**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

** **

| **ý** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                           |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                      |
|       | **For the fiscal year ended    December 31, 2003**                                                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                                                                                      |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                      |
|       | **For the transition period  from                       to                       ** |
|       |                                                                                                                                                                                                                                                                                                                      |
|       | **Commission file number   0-71094**                                                                                                                                                                                                                                                                       |

 

| **HERBST GAMING, INC.**                                         |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)          |
|                                                            |   |   |
| **NEVADA**                                                      |   | **88-0446145** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |
| **3440 West Russell Road, Las Vegas, Nevada**                   |   | **89118** |
| (Address of principal executive offices)                        |   | (Zip Code) |
|                                                            |   |   |
| **(702) 889-7695**                                              |
| (Registrant’s telephone number, including area code)       |
|                                                            |   |   |
| Securities  registered pursuant to Section 12(b) of the Act:    |
|                                                            |
| **Title of each class**                                         |   | **Name of each exchange on  which registered** |
| Not Applicable                                                  |   | Not Applicable |
|                                                            |   |   |
| Securities  registered pursuant to Section 12(g) of the Act:    |
|                                                            |   |   |
| **Not Applicable**                                              |
| (Title of class)                                                |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   ý Yes     o No

 

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

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of this Act).   oYes     ý No

 

The aggregatemarket value of voting and non-voting common equity held by non-affiliates ofthe registrants as of December 31, 2003, based on the price at which thecommon equity was sold, was approximately $0.

 

Indicate thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of December 31, 2003.

 

Common Stock,no par value, 300 outstanding shares.

 

Documents Incorporated by Reference

 

None.

 

 

----

 

**PART I**

 

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

 

**General**

 

We are agaming company that owned and operated as of December 31, 2003 throughsubsidiaries approximately 8,400 slot machines throughout the State ofNevada.  Our business is divided intotwo segments — slot route operations and casino operations.

 

Our routeoperations involve the exclusive installation and operation of slot machines atstrategic, high traffic, non-casino locations such as grocery stores, drugstores, convenience stores, bars and restaurants.  Our slot machines include video poker, Keno, slot and othergames.  We are one of the largest slotroute operators in Nevada with approximately 6,800 slot machines in approximately630 locations as of December 31, 2003.

 

Our casinooperations consist of owning and operating five casinos in Nevada includingTerrible’s Hotel & Casino, located one mile from the Las Vegas Strip,Terrible’s Lakeside Casino & RV Park and Terrible’s Town Casino inPahrump, Terrible’s Casino & Bowl in Henderson, and Terrible’sSearchlight Casino located in Searchlight.

 

HerbstGaming, Inc. was incorporated in Nevada on January 21, 1997.  In connection with the offering of$170,000,000 in principal amount of its 103⁄4% senior secured notes due 2008,Herbst Gaming, Inc. became the holding company of all gaming interests formerlyowned by Edward, Timothy and Troy Herbst, who are brothers as well as theowners of all of the stock of Herbst Gaming, Inc.  On August 23, 2001, 

 

2

----

 

Herbst Gaming, Inc. commencedbusiness operations when the Herbst brothers entered into contributionagreements pursuant to which they contributed all of the outstanding stock ofE-T-T, Inc. and Market Gaming, Inc., as well as all of the membershipinterests in E-T-T Enterprises L.L.C. and 80% of the membership interests inFlamingo Paradise Gaming, LLC to Herbst Gaming.  In addition, E-T-T, Inc., which owned a 20% membership interestin Flamingo Paradise Gaming, LLC, entered into an assignment of membershipinterest pursuant to which E-T-T, Inc. assigned its 20% membership interest inFlamingo Paradise Gaming, LLC to Herbst Gaming.  As a result of the contributions, Herbst Gaming, Inc. became aholding company of subsidiaries that conduct slot route or casino operations.

 

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

 

Herbst Gaminghas elected to be taxed as a Subchapter S corporation.

 

**AvailableInformation**

 

Our Internetaddress 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) of theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicableafter we electronically file such material with, or furnish it to, theSecurities and Exchange Commission.

 

**RecentDevelopments**

 

In February2003, we acquired Anchor Coin’s slot route business and related assets at apurchase price of approximately $61.0 million. Upon the consummation of this acquisition, the number of slot machinesused in our operations increased by approximately 1,100 machines.  The Anchor Coin transaction provided us withcontracts to operate slot machines in certain Smith’s Food & Druggrocery stores, and other locations.  Wefunded this acquisition, in part, with the proceeds from the issuance of anadditional $47.0 million in principal amount of our 103⁄4% senior secured notes.

 

**NarrativeDescription of Business**

 

Our businessfocuses on attracting and fostering repeat business from local gaming patrons inboth our route and casino operations. Local patrons are typically sophisticated gaming customers who seekconvenient locations, high payouts and a pleasant atmosphere.

 

*Route Operations*

 

Our routeoperations involve the exclusive installation and operation of slot machines inchain store and street account locations. We define chain stores as grocery stores, drug stores, merchandisestores and convenience stores, with more than five locations.  Our chain store contracts are primarily withlarge, national retailers, such as Albertsons, Vons, Safeway, SavOn, Smith’s,Kmart and Rite Aid, as well as Terrible Herbst.  Street accounts include local bars, restaurants and non-chainconvenience stores.  Nevada law limitsslot route operations to certain types of non-casino locations including bars,taverns, saloons, convenience stores, grocery stores, drug stores andairports.  Most locations are limited tooffering no more than 15 slot machines.

 

We generallyenter into two types of route contracts — one is a space lease arrangement andthe other is a revenue-sharing arrangement. Under space lease arrangements, which we principally enter into withchain stores, we pay a fixed monthly fee for each location in which we placeslot machines.  Under

 

3

----

 

revenue-sharing arrangements,which we typically enter into with street accounts, we pay the location owner apercentage of the revenues generated by our slot machines located at thatparticular street account.  In order toenter into a revenue-sharing arrangement, the location owner must hold a gaminglicense.  Both space lease andrevenue-sharing arrangements typically involve long-term contracts that provideus with the exclusive right to install our slot machines at particularlocations.  In the case of chain stores,our contracts give us the exclusive right to install slot machines at storesopened in the future.

 

InNovember 2000, we significantly increased the size of our route operationsthrough the acquisition of Jackpot Enterprises, Inc.’s route operations.  This acquisition increased the number ofslot machines in our route operations from approximately 2,200 to 5,400. InFebruary 2003, we further increased the size of our route operations throughthe acquisition of the route assets of Anchor Coin, Inc., a subsidiary ofIGT.  This acquisition increased thenumber of slot machines in our route operations from approximately 5,400 to6,600.

 

We believe ourroute patrons choose to play slot machines near their homes.  We attract these players by installingstate-of-the-art slot machines with popular games, by offering a high level ofcustomer service and providing an attractive, comfortable atmosphere at theroute locations.

 

*Casino Operations*

 

Our casinooperations consist of owning and operating five casinos in Nevada.

 

*Terrible’s Hotel & Casino*

 

Terrible’sHotel & Casino in Las Vegas, our largest casino, opened on December 6,2000.  Terrible’s features approximately775 slot and video poker machines, eight table games, a race and sports bookand 185-seat bingo hall.  Terrible’soffers a buffet, 24-hour café, and a McDonald’s.  There are 373 rooms with standard amenities as well as a pool andspa.  Terrible’s is conveniently locatedapproximately one mile east of the Las Vegas Strip, which we believe appeals tolocals who wish to avoid the congestion of the Strip.  Terrible’s favorable location has made it popular with Stripcasino employees.  The next major localscasino east of us is approximately six miles away on Boulder Highway.  Although we are not a tourist destination,we receive a certain amount of tourist traffic through our casino due to ourlocation near the airport, the Strip and the Las Vegas Convention Center.

 

*Other Casinos*

 

•                  Terrible’s TownCasino in Pahrump, featuring 389 slot machines, six table games, a race andsports book, a 145-seat bingo facility and a restaurant;

 

•                  Terrible’sLakeside Casino and RV Park in Pahrump, featuring 257 slot machines, a sportsbook that is open seasonally, a 232-seat bingo facility, a restaurant and 159spaces for recreational vehicles adjacent to a seven-acre lake;

 

•                  Terrible’sCasino & Bowl in Henderson, featuring 99 slot machines and a 16-lanebowling alley; and

 

•                  Terrible’sSearchlight Casino in Searchlight, featuring 75 slot machines.

 

4

----

 

**FinancialInformation**

 

The primarysource of our revenue and income is from our route and casino operations,although we view the restaurants, bars and services to be important adjuncts toour casino operations.  The followingtable sets forth the contribution to total net revenues on a dollar andpercentage basis of our major activities for the years ended December 31,2003, 2002 and 2001.  

 
|                           |   | **Years  Ended December 31,**           |    |
|--------------------------------|--------|-----------------------------------------|---------|
|                           |   | **2003(1)**                             |    | **2002** |   | **2001(1)** |   |
|                           |   | **Amount**                              |    | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                           |   | **(in  thousands, except percentages)** |    |
| Revenues:                      |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Route operations(2)            |   | $                                       | 241,833 |   | 77.5 | % | $ | 183,877 |   | 73.7 | % | $ | 170,893 |   | 73.3 | % |
| Casino operations(2)           |   | 78,342                                  |    | 25.1 |   | 72,498 |   | 29.0 |   | 67,831 |   | 29.1 |   |
| Other                          |   | 3,049                                   |    | 1.0 |   | 3,078 |   | 1.2 |   | 2,878 |   | 1.2 |   |
| Total revenues(3)              |   | 323,224                                 |    | 103.6 |   | 259,453 |   | 103.9 |   | 241,602 |   | 103.6 |   |
| Less promotional allowances(2) |   | 11,249                                  |    | 3.6 |   | 9,802 |   | 3.9 |   | 8,410 |   | 3.6 |   |
| Total net  revenues            |   | $                                       | 311,975 |   | 100.0 | % | $ | 249,651 |   | 100.0 | % | $ | 233,192 |   | 100.0 | % |

 

----

(1)           Calendaryear 2003 reflects a partial year of operations of the slot route operationspurchased from Anchor Coin in February 2003. Calendar year 2001 reflects thefirst full year of operations of (i) operations purchased from JackpotEnterprises, Inc. in November 2000 and (ii) the opening of Terrible’s Hotel& Casino in December 2000.  As aresult, the results of operations for calendar years 2003, 2002 and 2001 maynot be comparable to the results of operations incurred in earlier years.

 

(2)           Routeand casino revenues are the net difference between gaming wins and losses.  Promotional allowances consist primarily offood and beverages furnished gratuitously to customers.  The retail value of such services isincluded in the respective revenue classifications and is then deducted aspromotional allowances.  See Note 1 ofNotes to Consolidated Financial Statements in Item 8 “Financial Statements andSupplementary Data”.

 

(3)           Doesnot include interest income.

 

See “Item 8.  FinancialStatements and Supplementary Data” for additional financial information aboutus.

 

**Marketing**

 

We target ourmarketing to locals because we believe that a vast majority of our gamingpatrons are local residents.  Our 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 is used in over 80 gasoline stations and convenience stores throughoutCalifornia, Arizona and Nevada.  Forthis reason, we have licensed the Terrible Herbst trade name from TerribleHerbst, Inc., a related party, for a period of ten years.

 

We haveimplemented a unique players club that rewards customers with points forplaying at our route and casino locations as well as for purchases made atTerrible Herbst gas stations and convenience stores in the Las Vegas area.  Points may be redeemed for cash as well asfree or discounted rooms, food or other goods or services provided at any suchlocation.

 

**Competition**

 

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.  The principal method of competition for slotroute operators includes

 

5

----

 

the economic terms of therevenue-sharing or space lease arrangement, the services provided and thereputation of the route operator.  Pricecompetition for revenue-sharing or space lease arrangements is intense and webelieve that price competition among slot route operators will continue.  We are one of the largest route operatorswith approximately 6,800 slot machines situated in locations outside of ourcasinos as of December 31, 2003.

 

With respectto our casino operations in Las Vegas, Terrible’s Hotel & Casinocompetes for local gaming customers with other locals-oriented casino-hotels inLas Vegas.  We do not believe that weare in direct competition with many of the resort-casino properties on the LasVegas Strip, which focus primarily on attracting tourist players.  Rather, we believe that our principalcompetitors in our casino operations are the two other local casinos located withina one mile radius.  We compete withthese properties on the basis of the desirability of location, payout rates,personalized approach, casino promotions, comfort and value of restaurants andhotel rooms and the variety and value of entertainment.  The construction of new casinos or theexpansion of existing casinos near our casinos could have a negative impact onour casino operations.

 

Our casinooperations in Pahrump, Henderson, and Searchlight, Nevada face competition fromother casinos located in the vicinity of these properties.

 

**Seasonality**

 

We do notbelieve that our business as a whole is seasonal to any significant degree.

 

**EnvironmentalLaws**

 

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

 

**Employees**

 

As ofDecember 31, 2003 we employed approximately 2,100 employees.  None of our employees is covered by acollective bargaining agreement.  Webelieve that our relationship with our employees is good.

 

**Regulationand Licensing**

 

The ownershipand operation of casino gaming facilities and slot routes in Nevada are subjectto the Nevada Gaming Control Act and the regulations promulgated thereunder, orthe Nevada Act, and various local regulations.

 

Our gamingoperations are subject to the licensing and regulatory control of the NevadaGaming Commission, the Nevada State Gaming Control Board, the Clark CountyLiquor and Gaming Licensing Board, and the Cities of Las Vegas, Reno, Hendersonand other local regulatory authorities, or the Nevada Gaming Authorities.

 

The laws,regulations and supervisory procedures of the Nevada Gaming Authorities arebased upon declarations of public policy which are concerned with, among otherthings:

 

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

 

6

----

 

•                  theestablishment and maintenance of responsible accounting practices andprocedures;

 

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

 

•                  the preventionof cheating and fraudulent practices; and

 

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

 

Changes in these laws,regulations and procedures could have an adverse effect on our gamingoperations.

 

Corporationsand other entities that operate casinos or slot routes in Nevada are requiredto be licensed by the Nevada Gaming Authorities.  A gaming license for such activities requires the periodicpayment of fees and taxes and is not transferable.  Herbst Gaming is registered by the Nevada Gaming Commission as apublicly traded corporation (a “registered corporation”).  As a registered corporation, we are requiredperiodically to submit detailed financial and operating reports to the NevadaGaming Commission and furnish any other information that the Nevada GamingCommission may require.  Herbst Gaminghas been found suitable by the Nevada Gaming Commission to own the stock ofE-T-T, Inc., which is licensed by the Nevada Gaming Commission as a casino andslot route operator, Market Gaming, Inc., which is licensed as a slot routeoperator, and Flamingo Paradise Gaming, LLC, which is licensed as a casinooperator.  E-T-T, Inc., is alsoregistered by the Nevada Gaming Commission as an intermediary holding company(the “Intermediary Company”) and has been found suitable to own the stock ofCorral Country Coin, Inc., Cardivan Company, and Corral Coin, Inc., all ofwhich are licensed by the Nevada Gaming Authorities as slot route operators(all of the foregoing, including Market Gaming, Inc., and Flamingo ParadiseGaming, LLC, are referred to as the “Gaming Subsidiaries”).  No person may become a stockholder of, orreceive any percentage of the profits from, the Intermediary Company or any ofthe Gaming Subsidiaries without first obtaining licenses and approvals from theNevada Gaming Authorities.  HerbstGaming, the Intermediary Company, and all of the Gaming Subsidiaries haveobtained from the Nevada Gaming Authorities the various registrations,approvals, permits and licenses required in order to engage in gamingactivities in Nevada.

 

The NevadaGaming Authorities may investigate any individual who has a materialrelationship to, or material involvement with, Herbst Gaming, the IntermediaryCompany or the Gaming Subsidiaries in order to determine whether suchindividual is suitable or should be licensed as a business associate of agaming licensee.  Officers, directorsand certain key employees of Herbst Gaming, the Intermediary Company, and theGaming Subsidiaries must file applications with the Nevada Gaming Authoritiesand are required to be licensed by the Nevada Gaming Authorities.  The Nevada Gaming Authorities may deny anapplication for licensing for any cause that they deem reasonable.  A finding of suitability is comparable tolicensing, and both require submission of detailed personal and financialinformation followed by a thorough investigation.  Changes in licensed positions must be reported to the NevadaGaming Authorities, and, in addition to their authority to deny an applicationfor a finding of suitability or licensure, the Nevada Gaming Authorities havejurisdiction to disapprove a change in a corporate position.

 

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

 

7

----

 

Herbst Gaming,the Intermediary Company, and the Gaming Subsidiaries are required to submitdetailed financial and operating reports to the Nevada Gaming Commission.  Substantially all material loans, leases,sales of securities and similar financing transactions by Herbst Gaming, theIntermediary Company and the Gaming Subsidiaries must be reported to the NevadaGaming Commission.

 

If it weredetermined that Herbst Gaming, the Intermediary Company or the GamingSubsidiaries violated the Nevada gaming laws, our gaming licenses andregistrations with the Nevada Gaming Commission could be limited, conditioned,suspended or revoked, subject to compliance with certain statutory andregulatory procedures.  In addition,Herbst Gaming, the Intermediary Company, the Gaming Subsidiaries and thepersons involved could be subject to substantial fines for each separateviolation of the Nevada laws at the discretion of the Nevada GamingCommission.  Further, the Nevada GamingCommission could appoint a supervisor to operate our gaming properties and,under certain circumstances, earnings generated during the supervisor’sappointment (except for the reasonable rental value of our gaming properties)could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or theappointment of a supervisor could (and revocation of any gaming license would)materially adversely affect our operations.

 

Any beneficialholder of Herbst Gaming’s voting securities, regardless of the number of sharesowned, may be required to file an application, be investigated, and have hissuitability as a beneficial holder of Herbst Gaming’s voting securitiesdetermined if the Nevada Gaming Commission has reason to believe that suchownership would otherwise be inconsistent with the declared policies of theState of Nevada.  The applicant must payall costs of investigation incurred by the Nevada Gaming Authorities inconducting such investigation.

 

Although we donot intend to register or sell any equity securities, Nevada law requires anyperson who acquires more than 5% of a registered corporation’s voting securitiesto report the acquisition to the Nevada Gaming Commission.  Nevada law requires that beneficial ownersof more than 10% of a registered corporation’s voting securities apply to theNevada Gaming Commission for a finding of suitability within 30 days afterthe Chairman of the Nevada State Gaming Control Board mails the written noticerequiring the filing for a finding of suitability.  Under certain circumstances, an “institutional investor,” asdefined in the regulations of the Nevada Gaming Commission, which acquires morethan 10%, but not more than 15%, of our voting securities may apply to theNevada Gaming Commission for a waiver of such finding of suitability if thatinstitutional investor holds the voting securities for investment purposes only.  An institutional investor will not be deemedto hold voting securities for investment purposes unless the voting securitieswere acquired and are held in the ordinary course of business as aninstitutional investor and not for the purpose of causing, directly orindirectly, the election of a majority of the members of our board ofdirectors, any change in our corporate charter, bylaws, management, policies oroperations, or any of our gaming affiliates, or any other action which theNevada Gaming Commission finds to be inconsistent with holding our votingsecurities for investment purposes only. Activities which are not deemed to be inconsistent with holding votingsecurities for investment purposes only include:

 

•                  voting on allmatters voted on by stockholders;

 

•                  making financialand other inquiries of management of the type normally made by securitiesanalysts for informational purposes and not to cause a change in itsmanagement, policies or operations; and

 

•                  other activitiesas the Nevada Gaming Commission may determine to be consistent with suchinvestment intent.

 

8

----

 

If thebeneficial holder of voting securities who must be found suitable is acorporation, partnership or trust, it must submit detailed business andfinancial information including a list of beneficial owners.  The applicant is required to pay all costsof investigation.

 

Any person whofails or refuses to apply for a finding of suitability or a license within30 days after being ordered to do so by the Nevada Gaming Commission orthe Chairman of the Nevada State Gaming Control Board, may be foundunsuitable.  The same restrictions applyto a record owner if the record owner, after request, fails to identify thebeneficial owner.  Any stockholder foundunsuitable and who holds, directly or indirectly, any beneficial ownership ofthe common stock of a registered corporation beyond the period of time as maybe prescribed by the Nevada Gaming Commission may be guilty of a criminaloffense.  Herbst Gaming, theIntermediary Company or the Gaming Subsidiaries may become subject todisciplinary action if, after receipt of notice that a person is unsuitable tobe a stockholder or to have any other relationship with Herbst Gaming, theIntermediary Company or the Gaming Subsidiaries, Herbst Gaming:

 

•                  pays that personany dividend or interest upon voting securities;

 

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

 

•                  pays remunerationin any form to that person for services rendered or otherwise; or

 

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

 

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

 

Herbst Gamingmay be required to disclose to the Nevada State Gaming Control Board and theNevada Gaming Commission the identities of all holders of our issued andoutstanding 103⁄4% senior secured notes. The Nevada Gaming Commission may, in its discretion, require the holderof any debt security of a registered corporation to file applications, beinvestigated and be found suitable to own the debt security of a registeredcorporation.  If the Nevada GamingCommission determines that a person is unsuitable to own a debt security, thenpursuant to Nevada law, the registered corporation can be sanctioned, includingthe loss of its approvals, if without the prior approval of the Nevada GamingCommission, it:

 

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

 

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

 

•                  pays theunsuitable person remuneration in any form; or

 

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

 

Herbst Gamingis required to maintain a current ledger in Nevada, which may be examined bythe Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, therecord holder may be required to disclose the identity of the beneficial holderto the Nevada Gaming Authorities.  Afailure to make such disclosure may be grounds for finding the record holderunsuitable.

 

9

----

 

We are also required to rendermaximum assistance in determining the identity of the beneficial owner.  The Nevada Gaming Commission has the powerto require our securities to bear a legend indicating that the securities aresubject to the Nevada Act.  However, todate, the Nevada Gaming Commission has not imposed such a requirement on HerbstGaming.

 

Herbst Gamingmay not make a public offering of securities without the prior approval of theNevada Gaming Commission if the securities or proceeds from the securities areintended to be used to construct, acquire or finance gaming facilities inNevada, or to retire or extend obligations incurred for the purposes ofconstructing, acquiring or financing gaming facilities.  Furthermore, any approval, if granted, doesnot constitute a finding, recommendation or approval by the Nevada GamingCommission or the Nevada State Gaming Control Board as to the accuracy oradequacy of the prospectus or the investment merits of the securitiesoffered.  Any representation to thecontrary is unlawful.

 

Changes in thecontrol of Herbst Gaming through merger, consolidation, stock or assetacquisitions, management or consulting agreements, or any act or conduct by aperson whereby that person obtains control (including foreclosure on thepledged shares), may not occur without the prior approval of the Nevada GamingCommission.  Entities seeking to acquirecontrol or ownership of a registered corporation must satisfy the Nevada StateGaming Control Board and Nevada Gaming Commission in a variety of stringentstandards prior to assuming control of such registered corporation.  The Nevada Gaming Commission may alsorequire the stockholders, officers, directors and other persons having amaterial relationship or involvement with the entity proposing to acquirecontrol, to be investigated and licensed as part of the approval processrelating to the transaction.

 

License feesand taxes, computed in various ways depending on the type of gaming or activityinvolved, are payable to the State of Nevada and to the counties and cities inwhich the Nevada licensee’s respective operations are conducted.  Depending upon the particular fee or taxinvolved, these fees and taxes are payable either monthly, quarterly orannually and are based upon either:

 

•                  a percentage ofthe gross revenues received;

 

•                  the number ofgaming devices operated; or

 

•                  the number oftable games operated.

 

Any person whois licensed, required to be licensed, registered, required to be registered, oris under common control with such persons, or Licensees, and who is or whoproposes to become involved in a gaming venture outside of Nevada, is requiredto deposit with the Nevada State Gaming Control Board, and thereafter maintain,a revolving fund in the amount of $10,000 to pay the expenses of investigationby the Nevada State Gaming Control Board of the Licensees’ participation inforeign gaming.  The revolving fund issubject to increase or decrease in the discretion of the Nevada GamingCommission.  Thereafter, Licensees arealso required to comply with certain reporting requirements imposed by theNevada gaming laws.  Licensees are alsosubject to disciplinary action by the Nevada Gaming Commission if theyknowingly violate any laws of the foreign jurisdiction pertaining to a foreigngaming operation, fail to conduct the foreign gaming operation in accordancewith the standards of honesty and integrity required of Nevada gamingoperations, engage in activities or enter into associations that are harmful tothe State of Nevada or its ability to collect gaming taxes and fees, or employ,contract with or associate with a person in the foreign operation who has beendenied a license or a finding of suitability in Nevada on the ground ofpersonal unsuitability.

 

10

----

 

**Item2.****           Properties**

 

We believethat our properties are generally in good condition, are well maintained andare generally suitable and adequate to carry on our business.  We also believe that our gaming propertiesare operated at satisfactory levels of utilization and each property ismonitored to make sure that the needs of our business and customers aremet.  All of our properties are subjectto deeds of trust securing the 103⁄4% senior secured notes.

 

Our principalproperties consist of the following:

 

*Company Headquarters and Warehouse*.  We lease a four-acre site in Las Vegas andown the 50,000 square foot building where our executive offices and operationalheadquarters are located.  This facilityhouses our executive and administrative offices and is used for sub-assemblyand warehouse space for our slot route operations.  The lease between the Herbst Family Limited Partnership II,a Nevada limited partnership, and us ends on June 30, 2016, with optionsto renew the lease for five additional successive terms of ten years each.

 

*Office Space and Convenience Store*.  We lease a three-acre site and a 50,000square foot building where our employment center and purchasing department arelocated.  The lease between the HerbstGrandchildren’s Trust, a trust governed under the laws of the State of Nevadaand a related party, and us ends on November 27, 2012, with options to renewthe lease for five additional successive terms of ten years each.

 

*Terrible’s Searchlight Casino. *We lease the landon which Terrible’s Searchlight Casino is located in Searchlight, Nevada.  The lease ends on June 30, 2022, withoptions to renew the lease for five additional successive terms of ten yearseach.

 

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

 

*Terrible’s Town Casino*.  Terrible’s Town Casino in Pahrump, Nevada,which is approximately 60 miles from Las Vegas, comprises an approximate 30,000square foot building on approximately three acres.  We lease the land from the Herbst Family LimitedPartnership I, a Nevada limited partnership and a related party.  The lease expires on June 30, 2006.  We also have an option to further extend thelease for four additional successive terms of five years each.

 

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

 

*Terrible’s Town Casino & Bowl.*  We lease the land and building on which ourTerrible’s Town Casino & Bowl is located in Henderson, Nevada.  The lease ends on February 9, 2014,with options to renew the lease for five additional successive terms of ten yearseach.  We own a 0.8-acre lot adjacent toTerrible’s Town Casino & Bowl that we are holding for possible futuredevelopment.

 

**Item 3.****                                    LegalProceedings**

 

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

 

11

----

 

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

 

Notapplicable.

 

**PART II**

 

**Item 5.****                                    Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

(a)                                  PriceRange of Common Stock

 

No class of our capital stock has been registered under the SecuritiesAct of 1933 or under Section 12 of the Securities Exchange Act of1934.  All 300 shares of our outstandingcapital stock are owned by the Herbst brothers.

 

(b)                                 TheHerbst brothers own all of the outstanding shares of our capital stock.

 

(c)                                  DividendPolicy

 

The indenturegoverning our 103⁄4% senior secured notes restricts our ability to declare ormake distributions on our capital shares. To date, the only distributions that we have made on our common stockare distributions permitted by the indenture governing our 103⁄4% senior securednotes.  Subject to contractualrestrictions contained in the indenture, any future determinations as to thepayment of dividends will be at the discretion of our board of directors, andwill depend on our financial condition, results of operations, capitalrequirements, and such other factors as the board of directors deemsrelevant.  See “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Liquidity and CapitalResources” and “Item 8.  FinancialStatements and Supplementary Data – Notes to Consolidated FinancialStatements.”

 

**Item 6.****                                    SelectedFinancial Data**

 

We derived thefollowing selected financial data as of and for each of the five years endedDecember 31, 2003, from our audited consolidated financialstatements.  In February 2003, weacquired the slot route assets of Anchor Coin, Inc.  In November 2000, we purchased Jackpot’s route operations, and inDecember 2000, we opened Terrible’s Hotel & Casino.  Therefore, the periods beginning on or afterJanuary 1, 2001 may not be comparable to prior years.  The following information should be read in conjunction with ourconsolidated financial statements and related notes included in this Form 10-K,the “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the other financial and statistical data included in this Form10-K.

 

We haveelected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under thoseprovisions, the owners of our company pay income taxes on our taxableincome.  Accordingly, a provision forincome taxes is not included in our financial data.

 

12

----

 
|                                 |   | **Year Ended  December 31,** |   |
|--------------------------------------|--------|------------------------------|--------|
|                                 |   | **1999**                     |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                 |   | **(in thousands)**           |   |
| **Income statement data:**           |   |                         |   |   |   |   |   |   |   |   |   |
| Revenues                             |   |                         |   |   |   |   |   |   |   |   |   |
| Route operations                     |   | $                            | 67,870 |   | $ | 86,109 |   | $ | 170,893 |   | $ | 183,877 |   | $ | 241,833 |   |
| Casino operations                    |   | 19,664                       |   | 25,315 |   | 67,831 |   | 72,498 |   | 78,342 |   |
| Other                                |   | 2,695                        |   | 2,979 |   | 2,878 |   | 3,078 |   | 3,049 |   |
| Total revenues                       |   | 90,229                       |   | 114,403 |   | 241,602 |   | 259,453 |   | 323,224 |   |
| Promotional allowances-route         |   | (68                          | )      | (218 | ) | (143 | ) | (305 | ) | (371 | ) |
| Promotional allowances-casino        |   | (1,414                       | )      | (2,182 | ) | (8,267 | ) | (9,497 | ) | (10,878 | ) |
| Net revenues                         |   | 88,747                       |   | 112,003 |   | 233,192 |   | 249,651 |   | 311,975 |   |
| Costs and expenses                   |   |                         |   |   |   |   |   |   |   |   |   |
| Route operations                     |   | 58,995                       |   | 74,321 |   | 141,535 |   | 150,781 |   | 192,757 |   |
| Casino operations                    |   | 13,331                       |   | 17,322 |   | 46,686 |   | 48,635 |   | 51,142 |   |
| General and administrative           |   | 3,808                        |   | 4,782 |   | 10,168 |   | 10,812 |   | 12,514 |   |
| Depreciation and amortization        |   | 5,621                        |   | 5,318 |   | 14,198 |   | 15,741 |   | 24,382 |   |
| Pre-opening expenses                 |   | —                       |   | 2,361 |   | — |   | — |   | — |   |
| Total costs and expenses             |   | 81,755                       |   | 104,104 |   | 212,587 |   | 225,969 |   | 280,795 |   |
| Income from operations               |   | 6,992                        |   | 7,899 |   | 20,605 |   | 23,682 |   | 31,180 |   |
| Interest income                      |   | 64                           |   | 82 |   | 407 |   | 336 |   | 228 |   |
| Interest expense                     |   | (2,216                       | )      | (4,643 | ) | (19,952 | ) | (18,785 | ) | (22,932 | ) |
| Loss on early retirement of debt (1) |   | —                       |   | — |   | (13,024 | ) | — |   | (267 | ) |
| Net Income (loss)                    |   | $                            | 4,840  |   | $ | 3,338 |   | $ | (11,964 | ) | $ | 5,233 |   | $ | 8,209 |   |

 
|                                   |   | **As of  December 31,** |   |
|----------------------------------------|--------|-------------------------|--------|
|                                   |   | **1999**                |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                   |   | **(in thousands)**      |   |
| **Balance sheet data:**                |   |                    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |   | $                       | 11,632 |   | $ | 29,573 |   | $ | 44,750 |   | $ | 55,035 |   | $ | 54,030 |   |
| Total assets                           |   | 79,458                  |   | 171,132 |   | 180,183 |   | 183,713 |   | 237,068 |   |
| Total debt(2)                          |   | 59,463                  |   | 133,138 |   | 167,319 |   | 167,941 |   | 215,269 |   |
| Stockholders’ equity (deficiency) |   | 8,454                   |   | 6,972 |   | (6,468 | ) | (1,235 | ) | 1,554 |   |
|                                        |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                 |   | **Year Ended  December 31,**   |    |
|------------------------------------------------------|--------|--------------------------------|---------|
|                                                 |   | **1999**                       |    | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                 |   | **(in thousands, exceptions)** |    |
| **Other data:**                                      |   |                           |    |   |   |   |   |   |   |   |   |
| Ratio of earnings to fixed charges(3)                |   | 1.8                            | x  | 1.0 | x  | 1.1 | x  | 1.3 | x  | 1.3 | x  |
| Net cash provided by operating activities            |   | $                              | 12,374  |   | $ | 14,881 |   | $ | 14,945 |   | $ | 19,323 |   | $ | 34,997 |   |
| Net cash used in investing activities                |   | (19,674                        | )       | (44,939 | ) | (2,778 | ) | (8,700 | ) | (74,724 | ) |
| Net cash provided by (used in) financing  activities |   | 10,368                         |    | 47,999 |   | 3,010 |   | (338 | ) | 38,722 |   |
| Capital  expenditures                                |   | 20,920                         |    | 10,036 |   | 3,226 |   | 8,442 |   | 15,117 |   |
|                                                 |   |                           |    |   |   |   |   |   |   |   |   |
| Route EBITDA(4)                                      |   | 8,807                          |    | 11,570 |   | 29,215 |   | 32,791 |   | 48,705 |   |
| Casino  EBITDA(4)                                    |   | 4,919                          |    | 5,811 |   | 12,878 |   | 14,366 |   | 16,322 |   |
| Consolidated EBITDA(4)                               |   | $                              | 12,677  |   | $ | 15,660 |   | $ | 35,210 |   | $ | 39,759 |   | $ | 55,790 |   |

 

----

(1)          Includes(a) a charge of $13.0 million recognized in August 2001 related to the write-offof unamortized financing fees and other costs due to the repayment of $143.8million of our long-term debt.  Therepayment

 

13

----

 

was due in conjunction with the issuance of $170.0 million seniorsecured notes in August of 2001 and (b) a premium of $267,000 paid inconjunction with the repurchase of $2.0 million of our senior secured notes.

 

(2)           Total debt consists of the current andlong-term portions of notes payable to related parties and long-term debt forall periods presented.

 

(3)           For purposes of determining the ratio ofearnings to fixed charges, earnings are defined as earnings before fixedcharges and extraordinary items (other than capitalized interest).  Fixed charges consist of interest expensedand capitalized.

 

(4)          ConsolidatedEBITDA consists of net income (loss) plus depreciation and amortization,interest expense net of capitalized interest, pre-opening expenses and loss onearly retirement of debt.  SegmentEBITDA for route and casino is calculated before allocation of overhead.  EBITDA is presented because it is used as aperformance measure to analyze the performance of business segments and becauseit is frequently used by securities analysts, investors and others in theevaluation of companies in our industry. However, other companies in our industry may calculate EBITDAdifferently.  EBITDA is not ameasurement of financial performance under generally accepted accountingprinciples and should not be considered as an alternative to cash flow fromoperating activities or as a measure of liquidity or as an alternative to netincome (loss) or as an indicator of operating performance or any other measureof performance derived in accordance with generally accepted accountingprinciples.

 

The followingtable is a reconciliation of net income (loss) to EBITDA:

 

|                                           |   | **Year Ended  December 31,** |   |
|------------------------------------------------|--------|------------------------------|--------|
|                                           |   | **1999**                     |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                           |   | **(in  thousands)**          |   |
| Net income (loss)                              |   | $                            | 4,840  |   | $ | 3,338 |   | $ | (11,964 | ) | $ | 5,233 |   | $ | 8,209 |   |
| **Adjustments:**                               |   |                         |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                  |   | 5,621                        |   | 5,318 |   | 14,198 |   | 15,741 |   | 24,382 |   |
| Pre-opening expenses                           |   | —                       |   | 2,361 |   | — |   | — |   | — |   |
| Interest expense, net of capitalized  interest |   | 2,216                        |   | 4,643 |   | 19,952 |   | 18,785 |   | 22,932 |   |
| Loss on early retirement of debt               |   | —                       |   | — |   | 13,024 |   | — |   | 267 |   |
| Consolidated EBITDA                            |   | $                            | 12,677 |   | $ | 15,660 |   | $ | 35,210 |   | $ | 39,759 |   | $ | 55,790 |   |
|                                                |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

The followingdiscussion and analysis should be read in conjunction with the section“Selected Financial Data” and the consolidated financial statements and relatednotes included elsewhere in this annual report.

 

**Overview**

 

We are agaming company that owned and operated approximately 8,400 slot machinesthroughout the State of Nevada as of December 31, 2003.  Our route operations involved the exclusiveinstallation and operation of approximately 6,800 slot machines as ofDecember 31, 2003 in strategic, high traffic, non-casino locations, suchas grocery stores drug stores, convenience stores, bars and restaurants.  We also own and operate Terrible’s Hotel& Casino in Las Vegas, as well as four other small casinos.

 

We generallyenter into two types of route contracts. With chain store customers, such as Albertsons, Vons, Safeway, SavOn,Smith’s, Kmart, Terrible Herbst and Rite Aid, we pay a fixed monthly fee foreach location in which we place slot machines. With our street accounts, such as bars,

 

14

----

 

restaurants and non-chainconvenience stores, we share in the revenues on a percentage basis with thelocation owner.

 

In February2003, we acquired the slot route assets of Anchor Coin, Inc., and inNovember 2000, we completed the acquisition of the stock of threesubsidiaries of Jackpot.  Theseacquisitions dramatically impacted our operations.  In addition, in December 2000, we opened Terrible’sHotel & Casino.  Therefore, theperiods beginning on or after January 1, 2001 are not comparable to anyprior periods.

 

In August 2001,we restructured substantially all of our debt with a $170.0 million offering ofsenior secured notes. In February 2003, we issued another $47.0 million notesunder this same indenture for the purchase of the slot route assets of AnchorCoin, Inc.

 

We haveelected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under thoseprovisions, the owners of our company pay income taxes on our taxable income.  Accordingly, a provision for income taxes isnot included in our financial data.

 

Our revenuesare primarily derived from gaming revenues, which include revenues from slotmachines and table games.  Gamingrevenues is generally defined as gaming wins less gaming losses.  Our largest component of revenues is fromour slot machines.  Promotionalallowances consist primarily of food and beverages furnished gratuitously tocustomers.  The retail value of suchservices is included in the respective revenue classifications and is thendeducted as promotional allowance.  Wecalculate income from operations as net revenues less total operating costs andexpenses.  Income from operationsrepresents only those amounts that relate to our operations and excludesinterest income, interest expense, and other non-operating income and expenses.  Consolidated EBITDA consists of net incomeplus depreciation and amortization, interest expense net of capitalizedinterest, pre-opening expenses and loss on early retirement of debt; howevercasino and route EBITDA is calculated before allocation of overhead.

 

**FinancialHighlights for the 2001, 2002 and 2003 Fiscal Years**

 

*Route Operations*

* *
|                          |   | **2001**                         |   | **2002**          |   | **2003** |   |
|-------------------------------|--------|----------------------------------|--------|-------------------|--------|----------|--------|
|                          |   | **$**                            |   | **% of  revenue** |   | **$**    |   | **% of  revenue** |   | **$** |   | **% of  revenue** |   |
|                          |   | **(dollar  amount in millions)** |   |
|                          |   |                             |   |              |   |     |   |   |   |   |   |   |   |
| Route revenue                 |   | $                                | 170.9  |              | — |     | $      | 183.9 |   | — |   | $ | 241.8 |   | — |   |
| Promotional allowances        |   | $                                | (0.1   | )                 | 0.1    |     | $      | (0.3 | ) | 0.2 |   | $ | (0.4 | ) | 0.2 |   |
| Direct expenses               |   | $                                | 141.5  |              | 82.8   |     | $      | 150.8 |   | 82.0 |   | $ | 192.8 |   | 79.7 |   |
| Depreciation and amortization |   | $                                | 8.3    |              | 4.9    |     | $      | 9.5 |   | 5.1 |   | $ | 17.9 |   | 7.4 |   |
| EDITDA                        |   | $                                | 29.2   |              | 17.0   |     | $      | 32.8 |   | 17.8 |   | $ | 48.7 |   | 20.1 |   |

 

15

----

 

*Casino Operations*

* *
|                          |   | **2001**                         |   | **2002**          |   | **2003** |   |
|-------------------------------|--------|----------------------------------|--------|-------------------|--------|----------|--------|
|                          |   | **$**                            |   | **% of  revenue** |   | **$**    |   | **% of  revenue** |   | **$** |   | **% of  revenue** |   |
|                          |   | **(dollar  amount in millions)** |   |
|                          |   |                             |   |              |   |     |   |   |   |   |   |   |   |
| Casino revenue                |   | $                                | 67.8   |              | — |     | $      | 72.5 |   | — |   | $ | 78.3 |   | — |   |
| Promotional allowances        |   | $                                | (8.3   | )                 | 12.2   |     | $      | (9.5 | ) | 13.1 |   | $ | (10.9 | ) | 13.9 |   |
| Direct expenses               |   | $                                | 46.7   |              | 68.8   |     | $      | 48.6 |   | 67.1 |   | $ | 51.1 |   | 65.3 |   |
| Depreciation and amortization |   | $                                | 5.5    |              | 8.1    |     | $      | 3.9 |   | 8.1 |   | $ | 6.0 |   | 7.7 |   |
| EDITDA                        |   | $                                | 12.9   |              | 19.0   |     | $      | 14.4 |   | 19.8 |   | $ | 16.3 |   | 20.8 |   |

* *

*Other Costs*

* *
|                       |   | **2001**                         |   | **2002**                 |   | **2003** |   |
|----------------------------|--------|----------------------------------|--------|--------------------------|--------|----------|--------|
|                       |   | **$**                            |   | **% of total  revenues** |   | **$**    |   | **% of total  revenues** |   | **$** |   | **% of total  revenues** |   |
|                       |   | **(dollar  amount in millions)** |   |
|                       |   |                             |   |                     |   |     |   |   |   |   |   |   |   |
| General and administrative |   | $                                | 10.2   |                     | 4.2    |     | $      | 10.8 |   | 4.2 |   | $ | 12.5 |   | 3.9 |   |
|                            |        |                                  |        |                          |        |          |        |  |  |  |  |  |  |  |  |  |

 

**Year2003 Compared to Year 2002**

 

*Route Operations*

 

Routeoperations accounted for 75% of total revenues during the year endedDecember 31, 2003.  This was anincrease from 71% of total revenues for the year ended December 31, 2002.  Total revenues from route operations were$241.8 million for the year ended December 31, 2003, an increase of $57.9million, or 31%, from $183.9 million for the year ended December 31, 2002.  At December 31, 2003, we were operatingapproximately 6,800 slot machines, an increase of 1,400 machines from December2002. The increase in machines was primarily associated with the purchase ofthe slot route assets of Anchor Coin, Inc. The increase in route revenue was aresult of the absorption of these new assets as well as the continuedreplacement and refurbishment of existing slot machines during 2003.

 

Routeoperating costs were $192.8 million, or 80%, of route revenues for the yearended December 31, 2003.  Thiscompares to $150.8 million and 82% of route revenues for the same period in2002.  The increase in route operatingexpenses was primarily associated with the purchase of the slot route assets ofAnchor Coin, Inc. as well as increases in some participation expenses andscheduled space lease increases to our existing slot route contracts.

 

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

 

*Casino Operations*

 

Casinooperations accounted for 24% of total revenues for the year ended December 31,2003 and 28% of revenues for the year ended December 31, 2002.  Total revenues derived from casinooperations were $78.3 million for the year ended December 31, 2003, anincrease of $5.8 million, or 8%, from $72.5

 

16

----

 

million for the year endedDecember 31, 2002.  This increasein revenue was primarily due to increased customer play at Terrible’sHotel & Casino in Las Vegas and our two casinos in Pahrump. During 2003one of the main competitors in Pahrump, Nevada closed due to a fire. Thisclosure helped our Pahrump properties achieve higher revenues in the last twoquarters of 2003. There is no indication when or if the competitor’s propertywill re-open.

 

Casinooperating costs were $51.1 million, or 65%, of casino revenues for the yearended December 31, 2003, compared to $48.6 million, or 67%, of casinorevenues for the year ended December 31, 2002.  Operating expenses increased primarily in the areas of promotionsand taxes.  The increase in expenseswere generally in areas that helped to drive the increase in revenue, such ascomps, slot club and participation game fees. Casino EBITDA (as defined) was $16.3 million for the year ended December 31,2003, an increase of $1.9 million, or 13%, from $14.4 million from the yearended December 31, 2002.

 

*Other Revenue*

 

Other revenueconsists of revenue items such as ATM fees, pay phone charges, rental incomeand other miscellaneous items unrelated to route and casino operations.  Other revenues were $3.0 million for theyear ended December 31, 2003 compared to $3.1 million for the year endedDecember 31, 2002.

 

*Promotional Allowances*

 

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

 

*Other Costs*

 

General andadministrative expenses, or G&A, were $12.5 million for the year endedDecember 31, 2003, an increase of $1.7 million, or 16%, from $10.8 millionfor the year ended December 31, 2002. The increase was primarily due to overhead associated with the purchaseof the slot route assets of Anchor Coin in February 2003.  G&A costs also increased due to costsassociated with an increase in insurance expenses. G&A expenses as apercentage of revenue were 3.9% of the revenue for the year ended December 31,2003, down from 4.2% of revenue during fiscal year ended December 31,2002.

 

Depreciationand amortization expense was $24.4 million for the year ended December 31,2003, an increase of $8.7 million, or 55%, from $15.7 million for the yearended December 31, 2002.  Theincrease was due primarily to the amortization expenses associated with theacquired slot route contracts and depreciation expenses associated with newfixed assets.

 

*Income from Operations*

 

As a result ofthe factors discussed above, income from operations was $31.2 million for theyear ended December 31, 2003, an increase of $7.5 million from $23.7 millionfor the year ended December 31, 2002. As a percentage of total revenues, income from operations increased from9.1% during 2002 to 9.6% during the same period in 2003.

 

17

----

 

*Other Expenses*

 

Other expensewas $22.9 million for the year ended December 31, 2003, an increase of$4.5 million from the year ended December 31, 2002.  The increase in expenses was primarily dueto higher interest expensed as a result of the $47.0 million additionaloffering of senior secured notes done in conjunction with the acquisition ofthe slot route assets of Anchor Coin completed in February 2003.  Additionally, we expensed a small bondpremium of $267,000 that we paid to repurchase approximately $2.0 millionof our senior secured notes in December 2003.

 

*Net Income*

 

Net income forthe year ended December 31, 2003 was $8.2 million.  This is an improvement of $3.0 million, or58%, from a net income figure of $5.2 million recorded for the year endedDecember 31, 2002.

 

**Year2002 Compared to Year 2001**

 

*Route Operations*

 

Routeoperations accounted for 71% of total revenues during the years endedDecember 31, 2001 and 2002, respectively. Total revenues from route operationswere $183.9 million for the year ended December 31, 2002, an increase of$13.0 million, or 8%, from $170.9 million for the year ended December 31,2001.  At December 31, 2002, wewere operating approximately 5,400 slot machines, approximately the same numberof machines as at December 31, 2001. The increase in route revenue was a result of increased per machinerevenues due to the replacement and refurbishment of slot machines during 2002.

 

Routeoperating costs were $150.8 million, or 82%, of route revenues for the yearended December 31, 2002.  Thiscompares to $141.5 million and 83% of route revenues for the same period in2001.  The increase in route operatingexpenses was primarily related to increased participation costs and spaceleases.

 

Route EBITDA(as defined) for the year ended December 31, 2002 was $32.8 million, anincrease of $3.6 million, or 12%, from $29.2 million for the year endedDecember 31, 2001.

 

*Casino Operations*

 

Casinooperations accounted for 28% of total revenues for the years endedDecember 31, 2002 and 2001, respectively. Total revenues derived from casino operations were $72.5 million for theyear ended December 31, 2002, an increase of $4.7 million, or 7%, from$67.8 million for the year ended December 31, 2001.  This increase in revenue was primarily dueto increased customer play at Terrible’s Hotel & Casino in LasVegas.  Casino operating costs were$48.6 million, or 67%, of casino revenues for the year ended December 31,2002, compared to $46.7 million, or 69%, of casino revenues for the year endedDecember 31, 2001.  Operatingexpenses increased primarily in the areas of promotions and management.  The increase in expenses drove the increasein revenue.  Casino EBITDA (as defined)was $14.4 million for the year ended December 31, 2002, an increase of$1.5 million, or 12%, from $12.9 million from the year ended December 31,2001.  Increases in EBITDA came from thecasino properties in Las Vegas and Pahrump.

 

18

----

 

*Other Revenue*

 

Other revenueconsists of revenue items such as ATM fees, pay phone charges, rental incomeand other miscellaneous items unrelated to route and casino operations.  Other revenues were $3.1 million for theyear ended December 31, 2002 compared to $2.9 million for the year endedDecember 31, 2001, an increase of 7%.

 

*Promotional Allowances*

 

Promotionalallowances were $9.8 million, or 4% of total revenues, for the year endedDecember 31, 2002, an increase of $1.4 million, or 17%, from $8.4 million,or 4% of total revenues for the year ended December 31, 2001.  The increase was primarily due to heavierpromotional spending at the casinos.

 

*Other Costs*

 

General andadministrative expenses, or G&A, were $10.8 million for the year endedDecember 31, 2002, an increase of $0.6 million, or 6%, from $10.2 millionfor the year ended December 31, 2001. The increase was primarily due to costs associated with an increase ininsurance expenses and the increase in the license and trademark fees toTerrible Herbst, Inc., a related party. G&A expenses as a percentage of net revenue were 4% of the revenuefor the years ended December 31, 2001 and 2002, respectively.

 

Depreciationand amortization expense was $15.7 million for the year ended December 31,2002, an increase of $1.5 million, or 11%, from $14.2 million for the yearended December 31, 2001.  Theincrease was due to the amortization expenses associated with the acquired slotroute contracts and depreciation expenses associated with new fixed assets.

 

*Income from Operations*

 

As a result ofthe factors discussed above, income from operations was $23.6 million for theyear ended December 31, 2002, an increase of $3.0 million from $20.6 millionfor the year ended December 31, 2001. As a percentage of total revenues, income from operations increased from8.5% during 2001 to 9% during the same period in 2002.

 

*Other Expenses*

 

Other expensewas $18.4 million for the year ended December 31, 2002, a decrease of $1.1million from the year ending December 31, 2001.  The decrease was primarily due to lower interest expense as aresult of the debt restructuring done in August 2001.

 

*Loss on early retirement of debt*

 

We incurred acharge to earnings of $13.0 million in August 2001.  This charge was due to the costs associated with the retirementand restructuring of $143.0 million of our long-term debt.  This restructuring was done in conjunctionwith the issuance of $170.0 million 103⁄4% senior secured notes in August 2001.  There were no such charges in 2002.

 

19

----

 

*Net Income (loss)*

 

Net income forthe year ended December 31, 2002 was $5.2 million.  This is an improvement of $17.2 million fromthe net loss recorded in 2001.

 

The loss in2001, discussed above, included the $13.0 million in debt restructuringcharges.  Net income before the chargedue to early retirement of debt was $1.0 million for the year endedDecember 31, 2001, indicating an improvement in 2002 of $4.2 million, or 420%.

 

**Liquidityand Capital Resources**

 

*Cash Flows*

 

AtDecember 31, 2003, we maintained $54.0 million in cash andequivalents.  We expect to fund ouroperations, debt service and capital needs from operating cash flow and cash onhand.  Based upon our anticipated futureoperations, we believe that cash on hand together with available cash flow willbe adequate to meet our anticipated working capital requirements, capitalexpenditures and scheduled payments of interest on our 103⁄4% senior securednotes for the next twelve months and at least the foreseeable future.  No assurances can be given, however, thatour cash flow will be sufficient for that purpose.  There can be no assurance that our estimates of our cash needsare accurate or that new business developments or other unforeseeable eventswill not occur, resulting in the need to raise additional funds.

 

*Operating Activities*

 

During theyear ended December 31, 2003, operating activities provided $35.0 millionin cash flows on $8.2 million in net income. Net income for the year ended December 31, 2003 included non-cashexpenses (primarily depreciation and amortization) of $24.4 million.

 

Operatingactivities are a significant source of our cash flows.  We do not believe that there is a trend orlikelihood that our cash flows would be adversely impacted in the foreseeablefuture.  However, potential factors thatcould adversely affect the level of cash flows provided by operating activitiesinclude a downturn in the local Las Vegas economy, which results in residentsreducing the amount they spend on discretionary items, such as gaming, andincreased competition in the Las Vegas gaming industry for the locals market.

 

*Investing Activities and Capital Expenditures*

 

For the yearended December 31, 2003, we had net cash used for investing activities of$74.7 million primarily related to the purchase of the slot route assetsof Anchor Coin for cash of $57.2 million and capital expenditures of $15.1million primarily related to the purchase of gaming devices.

 

Capitalexpenditures are budgeted to be $14.0 million for 2004.  These funds will be primarily used formaintenance capital expenditures at the casinos and for the purchase of slotroute assets including new slot machines.

 

*Financing Activities*

 

Cash flowsprovided by financing activities were $38.7 million in 2003.  This figure is primarily the result of theissuance of $47.0 million of additional 103⁄4% senior secured notes maturing in2008.  The proceeds of this issuancewere used in connection with approximately $15.0 million in cash fromoperations to purchase the route assets of Anchor Coin, a subsidiary ofInternational Game Technology,

 

20

----

 

for approximately $61.0million.  Additionally, the feesassociated with this financing were approximately $2.6 million.  In December 2003, we repurchasedapproximately $2.0 million face value of our 103⁄4% notes maturing in 2008,resulting in a principal amount of our notes at $215.0 million.  We incurred a charge related to the earlyretirement of debt of $267,000.

 

Stockholderdistributions for 2003 were $5.4 million. These distributions were made for the payment of S corporationtaxes as well as discretionary distributions to the stockholders as permittedunder the indenture agreement.

 

As ofDecember 31, 2003, we maintain a $10.0 million line of credit for workingcapital purposes.  The line had noactivity for 2003.

 

*Free Cash Flow*

 
|                                                   |   | **2001**           |   | **2002** |   | **2003** |   |
|--------------------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                                   |   | **(in  millions)** |   |
|                                                   |   |               |   |     |   |     |   |
| Cash flow from operations                              |   | $                  | 14.9   |     | $      | 19.3     |   | $ | 35.0 |   |
| Cash paid for capital expenditures                     |   | 3.2                |   | 8.4      |   | 15.1     |   |
| Operating cash less non-financed capital  expenditures |   | $                  | 11.7   |     | $      | 10.9     |   | $ | 19.9 |   |

 

Our ability toservice our debt will be dependent on our future performance, which will beaffected by, among other things, prevailing economic conditions and financial,business and other factors certain of which are beyond our control.

 

*Contractual Obligations and Commitments*

 

The followingtable summarizes our contractual obligations and commitments as ofDecember 31, 2003.

 
|                               |   | **Payments  Due by Period** |    |
|------------------------------------|--------|-----------------------------|---------|
|                               |   | **Total**                   |    | **Less than  1 year** |   | **1-3 years** |   | **4-5 years** |   | **After  5 years** |   |
| **Contractual Obligations:**       |   |                        |    |   |   |   |   |   |   |   |   |
| Long-term debt                     |   | $                           | 215,269 |   | $ | 170 |   | $ | 202 |   | $ | 214,897 |   | $ | — |   |
| Operating leases                   |   | 321,372                     |    | 74,348 |   | 129,852 |   | 80,561 |   | 36,611 |   |
|                               |   |                        |    |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations |   | $                           | 536,641 |   | $ | 74,518 |   | $ | 130,054 |   | $ | 295,458 |   | $ | 36,611 |   |

 

Othersignificant operating uses of cash in 2004 include interest and distributionsmade to stockholders for payment of S corporation taxes and discretionarydistributions.  Our cash payments forinterest were $21.2 million for the year ended December 31, 2003 and cashdistributions to stockholders were $5.4 million for the year endedDecember 31, 2003.  We would expectsimilar levels of cash payments for interest and stockholder distributions in2004.

 

**CriticalAccounting Policies**

 

Thepreparation of our financial statements requires our management to adoptaccounting policies and make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. We prepare our consolidated

 

21

----

 

financial statements inconformity with accounting principles generally accepted in the United Statesof America.  Our business and industryis highly regulated.  The majority ofour revenue is counted in the form of cash, chips and tokens and therefore, isnot subject to any significant or complex estimation procedures.

 

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

 

*Long-Lived Assets*

 

Wehave a significant investment in long-lived property and equipment and leaseacquisition costs.  Significantaccounting policies that affect the reported amounts for these assets includethe determination of the assets’ estimated useful life, evaluation of theassets’ recoverability and the likelihood of technological obsolescence.  We estimate useful lives for its propertyand equipment based on historical experience and estimates of products’commercial lives.  Significantincremental costs associated with the acquisition of location leases arecapitalized and amortized using the straight-line method over the term of therelated leases, including expected renewals, which range from 1 to20 years.  Should the actual useful life of an assetdiffer from the estimated useful life, future operating results could bepositively or negatively affected.  We review useful lives, obsolescence, and assesscommercial viability of these assets periodically.

 

We assess therecoverability of long-lived assets when circumstances indicate that thecarrying amount of an asset may not be fully recoverable.  If undiscounted expected cash flows to begenerated by a long-lived asset or asset group are less than its carryingamount, we record an impairment to write down the long-lived asset or assetgroup to its estimated fair value.  Fairvalue is determined based on undiscounted expected future cash flows.  An adverse change to the estimate of theseundiscounted future cash flows could necessitate an impairment charge thatcould adversely affect operating results.

 

**RecentlyIssued and Adopted Accounting Standards**

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, an interpretation of SFAS Nos. 5, 57 and 107 and arescission of FASB Interpretation No. 34” (“Interpretation 45”).  Interpretation 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  It also clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  The provisions of this Interpretation 45 areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002, and the disclosure requirements are generally effectivefor financial statements of interim or annual periods ending afterDecember 15, 2002.  We believe thatInterpretation 45 will not have a significant impact on our results ofoperations or financial position.

 

In December2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003)”(“FIN 46R”), clarifying FIN 46 and exempting certain entities from theprovisions of FIN 46R.  Generally,application of FIN 46R is required in financial statements of public entitiesthat have interests in structures commonly referred to as special-purposeentities for periods ending after December 15, 2003, and, for other types ofvariable interest entities for periods ending after March 15, 2004.  FIN 46R addresses consolidation by businessenterprises of variable interest entities that either: (1) do not havesufficient equity investment at risk to permit the entity to finance its activitieswithout additional subordinated financial support, or (2) the company will holda significant variable interest in, or have significant involvement with, anexisting variable interest entity.

 

22

----

 

During the fourth quarter of2003, we adopted the provisions of FIN 46R related to special-purpose entities,which did not have a material impact on its financial position and results ofoperations.  We will adopt the provisionsof FIN 46R related to other types of variable interest entities during thefirst quarter of 2004.

 

**Statementon Forward-Looking Information**

 

Certaininformation included herein contain statements that may be consideredforward-looking, such as statements relating to projections of future resultsof operations or financial condition, expectations for our route operations andcasino properties, and expectations of the continued availability of capitalresources.  Any forward-lookingstatement made by us necessarily is based upon a number of estimates andassumptions that, while considered reasonable by us, is inherently subject tosignificant business, economic and competitive uncertainties and contingencies,many of which are beyond our control, and are subject 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 beregarded as a representation by us or any other person that the forward-lookingstatements will be achieved.  Undue relianceshould not be placed on any forward-looking statements.  Some of the contingencies and uncertaintiesto which any forward-looking statement contained herein is subject include, butare not limited to, the following:

 

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

 

We conduct ourroute operations under contracts with third parties.  Both contracts with chain and street accounts are renewable atthe option of the owner of the respective chain store or street account.  As our route contracts expire, we arerequired to compete for renewals. Although we have historically been able to renew our contracts, if weare unable to renew a material portion of our route contracts because ourcompetitors offer more favorable terms or for any other reason, our operationswould be adversely affected.  We cannotassure you that our current chain or street contracts will be renewed.

 

*Our substantial indebtedness could adverselyaffect our financial health and prevent us from fulfilling our obligationsunder the indenture.*

 

We have asignificant amount of indebtedness.  Thefollowing chart shows certain important information regarding our indebtedness:

 

|                                      |   | **December 31,  2003** |    |
|-------------------------------------------|--------|-----------------------------|---------|
|                                      |   | **(in  thousands)**         |    |
|                                      |   |                        |    |
| Long-term debt, including current portion |   | $                           | 215,269 |   |
| Stockholders’ equity                 |   | 1,554                       |    |
| Ratio of earnings to fixed charges        |   | 1.3                         | x       |
|                                           |        |                             |         |  |

 

Oursubstantial indebtedness could have important consequences.  For example, it could:

 

•                  make it moredifficult for us to satisfy our obligations with respect to the indenturegoverning our 103⁄4% senior secured notes;

 

•                  increase ourvulnerability to general adverse economic and industry conditions;

 

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

 

23

----

 

•                  limit ourflexibility in planning for, or reacting to, changes in our business and theindustry in which we operate;

 

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

 

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

 

We may be ableto incur substantial additional indebtedness in the future as the terms of theindenture do not fully prohibit us from doing so.  We may incur new debt if we have a fixed charge coverage ratio ofat least 2.0x.  In addition, we have anundrawn $10.0 million line of credit. In February 2003, we amended our indenture to increase the ability of usand our restricted subsidiaries to incur indebtedness for working capital and generalcorporate purposes from $10.0 million to $30.0 million.  If we incur additional debt, the risks setforth above could intensify.

 

*We will require a significant amount of cashto service our indebtedness.  Ourability to generate cash depends on many factors beyond our control.*

 

Our ability tomake payments on and to refinance our indebtedness, and to fund our operationswill depend upon our ability to generate cash in the future.  This, to a certain extent, is subject togeneral economic, financial, competitive, legislative, regulatory and otherfactors that are beyond our control. Based on our current level of operations and anticipated revenue growth,we believe our cash flow from operations, available cash and future borrowingswill be adequate to meet our future liquidity needs for the next fewyears.  However, we cannot assure youthat our business will generate sufficient cash flow from operations or thatfuture borrowings will be available to us in amounts sufficient to enable us topay our indebtedness, or to fund our other liquidity needs.  In addition, if we consummate significantacquisitions in the future, our cash requirements may increasesignificantly.  If we are unable togenerate sufficient cash flow and are unable to refinance or extend outstandingborrowings, we may have to:

 

•                  reduce or delayplanned expansion and capital expenditures;

 

•                  sell assets;

 

•                  restructuredebt; or

 

•                  raise additionalcapital.

 

Furthermore,we may need to refinance all or a portion of our debt on or beforematurity.  We cannot assure you that wewill be able to refinance any of our debt on commercially reasonable terms orat all.

 

*Our indebtedness imposes restrictivecovenants on us.*

 

The indenturegoverning our 103⁄4% senior secured notes contains certain restrictive covenantsthat, among other things, restrict our ability to:

 

•                  incur additionalindebtedness;

 

•                  pay dividends onor purchase our stock;

 

•                  makeinvestments;

 

•                  incur liens onour assets to secure debt;

 

24

----

 

•                  placerestrictions on distributions and other payments from our subsidiaries;

 

•                  merge orconsolidate with another company;

 

•                  transfer or sellour assets; and

 

•                  enter intotransactions with affiliates.

 

In addition,as of December 31, 2003, we maintained a $10.0 million credit facility toprovide us with additional working capital. The credit facility contains covenants similar to those in theindenture, as well as requirements that we maintain specified financial ratiosand satisfy certain financial tests. These restrictive covenants may restrict our ability to make capitalexpenditures or pursue other business strategies.

 

*We may experience reduced operating marginsand loss of market share due to intense competition from companies with longeroperating histories, greater resources and more established brand names.*

 

The gamingindustry is highly competitive.  Ifother route operations or properties operate more successfully, if existingroute operations or properties are enhanced or expanded, or if additional routeoperations or hotels and casinos are established in and around the locations inwhich we conduct business, we may lose market share.  In particular, the expansion of route operations or casino gamingin or near any geographic area from which we attract or expect to attract asignificant number of our customers could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Each of ourroute operations and our casinos are subject to intense competition.  The principal competitive factors in theroute business are location, service, quality and convenience.  The principal competitive factors for ourcasinos include the quality and location of a facility, the nature and qualityof the amenities, customer service and marketing programs.  Each of our casinos competes with othercasinos focusing on the locals market, as well as other casinos and other formsof gaming and entertainment in their respective locales.

 

Ourcompetitors vary in size, scope and breadth. Some of our competitors have greater name recognition and greaterfinancial, selling and marketing, technical and other resources than wedo.  We must continually attractcustomers to our route locations and casinos, which requires us to maintain ahigh level of investment on our part in marketing and customer service.  There can be no assurance that we will beable to compete effectively with our existing competitors or with newcompetitors.

 

*We face extensive regulation from gaming andother government authorities.*

 

As owners andoperators of gaming facilities, we are subject to extensive Nevada state andlocal regulation.  Nevada state andlocal government authorities require us and our subsidiaries to obtain gaminglicenses and require our officers and key employees to demonstrate suitabilityto hold gaming licenses.  The Nevadastate and local government authorities may limit, condition, suspend or revokea license for any cause deemed reasonable by the respective licensing agency.  They may also levy substantial fines againstus or our subsidiaries or the individuals involved in violating any gaming lawsor regulations.  Furthermore, the NevadaGaming Commission could request that a state court appoint a supervisor tooperate any non-restricted gaming establishment operated by us if the licensesheld by us are revoked, suspended or otherwise lapse.  In such extraordinary circumstances, earnings generated by gamingoperations during a supervisor’s appointment (except for reasonable rentalvalue) could be forfeited to the State of Nevada.  The occurrence of any of these events could have a materialadverse effect on our business, financial condition and results of operations.

 

25

----

 

Any futurepublic offering of debt or equity securities by Herbst Gaming will requirereview of and prior approval by the Nevada Gaming Commission.

 

We are subjectto a variety of other rules and regulations, including zoning, environmental,construction and land-use laws and regulations governing the serving of alcoholicbeverages.  Any changes to these lawscould have a material adverse effect on our business, financial condition andresults of operations.

 

From time totime, legislators and special interest groups have proposed legislation thatwould expand, restrict or prevent gaming operations in the jurisdictions inwhich we operate.  Any such change tothe regulatory environment or the adoption of new federal, state or localgovernment legislation could have a material adverse effect on our business.

 

*Taxation.*

 

We paysubstantial taxes and fees in connection with our operations as a gamingcompany.  In addition, from time totime, federal, Nevada state and local legislators and other governmentofficials have proposed changes in tax laws, or in the administration of thoselaws affecting the gaming industry.  Itis not possible to determine the likelihood of changes in tax laws or in theadministration of those laws.  Changesto applicable tax laws, if adopted, could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

During the2003 legislative session, there was an increase in the payroll taxes to 7% ofpayroll, an increase of the gross casino gaming taxes from 6.25% to 6.75%, aswell as a 33% increase in fees imposed on the operation of slot machineslocated in a restricted location (15 machines or less).

 

*Our operations could be adversely affecteddue to the adoption of anti-smoking regulations.*

 

If smokingwere banned at grocery stores and convenience stores, our business could bematerially adversely affected.  InNovember 2003, the voters of Clark and Washoe Counties of Nevada, the countiesin which the majority of our chain and street customers are located, eachapproved two non-binding advisory questions that recommended that:

 

•                  the Boards ofHealth of Clark and Washoe Counties be permitted to adopt regulations that arestronger than state law to protect people from secondhand smoke; and

 

•                  secondhandsmoking be completely prohibited in places frequented by children, such asschools, grocery stores, restaurants, and governmental buildings.

 

During the 2003 legislature,this initiative did not make it out of its legislative committee.  However, there are no assurances that futureattempts at regulation may not be more successful. It is not possible todetermine the manner, nature or likelihood of changes in the current lawsrelating to smoking in public places or the effect of regulations regardingsecondhand smoke; however, new anti-smoking laws, if adopted, could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

*We are unable to predict the future impactthat terrorism and the uncertainty of war may have on our business andoperations.*

 

We believethat the terrorist attacks that occurred on September 11, 2001 have hadlittle impact directly on our route operations.  The September 11 attacks had a modest effect on our casinooperations,

 

26

----

 

as our casino operations were impactedby a loss of room revenue as a result of less tourists traveling to southernNevada.  Overall, we believe that ouroperations to date have not been significantly affected by the terroristattacks and terrorism in general.  Wecannot guarantee, however, that our business will remain unaffected by fears ofwar and any future acts of terrorism. We are unable to predict the future impact that the uncertainty of warand any future acts of terrorism may have on our business and operations, thelocal markets in which we operate, and the economy in general.

 

*We depend upon our key employees and certainmembers of our management.*

 

Our success issubstantially dependent upon the efforts and skills of Edward J. Herbst,our chairman of the board, chief executive officer and president, andMary E. Higgins, our chief financial officer.  We have entered into employment agreements with Mr. Herbstand Ms. Higgins.  However, if wewere to lose the services rendered by either of them, our operations could beadversely affected.  In addition, wecompete with other potential employers for employees, and we may not succeed inhiring and retaining the executives and other employees that we need.  An inability to hire quality employees couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

*Our executive officers and members of ourboard of directors own 100% of Herbst Gaming and could have interests thatconflict with yours.*

 

Edward,Timothy and Troy Herbst own all of the outstanding stock of Herbst Gaming.  This concentration of ownership gives themthe power to control the outcome of all matters requiring stockholder approval,including the election of all directors, and will give them the power to hinderor delay a change of control of Herbst Gaming. In addition, Edward, Timothy and Troy Herbst are all officers anddirectors of Terrible Herbst, Inc., a company owned by parties related tous.  We currently engage in transactionswith Terrible Herbst, Inc. and plan to continue to do so in thefuture.  These related-partytransactions could lead to potential conflicts of interest.

 

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

 

Our businessdepends on customers living in Nevada, an area that has recently experiencedsignificant population growth.  Wecannot be certain that this growth will continue.  If it does not continue, the profitability of our route andcasino operations could be adversely affected. Our casinos are particularly dependent on the economy where they arelocated.  An economic downturn in Nevadaor these local markets could have a material adverse effect on our operatingresults.  In addition, there can be noassurance that the economy in Nevada or these local markets will continue togrow.

 

**Item 7A.****                           Quantitativeand Qualitative Disclosures About Market Risk**

 

Market risk isthe risk of loss arising from adverse changes in market rates and prices, suchas interest rates, foreign currency exchange rates, and commodity prices.

 

On August 24,2001 we issued $170.0 million in 103⁄4% senior secured notes.  The proceeds of these notes were used torefinance substantially all of our existing debt and for working capitalpurposes.  All debt is currently at afixed rate of interest.  OnFebruary 7, 2003, we issued an additional $47.0 million in 103⁄4% seniorsecured notes, and, as a result, we currently have approximately $215.0 millionin aggregate principal amount of notes outstanding under our indenture.  In December 2003, we renewed our $10.0million undrawn line of credit from U.S. Bank of Nevada.  This facility has a floating interest rateand currently no outstanding balance. All other debt is currently at a fixed rate of interest.

 

27

----

 

The fair valueof our long-term debt is estimated based on the quoted market prices for thesame or similar issues or on the current rates offered to us for debt of thesame remaining maturities.  Based on theborrowing rates currently available to us for debt with similar terms andaverage maturities, the estimated fair value of long-term debt outstanding isapproximately $242,412,500 as of December 31, 2003.  In December 2003, we purchased $2.0 millionface value of our outstanding long-term debt in the open market.  This purchase was made with the intention ofretiring those senior secured notes, and therefore, the face value of ourlong-term debt has been adjusted by this amount.

 

We do notinvest in derivative financial instruments, interest rate swaps or othersimilar investments to alter interest rate exposure.

 

We do not haveany cash or cash equivalents as of December 31, 2003 that are subject tomarket risk based on changes in interest rates.

 

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

 
| Independent Auditors’ Report                                                                               |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| Consolidated Balance Sheets at December 31, 2002 and 2003                                                  |
|                                                                                                            |
| Consolidated Statements of Operations for  the Years Ended December 31, 2001, 2002 and 2003                |
|                                                                                                            |
| Consolidated Statements of Stockholders’  Equity for the Years Ended December 31, 2001, 2002 and 2003 |
|                                                                                                            |
| Consolidated Statements of Cash Flows for  the Years Ended December 31, 2001, 2002 and 2003                |
|                                                                                                            |
| Notes to Consolidated Financial Statements                                                                      |

 

28

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directors andStockholders ofHerbst Gaming, Inc. and SubsidiariesLas Vegas, Nevada

 

We have audited theaccompanying consolidated balance sheets of Herbst Gaming, Inc. andSubsidiaries (the “Company”) as of December 31, 2002 and 2003, and therelated consolidated statements of operations, stockholders’ deficiency, andcash flows for each of the three years in the period ended December 31,2003.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable 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 31,2002 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2003, in conformitywith accounting principles generally accepted in the United States of America.

 

DELOITTE & TOUCHE LLP

 

Las Vegas, Nevada

March 9, 2004

 

29

----

 

**Herbst Gaming, Inc.**

 

**ConsolidatedBalance Sheets**

**(in thousands)**

** **
|                                                                                     |   | **December  31,** |    |
|------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                     |   | **2002**          |    | **2003** |   |
|                                                                                     |   |              |    |   |   |
| **Assets**                                                                               |   |              |    |   |   |
| Current assets                                                                           |   |              |    |   |   |
| Cash and cash equivalents                                                                |   | $                 | 55,035  |   | $ | 54,030 |   |
| Accounts receivable, net                                                                 |   | 1,389             |    | 1,216 |   |
| Notes and loans receivable                                                               |   | 266               |    | 706 |   |
| Prepaid expenses                                                                         |   | 3,520             |    | 4,070 |   |
| Inventory                                                                                |   | 1,143             |    | 1,039 |   |
|                                                                                     |   |              |    |   |   |
| Total current  assets                                                                    |   | 61,353            |    | 61,061 |   |
| Property and equipment, net                                                              |   | 99,932            |    | 106,824 |   |
| Lease acquisition costs, net                                                             |   | 15,140            |    | 59,620 |   |
| Due from related parties                                                                 |   | 546               |    | 563 |   |
| Other assets, net                                                                        |   | 6,742             |    | 9,000 |   |
|                                                                                     |   |              |    |   |   |
| Total assets                                                                             |   | $                 | 183,713 |   | $ | 237,068 |   |
|                                                                                     |   |              |    |   |   |
| **Liabilities and stockholders’ equity  (deficiency)**                              |   |              |    |   |   |
| Current liabilities                                                                      |   |              |    |   |   |
| Current portion of long-term debt                                                        |   | $                 | 127     |   | $ | 170 |   |
| Accounts payable                                                                         |   | 4,695             |    | 5,727 |   |
| Accrued expenses                                                                         |   | 10,707            |    | 13,599 |   |
| Due to related parties                                                                   |   | 430               |    | — |   |
|                                                                                     |   |              |    |   |   |
| Total current liabilities                                                                |   | 15,959            |    | 19,496 |   |
| Long-term debt, less current portion                                                     |   | 167,814           |    | 215,099 |   |
| Other liabilities                                                                        |   | 1,175             |    | 919 |   |
|                                                                                     |   |              |    |   |   |
| Commitments and contingencies (Note 9)                                                   |   |              |    |   |   |
|                                                                                     |   |              |    |   |   |
| Stockholders’ equity (deficiency)                                                   |   |              |    |   |   |
| Common stock (no par value; 2,500 shares  authorized; 300 shares issued and outstanding) |   | 2,368             |    | 2,368 |   |
| Additional paid-in-capital                                                               |   | 1,631             |    | 1,631 |   |
| Accumulated deficit                                                                      |   | (5,234            | )       | (2,445 | ) |
| Total stockholders’ equity (deficiency)                                             |   | (1,235            | )       | 1,554 |   |
|                                                                                     |   |              |    |   |   |
| Total liabilities and stockholders’ equity  (deficiency)                            |   | $                 | 183,713 |   | $ | 237,068 |   |

 

See notes to consolidated financialstatements.

 

30

----

**Herbst Gaming, Inc.**

 

**Consolidated Statements of Operations**

 

**(in thousands)**

 
|                                                |   | **Year Ended  December 31,** |    |
|-----------------------------------------------------|--------|------------------------------|---------|
|                                                |   | **2001**                     |    | **2002** |   | **2003** |   |
|                                                |   |                         |    |   |   |   |   |
| Revenues                                            |   |                         |    |   |   |   |   |
| Route operations                                    |   | $                            | 170,893 |   | $ | 183,877 |   | $ | 241,833 |   |
| Casino operations                                   |   | 67,831                       |    | 72,498 |   | 78,342 |   |
| Other—non-gaming                               |   | 2,878                        |    | 3,078 |   | 3,049 |   |
|                                                |   |                         |    |   |   |   |   |
| Total revenues                                      |   | 241,602                      |    | 259,453 |   | 323,224 |   |
| Less promotional allowances                         |   | (8,410                       | )       | (9,802 | ) | (11,249 | ) |
|                                                |   |                         |    |   |   |   |   |
| Net revenues                                        |   | 233,192                      |    | 249,651 |   | 311,975 |   |
|                                                |   |                         |    |   |   |   |   |
| Costs and expenses                                  |   |                         |    |   |   |   |   |
| Route operations                                    |   | 141,535                      |    | 150,781 |   | 192,757 |   |
| Casino operations                                   |   | 46,686                       |    | 48,635 |   | 51,142 |   |
| Depreciation and amortization                       |   | 14,198                       |    | 15,741 |   | 24,382 |   |
| General and administrative                          |   | 10,168                       |    | 10,812 |   | 12,514 |   |
|                                                |   |                         |    |   |   |   |   |
| Total costs and expenses                            |   | 212,587                      |    | 225,969 |   | 280,795 |   |
|                                                |   |                         |    |   |   |   |   |
| Income from operations                              |   | 20,605                       |    | 23,682 |   | 31,180 |   |
| Other income (expense)                              |   |                         |    |   |   |   |   |
| Interest income                                     |   | 407                          |    | 336 |   | 228 |   |
| Interest expense, net of  capitalized interest |   | (19,952                      | )       | (18,785 | ) | (22,932 | ) |
| Loss on early retirement of debt                    |   | (13,024                      | )       | — |   | (267 | ) |
|                                                |   |                         |    |   |   |   |   |
| Total other expense                                 |   | (32,569                      | )       | (18,449 | ) | (22,971 | ) |
|                                                |   |                         |    |   |   |   |   |
| Net income (loss)                                   |   | $                            | (11,964 | ) | $ | 5,233 |   | $ | 8,209 |   |

 

See notes to consolidatedfinancial statements.

 

31

----

 

**HerbstGaming, Inc.**

 

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

 

**(inthousands)**

** **
| **Balance**                      |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Retained   Earnings  (Accumulated  Deficit)** |   | **Total** |   |
|----------------------------------|--------|-------------------|--------|----------------------------------|--------|-------------------------------------------------|--------|-----------|--------|
|                             |   |              |   |                             |   |                                            |   |      |   |
| Balance, January 1, 2001    |   | $                 | 2,368  |                             | $      | 731                                             |   | $         | 3,873  |   | $ | 6,972 |   |
| Net loss                         |   | —            |   | —                           |   | (11,964                                         | )      | (11,964   | )      |
| Stockholders’ distributions |   | —            |   | —                           |   | (2,376                                          | )      | (2,376    | )      |
| Contributed capital              |   | —            |   | 900                              |   | —                                          |   | 900       |   |
|                             |   |              |   |                             |   |                                            |   |      |   |
| Balance, December 31, 2001  |   | 2,368             |   | 1,631                            |   | (10,467                                         | )      | (6,468    | )      |
| Net income                       |   | —            |   | —                           |   | 5,233                                           |   | 5,233     |   |
|                             |   |              |   |                             |   |                                            |   |      |   |
| Balance, December 31, 2002  |   | 2,368             |   | 1,631                            |   | (5,234                                          | )      | (1,235    | )      |
| Net income                       |   | —            |   | —                           |   | 8,209                                           |   | 8,209     |   |
| Stockholders’ distributions |   | —            |   | —                           |   | (5,420                                          | )      | (5,420    | )      |
|                             |   |              |   |                             |   |                                            |   |      |   |
| Balance, December 31, 2003  |   | $                 | 2,368  |                             | $      | 1,631                                           |   | $         | (2,445 | ) | $ | 1,554 |   |

 

See notes to consolidatedfinancial statements.

 

32

----

 

**Herbst Gaming, Inc.**

 

**Consolidated Statements of Cash Flows**

 

**(in thousands)**

** **
|                                                                                     |   | **Year Ended  December 31,** |    |
|------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                     |   | **2001**                     |    | **2002** |   | **2003** |   |
|                                                                                     |   |                         |    |   |   |   |   |
| Cash flows from operating activities                                                     |   |                         |    |   |   |   |   |
| Net income (loss)                                                                        |   | $                            | (11,964 | ) | $ | 5,233 |   | $ | 8,209 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities |   |                         |    |   |   |   |   |
| Depreciation and amortization                                                            |   | 14,198                       |    | 15,741 |   | 24,382 |   |
| Debt discount amortization                                                               |   | 1,633                        |    | 424 |   | 83 |   |
| Gain on sale of property and equipment                                                   |   | (41                          | )       | (129 | ) | (119 | ) |
| Other                                                                                    |   | (202                         | )       | — |   | — |   |
| Loss on early retirement of debt                                                         |   | 13,024                       |    | — |   | 267 |   |
| Decrease (increase) in Accounts receivable                                               |   | (621                         | )       | 7 |   | 173 |   |
| Prepaid expenses                                                                         |   | 2,182                        |    | (561 | ) | (343 | ) |
| Inventory                                                                                |   | (120                         | )       | (370 | ) | 104 |   |
| Due from related parties                                                                 |   | (8,597                       | )       | 170 |   | 630 |   |
| Increase (decrease) in Accounts payable                                                  |   |                         |    |   |   |   |   |
| Accrued expenses                                                                         |   | 6,157                        |    | (688 | ) | 2,314 |   |
| Due to related parties                                                                   |   | (1,499                       | )       | (544 | ) | (430 | ) |
| Other liabilities                                                                        |   | 774                          |    | 134 |   | (256 | ) |
| Net cash provided by operating activities                                                |   | 14,945                       |    | 19,323 |   | 34,997 |   |
|                                                                                     |   |                         |    |   |   |   |   |
| Cash flows from investing activities                                                     |   |                         |    |   |   |   |   |
| Net cash paid for acquisition of Anchor’s  Slot Route                               |   | —                       |    | — |   | (57,171 | ) |
| Additions to notes receivable                                                            |   | (325                         | )       | (860 | ) | (619 | ) |
| Collection on notes receivable                                                           |   | 432                          |    | 870 |   | 689 |   |
| Proceeds from sale of property and  equipment                                            |   | 951                          |    | 395 |   | 577 |   |
| Purchases of property and equipment                                                      |   | (3,226                       | )       | (8,442 | ) | (15,117 | ) |
| Lease acquisition costs                                                                  |   | (610                         | )       | (663 | ) | (3,083 | ) |
|                                                                                     |   |                         |    |   |   |   |   |
| Net cash used in investing activities                                                    |   | (2,778                       | )       | (8,700 | ) | (74,724 | ) |
| Cash flows from financing activities                                                     |   |                         |    |   |   |   |   |
| Increase in notes payable to related  parties                                            |   | 3,553                        |    | — |   | — |   |
| Decrease in notes payable to related  parties                                            |   | (20,947                      | )       | — |   | — |   |
| Proceeds from long-term debt                                                             |   | 167,025                      |    | — |   | 49,115 |   |
| Reduction of long-term debt                                                              |   | (127,531                     | )       | (104 | ) | (2,153 | ) |
| Loan origination fees                                                                    |   | (7,838                       | )       | (234 | ) | (2,553 | ) |
| Prepayment penalty on retired debt                                                       |   | (9,776                       | )       | — |   | (267 | ) |
| Additional paid-in capital                                                               |   | 900                          |    | — |   | — |   |
| Stockholders’ distributions                                                         |   | (2,376                       | )       | — |   | (5,420 | ) |
|                                                                                     |   |                         |    |   |   |   |   |
| Net cash provided by (used in) financing  activities                                     |   | 3,010                        |    | (338 | ) | 38,722 |   |
| Net increase (decrease) in cash and cash  equivalents                                    |   | 15,177                       |    | 10,285 |   | (1,005 | ) |
| Cash and cash equivalents                                                                |   |                         |    |   |   |   |   |
| Beginning of year                                                                        |   | 29,573                       |    | 44,750 |   | 55,035 |   |
| End of year                                                                              |   | $                            | 44,750  |   | $ | 55,035 |   | $ | 54,030 |   |

 

33

----

 
|                                                                  |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                  |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                  |   |                         |   |   |   |   |   |
| Supplemental cash flow information                                    |   |                         |   |   |   |   |   |
| Cash paid during the year for interest                                |   | $                            | 12,983 |   | $ | 18,637 |   | $ | 21,198 |   |
| Supplemental schedule of non-cash investing  and financing activities |   |                         |   |   |   |   |   |
| Purchase of property and equipment financed  through accounts payable |   | —                       |   | 271 |   | 661 |   |
| Purchase of assets through direct financing                           |   | 2,445                        |   | 302 |   | 283 |   |
| Acquisition of Anchor Coin’s Slot Route                          |   |                         |   |   |   |   |   |
| Fair value of assets and liabilities  acquired                        |   |                         |   |   |   |   |   |
| Current assets, other than cash                                       |   |                         |   |   |   | $ | 717 |   |
| Property and equipment                                                |   |                         |   |   |   | 5,200 |   |
| Lease acquisition costs                                               |   |                         |   |   |   | 50,532 |   |
| Other long-term assets                                                |   |                         |   |   |   | 1,300 |   |
| Other liabilities                                                     |   |                         |   |   |   | (578 | ) |
| Cash paid, net of cash acquired                                       |   |                         |   |   |   | $ | 57,171 |   |
|                                                                       |        |                              |        |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

34

----

 

**Herbst Gaming, Inc.**

 

**Notes to ConsolidatedFinancial Statements**

 

 

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

 

***Description ofBusiness and Principles of Consolidation***—Theaccompanying consolidated financial statements of Herbst Gaming, Inc.(“Herbst” or the “Company”) include the accounts of Herbst and itssubsidiaries; E-T-T, Inc. and Subsidiaries (“E-T-T”),Market Gaming, Inc. (“MGI”), E-T-TEnterprises L.L.C. (“E-T-T Enterprises”), and Flamingo and ParadiseGaming, LLC (“FPG”).  Thefinancial statements of E-T-T are consolidated and include thefollowing wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc., and Corral CountryCoin, Inc.

 

Allsignificant intercompany balances and transactions between Herbst, E-T-T,MGI, E-T-T Enterprises, and FPG have been eliminated in theconsolidated financial statements.

 

Herbst Gaming,Inc. was incorporated in Nevada on January 21, 1997.  In August of 2001, a restructuring occurred, wherein E-T-T, MGI,FPG and E-T-T Enterprises became wholly-owned subsidiaries of Herbst.  This restructuring occurred in conjunctionwith the $170.0 million offering of senior secured notes that was used toretire the majority of the existing debt of the consolidated entities.  Prior to August of 2001, the newlyconsolidated entities were combined for presentation purposes.

 

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

 

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

 

FPG owns andoperates Terrible’s Hotel & Casino in Las Vegas, Nevada, which beganoperations in December 2000.

 

The gamingindustry in the State of Nevada is subject to extensive state and localgovernment regulation.  The Company’sgaming operations are subject to the licensing and regulatory control of theNevada Gaming Commission, the Nevada Gaming Control Board, and localjurisdictions.

 

***Use of Estimates***—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the period.  Significantestimates incorporated into the Company’s consolidated financial statementsinclude the estimated useful lives for depreciable and amortizable assets, theestimated allowance for doubtful accounts receivable and the estimated cashflows in assessing the recoverability of long-lived assets.  Actual results could differ from thoseestimates.

 

***Reclassifications***—Certainprior period amounts have been reclassified in the consolidated financialstatements to conform to the current period’s presentation.  Such reclassifications had no impact on netincome.

 

35

----

 

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

 

***Fair Value ofFinancial Instruments***—The carrying value of theCompany’s cash, trade, notes and loans receivable, and trade payablesapproximates fair value primarily because of the short maturities of theseinstruments.  The fair value of theCompany’s long-term debt is estimated based on the quoted market prices for thesame or similar issues or on the current rates offered to the Company for debtof the same remaining maturities.  Basedon the borrowing rates currently available to the Company for debt with similarterms and average maturities, the estimated fair value of long-term debtoutstanding is approximately $242,412,500 as of December 31, 2003.

 

***Accounts Receivable***—Receivablesconsist primarily of amounts due from customers as a result of normal businessoperations.  The Company periodicallyperforms credit evaluations of its customers. The Company reviews accounts receivable balances in order to determinean allowance for potential credit losses. At December 31, 2002 and 2003, an allowance for potential creditlosses was $1,224,000 and $310,629, respectively.

 

***Notes and LoansReceivable***—In order to secure various routelocations, the Company has provided certain incentives to the locationoperators in the form of loans.  Theloans, made for build-outs, tenant improvements, and initial operatingexpenses, are generally secured by the personal guarantees of the operators andthe locations’ assets.  The majority ofthe loans are non-interest bearing and are expected to be repaid within oneyear from the locations’ share of net gaming win.

 

On a regularbasis, the Company evaluates the collectibility of the loans by individuallyevaluating each location’s operating results and cash flows.  Management provides for the carrying valueof loans that are determined to be uncollectible.  At December 31, 2002 and 2003, an allowance for potentialcredit losses was not deemed necessary.

 

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

 

***Property andEquipment***—Property and equipment are stated atcost and depreciated using the straight-line method over the estimated usefullives of the assets.  Leaseholdimprovements are amortized using the straight-line method over the shorter ofthe lease term or estimated 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 AcquisitionCosts***—Significant incremental costs associatedwith the acquisition of location leases are capitalized and amortized using thestraight-line method over the term of the related leases, including expectedrenewals, which range from 1 to 20 years. Lease acquisition costs are stated at cost less accumulated amortizationof $7,528,000 and $16,601,268 at December 31, 2002 and 2003, respectively.

 

36

----

 

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

 

***Long-Lived Assets***—Inaccordance with the provisions of SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” the Company evaluates the potentialimpairment of long-lived assets when events or changes in circumstancesindicate that the carrying amount of a long-lived asset may not berecoverable.  If it is determined thatthe carrying value of long-lived assets may not be recoverable based upon therelevant facts and circumstances, the Company estimates the future undiscountedcash flows expected to result from the use of the asset and its eventualdisposition.  If the sum of the expectedundiscounted future cash flows is less than the carrying value of the asset,the Company will recognize an impairment loss for the difference between thecarrying value of the asset and its fair value.  The Company believes that no material impairment of long-livedassets exists at December 31, 2003.

 

***Revenue andPromotional Allowances***—In accordance with industrypractice, the Company recognizes as gaming revenues the net win from routeoperations, which is the difference between gaming wins and losses.  The Company recognizes total net win fromgaming devices as revenues from gaming routes that operate underrevenue-sharing arrangements. Revenue-sharing payments to route locations are recorded as costs ofroute operations.  Revenues from casinooperations are gaming wins less losses. Revenues from casino operations include the retail value of food andbeverage, and goods and services provided to customers on a complimentarybasis.  Such amounts are then deductedas promotional allowances.  Theestimated cost of providing these promotional allowances is as follows:

 
|              |   | **Year Ended December 31,** |   |
|-------------------|--------|-----------------------------|--------|
|              |   | **2001**                    |   | **2002** |   | **2003** |   |
|              |   | **(dollars in thousands)**  |   |
| Room              |   | $                           | 658    |   | $ | 597 |   | $ | 498 |   |
| Food and beverage |   | 3,785                       |   | 4,507 |   | 4,798 |   |
| Other             |   | 1,322                       |   | 2,049 |   | 3,538 |   |
| Total             |   | $                           | 5,765  |   | $ | 7,153 |   | $ | 8,834 |   |

 

These costs are periodicallyreclassified out of the respective department into the casino department.

 

***Location RentExpense***—Fixed rental payments (including scheduledincreases) are recorded on a straight-line basis over the agreement term,including any optional extension periods that are expected to beexercised.  Contingent payments areexpensed in the period incurred. Renewal agreements are considered new agreements and are accounted foras described above over the new agreement term.

 

***Income Taxes***—Herbst,E-T-T and MGI have elected to be taxed under the provisions of Subchapter S ofthe Internal Revenue Code.  Under thoseprovisions, the owners of each company are liable for income tax on the taxableincome of the Company as it affects the owners’ individual income taxreturns.  Therefore, a provision forincome taxes has not been included in the accompanying consolidated financialstatements.  E-T-T Enterprises and FPGare treated as partnerships for federal income tax purposes and, therefore, donot incur income taxes.  Instead, theirearnings and losses are included in the personal returns of the members and aretaxed depending on their personal tax situations.  Accordingly, the accompanying financial statements do not reflecta provision for income taxes.

 

37

----

 

***Concentrations ofCredit Risk***—The Company maintains cash balances atcertain financial institutions located in southern Nevada.  The balances are insured by the FederalDeposit Insurance Corporation (“FDIC”) up to $100,000.  At times, cash balances may be in excess ofFDIC limits.

* *

***RecentlyIssued and Adopted Accounting Standards****—*

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, an interpretation of SFAS Nos. 5, 57 and 107 and arescission of FASB Interpretation No. 34” (“Interpretation 45”).  Interpretation 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  The provisions of this Interpretation 45 areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002, and the disclosure requirements are generally effective forfinancial statements of interim or annual periods ending after December 15,2002.  The Company believes thatInterpretation 45 will not have a significant impact on its results of operationsor financial position.

 

In December2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003)”(“FIN 46R”), clarifying FIN 46 and exempting certain entities from theprovisions of FIN 46R.  Generally,application of FIN 46R is required in financial statements of public entitiesthat have interests in structures commonly referred to as special-purposeentities for periods ending after December 15, 2003, and, for other types ofvariable interest entities for periods ending after March 15, 2004.  FIN 46R addresses consolidation by businessenterprises of variable interest entities that either:  (1) do not have sufficient equityinvestment at risk to permit the entity to finance its activities withoutadditional subordinated financial support, or (2) the company will hold asignificant variable interest in, or have significant involvement with, anexisting variable interest entity. During the fourth quarter of 2003, the Company adopted the provisions ofFIN 46R related to special-purpose entities, which did not have a materialimpact on its financial position and results of operations.  The Company will adopt the provisions ofFIN 46R related to other types of variable interest entities during thefirst quarter of 2004.

 

**2.****                                      Acquisition**

 

In February2003, the Company completed its acquisition of the route assets of Anchor Coin,Inc., a subsidiary of IGT (“Anchor”). Anchor was a leading route operator in Nevada.  The acquisition, which was recorded under the purchase method ofaccounting, included the purchase of all of the assets of the Anchor’s SlotRoute for an initial purchase price of $61,000,000.  A portion of the purchase price has been allocated to assets acquiredand liabilities assumed based on estimated fair market value at the date ofacquisition with the remaining balance of $50,532,000 recorded as leaseacquisition costs for the route contracts acquired.  Such intangible asset is being amortized on a straight-line basisover the remaining lives of the contracts.

 

The tablebelow reflects unaudited pro forma consolidated results of the Company andAnchor Coin as if the acquisition had taken place at the beginning of the year(dollars in thousands):

 

 
|           |   | **Year Ended  December 31, 2002** |    | **Year Ended  December 31, 2003** |   |
|----------------|--------|----------------------------------------|---------|----------------------------------------|--------|
|           |   |                                   |    |                                   |   |
| Gross Revenues |   | $                                      | 305,832 |                                   | $      | 329,393 |   |
| Net Income     |   | $                                      | 5,311   |                                   | $      | 7,239 |   |

 

 

38

----

 

Included inthe pro forma net income are approximately $4,668,000 and $453,000 of interestexpense and $1,736,000 and $953,000 of depreciation and amortization expensefor the years ended 2002 and 2003, respectively.  In management’s opinion, these unaudited pro forma amounts arenot necessarily indicative of what the actual consolidated results of operationsmight have been if the acquisition had been effective at the beginning of 2002.

 

**3.****                                      Propertyand Equipment**

 

Property andequipment consist of the following (dollars in thousands):

 

|                               |   | **December  31,** |   |
|------------------------------------|--------|-------------------|--------|
|                               |   | **2002**          |   | **2003** | ** ** |
|                               |   |              |   |   |   |
| Building                           |   | $                 | 52,847 |   | $ | 53,779 |   |
| Gaming equipment                   |   | 51,448            |   | 63,821 |   |
| Furniture, fixtures, and equipment |   | 18,031            |   | 23,312 |   |
| Leasehold improvements             |   | 1,622             |   | 1,690 |   |
| Land                               |   | 15,925            |   | 15,925 |   |
| Construction in progress           |   | 267               |   | 204 |   |
|                               |   | 140,140           |   | 158,731 |   |
| Less accumulated depreciation      |   | (40,208           | )      | (51,907 | ) |
|                               |   | $                 | 99,932 |   | $ | 106,824 |   |

 

**4.****                                      LeaseAcquisition Costs**

** **
|                    |   | **As of  December 31, 2002** |   | **As of  December 31, 2003** |   |
|-------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                    |   | **(dollars  in thousands)**       |   |
|                    |   | **Gross  Carrying  Amount**       |   | **Accumulated  Amortization**     |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                    |   |                              |   |                              |   |   |   |   |   |
| Lease Acquisition Costs |   | $                                 | 22,668 |                              | $      | 7,528 |   | $ | 76,221 |   | $ | 16,601 |   |
|                         |        |                                   |        |                                   |        |  |  |  |  |  |  |  |  |

 

The aggregateamortization expense for the years ended December 31, 2001, 2002 and 2003was  $2,931,000, $2,930,000 and$9,134,000, respectively.

 

Estimatedamortization expense for the years ending December 31, 2004, 2005, 2006,2007, and 2008 is $9,903,000, $9,649,000, $9,434,000, $9,289,000, and$8,542,000, respectively.

 

**5.****                                      OtherAssets**

 

Other assetsconsist of the following (dollars in thousands):

 
|                                                                                     |   | **December  31,** |   |
|------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                     |   | **2002**          |   | **2003** |   |
| Debt issuance costs, net of accumulated  amortization of $1,563 and $3,158, respectively |   | $                 | 6,510  |   | $ | 7,468 |   |
| Other assets                                                                             |   | 232               |   | 1,532 |   |
| Total                                                                                    |   | $                 | 6,742  |   | $ | 9,000 |   |

 

39

----

 

**6.****                                      AccruedExpenses**

 

Accruedexpenses consist of the following (dollars in thousands):

 
|                            |   | **December  31,** |   |
|---------------------------------|--------|-------------------|--------|
|                            |   | **2002**          |   | **2003** |   |
| Accrued interest                |   | $                 | 6,183  |   | $ | 7,833 |   |
| Progressive Jackpot liabilities |   | 1,089             |   | 1,593 |   |
| Other accrueds                  |   | 3,435             |   | 4,173 |   |
| Total                           |   | $                 | 10,707 |   | $ | 13,599 |   |

 

 

**7.****                                      Long-TermDebt**

 

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

 
|                                                                                                                                                                                                                           |   | **December  31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                                                                                           |   | **2002**          |    | **2003** |   |
|                                                                                                                                                                                                                           |   |              |    |   |   |
| Senior notes secured by assets of the  Company.  The notes bear interest at  103⁄4% per annum, payments are due on March 1 and September 1, commencing on  March 1, 2003.  The notes mature on  September 1, 2008 |   | $                 | 167,598 |   | $ | 214,798 |   |
| Notes payable to leasing company secured by  vehicles, payable in monthly installments of $4, including interest ranging  from 4.9% to 5.3%, due April 2004                                                                    |   | 343               |    | 471 |   |
| Total debt                                                                                                                                                                                                                     |   | 167,941           |    | 215,269 |   |
| Less current portion                                                                                                                                                                                                           |   | 127               |    | 170 |   |
| Total long-term debt                                                                                                                                                                                                           |   | $                 | 167,814 |   | $ | 215,099 |   |

 

OnAugust 24, 2001, the Company issued (under a private placement) $170.0million in 103⁄4% senior secured notes due in 2008.

 

The proceedsof these notes, approximately $167.0 million, were used to retire outstandingbalances on substantially all credit facilities of $123.6 million,related-party debt of $20.2 million, and $12.0 million in accrued interest andother costs associated with the early termination of the retired debt.  In addition, the Company used $6.8 millionof the proceeds to pay fees associated with the offering of the 103⁄4% seniorsecured notes and the remaining $4.4 million was paid to the Company incash.  The Company incurred anextraordinary charge to earnings of $13.0 million in August 2001.

 

In February2003, the Company issued $47.0 million in additional notes under the existingindenture. The proceeds of the debt were used to purchase the slot route assetsof Anchor Coin, Inc.

 

In December2003, the Company repurchased $2.0 million principal amount of the 103⁄4% seniorsecured notes, resulting in a principal balance of those notes atDecember 31, 2003 of $215.0 million. The Company incurred a charge related to the early retirement of debt of$267,000.

 

40

----

 

In December2003, the Company renewed its $10.0 million undrawn line of credit from U.S.Bank of Nevada.

 

The feesassociated with both issuances of the 103⁄4% senior secured notes are included inother assets at December 31, 2002 and 2003 and are being amortized tointerest expense over the life of the indebtedness.

 

The notesmature on August 24, 2008. Interest is payable in cash at a rate of 103⁄4% per annum on March 1and September 1, commencing March 1, 2003.  The indenture under which the notes were issued contains variouslimitations and restrictions including (i) change-in-control provisions,(ii) limitations on indebtedness and (iii) limitations on restrictedpayments such as dividends.  The Companyis in compliance with these covenants as of December 31, 2003.

 

In October2001, the Company filed a Form S-4 registration statement with theSecurities and Exchange Commission (“SEC”) for the purpose of effecting the exchangeof the notes for identical notes registered for resale under the federalsecurities laws.  This registrationstatement became effective on December 21, 2001 and the exchange offer wasconsummated on January 22, 2002. In March 2003, the Company filed another Form S-4 registrationstatement with the SEC for the purpose of effecting the exchange of theadditional notes for identical notes registered for resale under the federalsecurities laws.  This registrationstatement became effective on May 27, 2003 and the exchange offer wasconsummated on June 24, 2003.

 

Long-term debtat December 31, 2003 is expected to mature as follows (dollars inthousands):

 
| 2004       |   | $       | 170     |   |
|------------|--------|---------|---------|--------|
| 2005       |   | 120     |    |
| 2006       |   | 82      |    |
| 2007       |   | 77      |    |
| 2008       |   | 214,820 |    |
| Thereafter |   | —  |    |
| Total      |   | $       | 215,269 |   |

 

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

 

The Companyleases the land underlying its facilities for its Terrible’s Town Casino(Pahrump) operations from the Herbst Family Limited Partnership and the E-T-TCorporate facilities from Herbst Family Limited Partnership II.  The leases require monthly payments of$26,916 through June 2006 with several 5-year options by the Company toextend.  Rent expense of $307,992,$322,992 and $322,992 was incurred under these agreements for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

The Companyrents space for certain slot machine route operations in convenience storesowned by Terrible Herbst, Inc. (“Terrible’s”), a corporation in which theCompany’s owners are officers and which is owned by the father of theowners.  Rent expense of $3,653,000,$4,132,800 and $4,754,400 was incurred under this agreement for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

The Companyleases a warehouse located in Las Vegas, Nevada, for its employment center andpurchasing departments, from the Herbst’s Grandchildren’s Trust.  The lease began in November 2002

 

41

----

 

and requires payments of$43,525 through November 2012.  Rentexpense was $43,525 and $522,300 incurred under this lease arrangement for theyears ended December 31, 2002 and 2003, respectively.

 

The Companyleases the real property on which Terrible’s Searchlight Casino in Searchlightis located from Terrible Herbst, Inc. for $15,000 per month, pursuant to alease agreement entered into on June 30, 2002 that expires in 2022, withoptions to renew the lease for 5 additional successive terms of 10 yearseach.  Amounts paid under this leasewere $90,000 and $180,000 in the years ended December 31, 2002 and 2003,respectively.

 

The Companyleases land and office space in certain of its facilities to Terrible’s undernoncancelable lease agreements ranging from 10 to 20 years.  Monthly rental income is $63,500.  Rental income from these leases was$623,000, $662,000 and $642,000 for the years ended December 31, 2001,2002 and 2003, respectively.

 

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

 
| 2004       |   | $     | 642    |   |
|------------|--------|-------|--------|--------|
| 2005       |   | 642   |   |
| 2006       |   | 652   |   |
| 2007       |   | 663   |   |
| 2008       |   | 663   |   |
| Thereafter |   | 3,304 |   |
| Total      |   | $     | 6,566  |   |

 

The Companyhas entered into a trademark and license agreement with Terrible’s in whichTerrible’s agrees to permit the Company to use the Terrible Herbst brand nameand its cowboy logo for 25 years including renewal periods.  The agreement was amended in 2001 and theannual royalty fee was increased from $600,000 to $1,200,000.  Pursuant to this trademark and licenseagreement, the Company paid approximately $800,000 in 2001, $1,200,000 in 2002and $1,301,000 in 2003.

 

Due fromrelated parties at December 31, 2002 and 2003 includes $437,000 and$434,000, respectively, in notes receivable from an owner.  The notes bore interest at rates from 5 to6 percent and were repaid in full in the first quarter of 2004.  Due from related parties also includesreceivables of $107,000 from Terrible’s, which is non-interest bearing.  Interest income related to the notesreceivable was $27,000, $26,000 and $ 26,000 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

Obligationsdue to related parties at December 31, 2002 and 2003 consisted of balancesdue to Terrible’s for expenditures made on behalf of the Company, accrued rent,and accrued management fees.  Thebalances are non-interest bearing and payable on demand.

 

The Companyhas also entered into a servicing arrangement with Terrible’s pursuant to whichthe Company provides accounting and administrative services related to thecollection of daily deposits from Terrible’s convenience stores.  The Company also provides personnel toTerrible’s to count, maintain and safeguard large amounts of coin andcurrency.  Terrible’s reimburses theCompany’s expenses in providing these services.  Under this servicing arrangement, the Company recordedapproximately $214,000, $205,800 and $205,800 for services rendered for theyears ended December 31, 2001, 2002 and 2003, respectively.

 

42

----

 

In 1999,HIGCO, Inc. (“HIGCO”), a company owned and operated by Mr. Higgins, theCompany’s General Counsel, and two of his brothers, agreed to purchase from theCompany for $200,000 a liquor license related to owning and operating a tavernlocated in Henderson, Nevada.  The termsof the purchase between the Company and HIGCO require HIGCO to repay the debtat 9% interest per annum.  The balanceof that note at December 31, 2002 was $116,000 and $0 at December 31,2003.  In addition, the Company enteredinto a slot route contract to install, operate and service slot machines at thetavern.  Pursuant to the revenue-sharingcontract, HIGCO paid the Company, $114,442, $105,559 and $1,566 in gaming feesin 2001, 2002 and 2003, respectively. The bar was sold on December 31, 2002 to an unrelated party.  In January 2003, HIGCO repaid the note infull.

 

During 2003,HIGCO opened a new tavern and entered into a new slot route contract.  Pursuant to the revenue-sharing contract,HIGCO paid the Company $27,097 in gaming fees in 2003.  At December 31, 2003, HIGCO had a noteoutstanding of $20,000.

 

A member ofthe Company’s board of directors is a partner with Kummer KaempferBonner & Renshaw.  The Companyretains Kummer Kaempfer Bonner & Renshaw as outside legal counsel, andKummer Kaempfer Bonner & Renshaw has received fees for legal servicesin the amount of $387,369, $234,309 and $251,188 for 2001, 2002 and 2003,respectively.

 

A member ofthe Company’s board of directors, is the President and Chief Executive Officerof Las Vegas Dissemination, Inc., which provides services related to the raceand sports books at Terrible’s Hotel & Casino and Terrible’s Town. LasVegas Dissemination, Inc. has received fees for services in the amount of$220,555, $239,111 and $366,526 for 2001, 2002 and 2003, respectively.

 

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

 

Pursuant to alease agreement that expires in 2067, including renewal periods, the Companyleases the real property on which its corporate headquarters is located fromThe Herbst Family Limited Partnership II, or Herbst FLP II.  The general partners of the HerbstFLP II are Jerry and Maryanna Herbst. In each of 2001, 2002 and 2003, the Company paid $172,992 under thislease.

 

Pursuant to alease agreement that expires in 2026, including renewal periods, the Companyleases the real property on which Terrible’s Town in Pahrump is located fromthe Herbst Family Limited Partnership. In each of 2001, 2002 and 2003, the Company paid $135,000, $150,000 and$150,000, respectively, under this lease.

 

The Companyleases the facilities for its casino operations.  The lease for Terrible’s Town Casino (Henderson) requires monthlypayments of $27,500 through January 2004. Commencing February 2004, and on each five-year anniversarythereafter, the monthly rent increases by $2,500.  The initial lease term expires January 2014, with optionsfor ten additional five-year terms with a $2,500 increase in monthly rent atthe beginning of each option period.

 

The Companyleases the land underlying its facilities for its Terrible’s Town Casino(Pahrump) and its Las Vegas warehouse and employment center from relatedparties (see Note 8).

 

InDecember 1999, the Company executed agreements to lease certain gamingmachines for $110,000 per month beginning in July 2000 throughOctober 2004.

 

In April 2001,the Company executed agreements to lease certain gaming machines for $91,776per month, beginning in July 2001 through July 2004.

 

43

----

 

AtDecember 31, 2003, the Company has noncancelable location licenseagreements for space leases at groups of affiliated stores that expire onvarious dates from 2005 through 2010, with certain options for renewal.  Revenues from gaming machines in thesestores accounted for approximately 45 percent of the Company’s totalrevenues for the year ended December 31, 2003.

 

Future minimumlease payments under noncancelable operating leases and location licenseagreements are as follows (dollars in thousands):

 
| 2004       |   | $      | 74,348  |   |
|------------|--------|--------|---------|--------|
| 2005       |   | 71,043 |    |
| 2006       |   | 58,809 |    |
| 2007       |   | 49,429 |    |
| 2008       |   | 31,132 |    |
| Thereafter |   | 36,611 |    |
| Total      |   | $      | 321,372 |   |

 

Rent expenserelated to noncancelable leases with terms exceeding one year was $56,074,000,$55,998,000 and $67,111,000 for the years ended December 31, 2001, 2002and 2003, respectively.

 

The Company isa party to certain claims, legal actions, and complaints arising in theordinary course of business or asserted by way of defense or counterclaim inactions filed by the Company. Management believes that its defenses are substantial in each of thesematters and that the Company’s legal position can be successfully defendedwithout material adverse effect on its consolidated financial statements.

 

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

 

Routeoperations revenues at three groups of affiliated store chains in the yearended December 31, 2003 and two groups of affiliated store chains in theyears ended December 31, 2001 and 2002 each accounted for more than10 percent of the Company’s total route revenues.  The total of such revenues wereapproximately $81,833,000, $87,299,000 and $117,692,000, in the years ended December 31,2001, 2002 and 2003, respectively.  Eachindividual store chain included in an affiliated group of store chains has aseparate lease with the Company.

 

**11.****                               BusinessSegments**

 

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

 

The Companyoperates through two business segments—slot route operations and casinooperations.  The slot route operationsinvolve the installation, operation, and service of slot machines at strategic,high traffic non-casino locations, such as grocery stores, drug stores,convenience stores, bars, and restaurants. Casino operations consist of the following five casinos: Terrible’s TownCasino (Henderson) in Henderson, Nevada, Terrible’s Searchlight Casino inSearchlight, Nevada and Terrible’s 

 

44

----

 

Town Casino and Terrible’sLakeside Casino, both of which are located in Pahrump, Nevada, and Terrible’sHotel & Casino in Las Vegas, Nevada.

 

Revenues andincome for these segments are as follows (dollars in thousands):

 
|                          |   | **Year Ended  December 31,** |       |
|-------------------------------|--------|------------------------------|------------|
|                          |   | **2001**                     |       | **2002** |   | **2003** |   |
|                          |   |                         | ** ** |   | ** ** |   | ** ** |
| Net revenues                  |   |                         |       |   |   |   |   |
| Route operations              |   | $                            | 170,750    |   | $ | 183,572 |   | $ | 241,462 |   |
| Casino operations             |   | 59,564                       |       | 63,001 |   | 67,464 |   |
| Other — non-gaming       |   | 2,878                        |       | 3,078 |   | 3,049 |   |
| Total                         |   | $                            | 233,192    |   | $ | 249,651 |   | $ | 311,975 |   |
|                          |   |                         |       |   |   |   |   |
| Income from operations        |   |                         |       |   |   |   |   |
| Route operations              |   | $                            | 20,907     |   | $ | 23,327 |   | $ | 30,812 |   |
| Casino operations             |   | 7,329                        |       | 8,502 |   | 10,283 |   |
| Other(1)                      |   | (7,631                       | )          | (8,147 | ) | (9,915 | ) |
| Total                         |   | $                            | 20,605     |   | $ | 23,682 |   | $ | 31,180 |   |
|                          |   |                         |       |   |   |   |   |
| Depreciation and amortization |   |                         |       |   |   |   |   |
| Slot route operations         |   | $                            | 8,308      |   | $ | 9,464 |   | $ | 17,893 |   |
| Casino operations             |   | 5,548                        |       | 5,864 |   | 6,039 |   |
| Other                         |   | 342                          |       | 413 |   | 450 |   |
| Total                         |   | $                            | 14,198     |   | $ | 15,741 |   | $ | 24,382 |   |
|                          |   |                         |       |   |   |   |   |
| EBITDA(2)                     |   |                         |       |   |   |   |   |
| Route operations              |   | $                            | 29,215     |   | $ | 32,791 |   | $ | 48,705 |   |
| Casino operations             |   | 12,878                       |       | 14,366 |   | 16,322 |   |
| Other                         |   | (6,883                       | )          | (7,398 | ) | (9,237 | ) |
| Consolidated EBITDA           |   | $                            | 35,210     |   | $ | 39,759 |   | $ | 55,790 |   |

 

----

(1)          Amountrepresents primary other—non-gaming revenues and general andadministrative expenses.

(2)          ConsolidatedEBITDA consists of net income (loss) plus depreciation and amortization,interest expense net of capitalized interest and loss on early retirement ofdebt.  Segment EBITDA for route andcasino is calculated before allocation of overhead.  Other EBITDA represents other revenue, general and administrativeexpenses, interest income and other income. EBITDA is presented because it is used as a performance measure toanalyze the performance of our business segments and because it is frequentlyused by securities analysts, investors and others in the evaluation ofcompanies in our industry.  However,other companies in our industry may calculate EBITDA differently.  EBITDA is not a measurement of financialperformance under generally accepted accounting principles and should not beconsidered as an alternative to cash flow from operating activities or as ameasure of liquidity or as an alternative to net income or as an indicator ofoperating performance or any other measure of performance derived in accordancewith generally accepted accounting principles.

 

45

----

 

The followingtable is a reconciliation of net income (loss) to EBITDA:

 

|                                           |   | **Year Ended  December 31,** |    |
|------------------------------------------------|--------|------------------------------|---------|
|                                           |   | **2001**                     |    | **2002** |   | **2003** |   |
|                                           |   | **(in  thousands)**          |    |
| Net income (loss)                              |   | $                            | (11,964 | ) | $ | 5,233 |   | $ | 8,209 |   |
| **Adjustments:**                               |   |                         |    |   |   |   |   |
| Depreciation and amortization                  |   | 14,198                       |    | 15,741 |   | 24,382 |   |
| Interest expense, net of  capitalized interest |   | 19,952                       |    | 18,785 |   | 22,932 |   |
| Loss on early retirement of  debt              |   | 13,024                       |    | — |   | 267 |   |
| Consolidated EBITDA                            |   | $                            | 35,210  |   | $ | 39,759 |   | $ | 55,790 |   |

 

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

** **
|                             |   | **Mar. 31** |   | **June 30** |   | **Sept. 30** |   | **Dec. 31** |   | **Total** |   |
|----------------------------------|--------|-------------|--------|-------------|--------|--------------|--------|-------------|--------|-----------|--------|
|                             |   |        |   |        |   |         |   |        |   |      |   |
| **Year Ended December 31, 2003** |   |        |   |        |   |         |   |        |   |      |   |
|                             |   |        |   |        |   |         |   |        |   |      |   |
| Net revenues - Route operations  |   | $           | 53,680 |        | $      | 61,344       |   | $           | 62,178 |      | $      | 64,260 |   | $ | 241,462 |   |
| Net revenues - Casino operations |   | 16885       |   | 16,383      |   | 16,701       |   | 17,495      |   | 67,464    |   |
| Net revenues - Other             |   | 724         |   | 725         |   | 863          |   | 737         |   | 3,049     |   |
| Operating income                 |   | 8,579       |   | 9,335       |   | 6,193        |   | 7,073       |   | 31,180    |   |
| Net income                       |   | 3,336       |   | 3,561       |   | 351          |   | 961         |   | 8,209     |   |
|                             |   |        |   |        |   |         |   |        |   |      |   |
| **Year Ended December 31, 2002** |   |        |   |        |   |         |   |        |   |      |   |
|                             |   |        |   |        |   |         |   |        |   |      |   |
| Net revenues - Route operations  |   | $           | 44,844 |        | $      | 46,471       |   | $           | 45,147 |      | $      | 47,110 |   | $ | 183,572 |   |
| Net revenues - Casino operations |   | 16,047      |   | 15,884      |   | 15,360       |   | 15,710      |   | 63,001    |   |
| Net revenues - Other             |   | 657         |   | 636         |   | 1,054        |   | 731         |   | 3,078     |   |
| Operating income                 |   | 6,168       |   | 6,327       |   | 4,643        |   | 6,544       |   | 23,682    |   |
| Net income                       |   | 1,568       |   | 1,686       |   | 12           |   | 1,967       |   | 5,233     |   |

 

46

----

 

**Item 9.**                    **Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

None.

 

**Item 9A.****                    Controls andProcedures**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure.  In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of the end of the periodcovered by this report (the “Evaluation Date”), we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures.  Based on the foregoing, ourChief Executive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

There has been no change inour internal controls over financial reporting during the year endedDecember 31, 2003 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reports.

 

47

----

 

**PART III**

 

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

 

The followinginformation is furnished with respect to each member of the board of directors,each of whom, unless otherwise indicated, has served as a director continuouslysince the year shown opposite his name. Directors are elected annually. Each director serves until his successor has been elected andqualified.  Similar information isprovided for our executive officers.

 

**Directorsand Executive Officers**

 

Our directorsand executive officers are as follows:

 
| **Name**              |   | **Age** |   | **Position  Held Since** |   | **Position**                                                  |
|-----------------------|--------|---------|--------|--------------------------|--------|---------------------------------------------------------------|
|                  |   |    |   |                     |   |                                                          |
| Edward J. Herbst(1)   |   | 42      |   | 1997                     |   | Chairman of  the Board, Chief Executive Officer and President |
| Timothy P.  Herbst(1) |   | 40      |   | 1997                     |   | Executive  Vice President and Director                        |
| Troy D.  Herbst(1)    |   | 37      |   | 1997                     |   | Executive  Vice President, Secretary, Treasurer and Director  |
| John N.  Brewer       |   | 47      |   | 2001                     |   | Director                                                      |
| John D.  Gaughan      |   | 37      |   | 2001                     |   | Director                                                      |
| Mary E.  Higgins      |   | 46      |   | 2000                     |   | Chief  Financial Officer                                      |

 

----

(1)                       Edward,Timothy and Troy Herbst are brothers. Timothy and Troy Herbst are members of our executive committee and TroyHerbst is a member of our audit committee, but they are not involved inday-to-day operations.

 

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

 

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

 

*Troy D. Herbst* hasserved as Executive Vice President, Secretary, Treasurer and a Director of ourcompany and its predecessors since their inception in 1987.  Troy is a member of our Executive and AuditCommittees.  He also serves as a VicePresident of Terrible Herbst, Inc.

 

*John N. Brewer* hasserved as a Director of our company since December 2001.  Mr. Brewer is also a member of ourAudit Committee.  Mr. Brewer is apartner with the law firm of Kummer Kaempfer Bonner & Renshaw in Las Vegas,Nevada, where he has practiced principally in corporate and securities lawsince its inception in 1994.

 

48

----

 

*John D. Gaughan*has served as a Director of our company since December 2001.  Since 1988, Mr. Gaughan has been thePresident and Chief Executive Officer of Las Vegas Dissemination, Inc., acompany that provides horse and dog racing information to licensed racebooks inNevada and selected Indian gaming locations.

 

*Mary E. Higgins* hasbeen the Chief Financial Officer of our company since May 2000.  Prior to joining our company, fromMarch 1997 to June 2000, Ms. Higgins was the Chief FinancialOfficer 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 LasVegas.  Ms. Higgins serves at thediscretion of the Board of Directors.

 

**Codeof Ethics**

 

We haveadopted a Code of Ethics for our Chief Executive Officer and President, and ourChief Financial Officer and Chief Accounting Officer.  With respect to any amendment to, or a waiver from, any provisionof its Code of Ethics that applies to the officers noted above relates tostandards that are reasonably designed to deter wrongdoing and to promote:

 

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

 

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

 

•                  compliance withapplicable governmental laws, rules and regulations;

 

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

 

•                  accountabilityfor adherence to the Code of Ethics.

 

**AuditCommittee Financial Expert**

 

Our AuditCommittee is comprised of Messrs. Troy Herbst and John Brewer.  Mr. Brewer, an independent Director inaccordance with the New York Stock Exchange corporate governance standards, isthe Chairman of the Audit Committee and its financial expert, as defined by theSEC.

 

**Item 11.****                            ExecutiveCompensation**

 

The followingtables set forth compensation for the fiscal year ended December 31, 2003received by our Chief Executive Officer and other executive officers whoseaggregate cash compensation exceeded $100,000:

 

49

----

 

**SUMMARY COMPENSATIONTABLE**

** **
| **Name and Principal  Position**                                                   |   | **Fiscal  Year** |    | **Annual  Compensation** |   | **All Other  Compensation ($) —   Owner Tax  Distribution(2)** |    |
|------------------------------------------------------------------------------------|--------|------------------|---------|--------------------------|--------|---------------------------------------------------------------------|---------|
|                                                                               |   | **Salary ($)**   |    | **Bonus ($)**            |   | **Other  Annual  Compensation ($)**                                 |    |   |
| Edward J. Herbst(1)  Chairman of the Board,  Chief Executive Officer and President |   | 2003             |    | 488,250             |   | —                                                              |    | 1,323,347  |   | 489,000 |   |
|                                                                               | 2002   |             | 465,000 |                     | — |                                                                | 1,412   |   | — |   |
|                                                                               | 2001   |             | 229,962 |                     | — |                                                                | 792,080 |   | 1,021,044 |   |
|                                                                               |   |             |    |                     |   |                                                                |    |   |   |   |   |
| Timothy P. Herbst,  Executive Vice President                                       |   | 2003             |    | 157,500                  |   | —                                                              |    | 1,323,483 |   | 489,000 |   |
|                                                                               | 2002   |             | 150,000 |                     | — |                                                                | 1,300   |   | — |   |
|                                                                               | 2001   |             | 118,508 |                     | — |                                                                | 792,080 |   | 910,589 |   |
|                                                                               |   |             |    |                     |   |                                                                |    |   |   |   |   |
| Troy D. Herbst,  Executive Vice President,  Secretary and Treasurer                |   | 2003             |    | 157,500                  |   | —                                                              |    | 1,323,746 |   | 489,000 |   |
|                                                                               | 2002   |             | 150,000 |                     | — |                                                                | 1,296   |   | — |   |
|                                                                               | 2001   |             | 118,508 |                     | — |                                                                | 792,080 |   | 910,589 |   |
|                                                                               |   |             |    |                     |   |                                                                |    |   |   |   |   |
| Mary E. Higgins(1)  Chief Financial Officer                                        |   | 2003             |    | 262,500             |   | 3,000                                                               |    | — |   | — |   |
|                                                                               | 2002   |             | 250,000 |                     | 3,000  |                                                                | —  |   | — |   |
|                                                                               | 2001   |             | 250,000 |                     | 3,000  |                                                                | —  |   | — |   |

 

----

(1)               Wehave entered into employment agreements with Edward J. Herbst and Mary E.Higgins.

(2)               Weare a Subchapter S corporation and taxes on our income are paid by theowners.

 

**Employment Agreements**

** **

On August 1, 2001, we entered into employment agreements withEdward J. Herbst, our Chairman, Chief Executive Officer and President, andMary E. Higgins, our Chief Financial Officer, in which we agreed to paythem annual base compensation of $465,000 and $250,000, respectively, which maybe increased annually by five percent. These agreements commence on August 1, 2001 and terminate onJuly 31, 2006.  These 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 scheduledto expire.  Each employment agreementprovides that if the executive’s employment is terminated for Cause (as definedin the employment agreement), such executive will receive no severance of anykind.  If the executive voluntarilyterminates employment, the executive will receive no severance payment of anykind.  In the event that we choose toterminate the executive’s employment for any reason other than Cause, the executivewill receive a severance payment equal to one year’s salary.  The employment agreements with theseexecutives also contain a covenant to protect confidential information.

 

**Executive Compensationand Bonus Plan**

** **

The board of directors has adopted the Executive Compensation and BonusPlan for our executive officers who are also stockholders.  Any payments to be made under this plan mustbe approved by our independent directors. Commencing with calendar year 2003 and each succeeding calendar year,the maximum aggregate amount of annual compensation and cash bonuses increasesby 5%.  Commencing with calendar year2003, the independent directors began establishing the financial targets thatwe need to meet prior to our making a cash bonus to a participant.

 

50

----

 

**Executive CommitteeInterlocks and Insider Participation**

** **

During the fiscal year ended December 31, 2003, Edward, Timothyand Troy Herbst were members of the Executive Committee of our board ofdirectors.  Our executive compensationis determined by the Executive Committee, all members of which are officers,and the owners, of Herbst Gaming.

 

**Compensation ofDirectors**

** **

Our directors do not receive any compensation for serving on our boardof directors or attending meetings thereof, except that our independentdirectors will receive compensation in the amount of $1,000 per meetingattended.

 

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

** **

Not applicable.

 

**Item 12.**                            SecurityOwnership of Certain Beneficial Owners and Management

** **

The securities entitled to vote consist of shares of our common stock,no par value, with each share entitling its owner to one vote.  Common stock is the only outstanding classof voting securities authorized by our articles of incorporation.  The number of outstanding shares of commonstock as of March 1, 2004 was 300.

 

The following table sets forth certain information regarding thebeneficial ownership of our capital stock as of March 1, 2004 for(i) each stockholder who is known by us to own beneficially more than 5%of our common stock, (ii) each director and executive officer, and(iii) all of our directors and executive officers as a group.  The persons identified in this table havesole voting and investment power with regard to the shares beneficially owned.

 
| **Name and  Address(1)**                                      |   | **Number of  Shares  of Common Stock   Beneficially Owned** |   | **Percentage  of  Outstanding  Shares** |   |
|---------------------------------------------------------------|--------|-------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                          |   |                                                        |   |                                    |   |
| Edward J. Herbst                                              |   | 100                                                         |   | 33 1/3                                  | %      |
| Timothy P. Herbst                                             |   | 100                                                         |   | 33 1/3                                  | %      |
| Troy D. Herbst                                                |   | 100                                                         |   | 33 1/3                                  | %      |
| John N. Brewer                                                |   | —                                                      |   | —                                  |   |
| John D. Gaughan                                               |   | —                                                      |   | —                                  |   |
| Mary E. Higgins                                               |   | —                                                      |   | —                                  |   |
|                                                          |   |                                                        |   |                                    |   |
| All executive officers and directors as a group (6  persons). |   | 300                                                         |   | 100.0                                   | %      |

 

----

(1)           The address of each such person isc/o Herbst Gaming, Inc., 3440 West Russell Road, Las Vegas, Nevada 89118.

 

**Item 13.**                            CertainRelationships 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.

 

51

----

 

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

 

*Slot routecontract with Terrible Herbst, Inc*.  We rent space for certain slot machine route operationsin convenience stores owned by Terrible Herbst, Inc., a corporation inwhich our owners are officers and which is owned by the father of ourowners.  Rent expense of $3,653,000,$4,132,800 and $4,754,400 was incurred under this agreement for the years endedDecember 31, 2001, 2002 and 2003, respectively, for the exclusive placement of slot machines in the Terrible Herbstconvenience store locations.  Thiscontract expires in 2010 but may be extended at our option for two additionalterms of five years.

 

*Otherarrangements with Terrible Herbst, Inc*.  We have also entered into a servicingarrangement with Terrible Herbst, Inc. pursuant to which we provide accountingand administrative services related to the collection of daily deposits fromthe Terrible Herbst, Inc. convenience stores.  We also provide personnel to Terrible Herbst, Inc. to count,maintain and safeguard large amounts of coin and currency.  Terrible Herbst, Inc. reimburses ourexpenses in providing these services.  Under this servicing arrangement, we werepaid approximately $214,000, $205,800 and $205,800 for services rendered forthe years ended December 31, 2001, 2002 and 2003, respectively.

 

We have entered into a nonexclusive trademark and license agreementwith Terrible Herbst, Inc. for the use of the Terrible Herbst brand nameand its cowboy logo for 25 years, including renewal periods.  The annual royalty fee was previously$600,000.  The agreement was amended in2001 and the annual royalty fee was increased from $600,000 to $1,200,000.  Pursuant to this trademark and licenseagreement, we paid approximately $800,000 to Terrible’s during 2001, $1,200,000in 2002 and $1,301,000 in 2003.

 

*Lease agreements*.  Pursuant toa lease agreement that expires in 2067, including renewal periods, we lease thereal property on which our corporate headquarters is located from The HerbstFamily Limited Partnership II, or Herbst FLP II.  The general partners of the Herbst FLP IIare Jerry and Maryanna Herbst.  In eachof 2001, 2002 and 2003, we paid $172,992 under this lease.

 

Pursuant to a lease agreement that expires in 2026, including renewalperiods, we lease the real property on which Terrible’s Town in Pahrump islocated from the Herbst Family Limited Partnership.  In each of 2001, 2002 and 2003, we paid $135,000, $150,000 and$150,000, respectively, under this lease.

 

We lease land and office space in certain of our facilities to TerribleHerbst, Inc. under noncancelable lease agreements ranging from 10 to20 years.  Monthly rental income is$63,500.  Rental income from theseleases was $623,000, $662,000 and $642,000 for 2001, 2002 and 2003,respectively.

 

We lease the real property on which Terrible’s Searchlight Casino inSearchlight is located from Terrible Herbst, Inc. for $15,000 per month,pursuant to a lease agreement entered into on June 30, 2002 that expires in2022, with options to renew the lease for five additional successive terms often years each.  Terrible Herbst, Inc.leases that real property from an unrelated third party, pursuant to a leaseagreement entered into on June 30, 2002 that expires in 2042, including renewalperiods.  Amounts paid under this leasewere $90,000 in 2002 and $180,000 in 2003.

 

We lease a warehouse located in Las Vegas,Nevada for our employment center and purchasing departments from the Herbst’sGrandchildren’s Trust.  The lease beganin November 2002 and requires

 

52

----

 

payments of $43,525 throughNovember 2012.  Rent expense of $43,525was incurred under this lease arrangement for the year ended December 31,2003 and $522,300 was the rent expensed for 2003.

 

*Related-party transactions**. *Edward Herbst, an owner, owed usapproximately $434,000 represented by certain notes receivable at December 31,2003.  These notes were repaid in fullin the first quarter of 2004.  Interestincome related to the notes receivable was $27,000, $26,000 and $26,000, for 2001, 2002 and 2003, respectively.

 

Mr. Higgins is our General Counsel, the General Counsel ofTerrible Herbst, Inc. and the brother of Mary E. Higgins, our ChiefFinancial Officer.  Mr. Higginsreceived a salary for services rendered to us in 2001, 2002 and 2003 of $192,617,$260,674 and $295,708, respectively.

 

In 1999, HIGCO, Inc., a company owned and operated byMr. Higgins and two of his brothers, G. Michael Higgins and Kevin J.Higgins agreed to purchase from us for $200,000 a liquor license related toowning and operating a tavern located in Henderson, Nevada.  Mr. Higgins is the president and amember of the board of directors of HIGCO. The terms of the purchase between us and HIGCO require HIGCO to repaythe debt at 9% interest per annum.  Thebalance of that note at December 31, 2002 was $20,000 and $0 atDecember 31, 2003.  In addition, weentered into a slot route contract to install, operate and service slotmachines at the tavern.  Pursuant to therevenue-sharing contract, HIGCO paid us, $114,442, $105,559 and $1,566 ingaming fees in 2001, 2002 and 2003, respectively.  The tavern was sold on December 31, 2003 to an unrelatedparty and HIGCO repaid that note in full in January 2003.

 

In 2003, HIGCO opened another tavern and we have entered into a slotroute contract to install, operate and service slot machines at that newlocation.  Pursuant to thisrevenue-sharing contract, HIGCO paid us $27,097 in 2003.  We have a note due from HIGCO made inconjunction with the new bar with a balance due at December 31, 2003 of$20,000.

 

*John N. Brewer*.  John N.Brewer, a member of our board of directors, is a partner with Kummer KaempferBonner & Renshaw.  We retain KummerKaempfer Bonner & Renshaw as outside legal counsel, and Kummer KaempferBonner & Renshaw has received fees for legal services in the amount of$387,369, $234,309 and $251,188 for 2001, 2002 and 2003, respectively.

 

*John D. Gaughan*.  John D.Gaughan, a member of our board of directors, is the President and ChiefExecutive Officer of Las Vegas Dissemination, Inc., which provides servicesrelated to the race and sports books at Terrible’s Hotel & Casino andTerrible’s Town.  Las VegasDissemination, Inc. has received fees for services in the amount of $220,555,$239,111 and $366,526 for 2001, 2002 and 2003, respectively.

 

*Indemnification of Directors and Officers.* Section 78.7502 of the Nevada Revised Statutes, Article VIII of ourarticles of incorporation and Article IX of our by-laws contain provisionsfor indemnification of our officers, directors, employees and agents.  Our articles require us to indemnify suchpersons to the full extent permitted by Nevada law.  Each person will be indemnified in any proceeding if he acted in goodfaith and in a manner that he reasonably believed to be in, or not opposed to,our best interests.  Indemnificationwould cover expenses, including attorneys’ fees, judgments, fines and amountspaid 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.

 

53

----

 

**Item 14.**                            PrincipalAccounting Fees and Expenses

** **

The aggregate accounting fees billed and services provided by ourprincipal accountants for the years ended December 31, 2002 and 2003 areas follows:

 
|                  |   | **2002**           |    | **2003** |   |
|-----------------------|--------|--------------------|---------|----------|--------|
|                  |   | **(in thousands)** |    |
|                  |   |               |    |     |   |
| Audit fees(1)         |   | $                  | 214,625 |     | $      | 151,335 |   |
| Audit-related fees(2) |   | 21,108             |    | 8,200    |   |
| Tax fees              |   | —             |    | —   |   |
| All other fees        |   | —             |    | —   |   |
|                  |   |               |    |     |   |
| Total fees            |   | $                  | 235,733 |     | $      | 159,535 |   |

 

----

(1)          Represents the aggregate fees Deloitte& Touche LLP billed us in each of the last two fiscal years forprofessional services for the audits of our annual financial statements andreview of financial statements included in our Reports of Form 10-Q or servicesthat are normally provided by Deloite & Touche, LLP in connection withthose filings.

 

(2)          Represents the aggregate fees Deloitte& Touche LLP billed us in each of the last two fiscal years for assuranceand related services that are reasonably related to the performance of theaudit, including audit-related services in conjunction with the acquisition ofAnchor Coin’s Slot Route and our public debt offering.

 

It is our practice that all services provided to us by our independentauditors be pre-approved either by the Audit Committee or by the Chairman ofthe Audit Committee pursuant to authority delegated by the AuditCommittee.  No part of the independentauditor services related to the Audit Related Fees, Tax Fees, or All Other Feeslisted in the table above was approved by the Audit Committee pursuant to theexemption from pre-approval provided by paragraph (c)(7)(i)(C) ofRule 2-01 of Regulation S-X.

 

**PARTIV**

** **

**Item 15.**                            Exhibits,Financial Statement Schedules, and Reports on Form 8-K

** **

(a)                                  1.                                       Financial Statements

 

Included in Part II of this report:

 
| Independent Auditors’  Report.                                                                                            |
|--------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                           |
| Consolidated Balance Sheets  at December 31, 2002 and 2003.                                                               |
|                                                                                                                           |
| Consolidated  Statements of Operations for the Years Ended December 31, 2001, 2002 and  2003.                             |
|                                                                                                                           |
| Consolidated  Statements of Stockholders’ Equity (Deficiency) for the Years Ended  December 31, 2001, 2002 and 2003. |
|                                                                                                                           |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and  2003.                             |
|                                                                                                                           |
| Notes to  Consolidated Financial Statements.                                                                                   |

 

54

----

 

2.                                       Financial Statement Schedules

 

All required schedules are omitted because of the absence of conditionsunder which they are required or because the required information is given inthe financial statements or notes thereto.

 

(b)                                 Reports on Form 8-K

 

The following report on Form 8-K was filed by HerbstGaming during the fourth quarter of 2003 and thereafter through March 15,2003:

 

•                  Form 8-K filedNovember 5, 2003, regarding the results for the quarter and the nine-monthperiod ended September 30, 2003.

 

(c)                                  Exhibits, including those incorporated byreference.

 
| 2.1++++  |   | 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++++  |   | 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                              |
|     |   |                                                                                                                                                                                             |
| 3.1+     |   | Articles of Incorporation of Herbst Gaming, Inc.,  filed January 21, 1997.                                                                                                                       |
|     |   |                                                                                                                                                                                             |
| 3.2+     |   | By-laws of Herbst Gaming, Inc., adopted January 21,  1997.                                                                                                                                       |
|     |   |                                                                                                                                                                                             |
| 4.1+     |   | Indenture dated as of August 24, 2001 between Herbst  Gaming, Inc., certain guarantors and The Bank of New York relating to Series  A and Series B 103⁄4% Senior Secured Notes Due 2008.      |
|     |   |                                                                                                                                                                                             |
| 4.2++    |   | First Supplemental Indenture dated as of  August 23, 2002 between Herbst Gaming, Inc., certain guarantors and The  Bank of New York.                                                        |
|     |   |                                                                                                                                                                                             |
| 4.3+++++ |   | Second Supplemental Indenture dated as of  January 23, 2003 between Herbst Gaming, Inc., certain guarantors and The  Bank of New York.                                                      |
|     |   |                                                                                                                                                                                             |
| 4.4+++++ |   | Third Supplemental Indenture dated as of  February 6, 2003 between Herbst Gaming, Inc., certain guarantors and The  Bank of New York.                                                       |
|     |   |                                                                                                                                                                                             |
| 4.5+     |   | Form of Herbst Gaming, Inc. 103⁄4% [Series A] [Series  B] Senior Secured Notes due 2008 (included as part of the Indenture at  Exhibit 4.1).                                                  |
|     |   |                                                                                                                                                                                             |
| 4.6+     |   | Form of Herbst Gaming, Inc. Regulation S Global Note  103⁄4% [Series A] [Series B] Senior Secured Notes due 2008 (included as  part of the Indenture at Exhibit 4.1).                    |
|     |   |                                                                                                                                                                                             |
| 4.7+++++ |   | Form of Herbst Gaming, Inc. 103⁄4% [Series A] [Series  B] Senior Secured Notes due 2008 (included as part of the Third Supplemental  Indenture at Exhibit 4.4).                               |
|     |   |                                                                                                                                                                                             |
| 4.8+++++ |   | Form of Herbst Gaming, Inc. Regulation S Global Note  103⁄4% [Series A] [Series B] Senior Secured Notes due 2008 (included as  part of the Third Supplemental Indenture at Exhibit 4.4). |
|     |   |                                                                                                                                                                                             |
| 4.9+++++ |   | Registration Rights Agreement dated as of February  7, 2003, by and among Herbst Gaming, Inc., certain of its subsidiaries, and  Lehman Brothers Inc.                                            |

 

55

----

 
| 4.10+++    |   | Specimen common stock certificate for the common  stock of Herbst Gaming, Inc.                                                                                                                                                                                                 |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                           |
| 10.1+      |   | Escrow Agreement dated August 24, 2001 among Herbst  Gaming, Inc., E-T—T, Inc., Edward Herbst, Timothy Herbst and Troy Herbst and  Wilmington FSB, as escrow agent, and The Bank of New York, as trustee.                                                                 |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.2+      |   | Hazardous Substances Indemnity Agreement dated  August 24, 2001 by Herbst Gaming, Inc. and certain guarantors in favor of The  Bank of New York, as trustee.                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.3+      |   | Trademark License Agreement dated August 24, 2001 by  and between Herbst Gaming, Inc. and Terrible Herbst, Inc.                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.4+      |   | Security Agreement dated August 24, 2001, among  Herbst Gaming, Inc., certain guarantors and Bank of New York, as trustee.                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.5++     |   | First Amendment to Security Agreement dated as of  August 23, 2002 among Herbst Gaming, Inc. and its subsidiaries and The  Bank of New York.                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.6+++++  |   | Second Amendment to Security Agreement dated as of  February 6, 2003 among Herbst Gaming, Inc. and its subsidiaries and The  Bank of New York (included as part of the Third Supplemental Indenture at  Exhibit 4.4).                                                     |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.7+      |   | Collateral Assignment of Contracts and Documents  dated August 24, 2001by Herbst Gaming, Inc. and certain guarantors in favor  of The Bank of New York, as trustee.                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.8+      |   | Pledge and Security Agreement (Herbst Gaming, Inc.)  dated August 24, 2001 by Herbst Gaming, Inc. in favor of The Bank of New  York, as trustee.                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.9+      |   | Pledge and Security Agreement (E-T—T, Inc.) dated  August 24, 2001 by E-T—T, Inc. in favor of The Bank of New York, as trustee.                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.10+     |   | Pledge and Security Agreement (Edward, Tim and Troy  Herbst) dated August 24, 2001 by Edward J. Herbst, Timothy P. Herbst,  and Troy D. Herbst in favor of The Bank of New York, as trustee.                                                                              |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.11+     |   | Deed of Trust, Assignment of Leases and Rents,  Security Agreement and Fixture Filing (4100 Paradise Road) dated August 24,  2001, and made by Flamingo Paradise Gaming, LLC to National Title Co., as  trustee, for the benefit of The Bank of New York, as beneficiary.      |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.12++    |   | First Amendment to Deed of Trust  dated as of August 23, 2002 among Flamingo Paradise Gaming, LLC and The  Bank of New York.                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.13+++++ |   | Second Amendment to Deed of  Trust dated as of February 6, 2002 among Flamingo Paradise Gaming, LLC  and The Bank of New York (included as part of the Third Supplemental  Indenture at Exhibit 4.4).                                                                     |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.14+     |   | Deed of Trust, Assignment of Leases and Rents,  Security Agreement and Fixture Filing (Terrible’s Casino & Bowl) dated  August 24, 2001, and made by Market Gaming, Inc. to National Title Co., as  trustee, for the benefit of The Bank of New York, as beneficiary. |
|       |   |                                                                                                                                                                                                                                                                           |
| 10.15+++++ |   | First Amendment to Deed of Trust, Assignment of  Leases and Rents, Security Agreement and Fixture Filing (Terrible’s Casino  & Bowl) dated February 6, 2003 (included as part of the Third  Supplemental Indenture at Exhibit 4.4).                                   |

 

56

----

 
| 10.16+     |   | Deed of Trust, Assignment of Leases and Rents,  Security Agreement and Fixture Filing (5870 S. Homestead Road) dated August  24, 2001, and made by E-T-T Enterprises L.L.C. to National Title Co., as  trustee, for the benefit of The Bank of New York, as beneficiary.                      |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.17+++++ |   | First Amendment to Deed of Trust, Assignment of  Leases and Rents, Security Agreement and Fixture Filing (5870 S. Homestead  Road) dated February 6, 2003 (included as part of the Third Supplemental  Indenture at Exhibit 4.4).                                                             |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.18+     |   | Leasehold Deed of Trust, Security Agreement and  Fixture Filing (Warehouse Property) dated August 24, 2001, and made by E-T-T  Enterprises L.L.C. to National Title Co., as trustee, for the benefit of The  Bank of New York, as beneficiary.                                                |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.19+++++ |   | First Amendment to Leasehold Deed of Trust, Security  Agreement and Fixture Filing (Warehouse Property) dated February 6, 2003  (included as part of the Third Supplemental Indenture at Exhibit 4.4).                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.20+     |   | Leasehold Deed of Trust, Assignment of Leases and  Rents, Security Agreement and Fixture Filing (Terrible’s Casino & Bowl)  dated August 24, 2001, and made by Market Gaming, Inc. to National Title  Co., as trustee, for the benefit of The Bank of New York, as beneficiary. |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.21+++++ |   | First Amendment to Leasehold Deed of Trust,  Assignment of Leases and Rents, Security Agreement and Fixture Filing  (Terrible’s Casino & Bowl) dated February 6, 2003 (included as part  of the Third Supplemental Indenture at Exhibit 4.4).                                   |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.22+     |   | Leasehold Deed of Trust, Assignment of Leases and  Rents, Security Agreement and Fixture Filing (771 S. Nevada Highway) dated  August 24, 2001, and made by E-T—T, Inc. to National Title Co., as trustee,  for the benefit of The Bank of New York, as beneficiary.                     |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.23+++++ |   | First Amendment to Leasehold Deed of Trust,  Assignment of Leases and Rents, Security Agreement and Fixture Filing (771 S.  Nevada Highway) dated February 6, 2003 (included as part of the Third Supplemental  Indenture at Exhibit 4.4).                                                    |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.24+++++ |   | Leasehold Deed of Trust, Assignment of Leases and  Rents, Security Agreement and Fixture Filing (Terrible’s Searchlight Casino)  dated February 7, 2003, and made by E-T-T, Inc. to National Title Co.,  as trustee, for the benefit of The Bank of New York, as beneficiary.       |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.25**+   |   | Gaming Devices License Agreement  dated August 31, 1998 by and between The Vons Companies, Inc. and Market  Gaming, Inc.                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.26**+   |   | License Agreement (Gaming Devices) dated September  16, 1998 by and between Albertson’s, Inc. and Cardivan Company.                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.27**+   |   | Settlement Agreement dated November 18, 1999 among  Cardivan Company, Corral United, Inc., Jackpot Enterprises Inc. and  Albertson’s Inc.                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.28**+   |   | First Amendment to Settlement Agreement dated  December 22, 1999 among Cardivan Company, Corral United, Inc., Jackpot  Enterprises Inc. and Albertson’s, Inc.                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                          |
| 10.29**+   |   | License Agreement dated April 24, 1997 between  American Drug Stores, Inc. and Cardivan Company.                                                                                                                                                                                              |

 

57

----

 
| 10.30**+    |   | License Agreement dated April 24, 1997 between  American Drug Stores, Inc. and Corral United, Inc.                                                       |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                     |
| 10.31**+    |   | Gaming Devices License Agreement dated August 31,  1998 by and between Safeway, Inc. and Market Gaming, Inc.                                             |
|        |   |                                                                                                                                                     |
| 10.32*+     |   | License Agreement dated March 12, 1999 between Rite  Aid Corporation and Cardivan Company.                                                               |
|        |   |                                                                                                                                                     |
| 10.33*+     |   | First Amendment to Cardivan License Agreement dated  March 27, 2000 between Rite Aid Corporation and Cardivan Company.                                   |
|        |   |                                                                                                                                                     |
| 10.34*+     |   | License Agreement dated March 12, 1999 between Rite  Aid Corporation and Corral Coin, Inc.                                                               |
|        |   |                                                                                                                                                     |
| 10.35*+     |   | First Amendment to Corral Coin License Agreement  dated March 27, 2000 between Rite Aid Corporation and Corral Coin, Inc.                                |
|        |   |                                                                                                                                                     |
|        |   |                                                                                                                                                     |
| 10.36*+     |   | Gaming Devices License Agreement dated December 20,  1999 by and between Terrible Herbst, Inc. and E-T-T, Inc.                                           |
|        |   |                                                                                                                                                     |
| 10.37+      |   | Amendment to Gaming Device License Agreement dated  May       , 2001 by and between E-T-T, Inc. and  Terrible Herbst, Inc. |
|        |   |                                                                                                                                                     |
| 10.38*+     |   | Agreement dated May 1, 1998 by and between Kmart  Corporation and Cardivan Company.                                                                      |
|        |   |                                                                                                                                                     |
| 10.39**+    |   | License Agreement dated April 24, 1997 between Lucky  Stores, Inc. and Cardivan Company.                                                                 |
|        |   |                                                                                                                                                     |
| 10.40*+++++ |   | Lease and Sublease Agreement dated July 28, 1993, by  and between Smith’s Food & Drug Centers, Inc. and Anchor Coin, as  amended.               |
|        |   |                                                                                                                                                     |
| 10.41+++++  |   | Hold Harmless Agreement dated as of September 2,  1993 executed by Anchor Coin in favor of Smith’s Food & Drug Centers,  Inc.                   |
|        |   |                                                                                                                                                     |
| 10.42*+++++ |   | Letter Agreement and Consent to Assignment dated  January 16, 2003.                                                                                      |
|        |   |                                                                                                                                                     |
| 10.43+      |   | Lease Agreement dated July 1, 1997 by and between  The Herbst Family Limited Partnership II and E-T-T Enterprises, L.L.C.                                |
|        |   |                                                                                                                                                     |
| 10.44+      |   | Lease Agreement dated July 1, 1996 by and between  The Herbst Family Limited Partnership and E-T-T, Inc.                                                 |
|        |   |                                                                                                                                                     |
| 10.45+      |   | Lease extension dated April 30, 2001 between  The Herbst Family Limited Partnership and E-T-T, Inc.                                                 |
|        |   |                                                                                                                                                     |
| 10.46+      |   | Lease dated September 3, 1993 between The 1993  Samuel Josephson Revocable Family Trust and Phoenix Associates.                                          |
|        |   |                                                                                                                                                     |
| 10.47+      |   | Agreement for Sale dated August 1, 1995 between  Phoenix Associates and Market Gaming, Inc.                                                              |
|        |   |                                                                                                                                                     |
| 10.48+++++  |   | Lease Agreement dated November 27, 2002 by and  between Herbst Grandchildren’s Trust and Herbst Gaming, Inc.                                   |
|        |   |                                                                                                                                                     |
| 10.49+++++  |   | Lease dated  June       , 2002 by and between  Centennial Acquisitions, LLC and Terrible Herbst, Inc.                 |
|        |   |                                                                                                                                                     |
| 10.50+++++  |   | Amendment to Lease dated July 30, 2002 by and  between Centennial Acquisitions, LLC and Terrible Herbst, Inc.                                       |

 

58

----

 
| 10.51+++++ |   | Lease Agreement dated July 1, 2002 by and  between Terrible Herbst, Inc. and E-T-T, Inc.                                                                          |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                   |
| 10.52+     |   | Employment Agreement with Edward J. Herbst dated  August 1, 2001.                                                                                                      |
|       |   |                                                                                                                                                                   |
| 10.53+     |   | Employment Agreement with Mary E. Higgins dated  August 1, 2001.                                                                                                       |
|       |   |                                                                                                                                                                   |
| 10.54+     |   | Form of Executive Compensation and Bonus Plan.                                                                                                                         |
|       |   |                                                                                                                                                                   |
| 10.55++    |   | Credit Agreement dated September 6, 2002 by and  among Herbst Gaming, Inc., Flamingo Paradise Gaming, LLC, and U.S. Bank  National Association.                        |
|       |   |                                                                                                                                                                   |
| 10.56++    |   | Security Agreement dated as of September 6, 2002, by  and between Flamingo Paradise Gaming, LLC and U.S. Bank National Association                                     |
|       |   |                                                                                                                                                                   |
| 10.57+++++ |   | Code of Ethics                                                                                                                                                         |
|       |   |                                                                                                                                                                   |
| 10.58      |   | First Amendment to Credit Agreement dated  December 15, 2003 by and among Herbst Gaming, Inc., Flamingo Paradise  Gaming, LLC and U.S. Bank National Association. |
|       |   |                                                                                                                                                                   |
| 12.1       |   | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                     |
|       |   |                                                                                                                                                                   |
| 21.1+      |   | Subsidiaries of Herbst Gaming, Inc.                                                                                                                                    |
|       |   |                                                                                                                                                                   |
| 31.1       |   | Certification of Edward J. Herbst under Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                |
|       |   |                                                                                                                                                                   |
| 31.2       |   | Certification of Mary E. Higgins under Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                 |
|       |   |                                                                                                                                                                   |
| 32.1       |   | Certifications of Edward J. Herbst and  Mary E. Higgins pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                     |

 

----

| *     |   | Confidential Treatment for a portion of 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. |
| +     |   | Incorporated herein by reference from our  registration statement on Form S-4 (SEC No. 33-71094),  Part II, Item 21.                                                                   |
| ++    |   | Incorporated herein by reference from our quarterly  report on Form 10-Q filed with the SEC on November 14, 2002.                                                                                     |
| +++   |   | Incorporated herein by reference from our annual  report on Form 10-K/A filed with the SEC on April 9, 2002.                                                                                     |
| ++++  |   | Incorporated herein by reference from our current report on Form 8-K  filed with the SEC on March 10, 2003.                                                                                      |
| +++++ |   | Incorporated herein by reference from our  annual report on Form 10-K filed with the SEC on March 24, 2003.                                                                                      |

 

59

----

 

**SIGNATURES**

** **

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

 
|   |   | HERBST GAMING, INC. |
|--------|--------|---------------------|
|   |   |                |
|   |   |                |
|   |   | By:                 | /s/ EDWARD J. HERBST |
|   |   |                | Edward J. Herbst |
|   |   |                | Chairman of the Board, Chief  Executive Officer  and President |
|   |   |                | (Principal Executive Officer) |
|   |   |                |   |
|   |   | Date:               | March 15, 2004 |

 

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

 
| **Signature**         |   | **Title**                             |   | **Date**                             |
|-----------------------|--------|---------------------------------------|--------|--------------------------------------|
|                  |   |                                  |   |                                 |
| /s/ EDWARD J. HERBST  |   | Chairman of the Board, Chief          |   | March 15, 2004                       |
| Edward J. Herbst      |   | Executive Officer and President       |   |                                 |
|                  |   | (Principal Executive Officer)         |   |                                 |
|                  |   |                                  |   |                                 |
| /s/ MARY E. HIGGINS   |   | Chief Financial Officer               |   | March 15, 2004                       |
| Mary E. Higgins       |   | (Principal Financial and Accounting   |   |                                 |
|                  |   | Officer)                              |   |                                 |
|                  |   |                                  |   |                                 |
| /s/ TIMOTHY P. HERBST |   | Executive Vice President and Director |   | March 15, 2004                       |
| Timothy P. Herbst     |   |                                  |   |                                 |
|                  |   |                                  |   |                                 |
| /s/ TROY D. HERBST    |   | Executive Vice President, Secretary,  |   | March 15, 2004                       |
| Troy D. Herbst        |   | Treasurer and Director                |   |                                 |
|                  |   |                                  |   |                                 |
|                  |   | Director                              |   | March     , 2004 |
| John D. Gaughan       |   |                                  |   |                                 |
|                  |   |                                  |   |                                 |
| /s/ JOHN N. BREWER    |   | Director                              |   | March 15, 2004                       |
| John N. Brewer        |   |                                  |   |                                 |

 

60

----

 

**Supplemental Information to be Furnished With ReportsFiledPursuant to Section 15(d) of the Act by Registrants Which Have NotRegistered Securities Pursuant to Section 12 of the Act**

** **

We have not sent any annual reports to security holders covering theyear ended December 31, 2003.  Wehave not sent proxies, form of proxy or other proxy soliciting material to oursecurity holders with respect to any meeting of security holders and will notbe doing so subsequent to the filing of this Form 10-K.

 

----