UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended: September 30, 2004

OR

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

	For the transition period from: to

Commission file number: 0-71094

HERBST GAMING, INC.

(Exact name of registrant as specified in its charter)

NEVADA		88-0446145
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3440 West Russell Road, Las Vegas, Nevada		89118
(Address of principal executive offices)		(Zip Code)

(702) 889-7695

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. YES ý NO o

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

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value, 300 outstanding shares

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

	December 31, 2003					September 30, 2004
	(in thousands)
Assets

Current assets
Cash and cash equivalents	$			54,030		$	50,477
Accounts receivable, net	1,216					1,212
Notes and loans receivable	706					607
Prepaid expenses	4,070					5,232
Inventory	1,039					1,003
Total current assets	61,061					58,531
Property and equipment, net	106,824					106,120
Lease acquisition costs, net	59,620					53,019
Due from related parties	563					292
Other assets, net	9,000					7,761
Total assets	$		237,068			$		225,723

Liabilities and stockholders’ equity (deficiency)

Current liabilities
Current portion of long-term debt	$		170			$		156
Accounts payable	5,727					5,839
Accrued expenses	13,599					10,440
Total current liabilities	19,496					16,435
Long-term debt, less current portion	215,099					246,222
Other liabilities	919					1,064
Commitments and contingencies

Stockholders’ equity (deficiency)
Common stock (no par value; 2,500 shares authorized; 300 shares issued and outstanding)	2,368					2,368
Additional paid-in capital	1,631					1,631
Accumulated deficit	(2,445				)	(41,997				)
Total stockholders’ equity (deficiency)	1,554					(37,998				)
Total liabilities and stockholders’ equity (deficiency)	$	237,068				$			225,723

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended September 30,								Nine months Ended September 30,
	2003				2004				2003				2004
	(in thousands)
Revenues:

Route operations	$	62,266			$	73,548			$	177,490			$	215,291
Casino operations	19,340				22,422				58,025				67,871
Other — non-gaming	694				847				2,312				2,673
Total revenues	82,300				96,817				237,827				285,835
Less promotional allowances	(2,727			)	(3,038			)	(8,344			)	(9,037		)
Net revenues	79,573				93,779				229,483				276,798

Costs and expenses:

Route operations	50,505				57,907				140,422				168,131
Casino operations	13,202				14,120				37,792				41,835
Depreciation and amortization	6,426				6,610				17,852				19,890
General and administrative	3,246				3,619				9,309				10,756
Total costs and expenses	73,379				82,256				205,375				240,612
Income from operations	6,194				11,523				24,108				36,186

Other income (expense):

Interest income	49				51				182				150
Loss on early retirement of debt	—				—				—				(37,991		)
Interest expense, net of capitalized interest	(5,891			)	(4,411			)	(17,041			)	(15,527		)
Total other expense	(5,842			)	(4,360			)	(16,859			)	(53,368		)
Net income (loss)	$		352		$		7,163		$		7,249		$	(17,182	)

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)

	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Total
	(in thousands)

Balance, January 1, 2004	$	2,368	$	1,631	$	(2,445	)	$	1,554
Stockholders’ distributions	—		—		(22,370		)	(22,370		)
Net loss	—		—		(17,182		)	(17,182		)
Balance, September 30, 2004	$	2,368	$	1,631	$	(41,997	)	$	(37,998	)

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Nine Months Ended September 30,
	2003				2004
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	7,249			$	(17,182	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Depreciation and amortization	17,852				19,890
Debt discount amortization	72				64
Gain on sale of assets	(129			)	(30		)
Loss on early retirement of debt	—				37,991
Decrease (increase) in:
Accounts receivable	281				63
Prepaid expenses	(509			)	(1,162		)
Inventory	173				36
Other assets	—				(53		)
Due from related parties	(528			)	271
Increase (decrease) in:
Accounts payable	340				(728		)
Accrued expenses	(3,367			)	(3,159		)
Due to related parties	(430			)	—
Other liabilities	(298			)	145
Net cash provided by operating activities	20,706				36,146
Cash flows from investing activities:
Net cash paid for acquisition of Anchor Coin’s slot route assets	(57,171			)	—
Additions to notes receivable	(544			)	(912		)
Collection on notes receivable	546				466
Proceeds from sale of property and equipment	533				158
Purchases of property and equipment	(11,587			)	(9,862		)
Lease acquisition costs	(2,601			)	(953		)
Net cash used in investing activities	(70,824			)	(11,103		)
Cash flows from financing activities:
Proceeds from long-term debt	49,115				258,021
Reduction of long-term debt	(115			)	(227,044		)
Loan origination fees	(2,561			)	(5,874		)
Prepayment penalty on retired debt	—				(31,329		)
Stockholders’ distributions	(4,455			)	(22,370		)
Net cash provided by (used in) financing activities	41,984				(28,596		)
Net decrease in cash and cash equivalents	(8,134			)	(3,553		)
Cash and cash equivalents:
Beginning of period	55,035				54,030
End of period	$		46,901		$	50,477
Supplemental cash flow information -
Cash paid during the period for interest	$		21,139		$	19,063
Supplemental schedule of non-cash investing and financing activities -
Purchase of assets through direct financing	$		238		$	68
Purchase of assets through accounts payable	$		674		$	1,441

Acquisition of assets of Anchor Coin’s slot route assets Fair value of assets and liabilities acquired -
Current assets, other than cash	$		717		$	—
Property and equipment	5,200				—
Lease acquisition costs	50,532				—
Other long-term assets	1,300				—
Other liabilities	(578			)	—
Cash paid, net of cash acquired	$		57,171		$	—

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

HERBST GAMING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Principles of Consolidation—The accompanying interim condensed 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.

The Company conducts business in the gaming industry and generates 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 owns and operates Terrible’s Hotel & Casino in Las Vegas, Nevada, Terrible’s Town Casino & Bowl (Henderson) in Henderson, Nevada, Terrible’s Searchlight in Searchlight, Nevada, and Terrible’s Town Casino and Terrible’s Lakeside Casino & RV Park, both of which are located in Pahrump, Nevada.

Interim Financial Statements —The accompanying financial statements for the three and nine months ended September 30, 2003 and 2004, are unaudited but, in the opinion of management, include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the financial results of the interim periods. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. These accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2003.

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 our consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable and estimated cash flows in assessing the recoverability of long-lived assets. Actual results could differ from those estimates.

Reclassifications—Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current period’s presentation. Such reclassifications had no impact on net income.

2. ACQUISITIONS

Anchor Coin

On February 21, 2003, the Company acquired the assets of the slot route business of Anchor Coin, a wholly owned subsidiary of International Game Technology. The acquisition was an asset acquisition and the only liabilities assumed were progressive jackpots. The initial purchase price was $62.0 million with a subsequent adjustment to $61.0 million. A portion of the purchase price has been allocated to the assets acquired and liabilities assumed based on estimated fair value at the date of acquisition, with the remaining balance of $50.5 million recorded as lease acquisition costs for the route contracts acquired. Such intangible asset is being amortized on a straight-line basis over the remaining life of the contracts. The acquisition was funded in part by the issuance of $47.0 million of additional 10 3/4% senior secured notes maturing in 2008. The remaining $14.0 million of the purchase price was funded with cash. In conjunction with the issuance of the notes, the Company capitalized $2.5 million of debt issuance costs, which are being amortized over the life of the notes.

The table below reflects unaudited pro forma combined results of the slot route operations of the Company and Anchor Coin as if the acquisition had taken place at January 1, 2003 (dollars in thousands).

	Nine months ended September 30, 2003
Gross revenues	$	243,858
Net income	$	6,278

Included in the pro forma net income for the nine months ended September 30, 2003 is approximately $453,000 of interest expense. In management’s opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual combined results of operations might have been if the acquisition had been effective at the beginning of 2003.

Grace Entertainment

On July 20, 2004, the Company entered into definitive agreements to purchase the riverboat casino assets of Grace Entertainment Inc. for a cash purchase price of approximately $287 million. These assets include the St. Jo Frontier Casino, located in St. Joseph, Missouri, the Mark Twain Casino, located in La Grange, Missouri, and the Lakeside Casino Resort in Osceola, Iowa. Closing of the purchase of the riverboat casino assets is conditioned upon, among other things, our obtaining all applicable governmental approvals, including approvals from the Iowa Racing and Gaming Commission and the Missouri Gaming Commission.

3. Long-Term Debt

Long-term debt consists of the following:

	December 31,			September 30,
	2003			2004
	(dollars in thousands)
Senior secured credit facility - $90 million revolving line due September 30, 2009, secured by substantially all the assets of the Company	—			$	23,000
Senior secured credit facility - $60 million term loan due September 30, 2009, secured by substantially all the assets of the Company.	—			60,000
10 ¾% senior secured notes due September 1, 2008 secured by assets of the Company with interest paid semi-annually on March 1 and September 1, including original issue discount of $202 at December 31, 2003 and $3 at September 30, 2004.	$		214,798	4,068
8 1/8% senior subordinated notes due June 2012 with interest paid semi-annually on June 1 and December 1, including original issue discount of $1,138	—			158,899
Notes payable to leasing company secured by vehicles, payable in monthly installments of $4, including interest ranging from 4.9% to 5.3%, due April 2004	471			411
Total debt	215,269			246,378
Less current portion	170			156
Total long-term debt	$	215,099		$		246,222

The proceeds from the 8-1/8% notes, along with the new credit facility were used to retire 97% of its outstanding 10-¾% senior secured notes for $242.1 million and to pay a $15.0 million dividend to shareholders. Estimated fees of $5.9 million associated with the new notes and new credit facility are included in other assets at September 30, 2004 and are being amortized over the life of the indebtedness. In connection with the retirement of 97 % of the 10¾% notes, the Company recorded a loss on the early retirement of debt of $38.0 million. The loss consisted of $31.3 million in debt prepayment premiums and $6.7 million in unamortized loan fees.

The notes mature on June 1, 2012. Interest is payable in cash at a rate of 8-1/8% per annum on September 1 and December 1 of each year, beginning on December 1, 2004. The indenture under which the notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on certain payments such as dividends. The Company is in compliance with these covenants as of September 30, 2004.

In August 2004, the Company filed a Form S-4 registration statement with the Securities and Exchange Commission for the purpose of effecting the exchange of the 8-1/8% senior subordinated notes due in 2012 for identical notes registered for resale under the federal securities laws. This registration statement became effective on November 8, 2004.

Long-term debt at September 30, 2004 is expected to mature as follows (dollars in thousands):

2005	$		156
2006	11,352
2007	15,098
2008	19,117
2009	41,756
Thereafter	158,899
Total	$	246,378

In connection with the Grace Acquisition, we and our subsidiaries entered into a $275.0 million amended and restated secured credit facility, which consists initially of a $175.0 million revolving credit facility and, as described below, provides for an additional $100.0 million term loan facility in order to fund the Grace Acquisition (the “New Credit Facility”). The New Credit Facility is an amendment and restatement of the credit facility we entered into on June 10, 2004 (the “Existing Credit Facility”) and converts the $60.0 million of term loans made pursuant to the Existing Credit Facility into revolving loans. The maturity date for the revolving loans is June 10, 2009. Concurrently with the consummation of the Grace Acquisition, and provided that no default or event of default exists under the New Credit Facility, without further consent of the lenders thereto, we may request the extension of an additional term loan facility in an aggregate principal amount not to exceed $100.0 million. We are currently in the process of obtaining commitments from lenders under the New Credit Facility or other institutional lenders for the additional term loan facility. We intend to borrow the full $100.0 million available under the additional term loan facility in order to consummate the Grace Acquisition. The interest rate and maturity date of the additional term loan facility will be determined at the time of such extension; provided, that the maturity date of the additional term facility is not anticipated to be earlier than the maturity date of the revolving credit facility. Borrowings under the New Credit Facility will be secured by liens on substantially all of our and our subsidiaries’ assets, including, after the closing of the Grace Acquisition and to the extent permitted by applicable law, the assets acquired pursuant thereto.

4. BUSINESS SEGMENTS

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

Revenues, income from operations, and depreciation and amortization for these segments are as follows (dollars in thousands):

	Three Months Ended September 30,								Nine months Ended September 30,
	2003				2004				2003				2004
	(in thousands)
Net revenues:

Slot route operations	$	62,178			$	73,472			$	177,202			$	214,981
Casino operations	16,701				19,460				49,969				59,144
Other operations (1)	694				847				2,312				2,673
Total net revenues	$	79,573			$		93,779		$		229,483		$	276,798

Income from segment operations (excluding general and administrative expense):
Slot route operations	$	6,845			$		10,550		$		23,822		$	31,781
Casino operations	2,016				3,837				7,631				12,796
Total income from segment operations	8,861				14,387				31,453				44,577
Other (1)	(2,667			)	(2,864			)	(7,345			)	(8,391		)
Total income from operations	$	6,194			$		11,523		$		24,108		$	36,186

Depreciation/amortization:
Slot route operations	$	4,828			$		5,015		$		12,958		$	15,069
Casino operations	1,483				1,503				4,546				4,513
Other (1)	115				92				348				308
Total depreciation/amortization	$	6,426			$		6,610		$		17,852		$	19,890

Segment EBITDA (2):
Slot route operations	$	11,673			$		15,565		$		36,780		$	46,850
Casino operations	3,499				5,340				12,177				17,309
Total segment EBITDA (2)	15,172				20,905				48,957				64,159
Other and corporate	(2,503			)	(2,721			)	(6,815			)	(7,933		)
Depreciation and amortization	(6,426			)	(6,610			)	(17,852			)	(19,890		)
Interest expense, net of capitalized interest	(5,891			)	(4,411			)	(17,041			)	(15,527		)
Loss on early retirement of debt	—				—				—				(37,991		)
Net income (loss)	$		352		$		7,163		$		7,249		$	(17,182	)

(1) Amount represents primarily other non-gaming revenues and general and administrative expenses.

(2) Segment EBITDA consists of income (from segment operations) plus depreciation and amortization, and is calculated before allocation of overhead.

5. LEASE ACQUISITION COSTS

	As of December 31, 2003				As of September 30, 2004
	(dollars in thousands)
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Lease acquisition costs	$	76,221	$	16,601	$	77,144	$	24,125

The aggregate amortization expense for the three months ended September 30, 2003 and 2004 was $2,498,000, and $2,525,000, respectively. The aggregate amortization expense for the nine months ended September 30, 2003 and 2004 was $6,580,000 and $7,525,000, respectively.

Estimated amortization expense for the three months ended December 31, 2004, and the twelve months ended December 31, 2005, 2006, 2007, 2008 and 2009 is $2,471,000, $9,796,000, $9,568,000, $9,428,000, $8,683,000, and $6,301,000, respectively.

6. SUBSEQUENT EVENTS

On October 26, 2004, the Company extended its slot route contracts with Vons and Safeway through 2011. The extended contracts contain substantially similar terms as the previous contracts.

On October 8, 2004, the Company and its subsidiaries entered into a $275.0 million amended and restated secured credit facility which consists initially of a $175.0 million revolving credit facility and provides for the ability to incur a $100.0 million term loan in order to fund the Grace Acquisition. The maturity date for the revolving credit facility is June 10, 2009. In connection with the consummation of the Grace Acquisition, and provided that no default or event of default exists under the amended credit facility, without further consent of the lenders thereto, the Company may and intends to request the extension of the term loan. The maturity date of the term loan will be determined at the time of such extension but is not anticipated to be earlier than the maturity date of the revolving credit facility.

In connection with the Grace Acquisition, the Company and its subsidiaries recently commenced a private placement offering of $170.0 million in aggregate principal amount of 7% senior subordinated notes due 2014.

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

On November 9, 2004, the Company announced the selection of a new board member, John F. O’Reilly.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

We are a gaming company that owned and operated approximately 8,400 slot machines throughout the State of Nevada as of September 30, 2004. Our route operations involved the exclusive installation and operation of approximately 6,800 slot machines as of September 30, 2004 in strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants. We also own and operate Terrible’s Hotel & Casino 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, Smith’s, Kmart, Terrible Herbst and Rite Aid, we pay a fixed monthly fee for each location in which we place slot machines. With our street accounts, such as bars, restaurants and non-chain convenience stores, we share in the revenues on a percentage basis with the location owner.

In February 2003, we acquired the slot route assets of Anchor Coin. This acquisition dramatically impacted our operations. We paid for those assets by (i) issuing another $47.0 million in senior secured notes due 2008 under our indenture for our 10¾% senior secured notes and (ii) $14.0 million of cash.

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 statements.

Our revenues are primarily derived from gaming revenues, which include revenues from slot machines and table games. Gaming revenues is generally defined as gaming wins less gaming losses. Our largest component of revenues is from our slot machines. 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 allowance. We calculate income from operations as net revenues less total operating costs and expenses. Income from operations represents only those amounts that relate to our operations and excludes interest income, interest expense, and other non-operating income and expenses. Segment EBITDA consists of income from segment operations plus depreciation and amortization and is calculated before allocation of overhead.

Financial Highlights for the three months ended September 30, 2003 and 2004

Slot Route Operations

	Three months ended			Three months ended
	September 30, 2003			September 30, 2004
	$		% of revenue	$		% of revenue
	(dollar amount in thousands)
Slot route revenue	$	62,266	100.0	$	73,548	100.0
Promotional allowances	88		0.1	76		0.1
Direct expenses	50,505		81.1	57,907		78.7
EDITDA	11,673		18.8	15,565		21.2
Depreciation and amortization	4,828		7.8	5,015		6.8
Income from slot route operations	$	6,845	11.0	$	10,550	14.4

Casino Operations

	Three months ended			Three months ended
	September 30, 2003			September 30, 2004
	$		% of revenue	$		% of revenue
	(dollar amount in thousands)
Casino revenue	$	19,340	100.0	$	22,422	100.0
Promotional allowances	2,639		13.6	2,962		13.2
Direct expenses	13,202		68.3	14,120		63.0
EDITDA	3,499		18.1	5,340		23.8
Depreciation and amortization	1,483		7.7	1,503		6.7
Income from casino operations	$	2,016	10.4	$	3,837	17.1

Other Costs

	Three months ended			Three months ended
	September 30, 2003			September 30, 2004
	$		% of total revenue	$		% of total revenue
	(dollar amount in thousands)

General and administrative	$	3,246	3.9	$	3,619	3.7

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004

Route Operations

Route operations accounted for 76% of total revenues during both the three months ended September 30, 2004 and the three months ended September 30, 2003. Total revenues from route operations were $73.5 million for the three months ended September 30, 2004, an increase of $11.2 million, or 18%, from $62.3 million for the three months ended September 30, 2003. At September 30, 2004, we were operating approximately 6,800 slot machines in our route operations, an increase of 200 machines from September 2003. The increase in route revenue in the 2004 quarter primarily reflects the addition of these machines as well as the strength of the Las Vegas economy and the continued replacement and refurbishment of older slot machines during 2004.

Route operating costs were $57.9 million, or 79%, of route revenues for the three months ended September 30, 2004. This compares to $50.5 million and 81% of route revenues for the same period in 2003. The increase in route operating expenses was primarily associated with increases in participation expenses, as a result of increased revenue, and scheduled space lease increases to our existing slot route contracts.

Route EBITDA (as defined) for the three months ended September 30, 2004 was $15.6 million, an increase of $3.9 million, or 33%, from $11.7 million for the three months ended September 30, 2003. The increase in EBITDA was a result of increased play and operating costs that decreased as a percentage of revenue.

Casino Operations

Casino operations accounted for 23% of total revenues for both the three months ended September 30, 2004 and the three months ended September 30, 2003. Total revenues derived from casino operations were $22.4 million for the three months ended September 30, 2004, an increase of $3.1 million, or 16%, from $19.3 million for the three months ended September 30, 2003. This increase in

revenue was primarily due to increased customer play at Terrible’s Hotel & Casino in Las Vegas and our two casinos in Pahrump. During 2003 one of the main competitors in Pahrump, Nevada closed due to a fire. This closure helped our Pahrump properties achieve higher revenues. The competitor is currently reconstructing its facilities.

Casino operating costs were $14.1 million, or 63%, of casino revenues for the three months ended September 30, 2004, compared to $13.2 million, or 68%, of casino revenues for the three months ended September 30, 2003. Operating expenses increased primarily in the areas that were related to the growth in revenue such as promotions, payroll and taxes. Additionally, payroll expenses increased in total as a result of increasing volume but decreased as a percentage of revenue.

Casino EBITDA (as defined) was $5.3 million for the three months ended September 30, 2004, an increase of $1.8 million, or 51%, from $3.5 million from the three months ended September 30, 2003.

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 $.8 million for the three months ended September 30, 2004 compared to $.7 million for the three months ended September 30, 2003.

Promotional Allowances

Promotional allowances were $3.0 million, or 3.1% of total revenues, for the three months ended September 30, 2004, an increase of $.3 million, or 11%, from $2.7 million, or 3.3% of total revenues for the three months ended September 30, 2003. The increase in promotional activities is a product of increased play at our casino properties.

Other Costs

General and administrative expenses, or G&A, were $3.6 million for the three months ended September 30, 2004, an increase of $.4 million, or 13%, from $3.2 million for the three months ended September 30, 2003. Increases in this area were in various areas including general advertising, and insurance. G&A expenses as a percentage of revenue were 3.7% of revenue for the current three-month period, down from 3.9% for the same period last year.

Depreciation and amortization expense was $6.6 million for the three months ended September 30, 2004, an increase of $.2 million, or 3%, from $6.4 million for the three months ended September 30, 2003. This moderate increase is the result of our continued deployment of new equipment.

Income from Operations

As a result of the factors discussed above, income from operations was $11.5 million for the three months ended September 30, 2004, an increase of $5.3 million from $6.2 million for the three months ended September 30, 2003. As a percentage of total revenues, income from operations increased from 7.5% during 2003 to 11.9% during the same period in 2004.

Other Expenses

Other expense was $4.4 million for the three months ended September 30, 2004, a decrease of $1.4 million from $5.8 million for the three months ended September 30, 2003. The decrease in expenses was the result of a decrease in interest expense due to the issuance of the new debt in June of 2004 at a lower interest rate, and the retirement of outstanding debt at higher rates.

Net Income(Loss)

Net Income for the three months ended September 30, 2004 was $7.2 million. This increase of $6.8 million from a net income figure of $.4 million recorded for three months ended September 30, 2003, was due to the aforementioned operations as well as the decrease in interest expenses.

Financial Highlights for the nine months ended September 30, 2003 and 2004

Slot Route Operations

	Nine months ended				Nine months ended
	September 30, 2003				September 30, 2004
	$			% of revenue	$		% of revenue
	(dollar amount in thousands)
Slot route revenue	$	177,490		100.0	$	215,291	100.0
Promotional allowances	288			0.2	310		0.1
Direct expenses	140,422			79.1	168,131		78.1
EDITDA	36,780			20.7	46,850		21.8
Depreciation and amortization	12,958			7.3	15,069		7.0
Income from slot route operations	$		23,822	13.4	$	31,781	14.8

Casino Operations

	Nine months ended			Nine months ended
	September 30, 2003			September 30, 2004
	$		% of revenue	$		% of revenue
	(dollar amount in thousands)
Casino revenue	$	58,025	100.0	$	67,871	100.0
Promotional allowances	8,056		13.9	8,727		12.9
Direct expenses	37,792		65.1	41,835		61.6
EDITDA	12,177		21.0	17,309		25.5
Depreciation and amortization	4,546		7.8	4,513		6.6
Income from casino operations	$	7,631	13.2	$	12,796	18.9

Other Costs

	Nine months ended			Nine months ended
	September 30, 2003			September 30, 2004
	$		% of total revenue	$		% of total revenue
	(dollar amount in thousands)

General and administrative	$	9,309	3.9	$	10,756	3.8

NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004

Route Operations

Route operations accounted for 75% of total revenues for both the nine months ended September 30, 2004 and for the nine months ended September 30, 2003. Total revenues from route operations were $215.3 million for the nine months ended September 30, 2004, an increase of $37.8 million, or 21%, from $177.5 million for the nine months ended September 30, 2003. At September 30, 2004, we were operating approximately 6,800 slot machines, an increase of 200 machines from September 2003. The

increase in route revenue in 2004 is a result of the strength of the Las Vegas economy. It also reflects a full nine months of operations of the slot machines acquired from Anchor Coin in February 2003 versus a partial nine months of operations in 2003, and the continued replacement and refurbishment of existing slot machines during 2004.

Route operating costs were $168.1 million, or 78%, of route revenues for the nine months ended September 30, 2004. This compares to $140.4 million and 79% of route revenues for the same period in 2003. The increase in route operating expenses was primarily associated with the cost of operating the slot machines acquired from Anchor Coin for a full nine months of operations in 2004 as compared to a partial nine months of operations in 2003, as well as increases in participation expenses and scheduled space lease increases to our existing slot route contracts.

Route EBITDA (as defined) for the nine months ended September 30, 2004 was $46.9 million, an increase of $10.1 million, or 27%, from $36.8 million for the nine months ended September 30, 2003. The increase in EBITDA was a result of the strength of the Las Vegas economy. It also reflects a full nine months of operations of the slot machines acquired from Anchor Coin in February 2003 versus a partial nine months of operations in 2003, and the continued replacement and refurbishment of existing slot machines during 2004.

Casino Operations

Casino operations accounted for 24% of total revenues for both the nine months ended September 30, 2004 and for the nine months ended September 30, 2003. Total revenues derived from casino operations were $67.9 million for the nine months ended September 30, 2004, an increase of $9.9 million, or 17%, from $58.0 million for the nine months ended September 30, 2003. This increase in revenue was primarily due to increased customer play at Terrible’s Hotel & Casino in Las Vegas and our two casinos in Pahrump. During 2003 one of the main competitors in Pahrump, Nevada closed due to a fire. This closure helped our Pahrump properties achieve higher revenues. The competitor is currently reconstructing its facilities.

Casino operating costs were $41.8 million, or 62%, of casino revenues for the nine months ended September 30, 2004, compared to $37.8 million, or 65%, of casino revenues for the nine months ended September 30, 2003. Operating expenses increased in the areas that were related to the increased revenue such as promotions, taxes and payroll.

Casino EBITDA (as defined) was $17.3 million for the nine months ended September 30, 2004, an increase of $5.1 million, or 42%, from $12.2 million from the nine months ended September 30, 2003.

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 $2.7 million for the nine months ended September 30, 2004 compared to $2.3 million for the nine months ended September 30, 2003.

Promotional Allowances

Promotional allowances were $9.0 million, or 3.2% of total revenues, for the nine months ended September 30, 2004, an increase of $.7 million, or 8%, from $8.3 million, or 3.5% of total revenues for the nine months ended September 30, 2003. The increase in promotional activities is a product of increased play at our casino properties.

Other Costs

General and administrative expenses, or G&A, were $10.8 million for the nine months ended September 30, 2004, an increase of $1.5 million, or 16%, from $9.3 million for the nine months ended September 30, 2003. The increase was primarily due to overhead associated with the purchase of the slot route assets of Anchor Coin in February 2003. G&A costs also increased due to costs associated with an increase in insurance expenses. G&A expenses as a percentage of revenue decreased from 3.9% to 3.8% for the nine months ended September 30, 2003 and 2004, respectively.

Depreciation and amortization expense was $19.9 million for the nine months ended September 30, 2004, an increase of $2.0 million, or 11%, from $17.9 million for the nine months ended September 30, 2003. The increase was due primarily 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 $36.2 million for the nine months ended September 30, 2004, an increase of $12.1 million or 50% from $24.1 million for the nine months ended September 30, 2003. As a percentage of total revenues, income from operations increased from 10.1% during 2003 to 12.7% during the same period in 2004.

Other Expenses

Other expense was $53.4 million for the nine months ended September 30, 2004, an increase of $36.5 million from $16.9 million for the nine months ended September 30, 2003. The increase in expenses was due to a charge relating to the early retirement of our 10-3/4% senior secured notes. This charge consisted of $31.3 million in prepayment premiums and $6.7 million in unamortized loan fees.

Net Income (Loss)

Net loss was $17.2 million for the nine months ended September 30, 2004. The net loss includes $38.0 million in costs associated with the early retirement of debt.

Liquidity and Capital Resources

Cash Flows

At September 30, 2004, we maintained $50.5 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 from operations, and borrowing on our revolving credit facility will be adequate to meet our anticipated working capital requirements, capital expenditures and scheduled payments of interest on the notes for at least the foreseeable future. On July 20, 2004, we announced that we had entered in agreements to purchase the assets of Southern Iowa Gaming Company, Mark Twain Casino, L.L.C. and St. Joseph Riverboat Partners for a cash purchase price of $287 million. We have received a financing commitment to fund the purchase price of the riverboat casino assets, subject to normal and customary closing conditions. The commitment expires, at the latest, on September 30, 2005. 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 nine months ended September 30, 2004, operating activities provided $36.1 million in cash flows on a net loss of $17.2 million. Net loss for the nine months ended September 30, 2004 included non-cash expenses (depreciation and amortization) of $19.9 million and a charge of $38.0 million relating to the early retirement of debt.

Investing Activities and Capital Expenditures

For the nine months ended September 30, 2004, we had net cash used in investing activities of $11.1 million of which $9.9 million related to the net cash used to purchase of new equipment including gaming devices.

In the next six months we expect to use $287.5 million to fund the Grace Acquisition. The construction of a new parking structure, casino expansion and general property renovations at Terrible’s Hotel & Casino in Las Vegas are anticipated to cost between approximately $15.0 to $20.0 million over the next twelve months. Additionally, we intend to spend approximately $15.0 million to add new and update existing slot machines at the acquired Grace properties and for general maintenance and capital expenditures.

Financing Activities

Cash flows used in financing activities were $28.6 million in the first nine months of 2004. This was the result of the refinancing of substantially all of our debt including a prepayment penalty of $31.3 million on the repurchase of approximately $211 million in principal amount of our 10¾% senior secured notes due 2008. In connection with our purchase of the 10¾% senior secured notes we obtained the consent to amend the underlying indenture to eliminate substantially all restrictive covenants and certain events of default. After the repurchase approximately $4.1 million of our senior secured notes remain outstanding. We intend to redeem such notes at the earliest optional redemption date, September 1, 2005, at a redemption price of 105.375% of the outstanding principal amount. We also made distributions to our stockholders of $22.4 million, including $15.0 million in connection with the debt refinancing.

On October 8, 2004, we amended and restated the credit facility we entered into on June 10, 2004. The new $175.0 million credit facility consists of a $175.0 million revolving credit facility and provides, subject to certain conditions, for an additional $100.0 million term loan facility at the time the riverboat casino asset acquisition is consummated. Our debt now includes a $175 million senior credit facility due June 30, 2009, of which $52 million is available for future borrowings at September 30, 2004. Additionally, we issued $160 million in 8-1/8% senior subordinated notes due June 1, 2012 on June 11, 2004. Interest accrues on our credit facility based on a floating rate plus a leverage grid-based variable amount. The credit facility is secured by substantially all of our assets.

Our debt includes approximately $4.1 million of indebtedness related to our 10¾% senior secured notes due 2008 and approximately $160.0 million of indebtedness related to our 8 1/8% senior subordinated notes due 2012. The proceeds from the $170.0 million senior subordinated notes offering, the $100.0 million term loan and a draw down of approximately $27.5 million on the revolving credit facility will be sufficient to pay the purchase price for the Grace Acquisition and related fees and expenses. After giving effect to the offering, the Grace Acquisition and the related borrowings under the amended credit facility, our total debt will be approximately $543.9 million.

Free Cash Flow

The following table summarizes our operating cash flow after deducting non-financed capital expenditure for the nine months ended September 30:

	Nine months ended September 30,
	2003		2004
	(in thousands)
Cash flow from operations	$	20,706	$	36,146
Cash paid for capital expenditures	11,587		9,862
Operating cash less non-financed capital expenditures	$	9,119	$	26,284

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2004.

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years			4-5 Years			After 5 Years
	(in thousands)
Contractual obligations:
Long-term debt	$	246,378	$	156	$		26,450	$	60,873		$	158,899
Operating leases (1)	265,040		72,019		112,457			53,590			26,974
Total contractual obligations (2)	$	511,418	$	72,175	$	138,907		$		114,463	$		185,873

(1) Does not reflect the recent extension of the Von’s and Safeway slot route contracts, which were extended to 2011, effective October 26, 2004.

(2) Does not reflect the new $170.0 million 7% senior subordinated notes due in 2014, announced November 5, 2004.

Other significant operating uses of cash during the first nine months of 2004 include interest and distributions made to stockholders for payment of S corporation taxes and discretionary distributions. Our cash payments for interest were $19.1 million for the nine months ended September 30, 2004 and cash distributions to stockholders were $22.4 million for the nine months ended September 30, 2004. We would expect levels of cash payments for interest to be reduced in the future due to the lower interest rates on the Company’s debt as a result of the refinance of the Company’s debt in September of 2004. Stockholder distributions are estimated to be approximately $1.2 million for the remainder of 2004.

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.

Critical Accounting Policies

The preparation of our condensed consolidated 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 condensed 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 assets’ 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. An adverse change to the estimate of these undiscounted future cash flows could necessitate an impairment charge that would adversely affect operating results.

Certain Forward-Looking Statements

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.

• Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the indenture. The following chart shows certain important information regarding our indebtedness:

	September 30, 2004
	(in thousands)

Long-term debt, including current portion	$	246,378
Stockholders’ deficiency	(37,998		)
Ratio of earnings to fixed charges (1)	2.3		x

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

• 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 indebtedness imposes restrictive covenants on us.

• 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.

• We face extensive regulation from gaming and other government authorities.

• We face legislative pressures to increase taxation and any material increase in our tax rate could have a material adverse effect on our financial condition.

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

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

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

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

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

• We face certain risks associated with the potential acquisition of the assets of Southern Iowa Gaming Company, Mark Twain Casino, L.L.C. and St. Joseph Riverboat Partners. Those risks include purchasing, licensing and obtaining favorable financing. In addition, if any of these purchases is completed, failure to achieve the anticipated benefits of any such purchase could adversely impact our business.

ITEM 3. 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.

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 $253 million at September 30, 2004.

Based on the Company’s new credit facility, we will be exposed to some market risk due to floating or variable interest rates. The interest under the credit facility will be based on a floating rate plus a leverage grid-based variable amount. A portion of the interest under the revolving credit facility will be based on a floating rate (a base rate or LIBOR, at our option). The three-month LIBOR at September 21, 2004 was 1.03%. A 1.0% increase in interest rates would result in an approximate $830,000 annual increase in interest expense. At September 30, 2004 approximately $83 million of our outstanding indebtedness will bear interest at floating rates.

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

We do not have any cash or cash equivalents as of September 30, 2004 that are subject to market risk based on changes in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Herbst Gaming’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, Herbst Gaming’s disclosure controls and procedures are effective in alerting them on a

PART I. – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

		CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.	CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.	OTHER INFORMATION

ITEM 6.	EXHIBITS

Date:	November 12, 2004	HERBST GAMING, INC.
		(Registrant)


		By:	/s/ Mary E. Higgins
			Mary E. Higgins
		Its:	Chief Financial Officer

Exhibit Number		Description

31.1		Certification of Edward J. Herbst under Section 302 of the Sarbanes-Oxley Act of 2004.
31.2		Certification of Mary E. Higgins under Section 302 of the Sarbanes-Oxley Act of 2004.
32.1		Certification of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2004.