also elects to apply the provisions of SFAS No. 157, *Fair Value Measurements*.  We do not believe that the adoption of SFAS159 will have a material impact on our consolidated financial statements.

 

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**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 offorward-looking terminology such as “believes,” “estimates,” “expects,” “intends,”“may,” “will,” “should” or “anticipates” or the negative or other variation ofthese or similar words, or by discussions of strategy or risks anduncertainties.  Forward-looking statements in this report include, amongother things, statements concerning:

 

·                  projections of future results of operations or financial condition;

 

·                  expectations for our route operations and our casino properties;

 

·                  expectations of the continuedavailability of capital resources; and

 

·                  expectations regarding our restructuringefforts.

 

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 varymaterially from any forward-looking statement made by or on our behalf. Forward-looking statements should not be regarded as a representation by us orany other person that the forward-looking statements will be achieved. Undue reliance should not be placed on any forward-looking statements. Some of the contingencies and uncertainties to which any forward-lookingstatement contained herein is subject include, but are not limited to, thefollowing:

 

·                  We may not gain the approval of theProposed Plan from the Bankruptcy Court or requisite regulatory authorities andthird parties.  It is uncertain whetherwe will emerge from bankruptcy.  Even ifsuccessful, the bankruptcy proceeding contemplated by the Restructuring mayadversely affect our business, including our relationships with our customersand suppliers.  We may lose valuablecontracts in the process of the bankruptcy.

 

·                  The current general economic downturn,and in particular the economic downturn in Southern Nevada and SouthernCalifornia (two of our primary markets), may adversely affect our business.

 

·                  Our business relies heavily on certainmarkets and an economic downturn in these markets could have a material adverseeffect on our results.

 

·                  The current economic downturn may worsen,which may have an adverse impact on the Company’s operations and therefore theCompany’s liquidity.

 

·                  Our substantial indebtedness couldadversely affect our financial health and prevent us from fulfilling ourobligations under the instruments governing our outstanding indebtedness.

 

·                  We will require a significant amount ofcash to service our indebtedness.  Our ability to generate cash depends onmany factors beyond our control.

 

·                  The success of our route operations isdependent on our ability to renew our contracts.

 

·                  Our indebtedness imposes restrictivecovenants on us.

 

·                  We may not be able to successfullyintegrate the operations of casinos we acquire into our business.

 

·                  We may experience a loss of marketshare due to intense competition.

 

·                  We face extensive regulation from gamingand other government authorities.

 

·                  Changes to applicable tax laws could havea material adverse effect on our financial condition.

 

·                  We depend upon our key employees andcertain members of our management.

 

·                  Our executive officers and members of ourboard of directors own 100% of the Company, which could lead to conflicts ofinterest.

 

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

 

 

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**Industryand Market 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 otherknowledge.  We have not independently verified any of the data from thirdparty sources, and we make no representation as to the accuracy of suchinformation.  While we believe internal company estimates are reliable andmarket definitions are appropriate, they have not been verified by any independentsources, and we make no representations as to the accuracy of such estimates.

 

**Item7A. ********Quantitative andQualitative Disclosures About Market Risk.**

 

We are exposed to market risk, primarily related to interest rateexposure of our debt obligations that bear interest based on floatingrates.  We do not have any cash or cash equivalents as of December 31,2008 that are subject to market risk based on changes in interest rates. We are exposed to market risk due to floating or variable interest rates on ourindebtedness under our amended Credit Agreement.  The interest onrevolving borrowings and on the term loan under the amended Credit Agreement isbased on a floating rate (a base rate or LIBOR), plus a leverage grid-basedvariable amount.  At December 31, 2008, the principal amount of therelated borrowings under the amended Credit Agreement was $846.8 million,all of which was subject to variable interest rates.  A hypothetical 1.0%increase in LIBOR (or base rate) would result in an approximately$8.5 million annual increase in interest expense.  Please refer to “Liquidity and CapitalResources—Cash Flows; Restructuring” for a discussion of the Restructuring andtreatment of our outstanding indebtedness in the Lockup Agreement.  Itis expected that interest on the new loans contemplated by the Lockup Agreementwill also be based on a floating rate (a base rate or LIBOR) plus a statedamount.

 

The carrying value of our cash, trade, notes and loans receivable andtrade payables approximates fair value primarily because of the shortmaturities of these instruments.  The fair value of our long-term debt isestimated based on the quoted market prices for the same or similar issues oron the current rates offered to us for debt of the same remaining maturities. Based on the borrowing rates currently available to us for debt with similarterms and average maturities, the estimated fair value of current debtoutstanding is approximately $227.0 million as of December 31, 2008.

 

**Item8.****               ****Financial Statements andSupplementary Data.**

 
| **Report of Independent Registered Public Accounting  Firm**                                                                  |
|-------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                    |
| **Consolidated  Financial Statements**                                                                                        |
| ** **                                                                                                                    |
| Consolidated  Balance Sheets As of December 31, 2007 and 2008                                                            |
|                                                                                                                          |
| Consolidated  Statements of Operations For the years ended December 31, 2006, 2007 and  2008                             |
|                                                                                                                          |
| Consolidated  Statements of Stockholders’ Equity (Deficiency) For the years ended  December 31, 2006, 2007 and 2008 |
|                                                                                                                          |
| Consolidated  Statements of Cash Flows For the years ended December 31, 2006, 2007 and  2008                             |
|                                                                                                                          |
| **Notes to  Consolidated Financial Statements**                                                                               |

 

42

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Table of Contents

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders ofHerbst Gaming, Inc. and SubsidiariesLas Vegas, Nevada

 

We have audited theaccompanying consolidated balance sheets of Herbst Gaming, Inc. andsubsidiaries (Debtor-in-Possession) (the “Company”) as of December 31,2008 and 2007, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2008.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon the consolidated financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Herbst Gaming, Inc. and subsidiaries as of December 31,2008 and 2007, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2008, inconformity with accounting principles generally accepted in the United Statesof America.

 

As discussed in Note 1 to the consolidated financialstatements, the Company filed for reorganization under Chapter 11 of the U.S.Bankruptcy Code on March 22, 2009.  The accompanying consolidated financialstatements do not purport to reflect or provide for the consequences of thebankruptcy proceedings.  In particular, such financial statements do notpurport to show (1) as to assets, their realizable value on a liquidationbasis or their availability to satisfy liabilities; (2) as to prepetitionliabilities, the amounts that may be allowed for claims or contingencies, orthe status and priority thereof; (3) as to stockholder accounts, theeffect of any changes that may be made in the capitalization of the Company; or(4) as to operations, the effect of any changes that may be made in itsbusiness.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed inNote 1 to the financial statements, the Company’s recurring losses fromoperations, negative working capital, stockholders’ capital deficiency, and voluntarypetition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code filed on March 22,2009, raise substantial doubt about its ability to continue as a goingconcern.  Management’s plans concerning these matters are also discussedin Note 1 to the consolidated financial statements.  The consolidated financialstatements do not include adjustments that might result from the outcome ofthis uncertainty.

 

/s/ DELOITTE & TOUCHE LLP

 

Las Vegas, NevadaMarch 31, 2009

 

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**HerbstGaming, Inc.**

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

**Consolidated Balance Sheets**

**(inthousands)**

 
| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **2007**             | ** ** | **2008** | ** ** |
| **Assets**                                                                               | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current assets                                                                           |       |                 |       |   |   |
| Cash and cash  equivalents                                                               |       | $                    | 94,282     |   | $ | 105,990 |   |
| Accounts  receivable, net                                                                |       | 7,012                |       | 4,470 |   |
| Notes and loans  receivable                                                              |       | 609                  |       | 436 |   |
| Prepaid expenses                                                                         |       | 17,134               |       | 16,566 |   |
| Inventory                                                                                |       | 4,995                |       | 4,219 |   |
| Total current  assets                                                                    |       | 124,032              |       | 131,681 |   |
| Property and  equipment, net                                                             |       | 548,709              |       | 547,002 |   |
| Lease  acquisition costs, net                                                            |       | 21,551               |       | 15,068 |   |
| Due from related  parties                                                                |       | 1,704                |       | 1,450 |   |
| Other assets,  net                                                                       |       | 27,892               |       | 24,124 |   |
| Intangibles, net                                                                         |       | 244,059              |       | 211,668 |   |
| Goodwill                                                                                 |       | 112,438              |       | 3,255 |   |
|                                                                                     |       |                 |       |   |   |
| Total assets                                                                             |       | $                    | 1,080,385  |   | $ | 934,248 |   |
|                                                                                     |       |                 |       |   |   |
| **Liabilities  and stockholders’ deficit**                                          | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current  liabilities                                                                     |       |                 |       |   |   |
| Current portion  of long-term debt                                                       |       | $                    | 7,634      |   | $ | 1,176,330 |   |
| Accounts payable                                                                         |       | 18,429               |       | 14,179 |   |
| Accrued interest                                                                         |       | 4,562                |       | 41,672 |   |
| Accrued expenses                                                                         |       | 28,384               |       | 28,086 |   |
| Due to related  parties                                                                  |       | —               |       | — |   |
| Total current  liabilities                                                               |       | 59,009               |       | 1,260,267 |   |
| Long-term debt,  less current portion                                                    |       | 1,138,436            |       | — |   |
| Other liabilities                                                                        |       | 1,669                |       | 2,136 |   |
| Commitments and  contingencies (Note 12)                                                 |       |                 |       |   |   |
| Stockholders’  deficit                                                              |       |                 |       |   |   |
| Common stock (no  par value; 2,500 shares authorized; 300 shares issued and outstanding) |       | 2,368                |       | 2,368 |   |
| Additional  paid-in-capital                                                              |       | 1,631                |       | 1,631 |   |
| Accumulated  deficit                                                                     |       | (122,728             | )          | (332,154 | ) |
| Total  stockholders’ deficit                                                        |       | (118,729             | )          | (328,155 | ) |
|                                                                                     |       |                 |       |   |   |
| Total  liabilities and stockholders’ deficit                                        |       | $                    | 1,080,385  |   | $ | 934,248 |   |

 

See notes toconsolidated financial statements.

 

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**HerbstGaming, Inc.**

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

**Consolidated Statements of Operations**

**(inthousands)**

** **
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenues                                                                           |       |                                       |       |   |   |   |   |
| Route operations                                                                   |       | $                                          | 347,041    |   | $ | 276,946 |   | $ | 243,635 |   |
| Casino  operations                                                                 |       | 237,049                                    |       | 473,248 |   | 474,194 |   |
| Other — non  gaming                                                           |       | 10,676                                     |       | 98,987 |   | 116,609 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Total revenues                                                                     |       | 594,766                                    |       | 849,181 |   | 834,438 |   |
| Less promotional  allowances                                                       |       | (32,703                                    | )          | (64,241 | ) | (63,349 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Net revenues                                                                       |       | 562,063                                    |       | 784,940 |   | 771,089 |   |
| Costs and  expenses                                                                |       |                                       |       |   |   |   |   |
| Route operations                                                                   |       | 271,463                                    |       | 244,086 |   | 215,653 |   |
| Casino  operations                                                                 |       | 152,201                                    |       | 335,252 |   | 351,173 |   |
| Depreciation and  amortization                                                     |       | 38,124                                     |       | 56,405 |   | 57,783 |   |
| General and  administrative                                                        |       | 13,324                                     |       | 22,983 |   | 21,485 |   |
| Other —  non-gaming                                                           |       | 6,491                                      |       | 80,184 |   | 94,522 |   |
| Restructuring  costs                                                               |       |                                       |       |   |   | 17,717 |   |
| Loss on  impairment of assets                                                      |       | —                                     |       | 72,965 |   | 106,271 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Total costs and  expenses                                                          |       | 481,603                                    |       | 811,875 |   | 864,604 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Income (Loss)  from operations                                                     |       | 80,460                                     |       | (26,935 | ) | (93,515 | ) |
| Other income  (expense)                                                            |       |                                       |       |   |   |   |   |
| Interest income                                                                    |       | 734                                        |       | 1,481 |   | 921 |   |
| Interest  expense, net of capitalized interest of $873, $206, and $0, respectively |       | (39,134                                    | )          | (85,631 | ) | (116,832 | ) |
| Change in value  of derivative instruments                                         |       | —                                     |       | (16,115 | ) | — |   |
| Loss on early  retirement of debt                                                  |       | —                                     |       | — |   | — |   |
| Total other  expense, Net                                                          |       | (38,400                                    | )          | (100,265 | ) | (115,911 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                  |       | $                                          | 42,060     |   | $ | (127,200 | ) | $ | (209,426 | ) |

 

See notes toconsolidated financial statements.

 

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**HerbstGaming, Inc.**

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

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

**(inthousands)**

 
| ** **                        | ** ** | ** ** | ** ** | ** **     | ** ** | **Retained**     | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Additional** | ** ** | **Earnings**     | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **(accumulated** | ** ** | ** ** | ** ** |
| **Balance**                       | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **deficit)**     | ** ** | **Total**  | ** ** |
| Balance,  January 1, 2006    |       | $          | 2,368      |           | $          | 1,631            |       | $          | 3,982      |   | $ | 7,981 |   |
| Net income                        |       |       |       |           |       | 42,060           |       | 42,060     |       |
| Stockholders’  distributions |       | —     |       | —         |       | (31,270          | )          | (31,270    | )          |
| Balance  December 31, 2006   |       | $          | 2,368      |           | $          | 1,631            |       | $          | 14,772     |   | 18,771 |   |
| Net loss                          |       |       |       |           |       | (127,200         | )          | (127,200   | )          |
| Stockholders’  distributions |       |       |       |           |       | (10,300          | )          | (10,300    | )          |
| Balance  December 31, 2007   |       | $          | 2,368      |           | $          | 1,631            |       | $          | (122,728   | ) | $ | (118,729 | ) |
| Net loss                          |       |       |       |           |       | (209,426         | )          | (209,426   | )          |
| Stockholders’  distributions |       |       |       |           |       | —           |       | —     |       |
| Balance  December 31, 2008   |       | $          | 2,368      |           | $          | 1,631            |       | $          | (332,154   | ) | $ | (328,155 | ) |

 

See notes toconsolidated financial statements.

 

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**HerbstGaming, Inc.**

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

**Consolidated Statements of Cash Flows**

**(inthousands)**

 
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Cash flows from  operating activities                                                    |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                        |       | $                                          | 42,060     |   | $ | (127,200 | ) | (209,426 | ) |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                           |       | 38,124                                     |       | 56,405 |   | 57,783 |   |
| Amortization of  debt issuance costs                                                     |       | 1,811                                      |       | 3,188 |   | 4,116 |   |
| Debt discount  amortization                                                              |       | 143                                        |       | 144 |   | 143 |   |
| Gain (loss) on  sale of property and equipment                                           |       | 152                                        |       | 105 |   | (44 | ) |
| Loss on  retirement of assets                                                            |       | —                                     |       | — |   | — |   |
| Loss on early  retirement of debt                                                        |       | —                                     |       | — |   | — |   |
| Loss on  impairment of assets                                                            |       | —                                     |       | 72,965 |   | 106,271 |   |
| Decrease  (increase) in operating assets:                                                |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                     |       | (1,527                                     | )          | 3,790 |   | 2,661 |   |
| Prepaid expenses                                                                         |       | (443                                       | )          | (4,169 | ) | 568 |   |
| Inventory                                                                                |       | 77                                         |       | (239 | ) | 776 |   |
| Due from related  parties                                                                |       | (4                                         | )          | (606 | ) | 223 |   |
| Other assets                                                                             |       | (1,295                                     | )          | (538 | ) | 10 |   |
| Increase  (decrease) in operating liabilities:                                           |       |                                       |       |   |   |   |   |
| Accounts payable                                                                         |       | 848                                        |       | (1,074 | ) | (2,823 | ) |
| Accrued interest                                                                         |       | 262                                        |       | 927 |   | 37,110 |   |
| Accrued expenses                                                                         |       | 1,185                                      |       | 1,067 |   | (298 | ) |
| Due to related  parties                                                                  |       | (2                                         | )          | — |   | — |   |
| Other  liabilities                                                                       |       | 102                                        |       | (492 | ) | 432 |   |
| Net cash  provided (used) by operating activities                                        |       | $                                          | 81,493     |   | $ | 4,273 |   | $ | (2,498 | ) |
|                                                                                     |       |                                       |       |   |   |   |   |
| Cash flows from  investing activities                                                    |       |                                       |       |   |   |   |   |
| Net cash paid  for acquisition of software assets, net of cash acquired                  |       | (10,231                                    | )          | — |   | — |   |
| Net cash paid  for Sands Regent Casinos, net of cash acquired                            |       | (1,542                                     | )          | (147,878 | ) | — |   |
| Net cash paid  for Primm Casinos, net of cash acquired                                   |       | —                                     |       | (393,682 | ) | — |   |
| Additions to  notes and loans receivable                                                 |       | (1,090                                     | )          | (1,153 | ) | (911 | ) |
| Collection on  notes and loans receivable                                                |       | 872                                        |       | 1,937 |   | 927 |   |
| Proceeds from  sale of property and equipment                                            |       | 378                                        |       | 248 |   | 622 |   |
| Purchases of  property and equipment                                                     |       | (66,622                                    | )          | (32,418 | ) | (15,578 | ) |
| Lease  acquisition costs                                                                 |       | (1,523                                     | )          | (1,180 | ) | (806 | ) |
| Net cash used in  investing activities                                                   |       | $                                          | (79,758    | ) | $ | (574,128 | ) | $ | (15,746 | ) |
| ** **                                                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from  financing activities                                                    |       |                                       |       |   |   |   |   |
| Proceeds from  long term debt                                                            |       | $                                          | 33,000     |   | $ | 853,000 |   | $ | 35,859 |   |
| Payments on long  term debt                                                              |       | (11,118                                    | )          | (229,692 | ) | (5,742 | ) |
| Loan origination  fees                                                                   |       | (556                                       | )          | (14,513 | ) | (165 | ) |
| Loss on early  retirement of debt                                                        |       | —                                     |       | — |   | — |   |
| Stockholders’  distributions                                                        |       | (31,270                                    | )          | (10,300 | ) | — |   |
| Net cash  provided (used in) by financing activities                                     |       | (9,944                                     | )          | 598,495 |   | 29,952 |   |
| Net increase  (decrease) in cash and cash equivalents                                    |       | (8,209                                     | )          | 28,642 |   | 11,708 |   |
| Cash and cash  equivalents                                                               |       |                                       |       |   |   |   |   |
| Beginning of  year                                                                       |       | 73,849                                     |       | 65,640 |   | 94,282 |   |
| End of year                                                                              |       | $                                          | 65,540     |   | $ | 94,282 |   | $ | 105,990 |   |
| Supplemental  cash flow information:                                                     |       |                                       |       |   |   |   |   |
| Cash paid during  the period for interest                                                |       | $                                          | 37,790     |   | $ | 81,579 |   | $ | 75,463 |   |
| Supplemental  schedule of non cash investing and financing activities:              |       |                                       |       |   |   |   |   |
| Purchase of  property and equipment financed through accounts payable                    |       | $                                          | 1,802      |   | $ | 1,028 |   | $ | 338 |   |

 

See notes toconsolidated financial statements.

 

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**HerbstGaming, Inc.**

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

**Notes to consolidated financialstatements**

 

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

** **

The Company and certain of itssubsidiaries (the “Subsidiary Guarantors”)**haveentered into an agreement (the “LockupAgreement”) with (i) lenders holding, in the aggregate,approximately 68% in amount of all of the outstanding claims under our $860.0 million senior creditfacility (the “amended Credit Agreement”); (ii) Messrs. Edward J.Herbst, Timothy P. Herbst and Troy D. Herbst, in their capacities as equityholders of the Company; and (iii) Terrible Herbst, Inc. and certainof its affiliates, in their capacities as parties to agreements with theCompany and/or the Subsidiary Guarantors(the “THI Parties”).  Pursuant to the Lockup Agreement, the partiesthereto are contractually obligated to support the following restructuring ofthe Company and the Subsidiary Guarantors (the “Restructuring”) pursuant to ajoint plan of reorganization (the “Proposed Plan”) under Chapter 11 of the United StatesBankruptcy Code (the “Bankruptcy Code”), 11 U.S.C. §§ 101-1532:

 

·                  A separation of the Company’s casino andslot machine route businesses into two holding companies (thepost-Restructuring casino business is referred to herein as “Reorganized HerbstGaming” and the post-Restructuring slot machine route business is referred toherein as “Slot Co”).

 

·                  Conversion of all outstanding obligationsunder the amended Credit Agreement into debt and equity of the reorganizedcompanies, with the lenders under the amended Credit Agreement (the “Lenders”)receiving 100% of the new equity of Reorganized Herbst Gaming, and with ReorganizedHerbst Gaming owning 10% of the new equity of Slot Co.

 

·                  Termination of all outstandingobligations under our 8 1/8%senior subordinated notes due 2012 (“81/8% Notes”) and our 7% senior subordinated notes due2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”).

 

·                  Payment in full of all allowed generalunsecured claims.

 

·                  Cancellation of 100% of the existingequity in the Company.

 

·                  Amendments or modifications to, orassumptions and assignments of, the Company’s related party agreements, or newagreements to be entered into, with the THI Parties and settlements of claimswith the THI Parties in connection with the related party agreements.

 

·                  Receipt by certain of the THI Parties of90% of the new equity of Slot Co in exchange for the contribution of a newgaming device license agreement.

 

The Restructuring is subject to various regulatory,court and third party approvals.  Wecannot assure you that we will be successful in implementing the Restructuringin the form contemplated by the Lockup Agreement or at all.

 

On March 22, 2009 (the “Petition Date”), the Companyand the Subsidiary Guarantors (collectively, the “Debtors”) filed voluntarypetitions for relief under chapter 11 of the Bankruptcy Code (the “Chapter 11Cases”) in the United States Bankruptcy Court for the District of Nevada,Northern Division (the “Bankruptcy Court”) under case numbers 09-50746-gwzthrough 09-50763-gwz.  On the PetitionDate, the Debtors filed several emergency motions with the Bankruptcy Court,including a motion to have the Chapter 11 Cases jointly administered.  On March 23, 2009, the Bankruptcy Courtconducted hearings on the motion, including the motion for jointadministration.  The Bankruptcy Courtgranted the motions either on a final basis or an interim basis with acontinued hearing date regarding the interim orders on April 30, 2009. Thejoint administration motion was granted with the lead case being “Zante Inc”being case number 09-50746-gwz.  TheDebtors plan to continue to operate their businesses and manage theirproperties as “debtors in possession” under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court.

 

The amounts outstanding under the amended CreditAgreement and the indentures pursuant to which the Subordinated Notes wereissued are classified as current liabilities on the Company’s balancesheet.  On November 6, 2008, we receiveda Notice of Acceleration (the “Notice of Acceleration”) under our amendedCredit Agreement due to the occurrence and continuation of events of defaultunder the amended Credit Agreement. Pursuant to the Notice of Acceleration, the administrative agent underthe Credit Agreement has declared the unpaid principal amount of alloutstanding loans under the amended Credit Agreement immediately due andpayable, and has declared the commitment of each lender to be immediatelyterminated.  In addition, since the loansunder the amended Credit Agreement have been accelerated, the Company isprohibited from resuming payments on the Subordinated Notes.

 

The current outstanding balance under the amendedCredit Agreement is $846.8 million. Pursuant to the Lockup Agreement, (i) $135 million of these obligationswill be allocated to Slot Co pursuant to a new first priority senior securedbank loan which will mature on the fifth anniversary of the “Substantial

 

48

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Consummation Date” (as defined in the Lockup Agreement); (ii) $40million of these obligations will be allocated to Slot Co pursuant to a secondlien secured bank facility which will mature on the fifth anniversary of theSubstantial Consummation Date; (iii) $475 million of these obligations will beallocated to Reorganized Herbst Gaming pursuant to a new credit agreementcomprising a first lien term loan in the amount of $350 million and a secondlien term loan in the amount of $125 million on terms to be negotiated; and(iv) the remaining balance of these obligations will be exchanged for 100% ofthe new common equity of Reorganized Herbst Gaming, which will own 10% of thenew common equity of Slot Co.

 

The Company made interest payments totaling $8.1million to the Lenders on March 11, 2009, as provided by the LockupAgreement.  Based on the filing of theChapter 11 Cases, the Company will not make interest payments under the amendedCredit Agreement, other than certain adequate protection payments.  The Lockup Agreement provides for adequateprotection payments to be made to the Lenders during the period commencing onthe Petition Date and ending following the confirmation of the Proposed Plan bythe Bankruptcy Court (the “Effective Date”) in the amount of the Debtors’ cashand cash equivalents in excess of $100 million (measured as of the last day ofeach fiscal quarter and to be paid on the 30th day thereafter) reduced bycertain unpaid restructuring costs, as well as costs and expenses of theprofessionals retained by the administrative agent, pursuant to the “CashCollateral Stipulation” as further explained below.  The Lockup Agreement further provides thatthe Proposed Plan will provide for adequate protection payments to be made tothe Lenders during the period commencing on the Effective Date and ending onthe Substantial Consummation Date in the amount of (i) payments that would bemade under new loans to Slot Co as if those facilities were in effect as of theEffective Date, with certain exceptions described in the Lockup Agreement, plus(ii) the Debtors’ cash and cash equivalents in excess of a threshold to bedetermined (measured as of the end of every third full calendar month followingthe Effective Date and to be paid 30 days thereafter).

 

On the Petition Date, the Debtors filed with theBankruptcy Court a Stipulation Authorizing Use of Cash Collateral by Debtorsand Granting Adequate Protection (the “Cash Collateral Stipulation”).  Under the Cash Collateral Stipulation, theDebtors and the administrative agent for the Lenders have agreed that all thedisputes between the administrative agent and the Debtors regarding “cashcollateral” and the use thereof as provided for by Section 363 of theBankruptcy Court are reserved, and that Debtors may use their cash on hand andoperating cash flow to fund their operations during the period commencing onthe approval of the Cash Collateral Stipulation by the Bankruptcy Court andending on the Effective Date in accordance with the 13 week budget attached tothe Cash Collateral Stipulation, which budget will be updated at the end each13 week period until the Effective Date, with certain exceptions described inthe Cash Collateral Stipulation.  Basedon the Cash Collateral Stipulation, we expect to fund our existing operationsand capital needs during the Restructuring from operating cash flow and cash onhand, although that may be insufficient. We expect to monitor carefully our capital expenditures, and will likelydelay incurring capital expenditures where possible in order to conservecash.  We cannot assure you that our cashflow will be adequate to meet our anticipated working capital requirements andcapital expenditures for existing operations. If cash flow is insufficient, we would seek to obtain debtor inpossession financing to support our working capital needs.  The Bankruptcy Court approved the Cash CollateralStipulation on an interim basis on March 23, 2009, subject to a final hearingon April 30, 2009, and in so doing ordered that any payment to theprofessionals retained by the administrative agent under the Cash CollateralStipulation is subject to disgorgement pursuant to later Bankruptcy Courtorder.

 

The Debtors are currently operating pursuant toChapter 11 under the Bankruptcy Code and continuation of the Company as agoing-concern is contingent upon, among other things, the Debtors’ ability (i)to obtain confirmation of the plan of reorganization under the Bankruptcy Code;(ii) to return to profitability; (iii) to generate sufficient cash flow fromoperations; and (iv) to obtain financing sources to meet our futureobligations. These matters create uncertainty relating to our ability tocontinue as a going concern. The accompanying consolidated financial statementsdo not reflect any adjustments relating to the recoverability andclassification of assets or liabilities that might result from the outcome ofthese uncertainties. In addition, the plan of reorganization could materiallychange amounts reported in our combined financial statements, which do not giveeffect to any adjustments of the carrying value of assets and liabilities thatmay be necessary as a consequence of reorganization under chapter 11.

 

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

 

***Description of Business and Principles of Consolidation***—Theaccompanying condensed consolidated financial statements of Herbst Gaming, Inc.include the accounts of Herbst and its subsidiaries: E-T-T, Inc. andsubsidiaries (“ETT”), Market Gaming, Inc. (“MGI”), E-T-T EnterprisesL.L.C. (“E-T-T Enterprises”), Flamingo Paradise Gaming, LLC (“FPG”),HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HGI-SJ”), HGI-Mark Twain (“HGI-MT”), TheSands Regent and subsidiaries (“The Sands Regent”) and The Primadonna CompanyLLC (“Primadonna”).  The financial statements of ETT are consolidated and includethe following wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc.and Corral Country Coin, Inc.  The financial statements of The SandsRegent are consolidated and include the following direct and indirectwholly-owned subsidiaries: Zante, Inc., Last Chance, Inc., CaliforniaProspectors, Ltd. (which is a wholly owned subsidiary of Last Chance, Inc.),Plantation Investments, Inc. and Dayton Gaming, Inc.

 

All significantintercompany balances and transactions between and among Herbst Gaming, ETT,MGI, E-T-T Enterprises, FPG, HGI-L, HGI-SJ, HGI-MT, The Sands Regent andPrimadonna have been eliminated in the condensed consolidated financialstatements.  ETT and MGI conduct business in the gaming industry andgenerate revenue principally from gaming machine route operations and casinooperations.  Gaming machine route operations involve the installation,operation and service of gaming machines owned by the Company that are locatedin licensed, leased or subleased space in retail stores (supermarkets,convenience stores, etc.), bars and restaurants throughout the State ofNevada.  The Company owns and operates Terrible’s Town Casino &Bowl in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevadaand Terrible’s Town Casino and Terrible’s Lakeside Casino & RV Park,both of which are located in Pahrump, Nevada.  The operations of thesubsidiaries of the Company are as follows:

 

·      E-T-T Enterprises developsand leases real estate to ETT.

 

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

 

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

 

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

 

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

 

·      The Sands Regent and itsdirect and indirect wholly-owned subsidiaries, which were acquired on January 3,2007, own and operate the Sands Regent Casinos (see Note 3).

 

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·      Primadonna, which wasacquired on April 10, 2007, owns and operates the Primm Casinos, aCalifornia lottery station located on the Nevada/California border, threegasoline stations and the Primm Travel Center (such properties, together withthe Primm Casinos, the “Primm Properties”), all of which are located in Primm,Nevada (see Note 3).

 

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

 

The gaming industry inthe States of Nevada, Iowa, and Missouri is subject to extensive state andlocal government regulation. The Company’s gaming operations are subject to thelicensing and regulatory control of the Nevada Gaming Commission, the NevadaGaming Control Board, the Iowa Race and Gaming Commission, the Missouri GamingCommission as well as local jurisdictions.

 

***Use of Estimates***—The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the period.Significant estimates incorporated into the Company’s consolidated financialstatements include the estimated useful lives for depreciable and amortizableassets, the estimated allowance for doubtful accounts receivable and theestimated cash flows in assessing the recoverability of long-lived assets aswell as estimated fair values of certain assets related to write downs andimpairments, and contingencies and litigation, claims and assessments. Actualresults could differ from those estimates.

 

***Cash and Cash Equivalents***—Cash andcash equivalents include highly liquid investments with a maturity at the dateof purchase of three months or less. The carrying value of these investmentsapproximates 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 $227.0 million as of December 31, 2008.

 

***Accounts Receivable***—Receivablesconsist primarily of amounts due from customers as a result of normal businessoperations. The Company periodically performs credit evaluations of itscustomers. The Company reviews accounts receivable balances in order todetermine an allowance for potential credit losses based on our collectionsexperience and the age of the receivables. At December 31, 2007 and 2008,the allowance for potential credit losses was $802,000 and $840,000,respectively.

 

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

 

The Company regularlyevaluates the collectibility of the loans by individually evaluating eachlocation’s operating results and cash flows. Management provides for thecarrying value of loans that are determined to be uncollectible. At December 31,2007 and 2008, no allowance for potential credit losses was deemed necessary.

 

***Inventory***—Inventories are stated atthe lower of cost or market value. Cost is determined using the first-in,first-out method.  Inventories include parts, food, liquor, retail itemsand gasoline.

 

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

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

 

***Lease Acquisition Costs***— Significantincremental costs associated with the acquisition of location leases arecapitalized and amortized using the straight-line method over the term of therelated leases. Lease acquisition costs are stated at cost less accumulatedamortization of $34,129,000 and $41,284,000 at December 31, 2007 and 2008,respectively.

 

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***Debt Issuance Costs***—Debt issuancecosts incurred in connection with the issuance of long-term debt arecapitalized and amortized to interest expense using the effective interestmethod over the terms of the related debt agreements. Debt issuance costs areincluded in other assets on the balance sheets (see Note 7).

 

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

 

***Long-Lived Assets***—In accordance withthe provisions of SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” the Company evaluates the potential impairment oflong-lived assets when events or changes in circumstances indicate that thecarrying amount of a long-lived asset may not be recoverable. If it isdetermined that the carrying value of long-lived assets may not be recoverablebased upon the relevant facts and circumstances, the Company estimates thefuture undiscounted cash flows expected to result from the use of the asset andits eventual disposition. If the sum of the expected undiscounted future cashflows is less than the carrying value of the asset, the Company will recognizean impairment loss for the difference between the carrying value of the assetand its fair value. As a result of revenue declines related to our Primmproperties, the Company tested these assets for recoverability pursuant to SFAS144 in 2008. The test resulted in no impairment; however, we will continue tomonitor the performance of the Primm properties and, if necessary, continue toupdate our asset recoverability test under SFAS 144. The Company believes thatno impairment of long-lived assets for the years ended December 31, 2006,2007 and 2008.

 

***Goodwill and Intangible Assets***— Weevaluate our goodwill and indefinite-lived intangible assets in accordance withthe applications of SFAS No. 142, *Goodwill and OtherIntangible Assets.*Goodwill and indefinite-lived intangible assetsare not subject to amortization, but they are subject to an annual impairmenttest in the fourth quarter of each year and between annual test dates incertain circumstances. See Note 6, *Goodwill and OtherIntangible Assets*for a discussion of impairment charges related toour goodwill and other intangible assets.

 

***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 retail sales are presented net of sales tax. Revenues from casinooperations include the retail value of food and beverage and goods and servicesprovided to customers on a complimentary basis. Such amounts are then deductedas promotional allowances. The estimated cost of providing these promotionalallowances is as follows:

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(dollars in thousands)**       | ** ** |
| Room               |       | $                                          | 986        |   | $ | 8,094 |   | $ | 8,958 |   |
| Food and  Beverage |       | 8,096                                      |       | 21,507 |   | 22,827 |   |
| Other              |       | 19,824                                     |       | 20,150 |   | 14,198 |   |
| Total              |       | $                                          | 28,906     |   | $ | 49,751 |   | $ | 45,983 |   |

 

These costs arereclassified out of the respective department into the casino department.

 

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

 

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

 

***Income Taxes***—Herbst Gaming, E-T-T andMGI have elected to be taxed under the provisions of Subchapter S of theInternal Revenue Code. Under those provisions, the owners are liable for incometax on the taxable income of the Company as it affects the owners’ individualincome tax returns. Therefore, a provision for income taxes has not beenincluded in the accompanying consolidated financial statements.

 

***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, 2008, the Company does not consideritself to have any significant concentrations of credit risk.

 

***Recently Issued and Adopted Accounting Standards***—In April 2008, the FASB issued FSP No. FAS 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP 142-3”).  FSP 142-3 amends thefactors that should be considered in developing renewal or extension assumptionsused to determine the useful life of a recognized intangible asset under SFAS No. 142,*Goodwill and Other Intangible Assets*,and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assetsacquired as of and subsequent to fiscal years beginning after December 15,2008.  We believe that the adoption ofFSP 142-3 will not have a material impact on our consolidated financialstatements.

 

In February 2008,the FASB issued FASB Staff Position No. FAS 157-2, *Effective Date of FASB Statement No. 157*,which defers the effective date of SFAS No. 157, *Fair Value Measurements*, (“SFAS 157”) tofiscal years beginning after November 15, 

 

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2008 for nonfinancialassets and nonfinancial liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis. Earlyadoption of SFAS 157 is permitted.  We donot believe that the adoption of SFAS 157 will have a material impact on ourconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements — An Amendment of ARB No. 51*(“SFAS 160”).  SFAS 160 establishes newaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  Specifically, this statement requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements and separate from the parent’s equity. Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement.  SFAS 160 clarifies that changes in a parent’sownership in a subsidiary that do not result in deconsolidation are equitytransactions if the parent retains its controlling financial interest.  In addition, this statement requires that aparent recognize a gain or loss in net income when a subsidiary isdeconsolidated.  Such gain or loss willbe measured using the fair value of the noncontrolling equity investment on thedeconsolidation date.  SFAS 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest.  SFAS No. 160is effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. We do not believe that the adoption of SFAS 160 will have a materialimpact on our consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“SFAS159”)*.*  SFAS 159 permits companies to choose to measuremany financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing companies with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  The fair value option established by SFAS 159permits all companies to choose to measure eligible items at fair value atspecified election dates.  At eachsubsequent reporting date, companies must report in earnings any unrealizedgains and losses on items for which the fair value option has beenelected.  SFAS 159 is effective as of thebeginning of a company’s first fiscal year that begins after November 15,2007.  Early adoption is permitted as ofthe beginning of a fiscal year that begins on or before November 15, 2007,provided the company also elects to apply the provisions of SFAS No. 157, *Fair Value Measurements*.  We do not believe that the adoption of SFAS159 will have a material impact on our consolidated financial statements.

 

**3.****             Acquisitions**

 

**PrimmAcquisition**

 

On April 10, 2007,the Company completed the acquisition of certain gaming assets of MGM MIRAGE(the “Primm Acquisition”) for a net cash purchase price of $394 million.These assets include Buffalo Bill’s Hotel and Casino, Primm Valley Resort andWhiskey Pete’s Hotel and Casino located in Primm, Nevada. The purchase priceallocation is described in the following tables. The Company used borrowingsunder its senior credit facility to fund the purchase price of the PrimmAcquisition. The acquisition was recorded under the purchase method ofaccounting and the results of operations of the Primm Properties have beenincluded in the Company’s consolidated results following the date ofacquisition. All of the goodwill associated with the Primm Acquisition isincluded in the “Casino Operations—Nevada” reporting segment.

 

The allocation of thepurchase price for the Primm Acquisition, which was finalized during thequarter ended March 31, 2008, is as follows:

 

Fair Market Value ofassets acquired (in thousands) net of cash:

 
| Receivables                                               |   | $       | 2,513   |   |
|-----------------------------------------------------------|--------|---------|---------|--------|
| Inventory                                                 |   | 1,603   |    |
| Prepaid                                                   |   | 4,152   |    |
| Property, plant  and equipment                            |   | 286,319 |    |
| Other assets                                              |   | 1,310   |    |
| Intangible  assets                                        |   |    |    |
| Trade Name                                                |   | 40,600  |    |
| Customer Loyalty  Program                                 |   | 10,950  |    |
| Goodwill                                                  |   | 67,198  |    |
|                                                      |   |    |    |
| Fair Market  Value of liabilities assumed (in thousands): |   |    |    |
| Accounts payable                                          |   | $       | (8,112  | )      |
| Accrued expenses                                          |   | (11,582 | )       |
| Other  Liabilities                                        |   | (500    | )       |
| Total cash  purchase price                                |   | $       | 394,451 |   |

 

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The above table reflectsan adjustment from estimated amounts reported on the 2007 Form 10-K as thefinal fair values for property, plant and equipment were still based onmanagement’s estimate at the time of the 2007 Form 10-K filing.Management, upon completion of the finalization of the purchase priceallocation, determined that the fair value of the amounts for property, plantand equipment was greater than our initial estimate by approximately$24.3 million, and the value of the Customer Loyalty Program was less byapproximately $2.3 million, with a corresponding adjustment to goodwill.  See Note 6 for a discussion of impairment ofthe Primm assets and adjustment to the carrying value of goodwill and thetrademark associated with these assets following the finalization of thepurchase price allocation discussed above.

 

**SandsRegent Acquisition**

 

On January 3, 2007,the Company completed the acquisition of The Sands Regent (the “Sands RegentAcquisition”), paying approximately $149 million in cash for theoutstanding securities of The Sands Regent, the repayment of outstanding debtand related fees. The purchase price allocation is described in the followingtables. Pursuant to the Sands Regent Acquisition, the Company acquired RailCity, the Sands Regency, the Gold Ranch and Depot Casino. The Company usedborrowings under its senior credit facility to fund the purchase price of theSands Regent Acquisition. The Sands Regent Acquisition was recorded under thepurchase method of accounting and the results of operations of the assets ofThe Sands Regent have been included in the Company’s consolidated resultsfollowing the date of acquisition. All of the goodwill associated with theSands Regent Acquisition is included in the “Casino Operations—Nevada”reporting segment.

 

The allocation of thepurchase price for the Sands Regent Acquisition, which was finalized during thequarter ended March 31, 2008, is as follows:

 

Fair Market Value ofassets acquired (in thousands) net of cash:

 
| Receivables                                               |   | $      | 4,726   |   |
|-----------------------------------------------------------|--------|--------|---------|--------|
| Inventory                                                 |   | 600    |    |
| Prepaid                                                   |   | 2,132  |    |
| Property, plant  and equipment                            |   | 73,382 |    |
| Intangible  assets                                        |   |   |    |
| Trade Name                                                |   | 14,550 |    |
| Customer Loyalty  Program                                 |   | 10,500 |    |
| Goodwill                                                  |   | 48,873 |    |
|                                                      |   |   |    |
| Fair Market  Value of liabilities assumed (in thousands): |   |   |    |
|                                                      |   |   |    |
| Accounts payable                                          |   | $      | (2,150  | )      |
| Accrued expenses                                          |   | (3,962 | )       |
| Total cash  purchase price                                |   | $      | 148,651 |   |

 

The above table reflectsan adjustment from estimated amounts reported on the 2007 Form 10-K as thefinal fair values for property, plant and equipment were still based onmanagement’s estimate at the time of the 2007 Form 10-K filing.  Management, upon completion of thefinalization of the purchase price allocation, determined that the fair valueof the amounts for property, plant and equipment was greater than our initialestimate by approximately $7.6 million, with a corresponding adjustment togoodwill.  See Note 6 for a discussion ofimpairment of the Sands Regent assets and adjustment to the carrying value ofgoodwill associated with these assets following the finalization of thepurchase price allocation discussed above.

 

**4.****             Property andEquipment**

 

Property and equipmentconsist of the following (in thousands):

 

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| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **2008** | ** ** |
| Building                            |       | $                     | 411,730    |   | $ | 449,435 |   |
| Gaming equipment                    |       | 139,212               |       | 145,797 |   |
| Furniture,  fixtures, and equipment |       | 81,078                |       | 88,733 |   |
| Leasehold  improvements             |       | 2,038                 |       | 2,071 |   |
| Land                                |       | 37,528                |       | 36,930 |   |
| Barge                               |       | 17,160                |       | 17,171 |   |
| Construction-in-progress            |       | 10,673                |       | 2,711 |   |
|                                |       | 699,719               |       | 742,848 |   |
| Less accumulated  depreciation      |       | (150,710              | )          | (195,846 | ) |
|                                |       | $                     | 548,709    |   | $ | 547,002 |   |

 

**5.****             Lease AcquisitionCosts**

 
| ** **               | ** ** | **December 31, 2007**      | ** ** | **December 31, 2008** | ** ** |
|--------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Gross**                            | ** ** | ** **                      | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Carrying**                         | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **               | ** ** | **Amount**                           | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| Lease  Acquisition Costs |       | $                                    | 55,681     |                            | $          | 34,130 |   | $ | 56,352 |   | $ | 41,284 |   |
|                          |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

The aggregateamortization expense for the years ended December 31, 2006, 2007 and 2008was $10,272,000, $9,577,731 and $7,170,354, respectively.

 

During 2007, the Companyrecognized the impairment of two of its route space lease contracts inconjunction with the renegotiation of those contracts in response to the Nevadasmoking ban. The gross carrying amount of those leases was $21,643,202 and theaccumulated amortization was $ 18,478,502, resulting in a net impairment of$3,165,000.

 

Expected annualamortization for the years ending December 31 is:

 
| 2009 |   | $         | 6,785,000 |   |
|------|--------|-----------|-----------|--------|
| 2010 |   | 6,605,000 |      |
| 2011 |   | 893,000   |      |
| 2012 |   | 392,000   |      |
| 2013 |   | 210,000   |      |

 

**6.****             Goodwill and OtherIntangible Assets**

 

SFAS No. 142requires the Company to test intangibles licenses and other indefinite liveintangibles on an annual basis and between annual tests if events occur orcircumstances change that would, more likely than not, reduce the fair valuebelow the amount reflected in the balance sheet.  The annual test, whichis performed by the Company in the fourth quarter of each year, requires thatthe Company compare the carrying amount of the indefinately lived intangiblesreflected on the balance sheet to the fair value of the intangibles. Inaddition, the Company identified certain triggering events related to decliningrevenue and cash flows as of June 30, 2008 requiring performance of interimtesting of indefinite lived intangible assets as of that date.

 

The Company determinesthe fair value of the indefinite-lived intangible assets other than goodwill utilizingthe direct value method.  Fair value measurements of these intangibleassets include significant assumptions relating to variables that are based onpast experiences and judgments about future performance.  These variablesinclude, but are not limited to: (1) the forecasted earnings growth rateof each market, (2) risk-adjusted discount rate and (3) expectedgrowth rates for perpetuity to estimated terminal values.

 

Annual impairment testingperformed in the fourth quarter of 2007 and 2008 as well as interim testingperformed in the second quarter of 2008 determined that the fair value of ourLakeside Iowa license rights was less than the book value.  Accordingly, for the year ended December 31,2007 we recorded a non-cash charge of $33.3 million and for the year ended December 31,2008 we recorded non-cash charges totaling $19.2 million to reduce the balanceof this asset to its fair value.  TheCompany considered the continued and unexpected deterioration of earningsfollowing the 2007 annual impairment test to constitute a triggering event thatrequired an additional fair value measurement in the second quarter of 2008.

 

Annual impairment testingperformed in the fourth quarter of 2008 determined that the fair value of ourtrademark associated with the Primm Casinos was less than its book value.  Accordingly, for the year ended December 31,2008 we recorded a non-cash charge of $7.5 million to reduce the balance ofthis asset to its fair value.

 

SFAS No. 142 alsorequires the Company to test goodwill at its reporting units within its marketsegment on a annual basis and between annual tests if events occur orcircumstances change that would, more likely than not, reduce the fair value ofgoodwill 

 

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below the amountreflected in the balance sheet.  The Company performs its annualimpairment test in the fourth quarter of each year by comparing the fair valuewith the amount reflected in the balance sheet.  In addition, the Company identified certaintriggering events related to declining revenue and cash flows as of June 30, 2008requiring performance of interim testing of goodwill as of that date.

 

The Company determinesthe fair value of the goodwill utilizing the residual value method.  Fairvalue measurements of these assets include significant assumptions relating tovariables that are based on past experiences and judgments about futureperformance.  These variables include, but are not limited to: (1) theforecasted earnings growth rate of each market, (2) risk-adjusted discountrate and (3) expected growth rates for perpetuity to estimated terminalvalues.

 

Annual impairment testingpreformed in the fourth quarter of 2007 as well as interim testing performed inthe second quarter of 2008 determined that the fair value of goodwillassociated with the Primm Casinos was less than the book value.  Accordingly, for the years ended December 31,2007 and 2008 we recorded non-cash charges of $36.5 million and $30.7 millionrespectively to reduce the balance of this asset to zero as of June 30, 2008.  This charge was in addition to the impairmentof the Primm trademark discussed above.

 

Annual impairment testingperformed in the fourth quarter of 2008 determined that the fair value ofgoodwill associated with the Sands Regent Casinos was less than the bookvalue.  Accordingly, we recorded anon-cash charge of $48.9 million for the year ended December 31, 2008 toreduce the balance of this asset to zero, as of December 31, 2008.

 

The aforementionedimpairment charges are included in the table below.

 

Intangible assets consistof the following (dollars in thousands):

 
| ** **                     | ** ** | **December 31, 2007**      | ** ** | **December 31, 2008** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Gross**                            | ** ** | **Gross**                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Carrying**                         | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                     | ** ** | **Amount**                           | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)** | ** ** |
| Amortized  intangible assets   |       |                                 |       |                            |       |   |   |   |   |
| Customer Loyalty  Programs     |       | $                                    | 27,550     |                            | $          | 3,612 |   | $ | 24,350 |   | $ | 5,669 |   |
| Non-Competition  Agreement     |       | 2,180                                |       | 948                             |       | 2,180 |   | 1,383 |   |
| Total                          |       | 29,730                               |       | 4,560                           |       | 26,530 |   | 7,052 |   |
|                           |       |                                 |       |                            |       |   |   |   |   |
| Unamortized  intangible assets |       |                                 |       |                            |       |   |   |   |   |
| Gaming License  Rights         |       | 163,500                              |       |                            |       | 144,300 |   |   |   |
| Patent  applications           |       | 240                                  |       |                            |       | 240 |   |   |   |
| Tradename                      |       | 55,150                               |       |                            |       | 47,650 |   |   |   |
| Total                          |       | $                                    | 218,890    |                            |       |   | $ | 192,190 |   |   |   |
|                                |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

The changes in thecarrying amount of goodwill for the year ended December 31, 2008 are asfollows:

 
| Balance as of  January 1, 2008                                                         |   | $       | 112,438 |   |
|---------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Adjustment to  goodwill from finalization of purchase price allocation of Sands Acquisition |   | (7,594  | )       |
| Adjustment to  goodwill from finalization of purchase price allocation of Primm Acquisition |   | (22,017 | )       |
| Impairment of  goodwill related to the Primm Casinos                                        |   | (30,698 | )       |
| Impairment of  goodwill related to the Sands Regent Properties                              |   | (48,873 | )       |
| Balance as of  December 31, 2008                                                            |   | $       | 3,255   |   |

 

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

 

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

 

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

 

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Expected annualamortization for the years ending December 31 (in thousands) is:

 
| 2009 |   | $     | 2,002  |   |
|------|--------|-------|--------|--------|
| 2010 |   | 1,740 |   |
| 2011 |   | 1,632 |   |
| 2012 |   | 1,506 |   |
| 2013 |   | 1,506 |   |

 

For the year ended December 31,2008, amortization expense of intangibles was (in thousands) $2,492.

 

**7.****             Other Assets**

 

Other assets consist ofthe following (dollars in thousands):

 
| ** **                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **2007**              | ** ** | **2008** | ** ** |
| Debt issuance  costs, net of accumulated amortization of $7,333 and $11,450, respectively |       | $                     | 21,799     |   | $ | 17,848 |   |
| Other assets                                                                              |       | 6,093                 |       | 6,276 |   |
| Total                                                                                     |       | $                     | 27,892     |   | $ | 24,124 |   |

 

**8.****             Accrued Expenses**

 

Accrued expenses consistof the following (dollars in thousands):

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2007**              | ** ** | **2008** | ** ** |
| Progressive  jackpot liabilities |       | $                     | 3,003      |   | $ | 1,695 |   |
| Accrued payroll  and related     |       | 13,312                |       | 12,998 |   |
| Slot club point  liability       |       | 4,054                 |       | 3,495 |   |
| Other accrued                    |       | 8,015                 |       | 9,898 |   |
| Total                            |       | $                     | 28,384     |   | $ | 28,086 |   |

 

**9.****             Long-Term Debt**

 

The Company is in defaultunder the amended Credit Agreement and the indentures pursuant to which theSubordinated Notes were issued.  TheCompany and the Subsidiary Guarantors have entered into the Lockup Agreementand have filed the Chapter 11 Cases with the Bankruptcy Court.  The Restructuring is subject to variousregulatory, Bankruptcy Court and third party approvals.  We cannot assure you that we will besuccessful in implementing the Restructuring in the form contemplated by theLockup Agreement or at all.

 

The amounts outstandingunder the amended Credit Agreement and the indentures pursuant to which theSubordinated Notes were issued are classified as current liabilities on theCompany’s balance sheet.  On November 6,2008, we received a Notice of Acceleration (the “Notice of Acceleration”) underour amended Credit Agreement due to the occurrence and continuation of eventsof default under the amended Credit Agreement.  Pursuant to the Notice ofAcceleration, the Lenders and the administrative agent under the CreditAgreement have declared the unpaid principal amount of all outstanding loansunder the amended Credit Agreement immediately due and payable, and havedeclared the commitment of each Lender to be immediately terminated.  Inaddition, since the loans under the amended Credit Agreement have beenaccelerated, the Company is prohibited from resuming payments on the SubordinatedNotes.

 

The current outstandingbalance under the amended Credit Agreement is $846.8 million.  Pursuant to the Lockup Agreement, (i) $135million of these obligations will be allocated to Slot Co pursuant to a newfirst priority senior secured bank loan which will mature on the fifthanniversary of the “Substantial Consummation Date” (as defined in the LockupAgreement); (ii) $40 million of these obligations will be allocatedto Slot Co pursuant to a second lien secured bank facility which will mature onthe fifth anniversary of the Substantial Consummation Date; (iii) $475million of these obligations will be allocated to Reorganized Herbst Gamingpursuant to a new credit agreement comprising a first lien term loan in theamount of $350 million and a second lien term loan in the amount of $125million on terms to be negotiated; and (iv) the remaining balance of theseobligations will be exchanged for 100% of the new common equity of ReorganizedHerbst Gaming, which will own 10% of the new common equity of Slot Co.

 

The amended CreditAgreement includes a revolving credit facility in the amount of$100 million and $760 million of term loans that mature on December 2,2011 if we have not refinanced our 8 1/8%Notes, and otherwise on January 3, 2014. Our revolving credit facility was fully drawn at December 31, 2008,and the commitments of the Lenders have been terminated under the amendedCredit Agreement.  Interest accrues onborrowings under the amended Credit Agreement based on a floating rate.  This floating rate is based upon a variableinterest rate (a base rate or LIBOR, at our option) plus a leverage grid-basedspread.  Our average floating rate ondebt incurred under the amended Credit Agreement was 12.5% at December 31,2008.  This increase in interest rateswas a result of our defaults under the amended Credit Agreement.  Itis expected that interest on the new loans contemplated by the Lockup Agreementwill also be based on a floating rate (a base rate or LIBOR) plus a statedamount.

 

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

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2007**              | ** ** | **2008** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                  |       |   |   |
| Revolving credit  facility secured by assets of the Company. The loans bear interest at a  floating rate based on a spread determined by the Company’s leverage ratio  over the base rate or the one-, two-, three- or six-month Eurodollar Rate.  The average rate at December 31, 2008 was 12.5%. The revolving credit  facility matures on June 10, 2009                                                                                                                                                                                    |       | $                     | 63,000     |   | $ | 98,859 |   |
| Term loan  secured by substantially all of the assets of the Company. The term loan  bears interest an a floating rate based on a spread determined by the  Company’s leverage ratio over the base rate or the one-, two-, three- or  six-month Eurodollar Rate. The term loan requires $938 principal payments due  quarterly, with the balance payable at maturity. The average rate at 12/31/08  was 12.5%. The term loan matures on January 31, 2011                                                                                            |       | 371,250               |       | 368,438 |   |
| Term loan  secured by substantially all of the assets of the Company. The term loan  bears interest an a floating rate based on a spread determined by the  Company’s leverage ratio over the base rate or the one-, two-, three- or  six-month Eurodollar Rate. The term loan requires $938 principal payments due  quarterly, with the balance payable at maturity. The average rate at  December 31, 2008 was 12.5%. The term loan matures on January 31,  2011                                                                             |       | 59,850                |       | 59,400 |   |
| Delay draw term  loan secured by substantially all of the assets of the Company. The delay  draw term loan bears interest at a floating rate based on a spread determined  by the Company’s leverage ratio over the base rate or the one-, two-, three-  or six-month Eurodollar Rate. The delay draw term loan requires $812 in  principal payments due quarterly for the first five years of such term loan,  with the balance payable at maturity. The average rate at 12/31/08 was 12.5%.  The delay draw term loan matures on December 2, 2011 |       | 322,563               |       | 320,125 |   |
| 8 1/8 % senior subordinated notes due June 1,  2012 with interest paid semi-annually on June 1 and December 1,  including original issue discount of $1,065                                                                                                                                                                                                                                                                                                                                                                               |       | 159,365               |       | 159,508 |   |
| 7% senior  subordinated notes due November 1, 2014 with interest paid semi-annually  on May 15 and November 15                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 170,000               |       | 170,000 |   |
| Notes payable to  automobile finance companies secured by vehicles, payable in monthly  installments of $10, including interest ranging from 0% to 7.99%                                                                                                                                                                                                                                                                                                                                                                                                      |       | 42                    |       | — |   |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 1,146,070             |       | 1,176,330 |   |
| Less current  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (7,634                | )          | (1,176,330 | ) |
| Total long-term  debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | $                     | 1,138,436  |   | $ | — |   |

 

 

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

 

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

 

The proceeds from the 8 1/8% Notes, along with the amended Credit Agreement, wereused to retire 97% of then-outstanding 10 3/4% notes for $242.1 million and to pay a $15.0 milliondividend to shareholders. Fees of $4.3 million associated with the 81/8% Notes and $3.5 million associated withthe amended Credit Agreement are included in Other assets at December 31,2008 and are being amortized over the life of the indebtedness. In connectionwith the retirement of 97% of the 10 3/4% notes in 2004, the Company recorded a loss on theearly retirement of debt of $38.0 million. The loss consisted of $31.3 millionin debt prepayment premiums and $6.7 million in unamortized loan fees.

 

The 8 1/8%Notes mature on June 1, 2012. Interest is payable in cash at a rate of 8 1/8% per annum on June 1 and December 1of each year, beginning on December 1, 2005. The indenture under which the8 1/8 % Notes were issued contains variouslimitations and restrictions including (i) change in control provisions, (ii) limitationson indebtedness and (iii) limitations on certain payments such asdividends.

 

In August 2005, the Company filed a Form S-4 registrationstatement with the SEC for the purpose of effecting the exchange of the 8 1/8% Notes for identical notes registeredfor resale under the federal securities laws. This registration statementbecame effective in November 2005 and the exchange offer was consummatedin December 2005.

 

See above discussion of defaults under the 8 1/8% Notes. Under the proposed Restructuring, the Company’s obligations under theindenture governing the 8 1/8% Notes would be terminated.

 

 

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*7% Senior Subordinated Notes*

 

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

 

The proceeds from the 7% Notes, along with borrowings under the amendedcredit facility were used to finance the Grace Acquisition in February 2005. Fees of $6.2 million associated with the 7% Notes and the amended CreditAgreement are included in other assets at December 31, 2008 and are beingamortized over the life of the indebtedness.

 

The 7% Notes mature on November 15, 2014. Interest is payable incash at a rate of 7% per annum on May 15 and November 15 of eachyear, beginning on May 15, 2005. The indenture under which the 7% Noteswere issued contains various limitations and restrictions including (i) changein control provisions, (ii) limitations on indebtedness and (iii) limitationson certain payments such as dividends.

 

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

 

See above discussion of defaults under the 7% Notes.  Under the proposed Restructuring, the Company’sobligations under the indenture governing the 7% Notes would be terminated.

 

*CreditFacilities*

 

On January 3, 2007, the Company entered into a second amended andrestated credit agreement with Bank of America, N.A. (“Bank of America”), asAdministrative Agent, Swing Line Lender and L/C Issuer, Lehman Commercial Paper, Inc.and Wachovia Bank, National Association, as Syndication Agents, U.S. Bank,National Association, as Documentation Agent and Lehman Brothers Inc. andWachovia Capital Markets, LLC, as Joint Lead Arrangers and Joint Book Runnersas amended by Amendment No. 1 dated August 14, 2007, Amendment No. 2dated December 14, 2007, Amendment No. 3 dated April 24, 2008,Amendment No. 4 dated May 15, 2008 and Amendment No. 5 dated November 10,2008.

 

The amended Credit Agreement was an amendment and restatement of ourprevious amended and restated Credit Agreement dated as of October 8,2004.

 

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

 

See above discussion of current defaults and effectsof the proposed Restructuring on the amended Credit Agreement.

 

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

 
| ** ** | ** ** | **December 31,  2008** | ** ** |
|------------|------------|-----------------------------|------------|
| 2009       |       | $                           | 1,176,330  |   |
| 2010       |       | —                      |       |
| 2011       |       | —                      |       |
| 2012       |       | —                      |       |
| 2013       |       | —                      |       |
| Thereafter |       | —                      |       |
| Total      |       | $                           | 1,176,330  |   |

 

 **10.****                              ****Asset RetirementObligation**

 

The Company has adoptedSFAS No. 143, “Accounting for Asset Retirement Obligations,” whichrequires that the fair value of a liability for an asset retirement obligationbe recognized in the period in which it was incurred if a reasonable estimateof fair value could be made. The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset 

 

 

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and depreciated over theestimated useful life of the related assets.  The Company recognized thisobligation in association with a lease for real property in Primm, Nevada,which was a liability assumed under the Primm Acquisition in April 2007.The Company recorded a liability of $0.5 million in 2007 related to expectedcosts to return leased land to its original state at the end of the leaseagreement (using a 6.7% discount rate and a 3.0% inflation rate). Theinformation below reconciles the value of the asset retirement obligation forthe periods presented.

 

| **December 31,**         | ** ** | **2007** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance,  beginning of period |       | $        | 0          |     | $          | 524 |   |
| Liabilities  incurred         |       | 500      |       | —   |       |
| Accretion  expense            |       | 24       |       | 35       |       |
| Balance, end of  period       |       | $        | 524        |     | $          | 559 |   |

 

**11.****                              ****Related-PartyTransactions**

 

*General.*

 

Edward Herbst, Timothy Herbst and Troy Herbst are brothers and areofficers and directors of Herbst Gaming, Inc. and its wholly-ownedsubsidiaries.  In addition, they are officers and directors of TerribleHerbst, Inc. and Berry-Hinckley Industries.  There is no crossownership between Herbst Gaming, Inc. and either Terrible Herbst, Inc.or Berry-Hinckley Industries.  Terrible Herbst, Inc. is owned solelyby Jerry and Maryanna Herbst, the parents of the Herbst brothers.  SeanHiggins, the Company’s general counsel, is also the general counsel of Berry-HinckleyIndustries.  The Lockup Agreementprovides for the modification of certain related party agreements.  Except as described below and in the LockupAgreement, all terms and provisions in the Company’s related party agreementsshall continue to be valid and enforceable under the proposedRestructuring.  The Lockup Agreement alsoprovides for new non-competition agreements to be entered into by each of JerryE. Herbst, Timothy P. Herbst, Troy D. Herbst and Edward J. Herbst in favor ofSlot Co or Reorganized Herbst Gaming. Such agreements are to expire on the earlier of (i) the repaymentin full of the new loans to Slot Co pursuant to the Restructuring and (ii) December 31,2016.  We cannot assure you that theRestructuring will be approved or, if approved, implemented.

 

*Slotroute contract with Terrible Herbst, Inc.*

 

The Company rents space for certain slot machine route operations inconvenience stores owned by Terrible Herbst, Inc. (“Terrible Herbst”), acorporation in which the owners of the Company are officers and which is ownedby the parent of the Company’s owners.  Rent expense of $6,623,000,$6,954,000 and $7,114,000 was incurred under this agreement for the years endedDecember 31, 2006, 2007 and 2008, respectively, for the exclusiveplacement of slot machines in Terrible Herbst convenience storelocations.  This contract expires in 2010 but may be extended at theoption of the Company for one additional term of five years.

 

*Otherarrangements with Terrible Herbst, Inc. and Berry-Hinckley Industries.*

 

The Company has entered into a servicing arrangement with TerribleHerbst pursuant to which it provides accounting and administrative servicesrelated to the collection of daily deposits from Terrible Herbst conveniencestores.  The Company also provides personnel to Terrible Herbst to count,maintain and safeguard large amounts of coin and currency.  TerribleHerbst reimburses the Company’s expenses in providing these services. Under this servicing arrangement, the Company was paid approximately $205,800for services rendered for the year ended December 31, 2006, $246,000 forthe year ended December 31, 2007 and $246,000 for the year ended December 31,2008.

 

The Company has entered into a nonexclusive trademark license agreementwith Terrible Herbst for the use of the Terrible Herbst brand name and itscowboy logo which extends through 2011.  At the option of the Company, theagreement provides for the ability to renew the agreement for five additionalsuccessive terms of five years each.  Pursuant to this trademark licenseagreement, the Company paid approximately $1,483,000, $1,557,000 and $1,649,000to Terrible Herbst in the years ended December 31, 2006, 2007 and 2008,respectively.  Under the LockupAgreement, this trademark license agreement would be modified as follows: (i) expirationdate of December 31, 2016, terminable by Reorganized Herbst Gaming after December 31,2013 upon the payment of an early termination fee of $1 million, (ii) licensefee of $1.73 million per year, to be paid in equal monthly installments and (iii) one-timepayment of $1.5 million payable by the Company on the one-year anniversary ofthe “Effective Date” of the bankruptcy, as defined in the Lockup Agreement.

 

The Company entered into a shared services agreement with TerribleHerbst and Berry-Hinckley Industries inJanuary 2008 whereby (i) Terrible Herbst and Berry-HinckleyIndustries reimburse the Company for services performed by certain employees ofthe Company for Terrible Herbst andBerry-Hinckley Industries as requested from time to time, consistingprimarily of the day-to-day functions of Terrible Herbst, and Berry-Hinckley Industries and (ii) effectiveas of January 1, 2009, pursuant to an amended and restated shared servicesagreement entered into on January 16, 2009, the Company reimbursesTerrible Herbst for services performed by certain employees of Terrible Herbstfor the Company as requested from time to time, consisting primarily ofmaintaining the price books for certain of the Company’s service station locationsand providing management oversight of the service station operations at thePrimm Properties.  Under this agreement,the Company received approximately $583,000 for services rendered during theyear ended December 31, 2008 from Terrible Herbst and $102,000 forservices from Berry-Hinckley Industries. In 2009, payment for services rendered by the Company’s employees willbe reduced by amounts due for services rendered for the Company’s by TerribleHerbst’s employees.

 

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The Company entered into an advertising purchasing agreement withTerrible Herbst in January 2009 pursuant to which the Company purchasesadvertising time on Terrible Herbst’s network of gas pump and interiortelevision screens for $30,000 per month during the twelve months commencing January 1,2009.  This agreement replaced the prioradvertising purchasing agreement between the Company and Terrible Herbst thatexpired on December 31, 2008.

 

*Lease agreements.*

 

Pursuant to a lease agreement that expires in 2067, including renewalperiods, the Company leases the real property on which its corporateheadquarters is located from The Herbst Family Limited Partnership II, orHerbst FLP II.  The general partners of Herbst FLP II are Jerry andMaryanna Herbst.  The lease requires monthly rental payments of$14,416.  In each of 2006, 2007 and 2008, the Company paid $172,992 underthis lease.  Under the Restructuring,this lease would be assigned by the Company to Slot Co, with a term expiring December 31,2016.

 

Pursuant to a lease agreement that expires in 2026, including renewalperiods, the Company leases the real property on which Terrible’s Town Casino inPahrump is located from The Herbst Family Limited Partnership.  The leaserequires monthly rental payments of $15,000.  During 2006, the Companypaid $165,000 under this lease.  During 2007, the Company paid $180,000under this lease.  During 2008, the Companypaid $180,000 under this lease.  Underthe Restructuring, this lease would be assigned to Reorganized Herbst Gamingand modified to expire on December 31, 2016, with no renewal options and a$15,000 monthly rental fee through expiration.

 

The Company leases land and office space in certain of its facilitiesto Terrible Herbst under various lease agreements with terms ranging frommonthly to 20 years.  Monthly rental income is $29,000.  Under theseleases, in 2006 the Company received rental income of $640,500.  In eachof 2007 and 2008 the Company received rental income of $348,000.  Three of these lease agreements will bemodified pursuant to the Restructuring: (i) the sublease to TerribleHerbst of the service station at Terrible’s Town Casino in Pahrump will beassigned to Reorganized Herbst Gaming, the monthly rental fee will be fixed atits current amount through expiration and the lease will expire on December 31,2016; (ii) the lease to Terrible Herbst of the service station at Terrible’sLakeside Casino in Pahrump will be assigned to Reorganized Herbst Gaming, themonthly rental fee will be fixed at its current amount through expiration andthe lease will expire December 31, 2016; and (iii) the sublease toTerrible Herbst of the service station located on the real property on whichthe corporate headquarters is located will be assigned to Slot Co.

 

The Company subleases the real property on which Terrible’s SearchlightCasino in Searchlight is located from Terrible Herbst for $15,000 per month, pursuantto a lease agreement entered into on July 1, 2002 that expires in 2022,with options to renew the lease for five additional successive terms of tenyears each, contingent on Terrible Herbst renewing its lease of the realproperty.  Terrible Herbst leases that real property from an unrelatedthird party, pursuant to a lease agreement entered into on June 30, 2002that expires in 2042, including renewal periods.  In each of 2006, 2007and 2008, amounts paid by the Company under this lease was $180,000.  Under the Restructuring, this lease would beassigned to Reorganized Herbst Gaming.

 

The Company leases a warehouse located in Las Vegas, Nevada for itsemployment center and purchasing departments from Herbst’s Grandchildren’sTrust.  The lease began in November 2002 and requires payments of $46,500per month through November 2012.  The lease expires in November 2012,with options to renew for five additional ten-year terms.  Rent expense incurred under this leasearrangement $558,000 during 2006, $560,500 during 2007 and $555,500 during2008.  Under the Restructuring, thisagreement would be assigned by the Company to Slot Co with a term expiring December 31,2016.

 

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

 

| 2009       |   | $     | 348    |   |
|------------|--------|-------|--------|--------|
| 2010       |   | 348   |   |
| 2011       |   | 348   |   |
| 2012       |   | 348   |   |
| 2013       |   | 348   |   |
| Thereafter |   | 1,388 |   |
| Total      |   | $     | 3,128  |   |
|            |        |       |        |        |  |

 

 

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*Related-party transactions.*

 

Mr. Higgins is the Company’s General Counsel and the brother ofMary E. Higgins, the Company’s Chief Financial Officer.  Mr. Higginsreceived a salary for services rendered to us in 2006, 2007 and 2008 of$625,900, $658,700 and $638,500, respectively.

 

In 2003, the Company entered into a slot route contract to install,operate and service slot machines at a tavern owned by HIGCO, Inc., acompany owned and operated by Mr. Higgins and two of his brothers. Pursuant to this revenue-sharing contract, HIGCO, Inc. paid the Company$154,200 in 2006, $147,500 in 2007 and $182,500 in 2008.

 

In 2004, E-T-T entered into a slot route contract with SamCon, Inc.,a company owned and operated by Mr. Higgins, to install, operate andservice slot machines at a new location.  Terms of this revenue-sharingcontract are similar to the terms of the contract the Company entered into withHIGCO in 2003.  Pursuant to this revenue-sharing contract, SamCon, Inc.paid E-T-T $21,100 in 2006, $0 in 2007 and $72,700 in 2008.

 

In March 2006, E-T-T entered into a slot route contract toinstall, operate and service slot machines at a tavern owned by Prescott’s BarLLC, a company owned and operated by Mr. Todd Sosey, the brother-in-law ofTroy D. Herbst, one of the owners of the Company. Pursuant to thisrevenue-sharing contract, Prescott’s Bar LLC paid E-T-T $52,800 in 2006,$105,700 in 2007 and $94,900 in 2008.

 

John N. Brewer, a member of the Company’s board of directors, is apartner with Kummer Kaempfer Bonner & Renshaw.  The Companyretained Kummer Kaempfer Bonner & Renshaw as outside legal counsel,and Kummer Kaempfer Bonner & Renshaw has received fees for legalservices in the amount of $5,673, $5,160 and $5,558 for 2006, 2007 and 2008,respectively.

 

The balance sheet item “due from related parties” includes receivablesof $711,000 and $390,000 at December 31, 2007 and 2008, respectively, fromTerrible Herbst, which arise in the normal course of business.  The balances are non-interest bearing andpayable on demand.

 

The balance sheet item “due from related parties” also includesbalances from employees.  These amounts were $930,000 and $899,000 for2007 and 2008, respectively. The balances are charged interest at varying ratesand have terms ranging from due on demand to nine years.

 

Obligations due to related parties at December 31, 2006, 2007 and2008 consisted of balances due to Terrible Herbst for expenditures made onbehalf of the Company, accrued rent, and accrued administrative fees. Thebalances are non-interest bearing and payable on demand.  

 

**12.****                              ****Commitments andContingencies**

 

At December 31, 2008, the Company has non-cancelable locationlicense agreements for space leases at groups of affiliated stores that expireon various dates from 2010 through 2013, with certain options for renewal.Revenues from gaming machines in these stores did not exceed 10% of the Company’stotal revenues in any of the years ended December 31, 2006, 2007, or 2008.

 

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

 

| 2009       |   | 59,273  |    |
|------------|--------|---------|---------|
| 2010       |   | 58,639  |    |
| 2011       |   | 39,854  |    |
| 2012       |   | 34,616  |    |
| 2013       |   | 19,989  |    |
| Thereafter |   | 189,930 |    |
| Total      |   | $       | 402,301 |   |
|            |        |         |         |  |

 

Rent expense related to non-cancelable leases with terms exceeding oneyear was $74,852,000, $70,350,000 and $61,138,000 for the years ended December 31,2006, 2007 and 2008, respectively.

 

On February 17, 2006, the Clark County District Court enteredjudgment of a jury verdict delivered on January 14, 2006 against ETT for$4.1 million in compensatory damages and $10.1 million in punitivedamages.  The jury verdict was delivered in connection with an actionbrought by the family of an individual that alleged that ETT had negligentlyretained and negligently supervised a temporary employee who in 2001 stole atruck from ETT and, while drunk, hit and killed the individual.  Thepunitive damage award was subsequently lowered to $4.1 million in a post-trialruling.  The Company believes the award of compensatory and punitivedamages against ETT, the liability of ETT, and the amount thereof, is notsupportable in either law or in fact and plans to vigorously pursue allappropriate post-trial and other remedies, including exercising its right to appeal.Based on a review of the legal opinions and facts available to the Company atthis time, the Company believes it is adequately reserved for any potential liabilityrelated to this incident. The lawsuit is currently on appeal.

 

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The Company was party to an arbitration involving the for causetermination of an employee.  On March 10,2009, the Company received an interim award from the arbitrator that indicatedthe previous employee was to be awarded $1.3 million as a result of thisarbitration.  The award is currentlyunder appeal, however, the Company has fully recognized the award and approximately$0.2 million for attorney’s fees in the 2008 fiscal year.

 

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

 

*Nevada Use Tax Refund Claims*

 

On March 27, 2008, the Nevada Supreme Court issued a decision inSparks Nugget, Inc. vs. The State of Nevada Department of Taxation (the “Department”),holding that food purchased for subsequent use in the provision ofcomplimentary and/or employee meals was exempt from both sales and usetax.  On April 24, 2008, the Department filed a Petition forRehearing (the “Petition”) on the decision.  On July 17, 2008, theNevada Supreme Court denied the Department’s Petition.  We have beenpaying use tax on food purchased for subsequent use as complimentary andemployee meals at our Nevada casino properties and are in the process ofquantifying the amount of our potential refund, which we estimate to beapproximately $1.8 million, excluding interest, from July 1, 2001through January 1, 2008.  Based on the denial of the petition, as of January 1,2008, the Company no longer accrues for these taxes but due to the uncertaintyregarding the method for reimbursement to the Company of taxes paid to date, wewill not record any gain from previous tax years until the tax refund isrealized.

 

**13.****                              ****Derivative Instruments**

 

We have used interest rate swaps to manage the risk related to variablerate of our debt between fixed and variable rate instruments.  In thefourth quarter of 2007, we terminated all interest rate swap agreements. The termination costs were $16,115,000.  As of December 31, 2007 andduring 2008, we had no interest rate swap agreements.

 

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

 

The Company has retirement savings plans under Section 401(k) ofthe Internal Revenue Code for eligible employees.  The plans allow employees to defer, withinprescribed limits, up to 30% of their income on a pre-tax basis throughcontributions to the plans.  The Companymatches, within prescribed limits, a portion of eligible employees’contributions.  The Company recordedcharges for 401(k) contributions of $233,000, $1,114,000, and $933,000 forthe years ended December 31, 2006, 2007, and 2008 respectively.

 

The Company implemented a supplemental executive retirement plan (“SERP”)for certain key employees effective May 1, 2004.  The SERP is a nonqualified plan under whichthe Company makes monthly contributions which are intended to provide aretirement benefit that is a fixed percentage of a participants annual salaryup to a maximum of 33%.  Companycontributions and investment earnings on the contributions are tax-deferred andaccumulate as a retirement fund. Employees do not make contributions under this plan.  A portion of the Company contributions andinvestment earnings thereon vest after seven years of SERP participation andthe remaining portion vests after both seven years of SERP participation andthe participant reaching age 67.  For theyears ended December 31, 2006, 2007 and 2008, the Company recorded expenseunder this plan of $484,000, $297,000, and $279,000, respectively.

 

The Company is self-funded for health care benefits at its Midwestcasino properties for 2007 and 2008. Under this plan, the Company is responsible for employee heath carecosts up to a certain stop loss amount. For the years ended December 31, 2007 and 2008, the Company wasfully expensed to the stop loss limit and therefore had no liability recordedat year end.  During the fourth quarterof 2008, the Company discovered an error in the placement of the stop losspolicy that was in effect for 2007.  As aresult of the incorrect policy being in place, the Company was subject toadditional exposure for health care claims incurred in 2007.  Additional expense related to this issue for2007 in the amount of $1,145,000 was expensed in 2008.  Subsequent to 2008, the Company uses a fullyinsured plan for health care benefits for its Midwest casino properties.

 

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

 

The Company operates through two business segments:  slot routeoperations and casino operations. The slot route operations involve theinstallation, operation, and service of slot machines at strategic, hightraffic non-casino locations, such as grocery stores, drug stores, conveniencestores, bars, and restaurants. Casino operations consist of two geographicareas, Nevada and Other States.  The Nevada locations include: Terrible’sTown Casino (Henderson) in Henderson, Nevada, Terrible’s Searchlight Casino inSearchlight, Nevada, Terrible’s Town Casino and Terrible’s Lakeside Casino,both of which are located in Pahrump, Nevada, Terrible’s Hotel &Casino in Las Vegas, Nevada, Rail City Casino in Sparks, Nevada, the SandsRegency Casino Hotel in Reno, Nevada, Terrible’s Gold Ranch Casino and RVResort in Verdi, Nevada, Terrible’s Dayton Casino in Dayton, Nevada, andBuffalo Bill’s Hotel and Casino, Primm Valley Resort and Casino and WhiskeyPete’s Hotel and Casino, all located in Primm, Nevada.  Casinos located inother states are Terrible’s Lakeside Casino in Osceola, Iowa, Terrible’s St. JoFrontier Casino in St. Joseph, Missouri and Terrible’s Mark Twain Casino inLa Grange, Missouri. These segment results are regularly provided to theOffice of the CEO of the Company, the members of which are the chief operatingdecision makers of the Company.

 

Revenues andincome, as well as EBITDA, for these segments are shown below.  Route and Casino segment EBITDA are non-GAAPmeasures but are used by management to measure segment profits and losses inaccordance with SFAS 131, “Disclosures about Segments of an Enterprise andRelated Information.”  Route and Casinosegment EBITDA have certain limitations in that they doenot take into accountthe impact of certain expenses, including allocation of overhead.  The Company endeavors to compensate for thelimitations of the non-GAAP measures presented by providing the comparable GAAPmeasure with equal or greater prominence, financial statements prepared inaccordance with generally accepted accounting principles, and descriptions ofthe reconciling items, including quantifying such items, to derive the non-GAAPmeasures.  The following table reconcilesSegment EBITDA to net income(loss) (in thousands):

 

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| ** **                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                                                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                                                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Slot route  operations                                                                                             |       | $                                          | 292,868    |   | $ | 338,376 |   | $ | 346,955 |   | $ | 276,882 |   | $ | 243,545 |   |
| Casino  operations                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                                                                                             |       | 79,116                                     |       | 82,872 |   | 82,068 |   | 289,058 |   | 291,813 |   |
| Other States                                                                                                       |       | —                                     |       | 108,569 |   | 122,364 |   | 120,013 |   | 119,122 |   |
| Other—non gaming                                                                                              |       | 3,628                                      |       | 6,024 |   | 10,676 |   | 98,987 |   | 116,609 |   |
| Total net  revenues                                                                                                |       | $                                          | 375,612    |   | $ | 535,841 |   | $ | 562,063 |   | $ | 784,940 |   | $ | 771,089 |   |
| Depreciation and  amortization                                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Slot route  operations                                                                                             |       | 19,362                                     |       | 20,114 |   | 21,431 |   | 21,979 |   | 17,806 |   |
| Casino  operations                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                                                                                             |       | 5,727                                      |       | 6,359 |   | 6,408 |   | 22,765 |   | 28,450 |   |
| Other States                                                                                                       |       | —                                     |       | 7,150 |   | 9,967 |   | 11,316 |   | 11,228 |   |
|                                                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Other                                                                                                              |       | 318                                        |       | 318 |   | 318 |   | 345 |   | 299 |   |
| Total  depreciation and amortization                                                                               |       | $                                          | 25,407     |   | $ | 33,941 |   | $ | 38,124 |   | $ | 56,405 |   | $ | 57,783 |   |
|                                                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Segment  EBITDA(2)                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Slot route  operations                                                                                             |       | 64,939                                     |       | 80,262 |   | 75,492 |   | 32,796 |   | 27,892 |   |
| Casino  operations                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                                                                                                             |       | 22,785                                     |       | 23,747 |   | 17,719 |   | 43,551 |   | 29,475 |   |
| Other states                                                                                                       |       | —                                     |       | 29,330 |   | 34,512 |   | 30,268 |   | 30,287 |   |
| Other and  corporate(1)                                                                                            |       | (10,985                                    | )          | (11,813 | ) | (8,405 | ) | (2,700 | ) | (16,194 | ) |
| Depreciation and  amortization                                                                                     |       | (25,407                                    | )          | (33,941 | ) | (38,124 | ) | (56,405 | ) | (57,783 | ) |
| Interest  expense, net of capitalized interest (capitalized interest of $0, $101, $873,  $206 and $0 respectively) |       | (22,109                                    | )          | (36,532 | ) | (39,134 | ) | (85,631 | ) | (116,832 | ) |
| Loss on  impairment of assets                                                                                      |       | —                                     |       | — |   | — |   | (72,965 | ) | (106,271 | ) |
| Change in value  of derivatives                                                                                    |       | —                                     |       | — |   | — |   | (16,114 | ) | — |   |
| Loss on early  retirement of debt                                                                                  |       | (37,991                                    | )          | (221 | ) | — |   | — |   | — |   |
| Net income  (loss)                                                                                                 |       | $                                          | (8,768     | ) | $ | 50,832 |   | $ | 42,060 |   | $ | (127,200 | ) | $ | (209,426 | ) |

 

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(1)   Represents non-gaming revenues, generaland administrative expenses, interest income and loss on lease termination.

 

(2)   Segment EBITDA is used by management tomeasure segment profits and losses and consists of income from segmentoperations plus depreciation and amortization and is calculated beforeallocation of overhead.

 

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** **

**Selected Quarterly FinancialInformation (Unaudited)**

**(in thousands)**

** **
| ** **                             | ** ** | **Mar. 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------|------------|
| **Year  Ended December 31, 2008** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net revenues—Route  operations    |       | $                | 64,619     |             | $          | 63,930            |       | $                | 58,288     |       | $          | 56,708 |   | $ | 243,545 |   |
| Net  revenues—Casino operations   |       |             |       |             |       |              |       |             |       |       |       |
| Nevada                                 |       | 75,057           |       | 75,602           |       | 75,281            |       | 65,873           |       | 291,813    |       |
| Other states                           |       | 30,674           |       | 29,270           |       | 30,628            |       | 28,550           |       | 119,122    |       |
| Net  revenues—Other               |       | 27,778           |       | 35,727           |       | 32,282            |       | 20,822           |       | 116,609    |       |
| Operating income  (loss)               |       | 10,167           |       | (32,768          | )          | 5,868             |       | (76,782          | )          | (93,515    | )          |
| Net loss                               |       | (16,524          | )          | (62,329          | )          | (22,399           | )          | (108,174         | )          | (209,426   | )          |
| **Year  Ended December 31, 2007** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net  revenues—Route operations    |       | $                | 74,749     |             | $          | 71,720            |       | $                | 66,072     |       | $          | 64,341 |   | $ | 276,882 |   |
| Net  revenues—Casino operations   |       |             |       |             |       |              |       |             |       |       |       |
| Nevada                                 |       | 37,814           |       | 83,033           |       | 89,341            |       | 78,870           |       | 289,058    |       |
| Other states                           |       | 30,465           |       | 30,856           |       | 30,784            |       | 27,908           |       | 120,013    |       |
| Net  revenues—Other               |       | 7,386            |       | 28,615           |       | 32,808            |       | 30,178           |       | 98,987     |       |
| Operating income                       |       | 11,464           |       | 12,537           |       | 10,208            | (1)        | (61,144          | )(2)       | (26,935    | )          |
| Net income  (loss)                     |       | (3,253           | )          | 581              |       | (26,682           | )          | (97,846          | )          | (127,200   | )          |
| **Year  Ended December 31, 2006** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net  revenues—Route operations    |       | $                | 90,858     |             | $          | 86,999            |       | $                | 83,707     |       | $          | 85,391 |   | $ | 346,955 |   |
| Net revenues—Casino  operations   |       |             |       |             |       |              |       |             |       |       |       |
| Nevada                                 |       | 21,345           |       | 19,999           |       | 19,950            |       | 20,774           |       | 82,068     |       |
| Other states                           |       | 30,791           |       | 29,511           |       | 31,131            |       | 30,930           |       | 122,363    |       |
| Net  revenues—Other               |       | 1,914            |       | 2,286            |       | 3,309             |       | 3,167            |       | 10,676     |       |
| Operating income                       |       | 26,243           |       | 20,655           |       | 17,905            |       | 15,657           |       | 80,460     |       |
| Net income                             |       | 17,222           |       | 11,286           |       | 8,200             |       | 5,352            |       | 42,060     |       |

----

(1)            Amount includes $3.2 million impairment of leaseacquisition costs.

 

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

 

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

 

None.

 

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

 

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

 

As of the end of the period covered by this report (the “EvaluationDate”), an evaluation was carried out by management, with the participation ofour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures. Based on this evaluation, Company’s management concluded that our disclosurecontrols and procedures are effective as of December 31, 2008.

 

*Internal Control over FinancialReporting.* Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting (as defined in Rule 15d-15(f) underthe Exchange Act) for the Company.  Our internal control over 

 

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financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples in the United States.  Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of any evaluation or effectiveness tofuture periods are subject to risk that controls may become inadequate becauseof changes in conditions or because the degree of compliance with policies orprocedures may deteriorate.

 

As of 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 internal control over financial reporting utilizingcriteria established in*  Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

 

Management believes that the financial statements included in thisreport fairly present, in all material respects, our financial condition,results of operations and cash flows.

 

Based on the evaluation and findings discussed above, the Company’smanagement concluded that internal control over financial reporting waseffective as of December 31, 2008.

 

There has been no change in our internal control over financialreporting during the year ended December 31, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reports.

 

This annual report does not include an attestation report of theCompany’s registered public accounting firm regarding internal control overfinancial reporting.  Management’s report was not subject to theattestation by the Company’s registered public accounting firm pursuant totemporary rules of the SEC that permit the Company to provide onlymanagement’s report in this annual report.

 

**Item9B.  Other Information.**

 

None.

 

**PART III**

 

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

 

The following information is furnished with respect to each member ofthe board of directors, each of whom, unless otherwise indicated, has served asa director continuously since the year set forth below.  Directors areelected annually.  Each director serves until his successor has beenelected and qualified.  Similar information is provided for our executiveofficers.

 

**Directorsand Executive Officers**

 

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

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                                          |
|-----------------------|------------|---------|------------|---------------------------------------------------------------------------------------|
| Timothy P. Herbst     |       | 45      |       | Chairman of the Board  and Executive Vice President                                   |
| Ferenc Szony          |       | 53      |       | President and Chief  Operating Officer                                                |
| Troy D. Herbst        |       | 42      |       | Chief Executive  Officer, Executive Vice President, Secretary, Treasurer and Director |
| Edward J. Herbst      |       | 47      |       | Executive Vice  President and Director                                                |
| Mary E. Higgins       |       | 51      |       | Chief Financial Officer                                                               |
| John N. Brewer        |       | 51      |       | Director                                                                              |
| John F. O’Reilly |       | 63      |       | Director                                                                              |
| Sean Higgins          |       | 44      |       | General Counsel                                                                       |

 

Edward, Timothy and Troy Herbst are brothers.  Until April 30,2008, Edward served as Chairman and Chief Executive Officer.  He is currently on a leave of absence fromhis officer duties for personal reasons. Under the Restructuring, a new officer position for a Chief OperatingOfficer - Gaming will be created, with employment to commence followingapproval of gaming and bankruptcy authorities. In connection with the separation of the casino and slot machine routebusinesses under the Restructuring, the Lockup Agreement provides that theinitial board of directors of Reorganized Herbst Gaming will be selected by theLenders and the initial directors of Slot Co shall be three directors selectedby the THI Parties and one director nominated by the Lenders.  We cannot assure you that we will besuccessful in implementing the Restructuring in the form contemplated by theLockup Agreement, or at all, or what effect the new officers and directors mayhave on the results of operations.

 

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*Timothy P. Herbst* was appointed as Chairman of the Boardon April 30, 2008.  He has served asExecutive Vice President and a Director of our company and its predecessorssince their inception in 1987.  Timothy is a member of our ExecutiveCommittee.  He also serves as a Vice President of Terrible Herbst, Inc.

 

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

 

*Troy D. Herbst* was elected Chief Executive Officer on April 30,2008.  He has served as Executive VicePresident, Secretary, Treasurer and a Director of our company and itspredecessors since their inception in 1987.  Troy is a member of ourExecutive and Audit Committees.  He also serves as a Vice President ofTerrible Herbst, Inc.

 

*Edward J. Herbst* was elected Executive Vice President on April 30,2008.  He previously served as the ChiefExecutive Officer and Chairman of the Board of Directors of our company and itspredecessors from their inception in 1987.  Edward remains a Director ofthe Company.  He is currently on a leaveof absence from his officer duties for personal reasons.  Edward also serves as a Vice President ofTerrible Herbst, Inc. and sits as a member of U.S. Bank of Nevada’sadvisory board of directors.

 

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

 

*John N. Brewer* has served as a Director of our companysince December 2001.  Mr. Brewer is also a member of our AuditCommittee.  Mr. Brewer is a partner with the law firm of KummerKaempfer Bonner Renshaw & Ferrario in Las Vegas, Nevada, where he haspracticed principally in corporate and securities law since its inception in1994.

 

*John F. O’Reilly* has served as a Director of our companysince November 2004.  Mr. O’Reilly is the Chairman and ChiefExecutive Officer of the law firm of O’Reilly Law Group, LLC, in Las Vegas,Nevada, a position which he has held since 1999 and where he has practicedsince its inception in 1977 and also serves as the Chairman and Chief ExecutiveOfficer of the O’Reilly Gaming Group, in Las Vegas, Nevada, which he has servedsince its inception in 1999.  Mr. O’Reilly is also Chairman and anofficer and/or Director of various family-owned business entities and relatedinvestments.  Mr. O’Reilly has served as a Director of Nevada PowerCompany since 1995 and Sierra Pacific Resources and Sierra Pacific PowerCompany since 1999.

 

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

 

**Code of Ethics**

 

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

 

·                    honest and ethical conduct, including theethical handling of actual or apparent conflicts of interest between personaland professional relationships;

 

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

 

·                    compliance with applicable governmentallaws, rules and regulations;

 

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

 

·                    accountability for adherence to the Codeof Ethics.

 

**Committees of our Board of Directors**

 

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

 

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·                    to review reports of our independentpublic accountants;

 

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

 

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

 

·                    to consider selection of independentpublic accountants;

 

·                    to review related party transactions; and

 

·                    to make periodic reports on such mattersto the board of directors.

 

Our Audit Committee is comprised of Messrs. Troy Herbst and JohnBrewer.  Mr. Brewer is the Chairman of the Audit Committee.  Ourboard of directors has determined that Mr. Brewer is qualified as an auditcommittee financial expert as defined by Item 401(h) ofRegulation S-K and is independent under the listing standards of the NewYork Stock Exchange.

 

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

 

**Item11.  Executive Compensation.**

 

**Overviewof Compensation**

 

The Executive Committee, or the “Committee,” of the Board of Directorshas the responsibility for establishing, implementing and monitoring adherenceto the Company’s compensation programs.  The Committee’s goal is toprovide a compensation package that attracts, motivates and retains executivetalent and is designed to align executives’ interest with the Company’scorporate strategies and business objectives.  We refer to our chiefexecutive officer (Troy D. Herbst), or “CEO,” our chief financial officer (MaryE. Higgins), or “CFO,” and our president and chief operating officer (FerencSzony), or “COO,” as well as the other two individuals included in the SummaryCompensation Table (Timothy P. Herbst and Edward J. Herbst), as our “namedexecutive officers” or “NEOs.”  The Committee is comprised of the CEO andtwo other Executive Vice Presidents, all members of which are officers, and theowners, of Herbst Gaming.  During 2008, all executive compensation issueswere reviewed and approved by the entire Board of Directors.

 

We provide compensation to our CEO, CFO and COO primarily throughwritten employment agreements that set forth base compensation, cash bonus,employee benefit plans and perquisites due to such officers.  Prior to2008, our CFO had been employed under an employment agreement that was enteredinto in 2005.  Our COO was appointed to his position as chief operatingofficer in the 2007 fiscal year, upon our completion of the Sands RegentAcquisition, and appointed to his position as president in March 2008. In March 2008 we entered into new employment agreements with each of ourCFO and COO.  Our CEO was newly appointedto his position in April 2008.  Weentered into an employment agreement with our CEO in May 2008.  The new employment agreements executed in March 2008and May 2008 were approved by the entire Board.

 

We also have two annual incentive plans in place.  We have an Executive Officer and Cash BonusPlan (the “Bonus Plan”), which was established in 2001.  There have neverbeen any amounts paid under this plan. The Bonus Plan is available to provide additional incentive-basedcompensation to our Executive Vice Presidents (Timothy P. Herbst, Troy D.Herbst, and Edward J. Herbst) upon the achievement of performance targetsshould the Committee determine to use it. We also have the 2008 Executive Incentive Plan (the “Incentive Plan”),which was established and approved by the full Board of Directors in 2008 toprovide incentive-based compensation to various members of our management team,including two of our NEOs, Mary E. Higgins and Ferenc Szony.

 

Our compensation program is designed to promote and reward leadershipand commitment, in addition to performance improvement, with a focus on growthand productivity to drive financial performance. The main components of ourexecutive compensation program include base salary, annual incentives andbroad-based retirement, health and welfare employee benefits, subject to theterms and conditions of each benefit program.  Our compensation program isdesigned to remain competitive with market practices, which is necessary toattract and retain talented executives. Our compensation program does notinclude an equity component, as our CEO and two other Executive Vice Presidentscollectively own all of the outstanding stock of the Company.

 

In light of the Company’s restructuring efforts, it made certainchanges to its executive compensation in 2008, including entering into newemployment agreements and establishing the Incentive Plan discussed above.  These changes were made in recognition of thecurrent financial position of the Company and the need to substantially improveits financial and operating performance. To this end, the Incentive Plan was designed to incentivize each memberof the Company’s executive management team to perform at his or her highestlevel during 2008 and reward members of the executive management team forincreasing the value of the Company through improved financial performance,among other things.

 

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**Role of the Executive Officers and ofthe Committee in Determining Compensation**

 

Each year the CEO evaluates the performance of the other NEOs and makesrecommendations to the Committee with respect to compensation, includingrecommendations with respect to base salary levels and targets under the BonusPlan, as applicable.  The Committee takes these recommendations intoadvisement, but also conducts its own independent review of the CEO and theother NEOs prior to determining base salary increases and target incentivepayments.  Moreover, the administration of the Bonus Plan and the actualdeclaration of any cash bonus payments under the Bonus Plan must be approved bya committee consisting of not less than two independent directors.

 

**2008 Elements of ExecutiveCompensation**

 

The Company’s 2008 compensation program for executive officers wasprimarily comprised of a base salary, annual incentives and employee benefitsbroadly available to all employees of the Company.

 

**Base Salary**

 

The Company provides our NEOs and other employees with base salary tocompensate them for services rendered during the fiscal year.  Basesalaries are essential for the attraction and retention of talented executivesand are determined consistent with the factors set forth below:

 

·                    industry experience, knowledge andqualifications;

 

·                    salary levels in effect for comparablepositions within the Company’s principal industry marketplace competitors;

 

·                    internal review of the executive’s compensation, bothindividually and relative to other officers;

 

·                    individual performance of the executive ;

 

·                    expected future contributions;

 

·                    historical compensation;

 

·                    ability to impact corporate and/orbusiness unit results; and

 

·                    retention risks.

 

Our CFO’s salary was increased by approximately 35% in March 2008in connection with her new employment agreement.  The increase in basesalary was due to a recognition of the long-time dedication, service,leadership and direction provided to the Company during the prior eightyears.  Our CEO was newly-appointed tohis position as chief executive officer in April 2008 and our COO wasnewly-appointed to his position as president in March 2008.  Therefore, the new employment agreements forour CEO and COO executed in May 2008 and March 2008, respectively,provided for new salaries for new positions, rather than an increase in salaryfor the same officer and position.

 

**AnnualIncentives**

 

*Bonus Plan*.  Our ExecutiveVice Presidents (Timothy P. Herbst, Troy D. Herbst, and Edward J. Herbst) areeligible for incentive-based annual bonuses under the Bonus Plan.  Anypayments to be made under this plan are discretionary and must be approved byour independent directors.  To date, there have been no cash bonuses paidto any NEOs under this plan.

 

*Incentive Plan*.  Mary E.Higgins and Ferenc Szony are eligible for incentive-based annual bonuses underthe Incentive Plan.  The Incentive Planwas established to incentivize the Company’s management team to perform attheir highest levels for 2008, to reward members of the management team forincreasing the value of the enterprise through improved financial performance,to encourage members of the management team to collaborate as a team, and tocompensate those members of the management team whose workloads have andcontinue to increase substantially due to the Company’s financial restructuringand turnaround efforts.  Target paymentsunder the Incentive Plan for Ms. Higgins and Mr. Szony was 75% oftheir respective base salaries.  TheIncentive Plan is comprised of EBITDA performance related targets, a costcontrol target, a workload component, as well as a list of “significantmilestones” defined by the Company.  Thegoals under the Incentive Plan constitute confidential information that, ifdisclosed, could cause competitive harm to the Company.

 

**Severance Benefits**

 

The employment agreements with Troy D. Herbst, Mary E. Higgins andFerenc Szony provide that in the event that we choose to terminate theexecutive’s employment for any reason other than “Cause” (as defined below inthe “Potential Payments Upon Termination or Change in Control” section), theexecutive will receive a severance payment equal to one year’s salary. The 

 

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Committee providesthis severance benefit because it believes that it is important for both recruitmentand retention purposes to provide certain NEO’s with some measure of financialsecurity in the event of an involuntary termination.

 

**OtherElements of Compensation**

 

In order to attract, retain and pay market levels of compensation, weaim to provide benefits to our NEOs that are consistent with marketpractices.  These market practices werereviewed based on a survey of current compensation trends in the market.  The current market practices includebroad-based retirement, health and welfare employee benefits, subject to theterms and conditions of each benefit program.  Our NEOs are eligible toparticipate in these benefits on the same basis as other full-timeemployees.  In addition, the Company provides each NEO with an automobile.  This perquisite is provided because ourSouthern Nevada properties are geographically distant from one another and thecost represents a small fraction of the total compensation of each NEO. The value of the automobile is shown in the “All Other Compensation” column inthe Summary Compensation Table below. The Compensation Committee periodically reviews the perquisites that itprovides, including the cost to the Company of providing such perquisites.

 

**FISCAL YEAR 2008 SUMMARY COMPENSATIONTABLE**

 

The following table sets forth the total compensation awarded, paid toor earned by the Company’s Chief Executive Officer, Chief Financial Officer andthe next three most highly compensated executive officers during 2008.

 
| **Name and Principal Position**                     | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Incentive Plan Compensation  ($)(1)** | ** ** | **All Other  Compensation ($)** | ** ** | **Total  ($)** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|-----------------|------------|-----------------------------------------|------------|---------------------------------|------------|----------------|------------|
| Troy D. Herbst,*Chief Executive Officer, Executive Vice President* |       | 2008     |       | 811,487         |       |                                    |       |                            |       | 811,487        |       |
| * *                                                           | * *   | * * | * *   | * *        | * *   | * *                                | * *   | * *                        | * *   | * *       | * *   |
| Mary Higgins,*Chief Financial Officer*                             |       | 2008     |       | 500,000         |       | 112,500                                 |       | 7,375                           |       | 619,875        |       |
| * *                                                           | * *   | * * | * *   | * *        | * *   | * *                                | * *   | * *                        | * *   | * *       | * *   |
| Timothy P.  Herbst*Chairman, Executive Vice President*             |       | 2008     |       | 551,714         |       |                                    |       |                            |       | 551,714        |       |
| * *                                                           | * *   | * * | * *   | * *        | * *   | * *                                | * *   | * *                        | * *   | * *       | * *   |
| Edward J. Herbst  *Executive Vice President*                       |       | 2008     |       | 714,072         |       |                                    |       |                            |       | 714,072        |       |
| * *                                                           | * *   | * * | * *   | * *        | * *   | * *                                | * *   | * *                        | * *   | * *       | * *   |
| Ferenc Szony *President, Chief Operating Officer*                  |       | 2008     |       | 489,560         |       | 73,434                                  |       |                            |       | 562,494        |       |

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(1)          Represents bonus payments made to Ms. Higginsand Mr. Szony under the Incentive Plan.

 

**GRANTS OF PLAN-BASED AWARDS TABLE**

 
| ** **                                        | ** ** | **Estimated Future Payouts Under Non-Equity Incentive Plan Awards** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Name and Principal Position**    | ** ** | **Threshold ($)**                                                   | ** ** | **Target  ($)** | ** ** | **Maximum  ($)** | ** ** |
| Mary Higgins,*Chief Financial Officer*            |       | $                                                                   | 118,125    |   | $ | 393,750 |   | $ | 472,502 |   |
| * *                                          | * *   | * *                                                            | * *   | * * | * * | * * | * * |
| Ferenc Szony *President, Chief Operating Officer* |       | $                                                                   | 78,750     |   | $ | 393,750 |   | $ | 502,032 |   |

 

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**Narrative Disclosure to the SummaryCompensation Table and Grants of Plan-Based Awards Table**

 

*CEO Employment Agreement*

 

On May 14, 2008, we entered into a new employmentagreement with Troy D. Herbst, who was appointed our Chief Executive Officer onApril 30, 2008.  Pursuant to thisemployment agreement, Mr. Herbst receives annual base compensation of$973,800, which may be increased annually by five percent.  The employment agreement commenced May 14,2008 and the initial term will end December 31, 2009.  It will automatically renew for successiveone-year periods unless sooner terminated, or unless either party notifies theother in writing at least 60 days prior to the date the employment agreement isscheduled to expire.

 

*Employment Agreements of Other Named Executive Officers*

 

In March 2008, we entered into a new employment agreement withMary E. Higgins, our Chief Financial Officer, in which we agreed to pay her anannual base salary of $500,000, plus a discretionary bonus of up to 30% of hersalary per year.  Ms. Higgins’ contract expires on December 31,2009.  In addition, we entered into a newemployment agreement with Ferenc Szony, our President and COO in March 2008. His employment agreement provides for an annual base salary of $500,000, whichmay be increased annualy by five percent, and expires on December 31,2009.  Both Ms. Higgins’ and Mr. Szony’s agreementsautomatically renew for successive one-year periods unless sooner terminated orunless either party to the respective agreements notifies the other in writingat least 60 days prior to the date the respective agreement is scheduled toexpire.  Pursuant to the terms of the Incentive Plan described above, if Ms. Higginsor Mr. Szony earns an annual incentive payment under the Incentive Plan,such payment shall be in lieu of their bonus payments per their employmentagreements.

 

The Company does not currently have an employment agreement with itsother NEOs, Timothy P. Herbst and Edward J. Herbst.

 

**POTENTIALPAYMENTS UPON TERMINATION OR CHANGE IN CONTROL**

 

The Company’s employment agreements with Troy D. Herbst, Mary E.Higgins and Ferenc Szony provide that in the event that we choose to terminatethe executive’s employment for any reason other than “Cause,” the executivewill receive a severance payment equal to one year’s salary.  Our other NEOs, Timothy P. Herbst and EdwardJ. Herbst, do not have termination benefits. “Cause” is defined as: (i) the conviction of, or judgment against,the executive by a civil or criminal court of competent jurisdiction for afelony or any other offense involving embezzlement or misappropriation offunds, or any act of moral turpitude, dishonesty or lack of fidelity; (ii) theindictment of the executive by a state or federal grand jury of competentjurisdiction or the filing of a criminal complaint or information, for a felonyor any other offense involving embezzlement or misappropriation of funds, orany act of moral turpitude, dishonesty or lack of fidelity; (iii) theconfession by the executive of embezzlement or misappropriation of funds, orany act of moral turpitude, dishonesty or lack of fidelity; (iv) thepayment (or, by the operation solely of the effect of a deductible, the failureof payment) by a surety or insurer of a claim under a fidelity bond issued forthe benefit of the Company reimbursing the Company for a loss due to thewrongful act, or wrongful omission to act, of the executive; (v) thedenial, revocation or suspension of a license, qualification or certificate ofsuitability to the executive by any of the Gaming Authorities (as defined inthe employment agreements); and (vi) any action or failure to act by theexecutive that the Company reasonably believes, as a result of a communicationor action by the Gaming Authorities or on the basis of consultations with itsgaming counsel and/or other professional advisors, will likely cause any of theGaming Authorities to:  (A) fail to license, qualify and/or approvethe Company to own and operate a gaming business; (B) grant any suchlicensing, qualification and/or approval only upon terms and conditions thatare unacceptable to the Company; (C) significantly delay any suchlicensing, qualification and/or approval process; or (D) revoke or suspendany existing license.

 

Upon a termination without Cause on December 31, 2008, Mr. TroyHerbst, Ms. Higgins and Mr. Szony would have been entitled to receivethe following amounts, respectively:  $973,000, $500,000, and $500,000. All other amounts payable or other benefits (such as accrued vacation, vestedamounts payable under the Company’s 401(k) plan, etc.) are the same as forother salaried employees.

 

**FISCAL YEAR 2008 DIRECTORCOMPENSATION**

 

The following table provides information related to the compensation ofour non-employee directors during fiscal 2008.

 
| **Name**              | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------|------------|---------------------|------------|
| John F. O’Reilly |       | $                                                                   | 112,750    | (1)                 | $          | 112,750 |   |
| John N. Brewer        |       | $                                                                   | 120,250    | (2)                 | $          | 120,250 |   |

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(1)   $10,000 of this amount wasfor attendance at two Board meetings.

 

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(2)          $10,000 of this amount was for attendanceat two Board meetings and $6,000 of this amount was for meetings of the auditcommittee.

 

Directors who are employees of the Company do not receive anyadditional compensation for their services as a director.  Effective as ofJuly 1, 2008, non-employee directors receive compensation in the amount of$10,000 per month inclusive of all board and committee meetings.  Prior to July 1, 2008, our independentdirectors received compensation in the amount of $25,000 per year for servingon our board plus $5,000 per board meeting attended and $1,500 per committeemeeting attended.  In addition, ourindependent directors are reimbursed for expenses incurred in attending boardor committee meetings and while representing the Company in conducting certainbusiness.

 

**CompensationCommittee Interlocks and Insider Participation**

 

**Relationships and Independence of theCompensation Committee Members**

 

During the fiscal year ended December 31, 2008, Edward Herbst,Timothy Herbst and Troy Herbst were members of the Executive Committee of ourboard of directors.  Our executive compensation is determined by theExecutive Committee, all members of which are officers, and the owners, ofHerbst Gaming.

 

**Compensation Committee Report**

 

The Compensation Committee reviewed the Compensation Discussion and Analysisand discussed its contents with Company management.  Based on the reviewand discussions, the Committee has recommended that this CompensationDiscussion and Analysis be included in this annual report.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Not Applicable.

 

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

 

The securities entitled to vote consist of shares of our common stock,no par value, with each share entitling its owner to one vote.  Commonstock is the only outstanding class of voting securities authorized by ourarticles of incorporation.  The number of outstanding shares of commonstock as of December 31, 2008 was 300.

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

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

 

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

 

**Item13.  Certain Relationships and Related Transactions.**

 

We believe that all of the transactions mentioned below are on terms atleast as favorable to us as would have been obtained from an unrelated thirdparty.  The Lockup Agreement provides forthe modification of certain related party agreements.  Except as described below and in the LockupAgreement, all terms and provisions in the Company’s related party agreementsshall continue to be valid and enforceable under the proposedRestructuring.  The Lockup Agreement alsoprovides for new non-competition agreements to be entered into by each of JerryE. Herbst, Timothy P. Herbst, Troy D. Herbst and Edward J. Herbst in favor ofSlot Co or Reorganized Herbst Gaming. Such agreements are to expire on the earlier of (i) the repaymentin full of the new loans to Slot Co pursuant to the Restructuring and (ii) December 31,2016.  We cannot assure you that theRestructuring will be approved or, if approved, implemented.

 

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* *

*General. *Edward Herbst, Timothy Herbst and TroyHerbst are brothers and are officers and directors of Herbst Gaming, Inc.and its wholly-owned subsidiaries.  In addition, they are officers anddirectors of Terrible Herbst, Inc. and Berry-Hinckley Industries. There is no cross ownership between Herbst Gaming, Inc. and eitherTerrible Herbst, Inc. or Berry-Hinckley Industries Inc. TerribleHerbst, Inc. is owned solely by Jerry and Maryanna Herbst, the parents ofthe Herbst brothers.  Sean Higgins, our general counsel, is also thegeneral counsel of Berry-Hinckley Industries.

 

*Slot route contract with TerribleHerbst, Inc. *Pursuant to two gaming devices license agreements,we rent space forcertain slot machine route operations in convenience stores owned by TerribleHerbst, Inc., a corporation in which our owners are officers and which isowned by the father of our owners.  Rent expense of $6,623,000, $6,954,000and $7,114,000 was incurred under this agreement for the years ended December 31,2006, 2007 and 2008, respectively, for the exclusive placement of slot machinesin Terrible Herbst convenience store locations.  The Company’s contractcovering the majority of the Terrible Herbst stores expires in 2014.  A second contract, covering four TerribleHerbst stores, expires in 2009 and may be extended at our option for oneadditional term of five years.  Under theRestructuring, these gaming devices license agreements would be modified to fixthe monthly fee per slot machine at the current rate through the new expirationdate of December 31, 2014 and eliminate any per location minimum payment.

 

*Other arrangements with TerribleHerbst, Inc. and Berry-Hinckley Industries. *We have also entered into a servicing arrangement withTerrible Herbst pursuant to which we provide accounting and administrativeservices related to the collection of daily deposits from Terrible Herbstconvenience stores.  We also provide personnel to Terrible Herbst tocount, maintain and safeguard large amounts of coin and currency. Terrible Herbst reimburses our expenses in providing these services. Under this servicing arrangement, we were paid approximately $205,800 forservices rendered for the year ended December 31, 2006, $246,000 in 2007and $246,000 in 2008.

 

We have entered into a master ATM agreement with Terrible Herbstpursuant to which we are granted the exclusive right to install and maintainATMs in Terrible Herbst convenience store locations.  This agreement expires in 2010, subject toautomatic renewal for consecutive and repetitive terms of one year, unless weor Terrible Herbst notify the other of non-renewal.  Under the Restructuring, the term of thisagreement will be modified to expire December 31, 2016.

 

We have entered into a nonexclusive trademark and license agreementwith Terrible Herbst for the use of the Terrible Herbst brand name and itscowboy logo which extends through 2011.  The term of the agreement may beextended at our option for five additional successive terms of five yearseach.  Pursuant to this trademark and license agreement, we paidapproximately $1,483,000, $1,557,000 and $1,649,000 to Terrible Herbst in theyears ended December 31, 2006, 2007 and 2008, respectively.  Under the Lockup Agreement, this trademarklicense agreement would be modified as follows: (i) expiration date of December 31,2016, terminable by Reorganized Herbst Gaming after December 31, 2013 uponthe payment of an early termination fee of $1 million, (ii) license fee of$1.73 million per year, to be paid in equal monthly installments and (iii) one-timepayment of $1.5 million payable by the Company on the one-year anniversary ofthe “Effective Date” of the bankruptcy, as defined in the Lockup Agreement.

 

The Company entered into a shared services agreement with TerribleHerbst and Berry-Hinckley Industries in January 2008 whereby (i) TerribleHerbst and Berry-Hinckley Industries reimburses the Company for servicesperformed by certain employees of the Company for Terrible Herbst andBerry-Hinckley Industries as requested from time to time, consisting primarilyof the day-to-day functions of Terrible Herbst and Berry-Hinckley Industries,and (ii) effective as of January 1, 2009, pursuant to an amended andrestated shared services agreement entered into on January 16, 2009, theCompany reimburses Terrible Herbst for services performed by certain employeesof Terrible Herbst for the Company as requested from time to time, consistingprimarily of maintaining the price books for certain of the Company’s servicestation locations and providing management oversight of the service stationoperations at the Primm Properties. Under this agreement, the Company received approximately $583,000 forservices rendered during the year ended December 31, 2008 from TerribleHerbst and $102,000 for services from Berry-Hinckley Industries.  In 2009, payment for services rendered by theCompany’s employees will be reduced by amounts due for services rendered forthe Company’s by Terrible Herbst’s employees.

 

The Company entered into an advertising purchasing agreement withTerrible Herbst in January 2009 pursuant to which the Company purchasesadvertising time on Terrible Herbst’s network of gas pump and interior televisionscreens for $30,000 per month during the twelve months commencing January 1,2009.  This agreement replaced the prioradvertising purchasing agreement between the Company and Terrible Herbst thatexpired on December 31, 2008.  Underthe Restructuring, the term of this agreement will be modified to expire oneyear following the Substantial Consummation Date, with continuous one-yearextension options exercisable by Reorganized Herbst Gaming through December 31,2016, and the monthly fee will be fixed at $30,000 per month through theexpiration date.

 

*Lease agreements. *Pursuant to a lease agreement thatexpires in 2067, including renewal periods, we lease the real property on whichour corporate headquarters is located from The Herbst Family Limited Partnership II,or Herbst FLP II.  The general partners of Herbst FLP II areJerry and Maryanna Herbst.  In each of 2006, 2007 and 2008 we paid$172,992 under this lease.  Under theRestructuring, this lease would be assigned by the Company to Slot Co, with aterm expiring December 31, 2016. Pursuant to a lease agreement that expires in 2026, including renewalperiods, we lease the real property on which Terrible’s Town Casino in Pahrumpis located from The Herbst Family Limited Partnership.  The lease requiresmonthly rental payments of $15,000.  In 2006, we paid $165,000 under thislease.  In 2007, we paid 

 

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$180,000 underthis lease.  In 2008, we paid $180,000under this lease.  Under theRestructuring, this lease would be assigned by the Company to ReorganizedHerbst Gaming and modified to expire December 31, 2016, with no renewaloptions and a $15,000 monthly rental fee. We lease land and office space in certain of our facilities to TerribleHerbst under various lease agreements with terms ranging from month-to-month to20 years.  Monthly rental income is $63,500.  In 2006 we receivedrental income of $641,000 under these leases.  In 2007 we received rentalincome of $348,000 under these leases. In 2008, we received rental income of $348,000 under these leases.  Three of these lease agreements will bemodified pursuant to the Restructuring: (i) the sublease to TerribleHerbst of the service station at Terrible’s Town Casino in Pahrump will beassigned to Reorganized Herbst Gaming, the monthly rental fee will be fixed atits current amount through expiration and the lease will expire on December 31,2016; (ii) the lease to Terrible Herbst of the service station at Terrible’sLakeside Casino in Pahrump will be assigned to Reorganized Herbst Gaming, themonthly rental fee will be fixed at its current amount through expiration andthe lease will expire December 31, 2016; and (iii) the sublease toTerrible Herbst of the service station located on the real property on whichthe corporate headquarters is located will be assigned to Slot Co.

 

We lease the real property on which Terrible’s Searchlight Casino inSearchlight is located from Terrible Herbst for $15,000 per month, pursuant toa lease agreement entered into on June 30, 2002 that expires in 2022, withoptions to renew the lease for five additional successive terms of ten yearseach, contingent on Terrible Herbst renewing its lease of the realproperty.  Terrible Herbst leases that real property from an unrelatedthird party, pursuant to a lease agreement entered into on June 30, 2002that expires in 2042, including renewal periods.  In each of 2006, 2007and 2008, we paid $180,000 under this lease. Under the Restructuring, this lease would be assigned to ReorganizedHerbst Gaming.

 

We lease a warehouse located in Las Vegas, Nevada for our employmentcenter and purchasing departments from the Herbst’s Grandchildren’sTrust.  The lease began in November 2002 and requires payments of$46,500 per month through November 2012.  In 2006, we incurred rentexpense of $558,000 under this lease. In 2007 this expense was $560,500, whilein 2008 it was $555,500.  Under the Restructuring,this agreement would be assigned by the Company to Slot Co with a term expiringDecember 31, 2016.

 

*Related-party transactions. *Mr. Higgins is our general counsel,the general counsel of Terrible Herbst and the brother of Mary E. Higgins, ourchief financial officer.  Mr. Higgins received a salary for servicesrendered to us in 2006, 2007 and 2008 of $625,900, $658,700 and $638,500,respectively.

 

In 2003, we entered into a slot route contract to install, operate andservice slot machines at a tavern owned by HIGCO, Inc., a company ownedand operated by Mr. Higgins and two of his brothers, G. MichaelHiggins and Kevin J. Higgins.  Pursuant to this revenue-sharing contract,HIGCO, Inc. paid us $154,200 in 2006, $147,500 in 2007 and $182,500 in 2008.

 

In 2004, ETT entered into a slot route contract with SamCon, Inc.,a company owned and operated by Mr. Higgins, to install, operate andservice slot machines at a new location.  Terms of this revenue-sharingcontract are similar to the terms of the contract we entered into with HIGCO in2003.  Pursuant to this revenue-sharing contract, SamCon, Inc. paidETT $21,100 in 2006, $0 in 2007 and $72,700 in 2008.

 

In 2005, ETT entered into a slot route contract to install, operate andservice slot machines at a tavern owned by Prescott’s Bar LLC, a company ownedand operated by Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, oneof the owners of the Company.  Pursuant to this revenue-sharing contract,Prescott’s paid ETT $52,800 in 2006, $105,700 in 2007 and $94,900 in 2008.

 

The amount due from related party balance includes $930,000 and$899,000 due from employees at December 31, 2007 and 2008, respectively.The balances are charged interest at varying rates and have terms ranging fromdue on demand to nine years.

 

John N. Brewer, a member of our board of directors, is a partner withKummer Kaempfer Bonner & Renshaw.  We retained Kummer KaempferBonner & Renshaw as outside legal counsel through December 31,2004, and Kummer Kaempfer Bonner & Renshaw has received fees for legalservices in the amount of $5,673, $5,160 and $5,558 for 2006, 2007 and 2008,respectively.

 

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

 

Insofar as indemnification for liabilities arising under the SecuritiesAct may be permitted to directors, officers or controlling persons of theregistrants pursuant to the foregoing provisions, we have been informed that inthe opinion of the SEC such indemnification is against public policy asexpressed in the Securities Act and is, therefore, unenforceable.

 

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**Item14.****   ****Principal AccountantFees and Services****.**

 

The aggregate accounting fees billed and services provided by ourprincipal accountants for the years ended December 31, 2007 and 2008 areas follows:

 
| ** **             | ** ** | **2007** | ** ** | **2008** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit fees(1)          |       | $        | 497,074    |     | $          | 1,113,930 |   |
| Audit-related  fees(2) |       | 714,250  |       | —   |       |
| Tax fees               |       | —   |       | —   |       |
| All other fees         |       | 55,236   |       | 129,854  |       |
| Total fees             |       | $        | 1,266,560  |     | 1,243,784  |   |
|                        |            |          |            |          |            |  |  |

----

(1)          Represents the aggregate feesDeloitte & Touche LLP billed us in each of the last two fiscal yearsfor professional services for the audits of our annual financial statements andreview of financial statements included in our periodic filings with the SECand for services that are normally provided by Deloitte & Touche LLPin connection with those filings.

 

(2)          Represents the aggregate fees Deloitte &Touche LLP billed us in each of the last two fiscal years for assurance andrelated services that are reasonably related to the performance of the audit.

 

It is our practicethat all services provided to us by our independent auditors be pre-approved eitherby the Audit Committee or by the Chairman of the Audit Committee pursuant toauthority delegated by the Audit Committee.  No part of the independentauditor services related to the audit fees, audit-related fees, tax fees, orother 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.

 

**PART IV**

 

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

 

(a)                                  Financial Statements

 

1.                                  **List of FinancialStatements**

 

Included in Part II of this report:

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Financial Statements

 

Consolidated Balance Sheets As of December 31, 2007 and 2008

 

Consolidated Statements of Operations For the years ended December 31,2006, 2007 and 2008

 

Consolidated Statements of Stockholders’ Equity(Deficiency) For the years ended December 31, 2006, 2007 and 2008

 

Consolidated Statements of Cash Flows For the years ended December 31,2006, 2007 and 2008

 

Notes to Consolidated Financial Statements

 

2.                                       **Financial StatementsSchedules**

 

All schedules are omitted given the absence of conditions under whichthey are required to be included or because the required information isincluded in the financial statements or notes thereto.

 

(c)                                  Exhibits

 

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

 

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·                  Should not in all instances be treated as categoricalstatements of fact, but rather as a way of allocating the risk to one of theparties if those statements prove to be inaccurate;

 

·                  Have been qualified by disclosures that were made tothe other party in connection with the negotiation of the applicable agreement,which disclosures are not necessarily reflected in the agreement;

 

·                  May apply standards of materiality in a way thatis different from what may be viewed as material to you or other investors; and

 

·                  Were made only as of the date of the applicableagreement or such other date or dates as may be specified in the agreement andare subject to more recent developments.

 

Accordingly, these representations and warranties may not describe theactual state of affairs as of the date they were made or at any othertime.  Additional information about theCompany may be found elsewhere in this annual report and the Company’s otherpublic filings, which are available without charge through the SEC’s website athttp://www.sec.gov and the Company’s website at http://www.herbstgaming.com.

 
| **Index No.** | ** ** | **Description**                                                                                                                                                                                                |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                                     |
| 2.1(3)             |       | Asset Purchase  Agreement between Anchor Coin and Herbst Gaming, Inc. and Market  Gaming, Inc. and E-T-T, Inc. dated as of November 21, 2002.                                              |
|               |       |                                                                                                                                                                                                           |
| 2.2(3)             |       | First Amendment to  Asset Purchase Agreement by and among Anchor Coin and Herbst  Gaming, Inc. and Market Gaming, Inc. and E-T-T, Inc. dated as  of January 14, 2003.                      |
|               |       |                                                                                                                                                                                                           |
| 2.3(5)             |       | Asset Purchase and Sale  Agreement, dated July 20, 2004, made by and between Mark Twain Casino,  L.L.C. and Herbst Gaming, Inc.                                                                      |
|               |       |                                                                                                                                                                                                           |
| 2.4(5)             |       | Asset Purchase and Sale  Agreement, dated July 20, 2004, made by and between St. Joseph  Riverboat Partners and Herbst Gaming, Inc.                                                             |
|               |       |                                                                                                                                                                                                           |
| 2.5(5)             |       | Asset Purchase and Sale  Agreement, dated July 20, 2004, made by and between Southern Iowa Gaming  Company and Herbst Gaming, Inc.                                                                   |
|               |       |                                                                                                                                                                                                           |
| 2.6(7)             |       | Amendment to Asset  Purchase and Sale Agreement, made by and between Mark Twain Casino, L.L.C.  and Herbst Gaming, Inc. dated as of December 2004.                                                   |
| ** **         | ** ** | ** **                                                                                                                                                                                                     |
| 2.7(7)             |       | Amendment to Asset  Purchase and Sale Agreement, made by and between St. Joseph Riverboat  Partners and Herbst Gaming, Inc. dated as of December 2004.                                          |
|               |       |                                                                                                                                                                                                           |
| 2.8(7)             |       | Amendment to Asset  Purchase and Sale Agreement, made by and between Southern Iowa Gaming Company  and Herbst Gaming, Inc. dated as of December 2004.                                                |
|               |       |                                                                                                                                                                                                           |
| 2.9(7)             |       | Second Amendment to  Asset Purchase and Sale Agreement made by and between Southern Iowa Gaming  Company and Herbst Gaming, Inc., dated as of January 25, 2005.                                      |
|               |       |                                                                                                                                                                                                           |
| 2.10(9)            |       | Agreement and Plan of  Merger, dated as of May 16, 2006, by and among The Sands Regent, Herbst  Gaming, Inc. and HGI-Casinos, Inc.                                                              |
|               |       |                                                                                                                                                                                                           |
| 2.11(10)           |       | Amendment No. 1 to  the Agreement and Plan of Merger among The Sands Regent, Herbst  Gaming, Inc. and HGI-Casinos, Inc. dated as of August 24, 2006                                        |
|               |       |                                                                                                                                                                                                           |
| 2.12(11)           |       | Purchase Agreement,  dated as of October 31, 2006, by and among New York-New York  Hotel & Casino, LLC, PRMA Land Development Company, The Primadonna  Company LLC, and Herbst Gaming, Inc. |

 

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| 3.1(1)     |       | Articles of  Incorporation of Herbst Gaming, Inc.                                                                                                                                                                                            |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                              |
| 3.2(2)     |       | By-laws of Herbst  Gaming, Inc.                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                              |
| 4.1(6)     |       | Indenture dated  November 22, 2004 by and among Herbst Gaming, Inc., the guarantors  identified therein and U.S. Bank National Association, as trustee, relating  to 7% Senior Subordinated Notes due 2014.                             |
|       |       |                                                                                                                                                                                                                                              |
| 4.2(6)     |       | Specimen Form of  7% Senior Subordinated Notes due 2014 (included as part of the Indenture at  Exhibit 4.1).                                                                                                                            |
|       |       |                                                                                                                                                                                                                                              |
| 4.3(5)     |       | Indenture dated  June 11, 2004 by and among Herbst Gaming, Inc., the guarantors  identified therein and U.S. Bank National Association, as trustee, relating  to 81/8% Senior Subordinated Notes due 2012.                              |
|       |       |                                                                                                                                                                                                                                              |
| 10.1(1)    |       | Trademark License  Agreement dated August 24, 2001 by and between Herbst Gaming, Inc.  and Terrible Herbst, Inc.                                                                                                                   |
|       |       |                                                                                                                                                                                                                                              |
| 10.2++ (5) |       | Gaming Devices License  Agreement dated October 26, 2004 by and between The Vons  Companies, Inc. and Market Gaming, Inc.                                                                                                          |
|       |       |                                                                                                                                                                                                                                              |
| 10.3(1)    |       | Letter Agreement dated  May 31, 2006 among Albertson’s, Inc., SUPERVALU, Inc., AB  Acquisition LLC and Cardivan Company.                                                                                                      |
|       |       |                                                                                                                                                                                                                                              |
| 10.4++(1)  |       | Gaming License  Agreement dated as of June 2, 2006 among Cardivan Company, Nevada CVS  Pharmacy, L.L.C., Henderson CVS, L.L.C., Desert Eastern CVS, L.L.C., Maryland  Parkway CVS, L.L.C., CVS 2989 Las Vegas, L.L.C. and Senip CVS, L.L.C.* |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                        |
| 10.5+(1)   |       | License Agreement dated  April 24, 1997 between American Drug Stores, Inc. and Cardivan  Company.                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                              |
| 10.6+(1)   |       | License Agreement dated  April 24, 1997 between American Drug Stores, Inc. and Corral  United, Inc. II-13                                                                                                                          |
|       |       |                                                                                                                                                                                                                                              |
| 10.7+(1)   |       | License Agreement dated  March 12, 1999 between Rite Aid Corporation and Cardivan Company.                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                              |
| 10.8+(1)   |       | First Amendment to  Cardivan License Agreement dated March 27, 2000 between Rite Aid  Corporation and Cardivan Company.                                                                                                                      |
|       |       |                                                                                                                                                                                                                                              |
| 10.9+(1)   |       | License Agreement dated  March 12, 1999 between Rite Aid Corporation and Corral Coin, Inc.                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                              |
| 10.10+(1)  |       | First Amendment to  Corral Coin License Agreement dated March 27, 2000 between Rite Aid  Corporation and Corral Coin, Inc.                                                                                                              |
|       |       |                                                                                                                                                                                                                                              |
| 10.11+(1)  |       | Gaming Devices License  Agreement dated December 20, 1999 by and between Terrible  Herbst, Inc. and E-T-T, Inc.                                                                                                                    |
|       |       |                                                                                                                                                                                                                                              |
| 10.12(1)   |       | Amendment to Gaming  Device License Agreement dated May , 2001 by and between  E-T-T, Inc. and Terrible Herbst, Inc.                                                                                                               |
|       |       |                                                                                                                                                                                                                                              |
| 10.13+(1)  |       | Agreement dated  May 1, 1998 by and between Kmart Corporation and Cardivan Company.                                                                                                                                                          |

 

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| 10.14+(1)  |       | License Agreement dated  April 24, 1997 between Lucky Stores, Inc. and Cardivan Company.                                                                                                                                                                     |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                   |
| 10.15+(4)  |       | Lease and Sublease  Agreement dated July 28, 1993, by and between Smith’s Food & Drug  Centers, Inc. and Anchor Coin, as amended.                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.16(4)   |       | Hold Harmless Agreement  dated as of September 2, 1993 executed by Anchor Coin in favor of  Smith’s Food & Drug Centers, Inc.                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.17+(4)  |       | Letter Agreement and  Consent to Assignment dated January 16, 2003.                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.18(1)   |       | Lease Agreement dated  July 1, 1997 by and between The Herbst Family Limited Partnership II and  E-T-T Enterprises, L.L.C.                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.19(1)   |       | Lease Agreement dated  July 1, 1996 by and between The Herbst Family Limited Partnership and E-T-T, Inc.                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.20(1)   |       | Lease extension dated  April 30, 2001 between The Herbst Family Limited Partnership and  E-T-T, Inc.                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.21(1)   |       | Lease dated  September 3, 1993 between The 1993 Samuel Josephson Revocable Family  Trust and Phoenix Associates.                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.22(1)   |       | Agreement for Sale  dated August 1, 1995 between Phoenix Associates and Market  Gaming, Inc.                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                             |
| 10.23(4)   |       | Lease Agreement dated  November 27, 2002 by and between Herbst Grandchildren’s Trust and Herbst  Gaming, Inc.                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.24(4)   |       | Lease dated June 2002  by and between Centennial Acquisitions, LLC and Terrible Herbst, Inc.                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.25(4)   |       | Amendment to Lease  dated July 30, 2002 by and between Centennial Acquisitions, LLC and  Terrible Herbst, Inc.                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.26(4)   |       | Lease Agreement dated  July 1, 2002 by and between Terrible Herbst, Inc. and  E-T-T, Inc.                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.27(23)  |       | Amendment No. 5  and Second Forbearance and Standstill Agreement dated as of November 10,  2008 by and among Herbst Gaming, Inc., Wilmington Trust Company, each  lender party thereto and the Subsidiaries of Herbst Gaming, Inc. party  thereto. |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.28(18)  |       | Employment Agreement  with Mary E. Higgins dated March 7, 2008.                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.29(1)   |       | Form of Executive  Compensation and Bonus Plan.                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.30(4)   |       | Code of Ethics.                                                                                                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.31(13)  |       | Second Amended and Restated  Credit Agreement dated as of January 3, 2007 by and among Herbst  Gaming, Inc., Bank of America, N.A., as administrative agent and the  other lending parties thereto.                                                          |
|       |       |                                                                                                                                                                                                                                                                   |
| 10.32 (14) |       | Gold Ranch Casino  Lease, dated as of December 27, 2001, by and between Last  Chance, Inc., Prospector Gaming Enterprises, Inc. and Target  Investments, L.L.C.                                                                                         |

 

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

 

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| 10.48(21) |   | Amendment No. 4  and Forbearance and Standstill Agreement dated as of May 15, 2008 by and  among Herbst Gaming, Inc., Wilmington Trust Company, each lender party  thereto and the Subsidiaries of Herbst Gaming, Inc. party thereto.                                            |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                 |
| 10.49(22) |   | Amendment to Amendment  No. 4 and Forbearance and Standstill Agreement Effective dated as of  September 30, 2008 by and among Herbst Gaming, Inc., Wilmington  Trust Company and the Subsidiaries of Herbst Gaming, Inc. party thereto.                                          |
|      |   |                                                                                                                                                                                                                                                                                                 |
| 10.50(24) |   | Letter agreement dated  March 9, 2009 by and among the Company, the Company’s subsidiaries,  consenting lenders under the amended Credit Agreement, Edward J. Herbst,  Timothy P. Herbst, Troy D. Herbst, Terrible Herbst, Inc. and certain  affiliates of Terrible Herbst, Inc. |
|      |   |                                                                                                                                                                                                                                                                                                 |
| 12.1*     |   | Computation of Ratio of  Earnings to Fixed Charges.                                                                                                                                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                 |
| 21.1(19)  |   | Subsidiaries of Herbst  Gaming, Inc.                                                                                                                                                                                                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                 |
| 31.1*     |   | Certification of Troy  D. Herbst under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                 |
| 31.2*     |   | Certification of Troy  D. Herbst under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                 |
| 32.1*     |   | Certifications of Troy  D. Herbst and Mary E. Higgins pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                               |

----

| +      |   | Confidential Treatment  for a portion of this document has been granted pursuant to Rule 406  under the Securities Act.  The omitted portions have been separately  filed with the Commission.   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                       |
| ++     |   | Confidential Treatment  for a portion of this document has been requested pursuant to Rule 406  under the Securities Act.  The omitted portions have been separately  filed with the Commission. |
|   |   |                                                                                                                                                                                                       |
| (1)    |   | Incorporated herein by  reference from our registration statement on Form S-4 (SEC No. 33-71094),  Part II, Item 21.                                                                   |
|   |   |                                                                                                                                                                                                       |
| (2)    |   | Incorporated herein by  reference from our quarterly report on Form 10-Q filed with the SEC on November 14,  2002.                                                                               |
|   |   |                                                                                                                                                                                                       |
| (3)    |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on March 10,  2003.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (4)    |   | Incorporated herein by  reference from our annual report on Form 10-K filed with the SEC on March 24,  2003.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (5)    |   | Incorporated herein by  reference from our registration statement on Form S-4 (SEC No. 333-118068-05).                                                                                           |
|   |   |                                                                                                                                                                                                       |
| (6)    |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on November 23,  2004.                                                                                  |
|   |   |                                                                                                                                                                                                       |
| (7)    |   | Incorporated herein by  reference from our registration statement on Form S-4 (SEC No. 333-122837).                                                                                              |
|   |   |                                                                                                                                                                                                       |
| (8)    |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on March 15,  2006.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (9)    |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on May 16,  2006.                                                                                       |
|   |   |                                                                                                                                                                                                       |
| (10)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on August 28,  2006.                                                                                    |
|   |   |                                                                                                                                                                                                       |
| (11)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on November 2,  2006.                                                                                   |
|   |   |                                                                                                                                                                                                       |
| (12)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on August 7,  2006.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (13)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on January 9,  2007.                                                                                    |
|   |   |                                                                                                                                                                                                       |
| (14)   |   | Incorporated herein by  reference from our annual report on Form 10-K filed with the SEC on April 2,  2007.                                                                                      |
|   |   |                                                                                                                                                                                                       |
| (15)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on August 17,  2007.                                                                                    |
|   |   |                                                                                                                                                                                                       |
| (16)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on December 20,  2007.                                                                                  |
|   |   |                                                                                                                                                                                                       |
| (17)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on November 7,  2007.                                                                                   |
|   |   |                                                                                                                                                                                                       |
| (18)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on March 11,  2008.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (19)   |   | Incorporated herein by  reference from our annual report on Form 10-K filed with the SEC on April 2,  2007.                                                                                      |
|   |   |                                                                                                                                                                                                       |
| (20)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on April 30,  2008.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| (21)   |   | Incorporated herein by  reference from our quarterly report on Form 10-Q filed with the SEC on May 16,  2008.                                                                                    |
|   |   |                                                                                                                                                                                                       |
| (22)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on October 1,  2008.                                                                                    |
|   |   |                                                                                                                                                                                                       |
| (23)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on November 12,  2008.                                                                                  |
|   |   |                                                                                                                                                                                                       |
| (24)   |   | Incorporated herein by  reference from our current report on Form 8-K filed with the SEC on March 11,  2009.                                                                                     |
|   |   |                                                                                                                                                                                                       |
| *      |   | Filed herewith.                                                                                                                                                                                            |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this annual report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.

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

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **NAME**                         | ** ** | **TITLE**                                                        | ** ** | **DATE**            |
|----------------------------------|------------|------------------------------------------------------------------|------------|---------------------|
|                             |       |                                                             |       |                |
| /s/ Troy D. Herbst               |       | Chief Executive  Officer, Executive Vice President,              |       | March 31, 2009 |
| Troy D. Herbst                   |       | Secretary, Treasurer  and Director (Principal Executive Officer) |       |                |
|                             |       |                                                             |       |                |
| /s/ Mary E. Higgins              |       | Chief Financial Officer  (Principal                              |       | March 31, 2009 |
| Mary E. Higgins                  |       | Financial and  Accounting Officer)                               |       |                |
|                             |       |                                                             |       |                |
| /s/ Timothy P.   Herbst     |       | Chairman of the Board  and Executive Vice President              |       | March 31, 2009 |
| Timothy P.  Herbst          |       |                                                             |       |                |
|                             |       |                                                             |       |                |
|                             |       | Executive Vice  President and Director                           |       | March 31, 2009 |
| Edward J.  Herbst           |       |                                                             |       |                |
|                             |       |                                                             |       |                |
| /s/ John N.   Brewer        |       | Director                                                         |       | March 31, 2009 |
| John N.  Brewer             |       |                                                             |       |                |
|                             |       |                                                             |       |                |
| /s/ John F.   O’Reilly |       | Director                                                         |       | March 31, 2009 |
| John F.  O’Reilly      |       |                                                             |       | ** **          |

 

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