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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

x

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

 

for the quarterly period ended March 31, 2011

 

OR

 

o

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

 

Commission File No. 000-54085

 


 

HERBST GAMING, LLC

(Exact name of Registrant as specified in its charter)

 

Nevada

 

02-0815199

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

3440 West Russell Road,

 

 

Las Vegas, NV

 

89118

(Address of principal executive offices)

 

(Zip Code)

 

(702) 889-7600

(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 o  No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes o  No  x

 

The registrant’s units are not traded on an exchange or in any public market.  As of March 31, 2011, the number of the registrant’s common units outstanding was 20,200,001.

 

 

 




Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects”, “projects,” “may,” “will” or “should” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties, and similar references to future periods.  Examples of forward-looking statements include, but are not limited to, statements we make regarding (i) the adequacy of cash flows from operations and available cash and (ii) the effects to our business as a result of our reorganization proceedings under title 11 of the United States Code (the “Bankruptcy Code”), 11 U.S.C. §§ 101, et seq., as amended (“Chapter 11”), in the United States Bankruptcy Court for the District of Nevada, Northern Division.

 

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.  Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.  Our actual results may differ materially from those contemplated by the forward-looking statements.  We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance.  These risks and uncertainties include, but are not limited to, statements we make regarding: (i) the potential adverse impact of the Chapter 11 filing on our operations, management and employees; (ii) customer response to the Chapter 11 filing; (iii) the adequacy of cash flows from operations, available cash and available amounts under our credit facility to meet future liquidity needs; (iv) expectations regarding the operation of slot machines in chain stores, bars, restaurants and convenience stores (“slot route operations”) and casino properties; or (v) our continued viability, our operations and our results of operations.  Additional important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and include the following:

 

·                  the recently completed bankruptcy proceedings may adversely affect our business, including our relationships with customers and suppliers;

 

·                  the recession, and in particular the economic downturn in Nevada and California, may continue to adversely affect our business;

 

·                  our debt service requirements may adversely affect our operations and ability to compete;

 

·                  our ability to generate cash to service our substantial indebtedness depends on many factors that are beyond our control;

 

·                  the success of our slot route operations will be dependent on our ability to renew slot route operations contracts;

 

·                  we may experience a loss of revenue or market share due to intense competition;

 

·                  rising gasoline prices could have a material adverse effect on our revenues as our casinos primarily rely on drive in traffic for visitation.

 

·                  we face extensive regulation from gaming and other government authorities;

 

·                  changes to applicable gaming and tax laws could have a material adverse effect on our financial condition; and

 

·                  other factors that are described in “Part II. Item 1A. Risk Factors.”

 

Any forward-looking statement made by us in this report speaks only as of the date of this report.  Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.  We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

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Table of Contents

 

Herbst Gaming, LLC

Condensed Consolidated Balance Sheets

(unaudited)
(in thousands except unit amounts)

 

 

 

Successor

 

 

 

March 31,
2011

 

December 31, 
2010

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

115,626

 

$

103,231

 

Restricted Cash

 

7,737

 

7,737

 

Accounts receivable, net

 

3,170

 

3,999

 

Notes and loans receivable

 

389

 

442

 

Prepaid expenses

 

12,977

 

14,435

 

Inventory

 

4,776

 

4,744

 

Total current assets

 

144,675

 

134,588

 

Property and equipment, net

 

247,508

 

250,640

 

Lease acquisition costs, net

 

7,916

 

8,226

 

Due from related parties

 

123

 

255

 

Other assets, net

 

7,869

 

7,068

 

Intangibles, net

 

128,193

 

128,470

 

Goodwill

 

59,990

 

59,990

 

 

 

 

 

 

 

Total assets

 

$

596,274

 

$

589,237

 

 

 

 

 

 

 

Liabilities and Owners’ equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

11,821

 

11,555

 

Accrued expenses

 

30,763

 

28,430

 

Total current liabilities

 

42,584

 

39,985

 

Long-term debt, less current portion

 

350,000

 

350,000

 

Other liabilities

 

1,352

 

1,219

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Owners’ equity

 

 

 

 

 

Members capital ($10 par value; 20,000,001 units authorized and outstanding at December 31, 2010; 21,000,001 units authorized and 20,200,001 units outstanding at March 31, 2011)

 

198,033

 

198,033

 

Additional paid-in-capital

 

420

 

 

Retained Earnings

 

3,885

 

 

Total owners’ equity

 

202,338

 

198,033

 

 

 

 

 

 

 

Total liabilities and owners’ equity

 

$

596,274

 

$

589,237

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Herbst Gaming, LLC

Condensed Consolidated Statements of Operations

(unaudited)
(in thousands)

 

 

 

Successor

 

Predecessor

 

 

 

Three Months
Ended March 31,
 2011

 

Three Months 
Ended March 31,

2010

 

Revenues

 

 

 

 

 

Casino

 

$

82,703

 

$

82,269

 

Slot Route

 

45,685

 

48,164

 

Food and beverage

 

13,633

 

13,696

 

Lodging

 

8,134

 

7,307

 

Fuel and retail

 

20,174

 

17,695

 

Other

 

5,620

 

5,070

 

 

 

 

 

 

 

Total revenues

 

175,949

 

174,201

 

 

 

 

 

 

 

Promotional allowances

 

 

 

 

 

Casino

 

17,074

 

15,005

 

Slot Route

 

48

 

50

 

 

 

 

 

 

 

Total Promotional Allowances

 

17,122

 

15,055

 

 

 

 

 

 

 

Net revenues

 

158,827

 

159,146

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Casino

 

30,747

 

29,444

 

Slot Route

 

43,587

 

45,198

 

Food and beverage

 

13,380

 

13,539

 

Lodging

 

5,458

 

5,225

 

Fuel and retail

 

18,071

 

16,271

 

Other

 

3,564

 

3,517

 

General and administrative

 

20,565

 

21,359

 

Corporate

 

3,166

 

3,107

 

Depreciation and amortization

 

7,643

 

13,073

 

 

 

 

 

 

 

Total costs and expenses

 

146,181

 

150,733

 

 

 

 

 

 

 

Income from operations

 

12,646

 

8,413

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

 

26

 

27

 

Interest expense, (Predecessor’s contractual interest would have been $32,552 for the period ended March 31, 2010)

 

(8,787

)

 

Reorganization costs

 

 

(471

)

Total other expense, net

 

(8,761

)

(444

)

 

 

 

 

 

 

Net income

 

$

3,885

 

$

7,969

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Herbst Gaming, LLC

Condensed Consolidated Statements of Cash Flows

(unaudited)
(in thousands)

 

 

 

Successor

 

Predecessor

 

 

 

For the Three
Months Ended 
March 31, 2011

 

For the Three 
Months Ended 
March 31, 2010

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

3,885

 

$

7,969

 

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

7,643

 

13,073

 

Amortization of debt issuance costs

 

36

 

 

Gain (loss) on sale of property and equipment

 

(2

)

52

 

Equity-based compensation

 

420

 

 

Decrease (increase) in operating assets:

 

 

 

 

 

Accounts receivable

 

957

 

52

 

Prepaid expenses

 

1,458

 

(247

)

Inventory

 

(32

)

195

 

Due from related parties

 

1

 

(49

)

Other assets

 

82

 

(14

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accounts payable

 

(421

)

(182

)

Liabilities subject to compromise

 

 

(1,519

)

Accrued expenses

 

2,333

 

3,584

 

Other liabilities

 

122

 

152

 

Reorganization items

 

 

(5,095

)

Net cash provided by operating activities

 

$

16,482

 

$

17,971

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Additions to notes and loans receivable

 

$

(127

)

$

(29

)

Collection on notes and loans receivable

 

173

 

186

 

Proceeds from sale of property and equipment

 

28

 

33

 

Purchases of property and equipment

 

(2,917

)

(4,215

)

Lease acquisition costs

 

(315

)

(103

)

Net cash used in investing activities

 

$

(3,158

)

$

(4,128

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Loan origination fees

 

$

(929

)

$

 

Reorganization items

 

 

(1,146

)

Net cash used in financing activities

 

(929

)

(1,146

)

Net increase in cash and cash equivalents

 

12,395

 

12,697

 

Cash and cash equivalents

 

 

 

 

 

Beginning of year

 

103,231

 

116,894

 

End of year

 

$

115,626

 

$

129,591

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

8,750

 

$

 

Cash paid for reorganization items

 

 

5,567

 

Supplemental schedule of non cash investing and financing activities:

 

 

 

 

 

Purchase of property and equipment financed through accounts payable

 

$

933

 

$

1,710

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

Herbst Gaming, LLC

Notes to condensed consolidated financial statements

 

1.                                      Summary of Significant Accounting Policies

 

Organization

 

Herbst Gaming, LLC. (and together with its subsidiaries, the “Company,” “Successor,” “we” or “us”) was incorporated in the State of Nevada on March 29, 2010.  We are a Nevada limited liability company that was formed to acquire substantially all of the assets of Herbst Gaming, Inc. (“HGI” and, together with its subsidiaries, the “Predecessor”) pursuant to Predecessor’s plan of reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Plan”).  Predecessor’s bankruptcies were jointly administered under the lead case In re: Zante, Inc., Case No. BK-N-09-50746-GWZ in the United States Bankruptcy Court for the District of Nevada, Northern Division (the “Bankruptcy Court”).

 

We are a diversified operator of 15 wholly-owned casino gaming properties and a wholly-owned slot route operation.  Headquartered in Las Vegas, we have gaming operations in Nevada, Missouri and Iowa, which we have aggregated in order to present five Reportable Segments: (i) Southern Nevada, (ii) Northern Nevada, (iii) Primm, (iv) Midwest, and (v) Slot Route.

 

The reorganization of Predecessor was substantially consummated on December 31, 2010 (the “Emergence Date”), wherein we acquired all of Predecessor’s assets in consideration for the issuance of our membership interests and senior secured loans.  See Note 2 — Fresh Start Accounting for a further description of the reorganization of Predecessor.

 

The Company has its principal executive offices at 3440 West Russell Road, Las Vegas, Nevada 89118; its telephone number is (702) 889-7600.

 

Basis of Presentation

 

The condensed consolidated financial statements of Herbst Gaming, LLC as of March 31, 2011, and for the three months ended March 31, 2011 and 2010 are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of the financial results for the interim periods.  Our results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2011.  These interim statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2010.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Predecessor or Successor, as applicable, and its subsidiaries.  In preparing the condensed consolidated financial statements, all significant inter-company accounts and transactions have been eliminated.

 

Fresh Start Accounting

 

The Company adopted fresh start accounting in accordance with the provisions of ASC 852, Reorganizations. The adoption of fresh start accounting had a material effect on the consolidated financial statements as of December 31, 2010 and the accretion and amortization of such fresh start adjustments are expected to have a material impact on the Consolidated Statements of Operation and cash flows for periods subsequent to December 31, 2010. See Note 2 for additional information.

 

Subsequent Events

 

The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q.

 

Reclassifications

 

On the Emergence Date, we changed the classification of certain revenue and expense items on the Predecessor’s statements of operations to conform to the classification that the Successor intends to use in the future.  These changes were made to provide additional detail to the reader and to better conform the presentation to that typically used in the casino gaming industry and have no effect on previously reported operating income or net income.  The primary changes were to provide separate line items for Casino, Slot Route, Food and beverage, Fuel and Retail and Other Revenues and corresponding operating expenses; provide separate detail for Promotional allowances related to Casino and Slot Route and to reflect certain general and administrative expenses incurred at the properties as General and Administrative expenses rather than property expenses.

 

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Table of Contents

 

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 condensed consolidated financial statements include:  fair value determination of assets and liabilities in conjunction with fresh start accounting, reorganization valuation, 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 as well as estimated fair values of certain assets related to write downs and impairments, contingencies and litigation, and claims and assessments. Actual results could differ from those estimates.

 

Restricted Cash

 

Restricted cash consists primarily of cash held in reserve to satisfy Predecessor legal claims assumed by Successor.  These cash reserves have been established to meet contingent liabilities or obligations of the Company

 

Fair Value of Financial Instruments

 

On January 1, 2008, we adopted ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”).  ASC 820 does not determine or affect the circumstances under which fair value measurements are used, but defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These two types of inputs create the following fair value hierarchy:

 

·                  Level 1:          Quoted prices for identical instruments in active markets.

 

·                  Level 2:          Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

·                  Level 3:          Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  For some products or in certain market conditions, observable inputs may not be available.

 

Reorganization Costs

 

The Predecessor filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on March 22, 2009. Accounting Standards Codification (ASC) 852, Reorganizations, which provides accounting guidance for financial reporting by entities in reorganization under the Bankruptcy Code, requires that the financial statements for periods subsequent to the filing of a Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, effective March 22, 2009 (the “Filing Date”) revenues, expenses, and realized gains and losses that were directly associated with the reorganization of Predecessor’s business have been reported separately as reorganization costs in the statements of operations. In addition, cash provided by or used for reorganization costs is disclosed separately in the consolidated statements of cash flows.

 

Debt Issuance Costs

 

Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense using the straight line method, which approximates the effective interest method, over the terms of the related debt agreements.

 

Income Taxes

 

On the Emergence Date, the Company elected to be treated as a partnership for income tax under the provisions of the Internal Revenue Code. Under those provisions, the members are liable for income tax on the taxable income of the Company as it affects the members’ individual income tax returns. Accordingly, no provision for income taxes has been included in the condensed consolidated financial statements as of March 31, 2011.  Effective April 1, 2011, the Company elected to be treated as a c-corp for

 

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Table of Contents

 

income tax under the provisions of the Internal Revenue Code.  In connection with this election, the Company expects to include a provision for income taxes and related tax asset and liability accounts for the quarter ended June 30, 2011.  The Predecessor elected to be taxed as an S Corp for income tax under the provisions of the Internal Revenue Code.  Accordingly, no provision for income taxes has been included in the condensed consolidated financial statements of the Predecessor.

 

2.                                      Fresh Start Accounting

 

Plan of Reorganization

 

On the Emergence Date, (i) we acquired substantially all of the assets of Predecessor in consideration for $350.0 million in aggregate principal amount of senior secured loans (the “Senior Secured Loans”) and the issuance to HGI of all of our membership interests (the “Common Units”), (ii) the Senior Secured Loans and Common Units were distributed by HGI to its lenders (“Lenders”) under their credit facility (the “HGI Credit Facility”) on a pro rata basis in accordance with the Bankruptcy Plan, (iii) all of Predecessor’s approximately $1.1 billion in outstanding long-term debt obligations consisting of borrowings under the HGI Credit Facility, $160.0 million of outstanding principal amount of 8.125% senior subordinated notes (the “8.125% Notes”) and $170.0 million of outstanding principal amount of 7% senior subordinated notes (the “7% Notes”, together with the 8.125% Notes, the “Subordinated Notes”) were terminated and (iv) 100% of the existing equity in HGI was cancelled (clauses (i) through (iv) referred to herein as the “Restructuring Transactions”).

 

Fresh-Start Balance Sheet

 

In accordance with accounting guidance related to financial reporting by entities in reorganization under the bankruptcy code, the Company adopted fresh-start reporting upon the Emergence Date. The Company was required to apply the provisions of fresh-start reporting to its financial statements because (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims and (ii) the holders of the existing voting shares of Predecessor common stock immediately before confirmation (i.e., the holders of shares of the common stock of the Predecessor that were issued and outstanding prior to the commencement of the Chapter 11 Cases) received less than 50 percent of the voting shares of the emerging entity. Under the accounting guidance, fresh-start reporting is required on the date on which the plan of reorganization is confirmed by the Bankruptcy Court, but further provides that fresh-start reporting should not be applied until all material conditions to the Plan are satisfied. All material conditions to the Plan were satisfied as of the Emergence Date.

 

Fresh-start reporting generally requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s enterprise value as set forth in the Plan to its assets and liabilities pursuant to accounting guidance related to business combinations as of the Emergence Date. As set forth in the disclosure statement relating to the Plan, as confirmed by the Bankruptcy Court on February 5, 2010, the enterprise value of Predecessor was estimated to be in the range of $500 million to $600 million.  Successor’s enterprise value was estimated using various valuation methods, including (i) a comparison of the Predecessor and its projected performance to the market values of comparable companies, and (ii) a calculation of the present value of the future cash flows of Successor based on financial projections.

 

The enterprise value for each property was determined using the greater of the cost method or discounted cash flow method, a form of the income approach.  Under the cost method, assets were valued at the cost to acquire a similar or substitute asset.  Under the discounted cash flow method, value was determined using projected future cash flows.  For future cash flows, financial projections for the period 2011 through 2015 were used with a composite annual growth rate for the four years after 2011 of 5.25%. The average marginal tax rate was assumed to be 35% for Nevada properties, 38% for Missouri properties and 41.5% for the Iowa property and included federal, state and local taxes. The discount rates applied for assets valued using the discounted cash flow method were in the range of 10.9% to 11.8% which was calculated using a weighted average cost of capital analysis based on comparable statistics of the Company’s peer group. The present value of all cash flows after 2015 were calculated using terminal values which were calculated by applying 2% to 3% growth to the 2015 financial projections which were then discounted in the range of 10.9% to 11.8%.

 

Based upon a reevaluation of relevant factors used in determining the range of enterprise value and updated expected future cash flow projections, the Company concluded that an enterprise value of $548 million should be used for fresh-start reporting purposes, as it most closely approximated fair value. After deducting the fair value of debt, this resulted in a post-emergence equity value of $198 million calculated as follows (in thousands):

 

Enterprise value

 

$

548,033

 

 

 

 

 

Less debt at fair value at 12/31/10

 

(350,000

)

 

 

 

 

Post-emergence equity value of common units

 

$

198,033

 

 

In accordance with fresh-start reporting, the Company’s enterprise value has been allocated to existing assets using the measurement guidance provided in accounting guidance related to business combinations. In addition, liabilities have been recorded at the present value of amounts estimated to be paid. Finally, the Predecessor’s accumulated deficit has been eliminated, and the Company’s new debt and equity have been recorded in accordance with the Plan.

 

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Table of Contents

 

Estimates of fair value represent the Company’s best estimates, which are based on industry data and trends, and by reference to relevant market rates and transactions and discounted cash flow valuation methods, among other factors. The determination of the fair value of assets and liabilities is subject to significant estimation and assumptions, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized, and actual results could vary materially. The estimates of value presented herein are preliminary and will be finalized during 2011.  The Company is continuing to evaluate its fair value assessments of certain tangible assets, intangible assets, lease acquisition costs and long term debt. The December 31, 2010 balance sheet presented below summarizes the impact of the adoption of the Plan of reorganization and fresh start accounting as of the Effective Date:

 

Reorganization Items and Fresh Start Adjustments (dollars in thousands)

 

 

 

December 31,

 

 

 

Predecessor
2010

 

Reorganization
Items (a)

 

Fresh Start
Accounting

 

Successor
2010

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,231

 

$

 

$

 

$

103,231

 

Restricted Cash

 

7,737

 

 

 

7,737

 

Accounts receivable, net

 

5,060

 

(1,061

)

 

3,999

 

Notes and loans receivable

 

442

 

 

 

442

 

Prepaid expenses

 

14,975

 

 

(540

)(f)

14,435

 

Inventory

 

4,744

 

 

 

4,744

 

Total current assets

 

136,189

 

(1,061

)

(540

)

134,588

 

Property and equipment, net

 

501,056

 

 

(250,416

)(g)

250,640

 

Lease acquisition costs, net

 

8,566

 

 

(340

)(f)

8,226

 

Due from related parties

 

255

 

 

 

255

 

Other assets, net

 

7,068

 

 

 

7,068

 

Intangibles, net

 

120,784

 

 

7,686

(i)

128,470

 

Goodwill

 

3,255

 

 

56,735

(h)

59,990

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

777,173

 

$

(1,061

)

$

(186,875

)

$

589,237

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,360

 

$

1,195

(b)

$

 

$

11,555

 

Accrued interest

 

 

 

 

 

Accrued expenses

 

21,326

 

7,104

(b)

 

28,430

 

Total current liabilities

 

31,686

 

8,299

 

 

39,985

 

Long-term debt, less current portion

 

 

350,000

(d)

 

350,000

 

Other liabilities

 

2,797

 

 

(1,578

)(f)

1,219

 

Liabilities subject to compromise

 

1,191,053

 

(1,191,053

)(c)

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

 

Members capital ($10 par value; 20,000,001 units issued and outstanding)

 

 

198,033

(e)

 

198,033

 

Common stock (no par value; 2,500 shares authorized; 300 shares issued and outstanding)

 

2,368

 

(2,368

)(e)

 

 

Additional paid-in-capital

 

1,631

 

(1,631

)(e)

 

 

Accumulated deficit

 

(452,362

)

637,659

(e)

(185,297

)(j)

 

Total stockholders’ equity/(deficit)

 

(448,363

)

831,693

 

(185,297

)

198,033

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$

777,173

 

$

(1,061

)

$

(186,875

)

$

589,237

 

 


Fresh Start Accounting Explanatory notes

 

Reorganization Items

 

(a)          Represents amounts recorded as of the Emergence Date for the consummation of the Plan, including the settlement of liabilities subject to compromise, elimination of affiliate activity amongst the Predecessor, the issuance of new indebtedness, the cancellation of Predecessor’s equity, and the issuance of new common units.

 

(b)         Reflects liabilities subject to compromise assumed by Successor.

 

(c)          Reflects the discharge of the Predecessor’s liabilities subject to compromise in accordance with the Plan.

 

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(d)         Reflects the new Credit Facility as provided in the Plan.

 

(e)          Reflects the cumulative impact of the reorganization adjustments as follows (in thousands):

 

Discharge of liabilities subject to compromise

 

$

1,191,053

 

 

 

 

 

Elimination of Predecessor equity

 

3,999

 

 

 

 

 

Elimination of items paid by Predecessor on behalf of Successor

 

(1,061

)

 

 

 

 

Liabilities subject to compromise to be paid in cash

 

(8,299

)

 

 

 

 

Issuance Long Term Debt

 

(350,000

)

 

 

 

 

Issuance of Common Units at emergence value

 

(198,033

)

 

 

 

 

 

 

$

637,659

 

 

(f)            Represents the adjustment of assets and liabilities to fair value, or other measurement as specified in accounting guidance related to business combinations, in conjunction with the adoption of fresh-start accounting.

 

(g)         Reflects the fair value of property and equipment and intangible assets in connection with fresh-start reporting. The following table summarizes the components of property and equipment, net as a result of the application of fresh-start reporting (in thousands):

 

 

 

 

 

Successor

 

Predecessor

 

 

 

Estimated Life

 

December 31,

 

December 31,

 

 

 

(Years)

 

2010

 

2010

 

Building

 

40

 

$

139,351

 

$

459,833

 

Gaming equipment

 

5

 

32,527

 

159,577

 

Furniture, fixtures, and equipment

 

5 - 10

 

23,035

 

100,877

 

Leasehold improvements

 

1 - 20

 

297

 

3,077

 

Land

 

 

37,290

 

36,930

 

Barge

 

10

 

15,000

 

16,935

 

Construction-in-progress

 

 

 

3,140

 

3,140

 

 

 

 

 

250,640

 

780,369

 

Less accumulated depreciation

 

 

 

 

(279,313

)

 

 

 

 

$

250,640

 

$

501,056

 

 

Fair value estimates were based on various valuation methods. Personal property related to assets with active secondary markets, such as riverboats, barges and slot machines, were valued using market prices of similar assets. Other personal property such as furniture, fixtures and other equipment, were valued using a depreciated replacement cost method. Land was valued using market comparable data. Where applicable, the income approach was utilized to estimate the fair value of the income producing land, buildings, building improvements and land improvements either by direct capitalization or discounted cash flow analysis. For specific real property assets that were valued using the cost approach, the income and/or sales comparison approach was utilized to support the value conclusion of the cost approach.

 

(h)         Reflects the elimination of historical goodwill of $3.3 million and the establishment of $60.0 million of goodwill as a result of fresh-start reporting.

 

(i)             Reflects the fair value of identifiable intangible assets in connection with fresh-start reporting. The following table summarizes the components of intangible assets as a result of the application of fresh-start reporting (in thousands):

 

 

 

 

 

Successor

 

Predecessor

 

 

 

Estimated Life

 

December 31,

 

December 31,

 

 

 

(Years)

 

2010

 

2010

 

Definite Lived Intangibles

 

 

 

 

 

 

 

Customer Loyalty

 

4-8

 

$

7,341

 

$

15,609

 

Non-Compete

 

 

 

 

123

 

Terrible’s Tradename

 

5

 

502

 

 

Relationship — Slot Route

 

14-15

 

464

 

175

 

Indefinite Lived Intangibles

 

 

 

 

 

 

 

Gaming License Rights

 

Indef

 

110,646

 

97,854

 

Local Tradename

 

Indef

 

9,517

 

6,783

 

Other

 

 

 

 

240

 

 

 

 

 

$

128,470

 

$

120,784

 

 

For further information on the valuation of intangible assets, see Note 4—Goodwill and Intangible Assets.

 

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(j)             Reflects the adjustment of assets and liabilities to fair value, or other measurement as specified in accounting guidance related to business combinations as follows (in thousands):

 

Elimination of Predecessor’s goodwill

 

$

3,255

 

 

 

 

 

Successor goodwill

 

(59,990

)

 

 

 

 

Elimination of Predecessor’s intangible assets

 

(7,686

)

 

 

 

 

Property and equipment adjustment

 

250,416

 

 

 

 

 

Other asset and liabilities adjustment

 

(698

)

 

 

 

 

Total Elimination of Predecessor’s, members’ deficit

 

$

185,297

 

 

Liabilities Subject to Compromise

 

Liabilities subject to compromise are certain liabilities of the Predecessor incurred prior to the Petition Date. In accordance with accounting guidance for financial reporting by entities in reorganization under the bankruptcy code, liabilities subject to compromise are recorded at the estimated amount that is expected to be allowed as pre-petition claims in the Chapter 11 proceedings and are subject to future adjustments. Adjustments may result from negotiations, actions of the Bankruptcy Court, further developments with respect to disputed claims, rejection of executory contracts and unexpired leases, proofs of claim, implementation of the Plan, or other events. In some individual instances and in total, claims filed by creditors are in excess of the amounts recorded by the Predecessor. The Predecessor recorded an estimate of allowed claims based on the reconciliation work that had been performed.

 

Liabilities subject to compromise as of December 31, 2010 consist of the following (in thousands):

 

 

 

Predecessor

 

 

 

December 31,

 

 

 

2010

 

Secured Debt

 

$

790,588

 

Accrued Interest on Secured Debt

 

29,103

 

Subordinated Notes

 

330,000

 

Accrued Interest on Subordinated Notes

 

33,062

 

Accounts payable

 

2,695

 

Accrued expenses

 

5,605

 

Total liabilities subject to compromise

 

$

1,191,053

 

 

3.                                      Property and Equipment

 

Property and equipment acquired from Predecessor is stated at fair market value on Emergence Date and is being depreciated over the remaining useful life using the straight-line method. Property and equipment acquisitions are stated at cost and are being depreciated over useful life using the straight-line method. Property and equipment consists of the following (in thousands):

 

 

 

 

 

Successor

 

 

 

Estimated

 

March 31,

 

December 31,

 

 

 

Life (Years)

 

2011

 

2010

 

Building

 

40

 

$

139,370

 

$

139,351

 

Gaming equipment

 

5

 

34,822

 

32,527

 

Furniture, fixtures, and equipment

 

5 - 10

 

23,372

 

23,035

 

Leasehold improvements

 

1 - 20

 

300

 

297

 

Land

 

 

37,290

 

37,290

 

Barge

 

10

 

15,000

 

15,000

 

Construction-in-progress

 

 

 

4,090

 

3,140

 

 

 

 

 

254,244

 

250,640

 

Less accumulated depreciation

 

 

 

(6,736

)

 

 

 

 

 

$

247,508

 

$

250,640

 

 

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4.                                      Goodwill and Other Intangible Assets

 

ASC Topic 350 requires the Company to test goodwill and other indefinite-lived intangible assets on an annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value below the amount reflected in the balance sheet.  The annual test, which is performed by the Company in the fourth quarter of each year, requires that the Company compare the carrying amount of the indefinitely-lived intangible assets reflected on the balance sheet to the fair value of the intangible assets.

 

The Company determines the fair value of the indefinite-lived intangible assets other than goodwill utilizing the discounted cash flows method, a form of the income approach.  Fair value measurements of these intangible assets include significant assumptions relating to variables that are based on past experiences and judgments about future performance.  These variables include, but are not limited to: (1) the forecasted earnings growth rate of each market, (2) risk-adjusted discount rate and (3) expected growth rates in perpetuity to estimated terminal values.

 

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

 

 

 

Successor

 

Successor

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Amortizing intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Loyalty Programs

 

$

7,341

 

$

(244

)

$

7,097

 

$

7,341

 

$

 

$

7,341

 

Terrible’s Tradename

 

502

 

(25

)

477

 

502

 

 

502

 

Relationships — Slot Route

 

464

 

(8

)

456

 

464

 

 

464

 

Total Amortizing intangible assets

 

8,307

 

(277

)

8,030

 

8,307

 

 

8,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortizing intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming License Rights

 

110,646

 

 

 

110,646

 

110,646

 

 

 

110,646

 

Local Tradenames

 

9,517

 

 

 

9,517

 

9,517

 

 

 

9,517

 

Total Unamortizing intangible assets

 

120,163

 

 

 

120,163

 

120,163

 

 

 

120,163

 

Total

 

$

128,470

 

 

 

$

128,193

 

$

128,470

 

 

 

$

128,470

 

 

Definite lived intangible assets are amortized ratably over their expected life.  Customer loyalty program intangible assets are being amortized over an average life of 7.7 years.  The Terrible’s tradename is being amortized using an average life of 5 years and slot route relationships are being amortized over an average life of 14.5 years.

 

Gaming license rights are intangible assets acquired from the purchase of gaming entities that operate in gaming jurisdictions where competition is limited, such as states where only a certain number of operators are allowed by law.  Gaming license rights and local tradenames are not currently subject to amortization as we have determined they have an indefinite useful life.

 

5.                                      Accrued Expenses

 

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

 

 

 

Successor

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Progressive jackpot liabilities

 

$

2,206

 

$

2,103

 

Accrued payroll and related

 

12,806

 

10,906

 

Slot club point liability

 

3,937

 

3,854

 

Other accrued

 

11,814

 

11,567

 

Total

 

$

30,763

 

$

28,430

 

 

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6.                                      Long-Term Debt

 

On the Emergence Date, (i) we acquired substantially all of the assets of Predecessor in consideration for $350.0 million in aggregate principal amount of Senior Secured Loans and the issuance to HGI of all of our Common Units, (ii) the Senior Secured Loans and Common Units were distributed by HGI to its Lenders under the HGI Credit Facility on a pro rata basis in accordance with the Bankruptcy Plan, (iii) all of Predecessor’s approximately $1.1 billion in outstanding long-term debt obligations consisting of borrowings under the HGI Credit Facility, $160.0 million of outstanding principal amount of 8.125% Notes and $170.0 million of outstanding principal amount of 7% Notes were terminated and (iv) 100% of the existing equity in HGI was cancelled.  After the transfer of HGI’s assets to us, all of HGI’s subsidiaries (other than E-T-T Enterprises L.L.C. and Corral Coin, Inc., which have been dissolved) are wholly-owned by us.

 

Long-term debt is comprised entirely of the $350.0 million credit facility and is expected to mature on December 31, 2015.

 

The following table provides the fair value measurement information about our long-term debt at December 31, 2010.  For additional information regarding ASC Topic 820 and the fair value hierarchy, see Note 1, Description of Business and Summary of Significant Accounting Policies.

 

 

 

Carrying Value

 

Estimated Fair
Value

 

Fair Value
Hierarchy

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Bank Credit Facility

 

350,000

 

364,875

 

Level 2

 

 

The estimated fair value of our bank credit facility is based on bid prices on or about March 31, 2011.

 

7.                                      Equity-based compensation

 

We account for our share-based compensation arrangements under an accounting standard which requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The fair values of awards are recognized as additional compensation expense, which is classified as operating expenses, proportionately over the vesting period of the awards.

 

Our share-based compensation arrangements are designed to advance the long-term interests of the Company, including by attracting and retaining employees and directors and aligning their interests with those of our stockholders. The amount, frequency, and terms of share-based awards may vary based on competitive practices, our operating results, government regulations and availability under our equity incentive plans. Depending on the form of the share-based award, new shares of our common units may be issued upon grant, option exercise or vesting of the award. We maintain two classes of a share-based plan, each as discussed below.  As of March 31, 2011, the Company had awarded grants of 609,093 units and there were 390,907 units available for grant under the LTIP. This plan was approved by the compensation committee of the board of directors.

 

The Herbst Gaming, LLC 2011 Long Term Incentive Plan (LTIP) permits the granting of stock options to employees, officers, directors and consultants. Options granted to management under the LTIP generally vested ratably over a three-year period from the date of the grant, and expire five years from the date of grant.  Options granted to directors vest ratably over two years.  Options granted to our Chief Executive Officer will vest ratably on December 31, 2011, 2012, and 2013.  Vesting of the Chief Executive Officer’s options will be based 50% on time and 50% on achieving certain performance criteria as evaluated by the compensation committee annually.

 

Our 2011 LTIP provides for the grant of Restricted Stock Units (“RSUs”) to our Chief Executive Officer. An RSU is an award which may be earned in whole, or in part, upon the passage of time or the attainment of performance criteria and which may be settled for cash, shares, or other securities or a combination of such. The RSUs do not contain voting rights and are not entitled to dividends. The RSUs are subject to the terms and conditions contained in the applicable award agreement and our 2011 LTIP.  In March 2011, our Chief Executive Officer was granted RSUs, totaling approximately 200,000 units.  Each of these RSUs represents a contingent right to receive one unit of Herbst Gaming, LLC common units upon vesting. These RSUs will vest ratably on December 31, 2011, 2012, and 2013.  The vesting for each year will be based 50% on time and 50% on achieving certain performance criteria as evaluated by the compensation committee annually.

 

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Table of Contents

 

A summary of our outstanding and non-vested option and restricted unit activity for the period ended March 31, 2011 is as follows:

 

 

 

Stock Options

 

Restricted Stock

 

 

 

 

 

 

 

 

 

 

 

Outstanding and

 

 

 

Outstanding

 

Non-Vested

 

Non-Vested

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Average

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Fair

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Value

 

 

 

Fair

 

 

 

 

 

Price

 

 

 

Per 

 

 

 

Value

 

 

 

Shares

 

Per Share

 

Shares

 

Share

 

Shares

 

Per Share

 

Balance, January 1, 2011

 

 

$

 

 

$

 

 

$

 

Granted

 

409,093

 

10.00

 

409,093

 

5.5

 

200,000

 

10.00

 

Vested

 

 

 

(38,636

)

5.5

 

 

 

Exercised

 

 

 

 

 

 

 

Expired / Cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2011

 

409,093

 

10.00

 

370,457

 

5.5

 

200,000

 

10.00

 

 

A summary of our exercisable stock options as of March 31, 2011 is as follows:

 

Number of vested stock options

 

38,636

 

Weighted average exercise price per share

 

$

10.00

 

Aggregate intrinsic value

 

$

0

 

Weighted average remaining contractual term in years

 

5.0

 

 

We determine the fair value of stock option awards at their grant date, using a Black-Scholes Option-Pricing model applying the assumptions in the following table. We determine the fair value of restricted stock awards based on the fair market value of our common stock on the grant date.  Actual compensation, if any, ultimately realized may differ significantly from the amount estimated using an option valuation model.

 

The following stock option information is as of March 31:

 

 

 

As of March 
31, 2011

 

 

 

 

 

Weighted average grant date fair value per share of options granted Significant fair value assumptions:

 

$

5.50

 

Expected term in years

 

5.00

 

Expected volatility

 

63.43

%

Expected dividends

 

0.0

%

Risk-free interest rates

 

2.27

%

Total intrinsic value of options exercised

 

$

 

Aggregate cash received for option exercises

 

$

 

 

 

 

 

Compensation cost (included in operating expenses) (in thousands):-

 

 

 

Options

 

$

253

 

Restricted units

 

167

 

 

 

 

 

Total

 

$

420

 

 

 

 

 

As of period end date:

 

 

 

Total compensation cost for non-vested awards not yet recognized (in thousands):

 

 

 

Stock options

 

$

1,940

 

Restricted stock

 

$

1,833

 

Weighted-average years to be recognized

 

 

 

Options

 

2.6

 

Restricted units

 

2.7

 

 

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For each year presented, the expected option term was determined using the simplified method under the applicable accounting standard. Expected volatility is based on historical market factors related to an average of the stocks of the Company’s peer group. Risk-free interest rate is based on U.S. Treasury rates appropriate for the expected term.

 

8.                                      Commitments and Contingencies

 

On February 17, 2006, the Clark County District Court entered judgment of a jury verdict delivered on January 14, 2006 against E-T-T, Inc. (“ETT”), a subsidiary of Predecessor, for $4.1 million in compensatory damages and $10.1 million in punitive damages.  The jury verdict was delivered in connection with an action brought by the family of an individual that alleged that ETT had negligently retained and negligently supervised a temporary employee who in 2001 stole a truck from ETT and, while drunk, hit and killed the individual.  The punitive damage award was subsequently lowered to $4.1 million in a post-trial ruling.  The Company believes the award of compensatory and punitive damages against ETT, the liability of ETT, and the amount thereof, is not supportable in either law or in fact and plans to vigorously pursue all appropriate post-trial and other remedies, including exercising our right to appeal.  The Company appealed the decision and oral arguments were heard by the Supreme Court of Nevada on December 9, 2009.  The panel upheld the District Court’s decision, ETT filed a motion for en banc hearing and on January 4, 2011, the full Supreme Court heard oral argument solely regarding the punitive damages award.  Pursuant to a Bankruptcy Court order on May 3, 2010, we fully reserved for this potential liability including related interest.  As of March 31, 2011, the Company has reserved $5.7 million including interest for this judgment.

 

The Company was party to arbitration in 2008 in Las Vegas, Nevada involving the termination of an employee.  The former employee alleged he was terminated without cause and was therefore due amounts pursuant to his employment agreement.  On March 10, 2009, the arbitrator awarded the former employee $1.3 million.  The arbitration award was appealed to the Clark County District Court.  On April 21, 2010, the District Court issued findings of fact, conclusions of law and an order setting aside the award as arbitrary and capricious, and remanding the matter back to arbitration.  The former employee appealed the District Court Order to the Nevada Supreme Court, which determined it did not have jurisdiction to hear the appeal.  The former employee then sought a writ of mandamus from the Supreme Court directing the District Court to confirm the arbitration award or alternatively a writ of prohibition preventing the remand to the arbitrator so that the Supreme Court could consider his appeal.  That request for relief is pending.  The Predecessor fully reserved for this award and approximately $0.2 million for attorney’s fees in fiscal year 2008.  As of March 31, 2011, The Company has the $1.5 million fully reserved for this claim.

 

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

 

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Table of Contents

 

Nevada Use Tax Refund Claims

 

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

 

9.                                     Segment Information

 

We have aggregated certain of our operations in order to present five Reportable Segments: (i) Southern Nevada, (ii) Northern Nevada, (iii) Primm, (iv) Midwest, and (v) Slot Route. The table below lists the classification of each of our properties.

 

Southern Nevada

 

 

Terrible’s Hotel & Casino

 

Las Vegas, NV

Terrible’s Town Pahrump Casino

 

Pahrump, NV

Terrible’s Lakeside Pahrump Casino

 

Pahrump, NV

Terrible’s Town Henderson Casino & Bowl

 

Henderson, NV

Terrible’s Town Searchlight Casino

 

Searchlight, NV

Northern Nevada

 

 

Sand’s Regency Hotel & Casino

 

Reno, NV

Rail City Casino

 

Sparks, NV

Gold Ranch Casino

 

Verdi, NV

Dayton Casino

 

Dayton, NV

Primm

 

 

Primm Valley Casino, Resort & Spa

 

Primm, NV

Buffalo Bill’s Hotel & Casino

 

Primm, NV

Whiskey Pete’s Hotel & Casino

 

Primm, NV

Midwest

 

 

St. Joseph Riverboat Casino

 

St. Joseph, MO

Mark Twain Riverboat Casino

 

La Grange, MO

Lakeside Iowa Hotel and Riverboat Casino

 

Osceola, IA

Slot Route

 

 

Northern and Southern Nevada locations

 

Multiple Cities in NV

 

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Table of Contents

 

The following table reconciles Segment EBITDA to net income (loss) (in thousands):

 

 

 

Successor

 

Predecessor

 

 

 

For the Three
 Months Ended 
March 31, 2011

 

For the Three
 Months Ended 
March 31, 2010

 

 

 

 

 

 

 

Gross revenues

 

 

 

 

 

Southern Nevada

 

$

20,287

 

$

20,711

 

Northern Nevada

 

21,271

 

21,337

 

Primm

 

51,376

 

48,212

 

Midwest

 

36,939

 

35,151

 

Slot Route

 

46,076

 

48,704

 

Other

 

 

86

 

Total gross revenues

 

$

175,949

 

$

174,201

 

 

 

 

 

 

 

Segment EBITDA(1)

 

 

 

 

 

Southern Nevada

 

4,818

 

4,621

 

Northern Nevada

 

2,803

 

3,207

 

Primm

 

3,367

 

3,605

 

Midwest

 

10,027

 

9,619

 

Slot Route

 

2440

 

3,454

 

Corporate and other

 

(3,166

)

(3,020

)

Total segment EBITDA

 

20,289

 

21,486

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

Southern Nevada

 

1,424

 

1,463

 

Northern Nevada

 

1,065

 

1,728

 

Primm

 

1,690

 

4,169

 

Midwest

 

1,436

 

2,362

 

Slot Route

 

2,028

 

3,274

 

Corporate and other

 

 

77

 

Total depreciation and amortization

 

7,643

 

13,073

 

 

 

 

 

 

 

Operating income

 

12,646

 

8,413

 

 

 

 

 

 

 

Other non-operating items

 

 

 

 

 

Interest expense (Predecessor’s contractual interest would have been $32,552 for the period ended March 31, 2010)

 

(8,787

)

 

Interest Income

 

26

 

27

 

Reorganization items

 

 

(471

)

Total other non-operating expense

 

(8,761

)

(444

)

 

 

 

 

 

 

Net income

 

$

3,885

 

$

7,969

 

 


(1)          Segment EBITDA is used by management to measure segment profits and losses and consists of income from operations plus depreciation and amortization, plus loss on impairment of assets, and plus restructuring expense.

 

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

 

Executive Overview

 

We are a diversified gaming company that focuses on two business lines: casino operations and slot route operations.  As of March 31, 2011, our casino operations in Nevada consisted of 12 casinos.  Five of these casinos focus on local gaming patrons in Southern Nevada, and include the ownership and operation of Terrible’s Hotel & Casino in Las Vegas, Nevada (“Terrible’s Las Vegas”) and four other small casinos in Southern Nevada operated under the Terrible’s name that consist of Terrible’s Town Casino in Pahrump, Nevada (“Pahrump Casino”), Terrible’s Lakeside Casino & RV Park in Pahrump, Nevada (“Lakeside”), Terrible’s Town Casino & Bowl in Henderson, Nevada (“Henderson Casino”), and Terrible’s Searchlight Casino in Searchlight, Nevada.  We also operate the following four casinos in Northern Nevada, all of which were acquired by Predecessor in January 2007:

 

·                  the Sands Regency Casino Hotel in downtown Reno, Nevada (“Sands”);

 

·                  Terrible’s Rail City Casino in Sparks, Nevada (“Rail City”);

 

·                  Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada (“Gold Ranch”); and

 

·                  Terrible’s Dayton Depot Casino in Dayton, Nevada (“Dayton Casino”).

 

In additional, we operate the following three casinos in Primm, Nevada, all of which were acquired by Predecessor in April 2007:

 

·                  Primm Valley Resort and Casino (“Primm Valley”);

 

·                  Buffalo Bill’s Hotel and Casino (“Buffalo Bill’s”);and

 

·                  Whiskey Pete’s Hotel and Casino (“Whiskey Pete’s”, and together with Primm Valley and Buffalo Bill’s, the “Primm Casinos”).

 

Our casino operations outside of Nevada consist of Terrible’s St. Jo Frontier Casino in St. Joseph, Missouri (“St. Jo”), Terrible’s Mark Twain Casino in LaGrange, Missouri (“Mark Twain”), and Terrible’s Lakeside Casino Resort in Osceola, Iowa (“Lakeside Iowa”).

 

As of March 31, 2011, our properties collectively included approximately 322,000 square feet of gaming space with 8,293 slot machines, 141 table games and 3,869 hotel rooms.

 

Seasonality

 

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

 

Presentation

 

Emergence from Chapter 11 Reorganization

 

Herbst Gaming, LLC (and together with its subsidiaries, the “Successor”, “Company,” “we” or “us”) was incorporated in the state of Nevada on March 29, 2010.  We are a Nevada limited liability company that was formed to acquire substantially all of the assets of Herbst Gaming, Inc. (“HGI” and, together with its subsidiaries, the “Predecessor”) pursuant to Predecessor’s plan of reorganization under Chapter 11 of Title 11 of the United States Code (the “BankruptcyPlan”).

 

On December 31, 2010 (the “Emergence Date”), (i) we acquired substantially all of the assets of Predecessor in consideration for $350.0 million in aggregate principal amount of Senior Secured Loans and the issuance to Predecessor of all of our Common Units, (ii) the Senior Secured Loans and Common Units were distributed to the lenders of the Predecessor on a pro rata basis in accordance with the Bankruptcy Plan, (iii) all of Predecessor’s approximately $1.1 billion in outstanding long-term debt obligations consisting of borrowings under the HGI Credit Facility, $160.0 million of outstanding principal amount of 8.125% senior subordinated

 

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notes and $170.0 million of outstanding principal amount of 7% senior subordinated notes were terminated, and (iv) 100% of the existing equity in Predecessor was cancelled.

 

On the Emergence Date, we adopted fresh start accounting in accordance with ASC 852-10-15.  As a result, the value of Predecessor’s assets, including intangible assets, and liabilities have been adjusted to their fair values with any excess of our enterprise value over our tangible and identifiable intangible assets and liabilities reported as goodwill on our condensed consolidated balance sheet.  Due to the adoption of fresh start accounting, the Predecessors results of operation for the three months ended March 31, 2010 are not comparable to the results of our operations for the three months ended March 31, 2011 and are presented for comparative purposes only.  Particularly, as a result of the adoption of fresh start accounting, depreciation and amortization expense for the three months ended March 31, 2011 was $7.6 million compared to $13.1 million for the three months ended March 31, 2010.  Additionally, the Predecessor’s results of operations for the three months ended March 31, 2010 does not include contractual interest expense of $32.6 million which was stayed during the Chapter 11 Case.  Interest expense for the Successor for the three months ended March 31, 2011 was $8.8 million.

 

Key Performance Indicators

 

In assessing the performance of our business, we consider a variety of performance and financial measures.  The key measures for determining how our business is performing include gross gaming revenue, promotional allowances and marketing expenses, and controllable operating costs.

 

Management measures the performance of each geographical region in which we operate based on segment EBITDA.  Key volume indicators such as slot machine win per unit, table games win per unit, and promotional allowances as a percentage of gross gaming revenue are analyzed in connection with the casino operations.  Hotel occupancy and average daily rate are used to analyze the performance of our hotel operations. Fuel and retail operations include revenues from gas stations and convenience stores that we own and operate.  Management measures the performance of fuel operations based on gallons sold and profit margin per gallon.

 

Results of Operations

 

Our financial results are highly dependent upon the number of customers we attract to our casino facilities and the amounts those customers spend per visit.  Most of our casino properties focus on local customers with an emphasis on slot machine play.  Our casinos primarily rely on drive in traffic from feeder markets to provide visitation.  Our slot route operation is dependent on the local population in Nevada where we operate.  Generally, we believe that our operating results for the three months ended March 31, 2011 and 2010 have been adversely impacted by the weakened national economy.  Continued high unemployment rates and weak housing prices in the markets in which we operate have also negatively impacted our revenue.

 

The following provides a summary of overall operating results:

 

 

 

Successor

 

Predecessor

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Net revenues

 

$

158,827

 

$

159,146

 

Segment EBITDA

 

20,289

 

21,486

 

Operating income

 

12,646

 

8,413

 

Net interest income (expense)

 

(8,761

)

27

 

Reorganization costs

 

 

(471

)

Net income

 

3,885

 

7,969

 

 

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Table of Contents

 

Revenues by Category

 

The following table presents detail of our consolidated gross revenues and costs and expenses by category:

 

 

 

Successor

 

Predecessor

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2011

 

% Change

 

2010

 

Gross Revenues

 

 

 

 

 

 

 

Gaming

 

$

82,703

 

1

%

$

82,269

 

Slot Route

 

45,685

 

(5

)%

48,164

 

Fuel & Retail

 

20,174

 

14

%

17,695

 

Food and Beverage

 

13,633

 

%

13,696

 

Lodging

 

8,134

 

11

%

7,307

 

Other

 

5,620

 

11

%

5,070

 

 

 

 

 

 

 

 

 

Total Gross Revenues

 

$

175,949

 

1

%

$

174,201

 

 

 

 

 

 

 

 

 

Promotional Allowances

 

(17,122

)

14

%

(15,055

)

 

 

 

 

 

 

 

 

Net Revenues

 

158,827

 

%

159,146

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

Gaming

 

30,747

 

4

%

29,444

 

Slot Route

 

43,587

 

(4

)%

45,199

 

Fuel & Retail

 

18,071

 

15

%

15,712

 

Food and Beverage

 

13,380

 

(1

)%

13,539

 

Lodging

 

5,458

 

4

%

5,224

 

General and Administrative

 

20,565

 

(6

)%

21,918

 

Other

 

3,564

 

1

%

3,517

 

Corporate

 

3,166

 

2

%

3,107

 

 

 

 

 

 

 

 

 

Total Segment Costs and Expenses

 

138,538

 

1

%

137,660

 

 

 

 

 

 

 

 

 

Segment EBITDA Margins

 

 

 

 

 

 

 

Gaming (net of promotional allowances)

 

42

%

 

 

46

%

Slot Route

 

5

%

 

 

6

%

Fuel & Retail

 

10

%

 

 

11

%

Food and Beverage

 

2

%

 

 

1

%

Lodging

 

33

%

 

 

29

%

Other

 

37

%

 

 

31

%

 

Gross Revenue

 

We derive a substantial amount of our gross revenues from gaming operations at our 15 casinos, which produced approximately 47% of our gross revenues for the three months ended March 31, 2011 and 2010.  Gaming revenues include revenues from slot machines and table games.  Gaming revenues are 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 allowances.  Promotional allowances were 10% and 9% of gross revenues for the three months ended March 31, 2011 and 2010, respectively.  The promotional environment continues to be highly competitive and we continue to manage promotional expenses across our properties.

 

Gross revenues from our slot route represent the next most significant revenue source comprising approximately 26% and 28% for the three months ended March 31, 2011 and 2010, respectively.  We generally enter into two types of slot route contracts:  Chain accounts with large grocery and drug stores, for which we pay a fixed monthly fee for each location where we place slot machines, and street accounts with bars and restaurants, where we share revenue with the location owner on a percentage basis.  Total machines on our slot route were approximately 6,000 and 6,100 as of March 31, 2011 and 2010, respectively.  Slot route revenues include the gross slot machine gaming revenues from our chain and street locations before revenue share or space lease expenses.

 

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Table of Contents

 

Fuel and retail gross revenues produced approximately 11% and 10% of our gross revenues for the three months ended March 31, 2011 and 2010, respectively.  Our fuel operations include a gas station and convenience store located at the Lakeside property in Osceola, Iowa; a gas station and convenience store at the Gold Ranch property in Verdi, Nevada; and a total of three gas stations located at the Primm properties.

 

Food and beverage revenues are derived from food and beverage sales in the restaurants, bars, room service and entertainment outlets we own and operate in our casino properties. Food and beverage revenue is recognized at the time the food and/or beverage are provided to the guest. Food and beverage revenues from outlets that we own and operated at our casino locations produced approximately 8% of our gross revenues for the three months ended March 31, 2011 and 2010.

 

Lodging revenues from our hotel operations accounted for approximately 5% and 4% of our total revenues for the three months ended March 31, 2011 and 2010, respectively.  Lodging revenue is derived from rooms rented to guests. “Average daily rate” is an industry specific term used to define the average amount of revenue per occupied room per day. “Occupancy percentage” defines the total percentage of rooms occupied and is computed by dividing the number of rooms occupied by the total number of rooms available. Hotel revenue is recognized at the time the room is provided to the guest.

 

Other revenues are primarily derived from entertainment, lottery, golf and ATM revenues at our casino properties and produced approximately 3% of our gross revenues for the three months ended March 31, 2011 and 2010.

 

Costs and Expenses

 

Direct costs and expenses, including selling, general and administrative expenses for each of our geographical operations are aggregated and included in Reportable Segment expenses discussed below.

 

Corporate expenses represent unallocated payroll, professional fees and other expenses that are not directly attributable to our Reportable Segment operations.  Corporate expenses as a percentage of gross revenues are flat at 2% for each of the three months ended March 31, 2011 and 2010.

 

Results of Operations by Reportable Segment

 

We review results of operations based upon Reportable Segments.  Reportable Segment EBITDA represents each property’s earnings before interest expense, income taxes, depreciation and amortization, loss on impairment of assets and restructuring and reorganization costs.

 

The following table presents financial information, by Reportable Segment, for the three months ended March 31, 2011 and 2010:

 

 

 

Successor

 

Predecessor

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2011

 

%
Contribution

 

2010

 

%
Contribution

 

Gross Revenues

 

 

 

 

 

 

 

 

 

Southern Nevada

 

$

20,287

 

12

%

$

20,711

 

12

%

Northern Nevada

 

21,271

 

12

%

21,337

 

12

%

Primm

 

51,376

 

29

%

48,212

 

28

%

Midwest

 

36,939

 

21

%

35,151

 

20

%

Slot Route

 

46,076

 

26

%

48,703

 

28

%

Other

 

 

%

87

 

%

Total Gross Revenues

 

$

175,949

 

100

%

$

174,201

 

100

%

 

 

 

 

 

 

 

 

 

 

Segment EBITDA

 

 

 

 

 

 

 

 

 

Southern Nevada

 

$

4,818

 

24

%

$

4,621

 

21

%

Northern Nevada

 

2,803

 

14

%

3,207

 

15

%

Primm

 

3,367

 

17

%

3,605

 

17

%

Midwest

 

10,027

 

49

%

9,619

 

45

%

Slot Route

 

2,440

 

12

%

3,454

 

16

%

Corporate and Other

 

(3,166

)

(16

)%

(3,020

)

(14

)%

Total EBITDA

 

$

20,289

 

100

%

$

21,486

 

100

%

 

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Table of Contents

 

Southern Nevada

 

Southern Nevada casino operations include Terrible’s Las Vegas, Terrible’s Town Casino - Pahrump, Terrible’s Lakeside - Pahrump, Terrible’s Henderson Casino & Bowl and Terrible’s Searchlight.  Southern Nevada casino operations accounted for 12% of our gross revenues for the three months ended March 31, 2011 and 2010.

 

Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010

 

Gross revenues in the region declined $0.4 million, or 2%, to $20.3 million for the three months ended March 31, 2011 from $20.7 million for the same period in 2010 primarily in the casino division due to a continuation of the weak economic conditions in Southern Nevada and our feeder markets in California.  Southern Nevada continues to see record high unemployment and foreclosure rates affecting our local customer base.  In addition, Terrible’s Las Vegas, which attracts Las Vegas visitors, continued to face cautious consumer spending, resulting in a noticeable decline in the amount spent per visitor.

 

Despite revenue declines, Southern Nevada Segment EBITDA increased by $0.2 million, or 4%, from $4.6 million for the three months ended March 31, 2010 to $4.8 million for the comparable period in 2011 as a result of continuing cost savings measures designed to maintain operating margins.  Total expenses in Southern Nevada were down $0.3 million, or 2%, for the three months ended March 31, 2011 when compared to the same period in 2010.  Expense reductions in the food and beverage, lodging and fuel and retail divisions decreased a total of $0.3 million.  General and administrative expenses decreased by $0.8 million, primarily related to reductions in printing and supply expenses, repair and maintenance charges and utilities expenses while casino division expenses increased $0.8 million, primarily attributable to contract services and promotional expenses.

 

Northern Nevada

 

Northern Nevada operations include the Sands, Rail City, Gold Ranch and Dayton Casino.  Northern Nevada casino operations accounted for 12% of the Company’s gross revenues for the three months ended March 31, 2011 and the three months ended March 31, 2010.

 

Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010

 

Gross revenues in the region remained constant at $21.3 million for the three months ended March 31, 2011 and the three months ended March 31, 2010 despite considerable snowfall in the Sierra Nevada mountain range that was reportedly the second highest snowfall on record for the region.  While this inclement weather had an adverse impact on the market as a whole, our drive-in customers visited our properties to stay, play and dine.  Food and beverage revenues increased $0.2 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010 primarily related to an increase in food covers at the Rail City property.  Fuel and retail revenues decreased $0.2 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010 due to lower gasoline sales volume primarily related to conditions on the roadways that feed in and out of our Gold Ranch property which includes a fuel station.

 

Northern Nevada Segment EBITDA decreased by $0.4 million to $2.8 million for the three months ended March 31, 2011 compared to $3.2 million for the three months ended March 31, 2010 primarily due to increased operating expenses related to promotional costs, administrative expenses including insurance costs and a slightly reduced margin in the fuel and retail segment due to retail pricing pressures.

 

Primm

 

Primm operations include Primm Valley, Buffalo Bill’s and Whiskey Pete’s.  In addition to casino operations, our results from Primm include the operation of three gas station/convenience stores, a lottery store, and two 18-hole Tom Fazio designed golf courses, which we lease and manage.  Primm operations accounted for 29% and 28% of the Company’s gross revenues for the three months ended March 31, 2011 and 2010, respectively.

 

Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010

 

The customer base of the Primm Casinos consists primarily of value oriented drive-in tourists from the Southern California market.  Total revenues at Primm increased by $3.2 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010.  Fuel and retail revenue increases accounted for most of the increase, up $2.7 million, or 21%, due to increases in the retail price of gasoline.  Primm Casino revenues declined $0.6 million, or 3% for the three months ended March 31,

 

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2011 when compared to the same period in prior year.  Operations at Primm continue to be negatively affected by increased competition for Southern Nevada and Southern California customers.  The casino declines at Primm were mainly attributable to reductions in slot revenue.  Hotel  revenues increased by $0.9 million due to higher occupancy.  Hotel occupancy at Primm was 51.6% for the three months ended March 31, 2011 compared to 42.3% for the comparable period in 2010 and average daily rate was $38.36 for the three months ended March 31, 2011 compared to $39.46 for the three months ended March 31, 2010.  Other revenue includes revenues generated from entertainment, the lottery store and golf course.  Other revenues increased by $0.4 million primarily due to additional entertainment events as compared to the same period in 2010.

 

Primm management focuses on Segment EBITDA margins by concentrating on expense reduction plans and marketing philosophy. Overall, Segment EBITDA from Primm operations decreased by $0.2 million to $3.4 million for the three months ended March 31, 2011 compared to $3.6 million for the three months ended March 31, 2010.  Segment EBITDA margin for Primm operations was consistent at 7% for both periods.

 

Overall, expenses increased by a total of $1.5 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010.  Fuel and retail expenses increased $2.5 million as a direct result of the increased fuel revenue while expense declines in other operating divisions netted to $1.0 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.  Hotel expenses increased $0.4 million as a result of the increased occupancy while expenses in food and beverage declined $0.5 million as a result of the outsourcing of restaurants.  General and administrative expenses declined $0.9 million as a result of reductions in payroll and related expenses and other direct expenses including utilities.

 

Midwest

 

Midwest operations include St. Jo in Missouri, Mark Twain in Missouri and the Lakeside Iowa in Osceola, Iowa.  Midwest casino operations accounted for 21% and 20% of the Company’s gross revenues for the three months ended March 31, 2011 and 2010, respectively.

 

Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010

 

Gross revenues for our Midwest casinos increased $1.8 million, or 5%, to $36.9 million for the three months ended March 31, 2011 compared to $35.1 million in the comparable period in 2010.   The increases were primarily driven by results at our Iowa property as gross revenues increased by $1.2 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010. St. Jo and Mark Twain experienced revenue increases of $0.2 million and $0.3 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010, respectively.  Revenue increases at the Midwest properties were driven by higher visitation due to more favorable weather conditions and targeted marketing campaigns as compared to the same period in 2010.

 

Segment EBITDA at the Midwest casinos increased by $0.4 million, or 4%, to $10.0 million for the three months ended March 31, 2011 from $9.6 million for the comparable period in 2010.  Expense increases in promotional allowances and taxes at Lakeside partially offset the revenue increase resulting in an overall increase to Segment EBITDA of $0.1 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010.  Segment EBITDA at the Missouri properties increased by a total of $0.3 million for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010 as a result of the revenue increases offset by increases in variable costs.

 

Slot Route

 

Slot Route revenues contributed 26% and 28% of the Company’s gross revenues for the three months ended March 31, 2011 and 2010, respectively.

 

Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010

 

Slot Route gross revenues decreased by $2.6 million, or 5%, to $46.1 million for the three months ended March 31, 2011 compared to $48.7 million for the comparable period in 2010 primarily due to the continuing weak economy in Nevada.  Persistently high unemployment and foreclosure rates in Nevada continue to affect our local customer base and revenues derived from the Slot Route. Additionally, the number of machines in operation on the Slot Route decreased to approximately 6,000 for the three months ended March 31, 2011 compared to approximately 6,100 machines in operation for the three months ended March 31, 2010.

 

Slot Route expenses include fixed space lease payments to our chain store accounts and participation expenses, which represent revenue share arrangements with our street accounts.  Slot Route Segment EBITDA decreased by $1.0 million, or 29%, to $2.4 million in the first quarter of 2011 from $3.4 million in the first quarter of 2010 primarily due to the fixed nature of those

 

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expenses against declining revenues.  Overall, the Slot Route segment contributed 12% to the Company’s Segment EBITDA for the three months ended March 31, 2011 compared to 16% for the comparable period in 2010.

 

Liquidity and Capital Resources

 

Overview

 

Our business relies on cash flows from operations as our primary source of liquidity.  On the Emergence Date, we entered into a credit agreement with Wilmington Trust Company, as administrative agent, and the lender parties from time to time thereto (the “Credit Agreement”).  We do not currently have access to additional liquidity, if needed, through borrowings under our Credit Agreement.  Our Credit Agreement does permit us to incur limited indebtedness for trade payables and capital leases in the ordinary course of business.  We cannot provide assurance that, if required, we will be able to obtain necessary approval for additional financing under our Credit Agreement.  Our primary cash needs for the next twelve months of operation include interest payments on our debt and capital expenditures for refurbishment of some of our properties, acquisition of slot machines and other equipment required to maintain our facilities.  Required principal prepayment on our debt is based on excess cash flow (as defined in the Credit Agreement and described below) calculated at the end of each calendar year.  The most significant components of our working capital are current accounts receivable, accounts payable and other current liabilities.  Our liquidity position benefits from the fact that we generally collect cash from transactions with customers the same day or, in the case of credit or debit card transactions, within a few days of the related transaction.

 

Our cash flows are affected by a variety of factors, many of which are outside of our control, including regulatory issues, competition, financial markets and other general business conditions.  We believe that we will have sufficient liquidity through available cash, trade credit and cash flow to fund our cash requirements and maintenance capital expenditures for at least the next twelve months.  However, we cannot assure you that we will generate sufficient income and cash flow to meet all of our liquidity requirements.

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was $16.5 million for the three months ended March 31, 2011 compared to net cash provided by operating activities of $18.0 million for the three months ended March 31, 2010, a decrease of $1.5 million.  Operating cash flows were lower primarily in connection with the decrease in net income, offset by approximately $5.1 million in reorganization expenses paid during the first quarter of 2010.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $3.2 million for the three months ended March 31, 2011 compared to $12.1 million for the three months ended March 31, 2010.  Net cash used in investing activities is primarily comprised of $2.9 million in capital expenditures for the three months ended March 31, 2011.  Our primary capital expenditures during the three months ended March 31, 2011 included slot machine purchases of $0.2 million, property-level maintenance costs of $2.2 million and $0.5 million of project-related costs primarily associated with refurbishments at the Primm properties.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities was $0.9 million for the three months ended March 31, 2011 compared to $1.1 million for the three months ended March 31, 2010.  Cash flow from financing activities primarily consisted of loan origination fees for the three months ended March 31, 2011 and reorganization expenses for the three months ended March 31, 2010.

 

Off-Balance Sheet Arrangements

 

We currently have no material off-balance sheet arrangements.

 

Critical Accounting Policies

 

For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2011.

 

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Recently Issued Accounting Pronouncements

 

None

 

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

We are exposed to market risk, primarily related to interest rate exposure of our debt obligations that bear interest based on floating rates. We do not have any cash or cash equivalents as of March 31, 2011 that are subject to market risk based on changes in interest rates. We are exposed to market risk due to floating or variable interest rates on our indebtedness under the Credit Agreement. The interest on the term loan under the Credit Agreement is based on the rate of, at the Company’s election, either (i) the LIBOR plus a margin of 7.0% or (ii) the alternative base rate plus a margin of 6.5%. Both LIBOR and the alternative base rate are subject to a fixed floor of 3% and 4% respectively. At March 31, 2011, the principal amount of the related borrowings under the Credit Agreement was $350.0 million, all of which was subject to variable interest rates. A hypothetical 1.0% increase in LIBOR (or base rate) above the current floor would result in an approximately $3.5 million annual increase in interest expense.

 

The carrying value of our 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 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 current debt outstanding is approximately $364.9 million as of March 31, 2011.

 

ITEM 4.          CONTROLS AND PROCEDURES.

 

(a)           Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2011, including controls and procedures to timely alert management to material information relating to the Company and its subsidiaries required to be included in the reports the Company files or submits under the Exchange Act. Based on such evaluation, they have concluded that, as of such date, our disclosure controls and procedures were effective.

 

(b)           Management Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2011.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.

 

Based on our assessment, management believes that, as of March 31, 2011, the Company’s internal control over financial reporting was effective.

 

(c)           Changes in Internal Control Over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1.          LEGAL PROCEEDINGS.

 

For a description of our previously reported legal proceedings, refer to “Part I, Item 3-Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material developments with respect to the legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

We are party to other ordinary and routine litigation incidental to our business. We do not expect the outcome of any pending litigation to have a material adverse effect on our consolidated financial position or results of operations.

 

ITEM 1A.       RISK FACTORS.

 

“Part I. Item 1A.—Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010 includes a discussion of our risk factors. There have been no material changes to those risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2010. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

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

 

None.

 

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.          [REMOVED AND RESERVED.]

 

ITEM 5.          OTHER INFORMATION.

 

None.

 

ITEM 6.          EXHIBITS

 

(a)               Exhibits.

 

EXHIBIT INDEX

 

Exhibit Number

 

Exhibit Description

10.1*

 

Letter Agreement regarding offer of employment, dated as of January 11, 2011, from Herbst Gaming, LLC to, and acknowledged by, David D. Ross (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated January 12, 2011).

10.2*

 

Letter Agreement regarding offer of employment, dated as of January 12, 2011, from Herbst Gaming, LLC to, and acknowledged by, Donna Lehmann (incorporated by reference from Exhibit 10.2 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated January 12, 2011).

10.3*

 

Letter Agreement regarding offer of employment, dated as of February 4, 2011, from Herbst Gaming, LLC to, and acknowledged by, Marc H. Rubinstein (incorporated by reference from Exhibit 10.23 to Registrant’s Annual Report on Form 10-K (File No. 000-54085) dated March 31, 2011).

10.4*

 

Letter Agreement regarding offer of employment, dated as of January 21, 2011, from Herbst Gaming, LLC to, and acknowledged by, John Christopher Krabiel (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated May 9, 2011).

10.5*

 

Executive Severance Agreement, dated as of January 11, 2011, between Herbst Gaming, LLC and David D. Ross (incorporated by reference from Exhibit 10.3 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated January 12, 2011).

10.6*

 

Executive Severance Agreement, dated as of January 11, 2011, between Herbst Gaming, LLC and Donna Lehmann (incorporated by reference from Exhibit 10.4 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated January 12, 2011).

10.7*

 

Executive Severance Agreement, dated as of February 4, 2011, between Herbst Gaming, LLC and Marc H. Rubinstein (incorporated by reference from Exhibit 10.26 to Registrant’s Annual Report on Form 10-K (File No. 000-54085) dated March 31, 2011).

 

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10.8*

 

Executive Severance Agreement, dated as of January 21, 2011, between Herbst Gaming, LLC and John Christopher Krabiel (incorporated by reference from Exhibit 10.2 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated May 9, 2011).

10.9*

 

Duty of Loyalty Agreement, dated as of January 11, 2011, between Herbst Gaming, LLC and David D. Ross (incorporated by reference from Exhibit 10.5 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated January 12, 2011).

10.10*

 

Duty of Loyalty Agreement, dated as of January 11, 2011, between Herbst Gaming, LLC and Donna Lehmann (incorporated by reference from Exhibit 10.6 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated January 12, 2011).

10.11*

 

Duty of Loyalty Agreement, dated as of February 4, 2011, between Herbst Gaming, LLC and Marc H. Rubinstein (incorporated by reference from Exhibit 10.29 to Registrant’s Annual Report on Form 10-K (File No. 000-54085) dated March 31, 2011).

10.12*

 

Duty of Loyalty Agreement, dated as of January 21, 2011, between Herbst Gaming, LLC and John Christopher Krabiel (incorporated by reference from Exhibit 10.3 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated May 9, 2011).

10.13*

 

Amendment to Letter Agreement, dated as of May 3, 2011, from Herbst Gaming, LLC to, and acknowledged by, Donna Lehmann (incorporated by reference from Exhibit 10.4 to Registrant’s Current Report on Form 8-K (File No. 000-54085) dated May 9, 2011).

10.14*

 

Herbst Gaming, LLC 2011 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.30 to Registrant’s Annual Report on Form 10-K (File No. 000-54085) dated March 31, 2011).

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


*              Denotes a compensatory plan or management contract

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

HERBST GAMING, LLC

 

 

 

 

 

 

Dated: May 13, 2011

By:

/s/ David D. Ross

 

 

Name: David D. Ross

 

 

Title: Chief Executive Officer

 

 

 

Dated: May 13, 2011

By:

/s/ John Christopher Krabiel

 

 

Name: John Christopher Krabiel