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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

For the transition period from                              to                             

Commission file number 0-71094

HERBST GAMING, INC.
(Exact name of registrant as specified in its charter)

(702) 889-7695
(Registrant's telephone number, including area code)

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

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

Not Applicable
(Title of class)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes    o No    Not Applicable

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

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

        The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrants as of December 31, 2002, based on the price at which the common equity was sold, was approximately $0.

        Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 31, 2002.

        Common Stock, no par value, 300 outstanding shares.

Documents Incorporated by Reference

        None.

PART I

Item 1. Business

General

        We are a gaming company that owned and operated as of December 31, 2002 through subsidiaries approximately 7,000 slot machines throughout the State of Nevada. Our business is divided into two segments—slot route operations and casino operations.

        Our route operations involve the exclusive installation and operation of slot machines at strategic, high traffic, non-casino locations such as grocery stores, drug stores, convenience stores, bars and restaurants. Our slot machines include video poker, Keno, slot and other games. We are one of the largest slot route operators in Nevada with approximately 5,400 slot machines in approximately 530 locations as of December 31, 2002.

        Our casino operations consist of owning and operating five casinos in Nevada including Terrible's Hotel & Casino, located one mile from the Las Vegas Strip, Terrible's Lakeside Casino & RV Park and Terrible's Town Casino in Pahrump, Terrible's Casino & Bowl in Henderson, and Terrible's Searchlight Casino located in Searchlight.

        Herbst Gaming, 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 formerly owned by Edward, Timothy and Troy Herbst, who are brothers as well as the owners of all of the stock of Herbst Gaming, Inc. On August 23, 2001, Herbst Gaming, Inc. commenced business operations when the Herbst brothers entered into contribution agreements pursuant to which they contributed all of the outstanding stock of E-T-T, Inc. and Market Gaming, Inc., as well as all of the membership interests in E-T-T Enterprises L.L.C. and 80% of the membership interests in Flamingo Paradise Gaming, LLC to Herbst Gaming. In addition, E-T-T, Inc., which owned a 20% membership interest in Flamingo Paradise Gaming, LLC, entered into an assignment of membership interest pursuant to which E-T-T, Inc. assigned its 20% membership interest in Flamingo Paradise Gaming, LLC to Herbst Gaming. As a result of the contributions, Herbst Gaming, Inc. became a holding company of subsidiaries that conduct slot route or casino operations.

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

        Herbst Gaming has elected to be taxed as a Subchapter S corporation.

Available Information

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

Recent Developments

        Consent Solicitation.    On January 23, 2003, we consummated a consent solicitation to amend provisions of our indenture governing our 10³/4% senior secured notes and related collateral documents relating to (1) the incurrence of debt and liens, and the taking of other actions, in connection with the then pending acquisition of Anchor Coin's slot route business and related assets and (2) the amount of indebtedness that we or our restricted subsidiaries may incur for working capital and other general corporate purposes. Accordingly, holders of our notes consented to (i) the incurrence of debt for the

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purchase of Anchor Coin's slot route business prior to consummation of the acquisition and (ii) increasing the amount that we may incur for working capital purposes to $30.0 million.

        Issuance of Notes.    On January 24, 2003, we completed the sale of an additional $47.0 million in aggregate principal amount of our existing 10³/4% senior secured notes due September 1, 2008. The net proceeds of the notes were used to purchase a portion of the slot route assets of Anchor Coin, a subsidiary of International Game Technology. Pursuant to the registration rights agreement that we entered into in connection with the offering of the 10³/4% senior secured notes, we agreed to complete an exchange offer whereby the holders of the 10³/4% senior secured notes would be able to exchange their unregistered notes for substantially identical notes that would be registered under the Securities Act of 1933. Accordingly, we will be filing an exchange offer registration statement on Form S-4 in the near future.

        Anchor Coin Acquisition.    Following issuance of the additional 10³/4% senior secured notes due 2008, we completed our purchase of all of the slot route business and related assets of Anchor Coin at a purchase price of approximately $61.0 million on February 21, 2003. As a result of the acquisition, the number of slot machines operated by us in the State of Nevada increased by 1,100 to approximately 8,100 slot machines. The Anchor Coin transaction provided us with contracts to operate slot machines in 88 additional locations, including 28 Smith's Food & Drug grocery stores.

        Prior to closing the Anchor Coin transaction, The Kroger Co., through two of its subsidiaries, acquired 18 grocery stores in the Las Vegas area from Raley's Inc. Smith's Food & Drug Centers, one of Kroger's subsidiaries, acquired 7 of the 18 grocery stores, the other Kroger subsidiary acquired 8 stores to be operated under the trade name "Food 4 Less" and 3 stores were not reopened. Anchor Coin claimed the exclusive right to operate slot machines in the remaining 15 grocery stores pursuant to its space lease agreement with Smith's, while another route operator that had a similar agreement with Raley's claimed it had the right to continue to operate slot machines in the grocery stores.

        On January 16, 2003, Kroger, Anchor Coin and the other slot route operator entered into a settlement agreement that permits us to operate the 7 grocery stores acquired by Smith's beginning on July 1, 2003. In exchange, we will transfer our rights to any Food 4 Less stores that we operate as of June 30, 2003 to the other slot route operator. In addition, Kroger and the other slot route operator consented to the assignment of all rights and obligations of Anchor Coin under the settlement agreement to us as of the date that we acquire the slot route business and other related assets, including the space lease arrangements with Smith's.

Narrative Description of Business

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

Route Operations

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

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

        In November 2000, we significantly increased the size of our route operations through the acquisition of Jackpot Enterprises, Inc.'s route operations. This acquisition increased the number of slot machines in our route operations from approximately 2,200 to 5,400.

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

Casino Operations

        Our casino operations consist of owning and operating five casinos in Nevada.

Terrible's Hotel & Casino

        Terrible's Hotel & Casino in Las Vegas, our largest casino, opened on December 6, 2000. Terrible's features 769 slot and video poker machines, eight tables, a race and sports book and 185-seat bingo hall. Terrible's offers a buffet, 24-hour café, and a McDonald's. There are 373 rooms with standard amenities as well as a pool and spa. Terrible's is conveniently located approximately one mile east of the Las Vegas Strip, which we believe appeals to locals who wish to avoid the congestion of the Strip. Terrible's favorable location has made it popular with Strip casino employees. The next major locals casino 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 our location near the airport, the Strip and the Las Vegas Convention Center.

Other Casinos

•

Terrible's Town Casino in Pahrump, featuring 323 slot machines, six table games, a race and sports book, a 145-seat bingo facility and a restaurant;



•

Terrible's Lakeside Casino and RV Park in Pahrump, featuring 241 slot machines, a sports book that is open seasonally, a 232-seat bingo facility, a restaurant and 159 spaces for recreational vehicles adjacent to a seven-acre lake;



•

Terrible's Casino & Bowl in Henderson, featuring 96 slot machines and a 16-lane bowling alley; and



•

Terrible's Searchlight Casino in Searchlight, featuring 74 slot machines.

Financial Information

        The primary source of our revenue and income is from our route and casino operations, although we view the restaurants, bars and services to be important adjuncts to our casino operations. The

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following table sets forth the contribution to total net revenues on a dollar and percentage basis of our major activities for the years ended December 31, 2002, 2001 and 2000.

(1)

Calendar year 2001 reflects the first full year of operations of (i) the slot route operations purchased from Jackpot Enterprises, Inc. in November 2000 and (ii) the opening of Terrible's Hotel & Casino in December 2000. As a result, the results of operations for calendar years 2002 and 2001 may not be comparable to the results of operations incurred in earlier years. Route and casino revenues are the net difference between gaming wins and losses. Promotional allowances consist primarily of food and beverages furnished gratuitously to customers. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances. See Note 1 of Notes to Consolidated Financial Statements in Item 8 "Financial Statements and Supplementary Data".

(2)

Does not include interest income.

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

Marketing

        We target our marketing to locals because we believe that a vast majority of our gaming patrons are local residents. Our marketing efforts seek to capitalize on the strong recognition and high level of quality and value associated with the Terrible Herbst trade name and its cowboy logo, which is used in over 65 gasoline stations and convenience stores throughout California, Arizona and Nevada. For this reason, we have licensed the Terrible Herbst trade name from Terrible Herbst, Inc., a related party, for a period of ten years.

        We have implemented a unique players club that rewards customers with points for playing at our route and casino locations as well as for purchases made at Terrible Herbst gas stations and convenience stores in the Las Vegas area. Points may be redeemed for cash as well as free or discounted rooms, food or other goods or services provided at any such location.

Competition

        Our slot route operations are subject to substantial direct competition for our revenue-sharing and fixed space lease locations from two large route operators and numerous small operators, located principally in Las Vegas, Nevada. The principal method of competition for slot route operators includes the economic terms of the revenue-sharing or space lease arrangement, the services provided and the reputation of the route operator. Price competition for revenue-sharing or space lease arrangements is intense and we believe that price competition among slot route operators will continue. We are one of

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the largest route operators with approximately 5,400 slot machines situated in locations outside of our casinos as of December 31, 2002.

        With respect to our casino operations in Las Vegas, Terrible's Hotel & Casino competes for local gaming customers with other locals-oriented casino-hotels in Las Vegas. We do not believe that we are in direct competition with many of the resort-casino properties on the Las Vegas Strip, which focus primarily on attracting tourist players. Rather, we believe that our competitors in our casino operations are the other local casinos located near us. We compete with these properties on the basis of the desirability of location, payout rates, personalized approach, casino promotions, comfort and value of restaurants and hotel rooms and the variety and value of entertainment. The construction of new casinos or the expansion of existing casinos near our casinos could have a negative impact on our casino operations.

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

Seasonality

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

Environmental Laws

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

Employees

        As of December 31, 2002 we employed approximately 2,100 employees. None of our employees is covered by a collective bargaining agreement. We believe that our relationship with our employees is good.

Regulation and Licensing

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

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

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

•

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



•

the establishment and maintenance of responsible accounting practices and procedures;



•

the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;



•

the prevention of cheating and fraudulent practices; and

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•

providing a source of state and local revenues through taxation and licensing fees.

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

        Corporations and other entities that operate casinos or slot routes in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license for such activities requires the periodic payment of fees and taxes and is not transferable. Herbst Gaming is registered by the Nevada Gaming Commission as a publicly traded corporation (a "registered corporation"). As a registered corporation, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information that the Nevada Gaming Commission may require. Herbst Gaming has been found suitable by the Nevada Gaming Commission to own the stock of E-T-T, Inc., which is licensed by the Nevada Gaming Commission as a casino and slot route operator, Market Gaming, Inc., which is licensed as a slot route operator, and Flamingo Paradise Gaming, LLC, which is licensed as a casino operator. E-T-T, Inc., is also registered by the Nevada Gaming Commission as an intermediary holding company (the "Intermediary Company") and has been found suitable to own the stock of Corral Country Coin, Inc., Cardivan Company, and Corral Coin, Inc., all of which are licensed by the Nevada Gaming Authorities as slot route operators (all of the foregoing, including Market Gaming, Inc., and Flamingo Paradise Gaming, LLC, are referred to as the "Gaming Subsidiaries"). No person may become a stockholder of, or receive any percentage of the profits from, the Intermediary Company or any of the Gaming Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. Herbst Gaming, the Intermediary Company, and all of the Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada.

        The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Herbst Gaming, the Intermediary Company or the Gaming Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of Herbst Gaming, the Intermediary Company, and the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and are required to be licensed by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities, and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position.

        If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

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

        If it were determined that Herbst Gaming, the Intermediary Company or the Gaming Subsidiaries violated the Nevada gaming laws, our gaming licenses and registrations with the Nevada Gaming Commission could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, Herbst Gaming, the Intermediary Company, the Gaming Subsidiaries and the persons involved could be subject to substantial fines for each separate

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violation of the Nevada laws at the discretion of the Nevada Gaming Commission. Further, the Nevada Gaming Commission could appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (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 the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect our operations.

        Any beneficial holder of Herbst Gaming's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of Herbst Gaming's voting securities determined if the Nevada Gaming Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting such investigation.

        Although we do not intend to register or sell any equity securities, Nevada law requires any person who acquires more than 5% of a registered corporation's voting securities to report the acquisition to the Nevada Gaming Commission. Nevada law requires that beneficial owners of more than 10% of a registered corporation's voting securities apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada State Gaming Control Board mails the written notice requiring the filing for a finding of suitability. Under certain circumstances, an "institutional investor," as defined in the regulations of the Nevada Gaming Commission, which acquires more than 10%, but not more than 15%, of our voting securities may apply to the Nevada Gaming Commission for a waiver of such finding of suitability if that institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or any other action which the Nevada Gaming Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:

•

voting on all matters voted on by stockholders;



•

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



•

other activities as the Nevada Gaming Commission may determine to be consistent with such investment intent.

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

        Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or the Chairman of the Nevada State Gaming Control Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. Herbst Gaming, the Intermediary Company or the Gaming Subsidiaries may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be a

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stockholder or to have any other relationship with Herbst Gaming, the Intermediary Company or the Gaming Subsidiaries, Herbst Gaming:

•

pays that person any dividend or interest upon voting securities;



•

allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;



•

pays remuneration in any form to that person for services rendered or otherwise; or



•

fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value.

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

        Herbst Gaming may be required to disclose to the Nevada State Gaming Control Board and the Nevada Gaming Commission the identities of all holders of our issued and outstanding 10³/4% senior secured notes. The Nevada Gaming Commission may, in its discretion, require the holder of any debt security of a registered corporation to file applications, be investigated and be found suitable to own the debt security of a registered corporation. If the Nevada Gaming Commission determines that a person is unsuitable to own a debt security, then pursuant to Nevada law, the registered corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Gaming Commission, it:

•

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



•

recognizes any voting right by the unsuitable person in connection with debt securities;



•

pays the unsuitable person remuneration in any form; or



•

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

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

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

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        Changes in the control of Herbst Gaming through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on the pledged shares), may not occur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control or ownership of a registered corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in a variety of stringent standards prior to assuming control of such registered corporation. The Nevada Gaming Commission may also require the stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

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

•

a percentage of the gross revenues received;



•

the number of gaming devices operated; or



•

the number of table games operated.

        Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons, or Licensees, and who is or who proposes to become involved in a gaming venture outside of Nevada, is required to 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 investigation by the Nevada State Gaming Control Board of the Licensees' participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter, Licensees are also required to comply with certain reporting requirements imposed by the Nevada gaming laws. Licensees are also subject to disciplinary action by the Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to a foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the 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 been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability.

Item 2. Properties

        We believe that our properties are generally in good condition, are well maintained and are generally suitable and adequate to carry on our business. We also believe that our gaming properties are operated at satisfactory levels of utilization and each property is monitored to make sure that the needs of our business and customers are met. All of our properties are subject to deeds of trust securing the 10³/4% senior secured notes.

        Our principal properties consist of the following:

        Company Headquarters and Warehouse.    We lease a four-acre site in Las Vegas and own the 50,000 square foot building where our executive offices and operational headquarters are located. This facility houses our executive and administrative offices and is used for sub-assembly and 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 options to renew the lease for five additional successive terms of ten years each.

        Office Space and Convenience Store.    We lease a 3-acre site and a 50,000 square foot building where our employment center and purchasing department are located. The lease between the Herbst

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Grandchildren's Trust, a trust governed under the laws of the State of Nevada and a related party, and us ends on November 27, 2012, with options to renew the lease for five additional successive terms of ten years each.

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

        Terrible's Hotel & Casino.    We own the 10-acre site in Las Vegas on which Terrible's Hotel & Casino is located, consisting of a 45,000 square 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 30,000 square foot building on approximately three acres. We lease the land from the Herbst Family Limited Partnership I, a Nevada limited partnership and a related party. The lease expires on June 30, 2006. We also have an option to further extend the lease for four additional successive terms of five years each.

        Terrible's Lakeside Casino & RV Park.    We own the land in Pahrump, Nevada on which Terrible's Lakeside Casino & RV Park, an approximate 8,000 square foot casino on 30 acres, is located.

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

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

        Not applicable.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

(a)

Price Range of Common Stock

        No class of our capital stock has been registered under the Securities Act of 1933 or under Section 12 of the Securities Exchange Act of 1934. All 300 shares of our outstanding capital stock are owned by the Herbst brothers.

(b)

The Herbst brothers own all of the outstanding shares of our capital stock.



(c)

Dividend Policy

        To date, we have not made any distributions on our common stock, other than distributions permitted by the indenture governing our 10³/4% senior secured notes. The indenture governing our 10³/4% senior secured notes restricts our ability to declare or make distributions on our capital shares. Subject to contractual restrictions contained in the indenture, any future determinations as to the payment of dividends will be at the discretion of our board of directors, and will depend on our financial condition, results of operations, capital requirements, and such other factors as the board of directors deems relevant. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and "Item 8. Financial Statements and Supplementary Data—Notes to Financial Statements."

Item 6. Selected Historical Consolidated Financial Data

        We derived the following selected historical consolidated financial data as of and for each of the five years ended December 31, 2002, from our audited consolidated financial statements. In November 2000, we purchased Jackpot's route operations, and in December 2000, we opened Terrible's Hotel & Casino. Therefore, the periods beginning on or after January 1, 2001 are the only periods presented that reflect all of our current operations and may not be comparable to prior years. The following information should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements and related notes included in this annual report.

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

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(1)

Includes an extraordinary charge of $13.0 million recognized in August 2001 related to the write-off of unamortized financing fees and other costs due to the repayment of $143.8 million of our long-term debt. The repayment was due in conjunction with the issuance of $170.0 million senior secured notes in August of 2001.

(2)

Total debt consists of the current and long-term portions of notes payable to related parties and long-term debt for all periods presented.

(3)

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

(4)

Consolidated EBITDA consists of net income plus depreciation and amortization, interest expense net of capitalized interest, pre-opening expenses and extraordinary item. Segment EBITDA for route and casino is calculated before allocation of overhead. EBITDA is presented because it is used as a performance measure to analyze the performance of our business segments (see Note 11 to financial statements—Business Segments). In addition, EBITDA is presented because we believe it is frequently used by securities analysts, investors and others in the evaluation of companies in our industry and because certain debt covenants under the indenture governing our 10³/4% senior secured notes due 2008 are tied to EBITDA. However, other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or as an alternative to net income or as an indicator of operating performance or any other measure of performance derived in accordance with generally accepted accounting principles.

        The following table is a reconciliation of net income to EBITDA:

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis should be read in conjunction with the section "Selected Historical Consolidated Condensed Financial Data" and the consolidated financial statements and related notes included elsewhere in this annual report.

Overview

        We are a gaming company that owned and operated approximately 7,000 slot machines throughout the State of Nevada as of December 31, 2002. Our route operations involved the exclusive installation and operation of approximately 5,400 slot machines as of December 31, 2002 in strategic, high traffic, non-casino locations, such as grocery stores drug stores, convenience stores, bars and restaurants. We also own and operate Terrible's Hotel & Casino in Las Vegas, as well as four other small casinos.

        We generally enter into two types of route contracts. With chain store customers, such as Albertsons, Vons, Safeway, SavOn, Kmart, Terrible Herbst and Rite Aid, we pay a fixed monthly fee for each location in which we place slot machines. With our street accounts, such as bars, restaurants and non-chain convenience stores, we share in the revenues on a percentage basis with the location owner.

        On November 20, 2000, we completed the acquisition of the stock of three subsidiaries of Jackpot. This acquisition dramatically impacted all of our operations since November 2000. In addition, in December 2000, we opened Terrible's Hotel & Casino. Therefore, the periods beginning on or after January 1, 2001 are the only periods presented that reflect all of our current operations and may not be comparable to any prior periods.

        In August of 2001, we restructured substantially all of our debt with a $170.0 million offering of senior secured notes.

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

Recent Events

        In February 2003, we acquired Anchor Coin's slot route business and related assets at a purchase price of approximately $61.0 million. Upon the consummation of this acquisition, the number of slot machines used in our operations increased from approximately 7,000 to approximately 8,100. The Anchor Coin transaction provided us with contracts to operate slot machines in certain Smith's Food & Drug grocery stores, and other locations. We funded this acquisition, in part, with the proceeds from the issuance of an additional $47.0 million in principal amount of our senior secured notes.

Year 2002 Compared to Year 2001

Route Operations

        Route operations accounted for 71% of total revenues during the years ended December 31, 2001 and 2002, respectively. Total revenues from route operations were $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, we were operating approximately 5,400 slot machines approximately the same number of machines as at December 31, 2001. The increase in route revenue was a result of increased per machine revenues due to the replacement and refurbishment of slot machines during 2002.

        Route operating costs were $150.8 million, or 82%, of route revenues for the year ended December 31, 2002. This compares to $141.5 million and 83% of route revenues for the same period in 2001. The increase in route operating expenses was primarily related to increased participation costs and space leases.

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

Casino Operations

        Casino operations accounted for 28% of total revenues for the years ended December 31, 2002 and 2001, respectively. Total revenues derived from casino operations were $72.5 million for the year 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 due to increased customer play at Terrible's Hotel & Casino in Las Vegas. 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 ended December 31, 2001. Operating expenses increased primarily in the areas of promotions and management. The increase in expenses drove the increase in 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 the casino properties in Las Vegas and Pahrump.

Other Revenue

        Other revenue consists of revenue items such as ATM fees, pay phone charges, rental income and other miscellaneous items unrelated to route and casino operations. Other revenues were $2.9 million for the year ended December 31, 2002 compared to $2.8 million for the year ended December 31, 2001, an increase of 4%.

Promotional Allowances

        Promotional allowances were $9.8 million, or 4% of total revenues, for the year ended December 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 heavier promotional spending at the casinos.

Other Costs

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

        Depreciation and 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 year ended December 31, 2001. The increase was due to the amortization expenses associated with the acquired slot route contracts and depreciation expenses associated with new fixed assets.

Income from Operations

        As a result of the factors discussed above, income from operations was $23.6 million for the year ended December 31, 2002, an increase of $3.0 million from $20.6 million for the year ended December 31, 2001. As a percentage of total revenues, income from operations increased from 8.5% during 2001 to 9% during the same period in 2002.

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Other Expenses

        Other expense was $18.3 million for the year ended December 31, 2002, a decrease of $1.2 million from the year ending December 31, 2001. The decrease was primarily due to lower interest expense as a result of the debt restructuring done in August of 2001.

Extraordinary Charge

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

Net Income (loss)

        Net income for the year ending December 31, 2002 was $5.2 million. This is an improvement of $17.2 million from the net loss recorded in 2001.

        The loss in 2001, discussed above, included the $13.0 million in extraordinary charges. Net income before the extraordinary charge due to early retirement of debt was $1.1 million for the year ended December 31, 2001, indicating an improvement in 2002 of $4.2 million or 393%.

Year 2001 Compared to Year 2000

Route Operations

        Route operations accounted for 76% and 71% of total revenues during the years ended December 31, 2000 and 2001, respectively. Total revenues from route operations were $170.9 million for the year ended December 31, 2001, an increase of $84.8 million, or 98.5%, from $86.1 million for the year ended December 31, 2000. At December 31, 2001, we were operating approximately 5,400 slot machines in the route compared to approximately 5,600 slot machines at December 31, 2000. The increase in route revenue was a result of the acquisition of Jackpot's route operations purchased in November 2000 and the subsequent replacement and refurbishment of existing slot machines during 2001.

        Route operating costs were $141.5 million, or 83%, of route revenues for the year ended December 31, 2001. This compares to $74.3 million and 86% of route revenues for the same period in 2000. The increase in route operating expenses was primarily related to the increase in route operations due to the acquisition of Jackpot's route operations.

        Route EBITDA (as defined) for the year ended December 31, 2001 was $29.2 million, an increase of $17.6 million, or 153%, from $11.6 million for the year ended December 31, 2000.

Casino Operations

        Casino operations accounted for 28% and 22% of total revenues for the years ended December 31, 2001 and 2000, respectively. Total revenues derived from casino operations were $67.8 million for the year ended December 31, 2001, an increase of $42.5 million, or 168%, from $25.3 million for the year ended December 31, 2000. Casino operating costs were $46.7 million, or 69%, of casino revenues for the year ended December 31, 2001, compared to $17.3 million, or 68%, of casino revenues for the year ended December 31, 2000. The opening and ramp up of the new Terrible's Hotel & Casino contributed heavily to the increased revenue and operating costs in the period-to-period comparison. This revenue increase from Terrible's Las Vegas was offset by a 12% or $2.5 million decline in the Pahrump market revenues due to the opening of a new competitor in late

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March 2001. Casino EBITDA (as defined) was $12.9 million for the year ended December 31, 2001, an increase of $7.1 million, or 122%, from $5.8 million from the year ended December 31, 2000.

Other Revenue

        Other revenue consists of revenue items unrelated to route and casino operations. Other revenues were $2.8 million for the year ended December 31, 2001 compared to $2.4 million for the year ended December 31, 2000, an increase of 17%. The increase in other revenue primarily related to the full year of operations of Terrible's Las Vegas in the year ended December 31, 2001.

Promotional Allowances

        Promotional allowances were $8.4 million, or 3.5% of total revenues, for the year ended December 31, 2001, an increase of $6.1 million, or 244%, from $2.4 million, or 2.1% of total revenues for the year ended December 31, 2000. The increase was primarily due to the opening of Terrible's Hotel & Casino.

Other Costs

        General and administrative expenses, or G&A, were $10.2 million for the year ended December 31, 2001, an increase of $5.3 million, or 108%, from $4.8 million for the year ended December 31, 2000. The increase was due to costs associated with the acquisition of Jackpot's route operations and the opening of Terrible's Hotel & Casino. G&A expenses as a percentage of net revenue were 4% of revenue for the years ended December 31, 2000 and 2001, respectively.

        Depreciation and amortization expense was $14.2 million for the year ended December 31, 2001, an increase of $8.9 million, or 167%, from $5.3 million for the year ended December 31, 2000. The increase was due to the amortization expenses associated with the acquired slot route contracts and depreciation expenses associated with the fixed assets added in the acquisition of Jackpot's route operations and the opening of Terrible's Hotel & Casino in December of 2000.

Income from Operations

        As a result of the factors discussed above, income from operations was $20.6 million for the year ended December 31, 2001, an increase of $13.3 million from $7.3 million for the year ended December 31, 2000. As a percentage of total revenues, income from operations increased from 6.3% during 2000 to 8.5% during the same period in 2001.

Other Expenses

        Other expense was $19.5 million for the year ended December 31, 2001, increasing $15.5 million from $4.0 million in the same period in 2000. The increase in this expense is primarily due to interest expense of $20.0 million for the year ended December 31, 2001, an increase of $15.3 million from $4.6 million used for interest payments in 2000. Interest expense is related to the debt used to purchase Jackpot's route operations, the construction of Terrible's Hotel & Casino and financing for furniture, fixtures and equipment, or FF&E, at Terrible's Hotel & Casino.

Extraordinary Charge

        We incurred an extraordinary charge to earnings of $13.0 million in August of 2001. This charge was due to the costs associated with the retirement and restructuring of $143.0 million of our long-term debt. This restructuring was done in conjunction with the issuance of $170.0 million 10³/4% senior secured notes in August of 2001.

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Net Income (loss)

        As a result of the factors discussed above, including the $13.0 million in extraordinary charge for the early debt restructuring costs, net loss for the year ended December 31, 2001 was $12.0 million, a decrease of $15.3 million from net income of $3.3 million for the year ended December 31, 2000. Net income before the extraordinary charge due to early retirement of debt was $1.1 million for the year ended December 31, 2001.

Liquidity and Capital Resources

Cash Flows

        At December 31, 2002, we maintained $55.0 million in cash and equivalents. We expect to fund our operations, debt service and capital needs from operating cash flow and cash on hand. Based upon our anticipated future operations, we believe that cash on hand together with available cash flow will be adequate to meet our anticipated working capital requirements, capital expenditures and scheduled payments of interest on our 10³/4% senior secured notes for the next twelve months and at least the foreseeable future. No assurances can be given, however that our cash flow will be sufficient for that purpose. There can be no assurance that our estimates of our cash needs are accurate or that new business developments or other unforeseeable events will not occur, resulting in the need to raise additional funds.

Operating Activities

        During the year ended December 31, 2002, operating activities provided $19.3 million in cash flows on $5.2 million in net income. Net income for the year ended December 31, 2002 included non-cash expenses (depreciation and amortization) of $15.7 million.

Investing Activities and Capital Expenditures

        For the year ended December 31, 2002, we had net cash used for investing activities of $8.7 million primarily related to the purchase and installation of new slot machines.

        Capital expenditures are budgeted to be $11.0 million for 2003. These funds will be primarily used for maintenance capital expenditures at the casinos and for the purchase of slot route assets including new slot machines.

Financing Activities

        Cash flows used in financing activities were $0.3 million in 2002.

        As of December 31, 2002, we maintain a $10.0 million line of credit for working capital purposes. The line had no activity for 2002.

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

Subsequent Events

        In February of 2003, we issued $47.0 million of additional 10³/4% senior secured notes maturing in 2008 increasing the principal amount of senior secured notes outstanding to $217.0 million under the indenture governing our existing 10³/4% senior secured notes. The proceeds of this issuance were used in connection with approximately $15.0 million in cash from operations to purchase the route assets of Anchor Coin, a subsidiary of International Game Technology, for approximately $61.0 million.

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Contractual Obligations and Commitments

        The following table summarizes our contractual obligations and commitments as of December 31, 2002.

Critical Accounting Policies

        The preparation of our financial statements requires our management to adopt accounting policies and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Our business and industry is highly regulated. The majority of our revenue is counted in the form of cash, chips and tokens and therefore, is not subject to any significant or complex estimation procedures.

        We have determined that the following accounting policy and related estimates are critical to the preparation of our consolidated financial statements:

Long-Lived Assets

        We have a significant investment in long-lived property and equipment and lease acquisition costs. Significant accounting policies that affect the reported amounts for these assets include the determination of the assets' estimated useful lives, evaluation of the asset's recoverability and the likelihood of technological obsolescence. We estimate useful lives for property and equipment based on historical experience and estimates of products' commercial lives. Significant incremental costs associated with the acquisition of location leases are capitalized and amortized using the straight-line method over the term of the related leases, including expected renewals, which range from 1 to 20 years. Should the actual useful life of an asset differ from the estimated useful life, future operating results could be positively or negatively affected. We review useful lives, obsolescence, and assess commercial viability of these assets periodically.

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

Recently Issued and Adopted Accounting Standards

        On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" that amend APB Opinion No. 16, "Business Combinations," and supercede APB Opinion No. 17, "Intangible Assets." These statements (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and

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prohibit the pooling-of-interest method and (2) change the accounting for goodwill and other intangible assets on January 1, 2002. The new method of accounting for goodwill and other intangible assets applies to all existing and future unamortized goodwill and other intangible assets balances at the time of adoption. We adopted SFAS No. 142 on January 1, 2002, and the adoption did not have a material impact on our consolidated financial statements.

        In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations," and amends ARB No. 51, "Consolidated Financial Statements." SFAS No. 144 requires one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The requirements of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 on January 1, 2002, and the adoption did not have a material impact on our consolidated financial statements.

        In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 all but eliminates the presentation in income statements of debt extinguishments as extraordinary items. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We plan to implement SFAS No. 145 in the first quarter of 2003.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

Statement on Forward-Looking Information

        Certain information included herein contains statements that may be considered forward-looking, such as statements relating to projections of future results of operations or financial condition, expectations for our route operations and casino properties, and expectations of the continued availability of capital resources. Any forward-looking statement made by us necessarily is based upon a number of estimates and assumptions that, while considered reasonable by us, is inherently subject to significant 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 vary materially from any forward-looking statement made by or on our behalf. Forward-looking statements should not be regarded as a representation by us or any other person that the forward-looking statements will be achieved. Undue reliance should not be placed on any forward-looking statements. Some of the contingencies and uncertainties to which any forward-looking statement contained herein is subject include, but are not limited to, the following:

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

        We conduct our route operations under contracts with third parties. Both contracts with chain and street accounts are renewable at the option of the owner of the respective chain store or street account. As our route contracts expire, we are required to compete for renewals. Although we have historically been able to renew our contracts, if we are unable to renew a material portion of our route contracts because our competitors offer more favorable terms or for any other reason, our operations would be adversely affected. We cannot assure you that our current chain or street contracts will be renewed.

        Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the indenture.

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        We have a significant amount of indebtedness. The following chart shows certain important information regarding our indebtedness:

        Our substantial indebtedness could have important consequences. For example, it could:

•

make it more difficult for us to satisfy our obligations with respect to the indenture governing our 10³/4% senior secured notes;



•

increase our vulnerability to general adverse economic and industry conditions;



•

require us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;



•

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



•

place us at a competitive disadvantage compared to our competitors that have less debt; and



•

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

        We may be able to incur substantial additional indebtedness in the future as the terms of the indenture do not fully prohibit us from doing so. We may incur new debt if we have a fixed charge coverage ratio of at least 2.0x. In addition, we have an undrawn $10.0 million line of credit. Subsequent to December 31, 2002, we amended our indenture to increase the ability of us and our restricted subsidiaries to incur indebtedness for working capital and general corporate purposes from $10.0 million to $30.0 million. If we incur additional debt, the risks set forth above could intensify.

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

        Our ability to make payments on and to refinance our indebtedness, and to fund our operations will depend upon our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors 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 borrowings will be adequate to meet our future liquidity needs for the next few years. However, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. In addition, if we consummate significant acquisitions in the future, our cash requirements may increase significantly. If we are unable to generate sufficient cash flow and are unable to refinance or extend outstanding borrowings, we may have to:

•

reduce or delay planned expansion and capital expenditures;



•

sell assets;



•

restructure debt; or

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•

raise additional capital.

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

Our indebtedness imposes restrictive covenants on us.

        The indenture governing our 10³/4% senior secured notes contains certain restrictive covenants that, among other things, restrict our ability to:

•

incur additional indebtedness;



•

pay dividends on or purchase our stock;



•

make investments;



•

incur liens on our assets to secure debt;



•

place restrictions on distributions and other payments from our subsidiaries;



•

merge or consolidate with another company;



•

transfer or sell our assets; and



•

enter into transactions with affiliates.

        In addition, as of December 31, 2002, we maintained a $10.0 million credit facility to provide us with additional working capital. The credit facility contains covenants similar to those in the indenture, as well as requirements that we maintain specified financial ratios and satisfy certain financial tests. These restrictive covenants may restrict our ability to make capital expenditures or pursue other business strategies.

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

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

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

        Our competitors vary in size, scope and breadth. Some of our competitors have greater name recognition and greater financial, selling and marketing, technical and other resources than we do. We must continually attract customers to our route locations and casinos, which requires us to maintain a high level of investment on our part in marketing and customer service. There can be no assurance that we will be able to compete effectively with our existing competitors or with new competitors.

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We face extensive regulation from gaming and other government authorities.

        As owners and operators of gaming facilities, we are subject to extensive Nevada state and local regulation. Nevada state and local government authorities require us and our subsidiaries to obtain gaming licenses and require our officers and key employees to demonstrate suitability to hold gaming licenses. The Nevada state and local government authorities may limit, condition, suspend or revoke a license for any cause deemed reasonable by the respective licensing agency. They may also levy substantial fines against us or our subsidiaries or the individuals involved in violating any gaming laws or regulations. Furthermore, the Nevada Gaming Commission could request that a state court appoint a supervisor to operate any non-restricted gaming establishment operated by us if the licenses held by us are revoked, suspended or otherwise lapse. In such extraordinary circumstances, earnings generated by gaming operations during a supervisor's appointment (except for reasonable rental value) could be forfeited to the State of Nevada. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

        Any future public offering of debt or equity securities by Herbst Gaming will require review of and prior approval by the Nevada Gaming Commission.

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

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

        The proposed recommendation of the Nevada Governor's Task Force on Tax Policy could, if implemented, have a material adverse effect on our financial condition.

        We pay substantial taxes and fees in connection with our operations as a gaming company and such taxes and fees are subject to increase at any time. On November 15, 2002, the Nevada Governor's Task Force on Tax Policy recommended, among other taxes:

•

a new 0.25% tax on the gross receipts of all business; and



•

a new 33% increase in fees imposed by the State on the operation of slot machines in route operations.

        Any tax increase must ultimately be approved by the Nevada legislature, which convened on February 3, 2003, and the Governor of the State of Nevada. It is possible that other legislation relating to tax increases could be enacted that would affect the gaming industry. Any future changes to applicable tax laws, if adopted, could have a material adverse effect on our business, financial condition and results of operations.

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

        In November 2002, the voters of Clark and Washoe Counties of Nevada, the counties in which the majority of our chain and street customers are located, each approved two non-binding advisory questions that recommended that:

•

the Boards of Health of Clark and Washoe Counties be permitted to adopt regulations that are stronger than state law to protect people from secondhand smoke; and



•

secondhand smoking be completely prohibited in places frequented by children, such as schools, grocery stores, restaurants, and governmental buildings.

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        However, no anti-smoking regulation can be implemented until legislation is first proposed by a state legislator and then approved by the Nevada legislature and the Governor of the State of Nevada. It is not possible to determine the manner, nature or likelihood of changes in the current laws relating to smoking in public places or the effect of regulations regarding secondhand smoke; however, new anti-smoking laws, if adopted, could have a material adverse effect on our business, financial condition and results of operations.

        We are unable to predict the future impact that terrorism and the uncertainty of war may have on our business and operations.

        We believe that the terrorist attacks that occurred on September 11, 2001 have had little impact directly on our route operations. The September 11 attacks have had a modest effect on our casino operations, as our casino operations are impacted by a loss of room revenue as a result of less tourists traveling to southern Nevada. Overall, we believe that our operations to date have not been significantly affected by the terrorist attacks and terrorism in general. We cannot guarantee, however, that our business will remain unaffected by fears of war and any future acts of terrorism. We are unable to predict the future impact that the uncertainty of war and any future acts of terrorism may have on our business and operations, the local markets in which we operate, and the economy in general.

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

        Our success is substantially dependent upon the efforts and skills of Edward J. Herbst, our chairman of the board, chief executive officer and president, and Mary E. Higgins, our chief financial officer. We have entered into employment agreements with Mr. Herbst and Ms. Higgins. However, if we were to lose the services rendered by either of them, our operations could be adversely affected. In addition, we compete with other potential employers for employees, and we may not succeed in hiring and retaining the executives and other employees that we need. An inability to hire quality employees could have a material adverse effect on our business, financial condition and results of operations.

        Our executive officers and members of our board of directors own 100% of Herbst Gaming and could have interests that conflict with yours.

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

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

        Our business depends on customers living in Nevada, an area that has recently experienced significant population growth. We cannot be certain that this growth will continue. If it does not continue, the profitability of our route and casino operations could be adversely affected. Our casinos are particularly dependent on the economy where they are located. An economic downturn in Nevada or these local markets could have a material adverse effect on our operating results. In addition, there can be no assurance that the economy in Nevada or these local markets will continue to grow.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and commodity prices.

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        On August 24, 2001 we issued $170.0 million in 10³/4% senior secured notes. The proceeds of these notes were used to refinance substantially all of our existing debt and for working capital purposes. All debt is currently at a fixed rate of interest. On February 7, 2003, we issued an additional $47.0 million in 10³/4% senior secured notes, and, as a result, we currently have approximately $217.0 million in aggregate principal amount of notes outstanding under our indenture. In September 2002, we secured a $10.0 million undrawn line of credit from U.S. Bank of Nevada. This facility has a floating interest rate and currently no outstanding balance. All other debt is currently at a fixed rate of interest.

        The fair value of our long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. Based on the borrowing rates currently available to us for debt with similar terms and average maturities, the estimated fair value of long-term debt outstanding is approximately $177,650,000 as of December 31, 2002.

        We do not invest in derivative financial instruments, interest rate swaps or other similar investments to alter interest rate exposure.

        We do not have any cash or cash equivalents as of December 31, 2002 that are subject to market risk based on changes in interest rates.

Item 8. Financial Statements and Supplementary Data

        Independent Auditors' Report

Consolidated Balance Sheets at December 31, 2002 and 2001

Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

Notes to Consolidated Financial Statements

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HERBST GAMING, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Herbst Gaming, Inc. and Subsidiaries Las Vegas, Nevada

We have audited the accompanying consolidated balance sheets of Herbst Gaming, Inc. and Subsidiaries (the "Company") as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Herbst Gaming, Inc. and Subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Las Vegas, Nevada
March 4, 2003

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Herbst Gaming, Inc.

Consolidated Balance Sheets

(in thousands)

See notes to consolidated financial statements.

29

Herbst Gaming, Inc.

Consolidated Statements of Operations

(in thousands)

See notes to consolidated financial statements.

30

Herbst Gaming, Inc.

Consolidated Statements of Stockholders' Equity (Deficiency)

(in thousands)

See notes to consolidated financial statements.

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Herbst Gaming, Inc.

Consolidated Statements of Cash Flows

(in thousands)

See notes to consolidated financial statements.

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Herbst Gaming, Inc.

Notes to Consolidated Financial Statements

1.    Description of Business and Summary of Significant Accounting Policies

        Description of Business and Principles of Consolidation—The accompanying consolidated financial statements of Herbst Gaming, Inc. ("Herbst" or the "Company") include the accounts of Herbst and its subsidiaries; E-T-T, Inc. and Subsidiaries ("E-T-T"), Market Gaming, Inc. ("MGI"), E-T-T Enterprises L.L.C. ("E-T-T Enterprises"), and Flamingo Paradise Gaming, LLC ("FPG"). The financial statements of E-T-T are consolidated and include the following wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc., and Corral Country Coin, Inc.

        All significant intercompany balances and transactions between Herbst, E-T-T, MGI, E-T-T Enterprises, and FPG have been eliminated in the consolidated 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 conjunction with the $170.0 million bond offering that was used to retire the majority of the existing debt of the consolidated entities. Prior to August of 2001, the newly consolidated entities were combined for presentation purposes.

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

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

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

        The gaming industry in the State of Nevada is subject to extensive state and local government regulation. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada Gaming Control Board, and local jurisdictions.

        Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant estimates incorporated into the Company's consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable and the estimated cash flows in assessing the recoverability of long-lived assets. Actual results could differ from those estimates.

        Cash and Cash Equivalents—Cash and cash equivalents include highly liquid investments with an original maturity at the date of purchase of three months or less. The carrying value of these investments approximates their fair value due to their short maturities.

        Fair Value of Financial Instruments—The carrying value of the Company's cash, trade, notes and loans receivable, and trade payables approximates fair value primarily because of the short maturities of these instruments. The fair value of the Company's long-term debt is estimated based on the quoted

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market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Based on the borrowing rates currently available to the Company for debt with similar terms and average maturities, the estimated fair value of long-term debt outstanding is approximately $177,650,000 as of December 31, 2002.

        Accounts Receivable—Receivables consist primarily of amounts due from customers as a result of normal business operations. The Company periodically performs credit evaluations of its customers. The Company reviews accounts receivable balances in order to determine an allowance for potential credit losses. At December 31, 2001 and 2002, an allowance for potential credit losses was $1,027,557 and $1,224,000, respectively.

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

        On a regular basis, the Company evaluates the collectibility of the loans by individually evaluating each location's operating results and cash flows. The carrying value of loans that are determined to be uncollectible is charged to operations at that time. At December 31, 2001 and 2002, an allowance for potential credit losses was not deemed necessary.

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

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

        Real Estate Costs—Costs that clearly relate to the acquisition, development, and construction of real estate projects are capitalized. Interest costs are capitalized while development and construction are in progress. Interest capitalized for the years ended December 31, 2000, 2001 and 2002 was $3,408,000, $0 and $0, respectively.

        Lease Acquisition Costs—Significant incremental costs associated with the acquisition of location leases are capitalized and amortized using the straight-line method over the term of the related leases, including expected renewals, which range from 1 to 20 years. Lease acquisition costs are stated at cost less accumulated amortization of $5,454,000 and $7,528,000 at December 31, 2001 and 2002, respectively.

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

        Long-Lived Assets—In accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company evaluates the potential impairment of

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long-lived assets when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If it is determined that the carrying value of long-lived assets may not be recoverable based upon the relevant facts and circumstances, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, the Company will recognize an impairment loss for the difference between the carrying value of the asset and its fair value. The Company believes that no material impairment of long-lived assets exists at December 31, 2002.

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