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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

 

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

 

**For the quarterly period ended: September 30, 2010**

** **

**or**

 

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

** **

**For the transition period from:             to             **

 

**Commission file number: 333-71094**

** **

**HERBSTGAMING, LLC**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                      | ** ** | **02-0815199**                          |
|-------------------------------------------------|------------|-----------------------------------------|
| (State of incorporation)                        |       | (I.R.S. Employer Identification Number) |
| ** **                                      | ** ** | ** **                              |
| **3440 West Russell Road**,**Las Vegas**,**NV** | ** ** | **89118**                               |
| (Address of principal executive offices)        |       | (Zip Code)                              |

 

Registrant’s telephone number:  **(702) 889**-**7695**

** **

**Not Applicable**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x     NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). YES o     NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No x

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVEYEARS

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Exchange Actsubsequent to the distribution of securities under a plan confirmed by acourt.  YES o        NO o   Not Applicable x

 

APPLICABLEONLY TO CORPORATE ISSUERS

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

Notapplicable.

 

 

 

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**FORM 10**-**Q**

 

**TABLE OF CONTENTS**

 
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING  STATEMENTS           |                                                                                        | 1      |
|----------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                                                 |                                                                                        |   |
| EXPLANATORY  NOTE                                                    |                                                                                        | 2      |
|                                                                 |                                                                                        |   |
| PART I — FINANCIAL INFORMATION                             |                                                                                        | 3      |
|                                                                 |                                                                                        |   |
|                                                                 | CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                           |   | 3 |
|                                                                 |                                                                                        |   |   |
|                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED)                                |   | 4 |
|                                                                 |                                                                                        |   |   |
|                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)                                |   | 5 |
|                                                                 |                                                                                        |   |   |
|                                                                 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)                           |   | 6 |
|                                                                 |                                                                                        |   |   |
| ITEM 2.                                                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   | 16 |
|                                                                 |                                                                                        |   |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK  |                                                                                        | 27     |
|                                                                 |                                                                                        |   |
| ITEM 4. CONTROLS AND PROCEDURES                                      |                                                                                        | 27     |
|                                                                 |                                                                                        |   |
| PART II — OTHER INFORMATION                                |                                                                                        | 27     |
|                                                                 |                                                                                        |   |
| ITEM 1. LEGAL PROCEEDINGS                                            |                                                                                        | 27     |
|                                                                 |                                                                                        |   |
| ITEM 1A. RISK FACTORS                                                |                                                                                        | 27     |
|                                                                 |                                                                                        |   |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS |                                                                                        | 27     |
|                                                                 |                                                                                        |   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                              |                                                                                        | 28     |
|                                                                 |                                                                                        |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS    |                                                                                        | 28     |
|                                                                 |                                                                                        |   |
| ITEM 5. OTHER INFORMATION                                       |                                                                                        | 28     |
|                                                                 |                                                                                        |   |
| ITEM 6. EXHIBITS                                                |                                                                                        | 28     |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q contains forward-lookingstatements. Such statements contain words such as “believes,” “estimates,” “expects,”“intends,” “may,” “will,” “should” or “anticipates” or the negative or othervariation of these or similar words, or by discussions of strategy or risks anduncertainties. Forward-looking statements in this report include, among otherthings, statements concerning: projections of future results of operations orfinancial condition; expectations regarding the operation of slot machines inchain stores, bars, restaurants and convenience stores (“route operations”) andcasino properties; expectations of the continued availability of capitalresources; and expectations regarding the restructuring efforts of HerbstGaming, Inc. (“HGI”), andits subsidiaries. HGI and its subsidiaries are referred to collectively in thisQuarterly Report on Form 10-Q as the “Predecessors.” Any forward-looking statement necessarily isbased upon a number of estimates and assumptions that, while consideredreasonable by us, is inherently subject to significant business, economic andcompetitive uncertainties and contingencies, many of which are beyond our orPredecessors’ control, and are subject to change. Actual results of operationsmay vary materially from any forward-looking statement made herein.Forward-looking statements should not be regarded as a representation by us,Predecessors or any other person that the forward-looking statements will beachieved. Undue reliance should not be placed on any forward-lookingstatements. Some of the contingencies and uncertainties to which anyforward-looking statement contained herein is subject include, but are notlimited to, the following:

 

·                  Although the Plan (asdefined herein) has been confirmed, it will not be fully implemented until theSubstantial Consummation Date (as defined herein). The timing of substantialconsummation of the Plan is uncertain. The continuing bankruptcy proceedingsand consummation of the Plan may adversely affect Predecessors’, andconsequently our, business, including their and our relationships withcustomers and suppliers.

 

·                  The recession, and inparticular the economic downturn in Nevada and California (two of Predecessors’primary markets), has adversely affected Predecessors’ business. We expect thatPredecessors’, and consequently our, business will continue to be adverselyaffected by the economic downturn.

 

·                  We will have substantialdebt outstanding following the Substantial Consummation Date. Our debt servicerequirements may adversely affect our operations and ability to compete.

 

·                  We will require asignificant amount of cash to service our indebtedness. Our ability to generatecash depends on many factors that are beyond our control.

 

·                  The success of our routeoperations will be dependent on our ability to renew route contracts.

 

·                  We may experience a loss ofmarket share due to intense competition.

 

·                  We face extensive regulationfrom gaming and other government authorities.

 

·                  Changes to applicable gamingand tax laws could have a material adverse effect on our financial condition.

 

·                  For additional contingenciesand uncertainties, see “Item 1A. Risk Factors” in the RegistrationStatement.

 

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**EXPLANATORY NOTE**

 

On August 17, 2010,  HerbstGaming, LLC (the “Company,”“we,” “us,” or “our”)filed a registration statement on Form 10 (as amended by Amendment No. 1to Form 10 filed with the Securities and Exchange Commission (the “SEC”)on October 14, 2010, the “RegistrationStatement”) in order to register membership interests of the Company (“Common Units”) voluntarily pursuantto Section 12(g) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”).The Registration Statement became effective by passage of 60 days after thedate of its initial filing pursuant to Section 12(g) of the ExchangeAct.  As a result of the effectiveness ofthe Registration Statement, we are subject to the reporting requirements under Section 13(a) ofthe Exchange Act. Accordingly, this Quarterly Report on Form 10-Q is beingfiled by us to comply with the reporting requirements under Section 13(a) ofthe Exchange Act.

* *

*HerbstGaming, LLC*

 

We are a Nevada limited liability company that was formed in Nevada onMarch 29, 2010 to acquire substantially all of the assets of Predecessorspursuant to their plan of reorganization under Chapter 11 of Title 11 ofthe United States Code (the “BankruptcyCode”). Predecessors’ bankruptcies are being jointly administered underthe lead case In re: Zante, Inc., Case No. BK-N-09-50746-GWZ in theUnited States Bankruptcy Court for the District of Nevada, Northern Division(the “Bankruptcy Court”).

 

To date, we have conducted no business and have no material assets orliabilities. We expect the reorganization of Predecessors to be completedsometime during the fourth quarter of 2010, at which time, we will acquire allof Predecessors’ assets in consideration for the issuance of our membershipinterests and senior secured loans. See “Item 1. Business—Chapter 11Reorganization” in the Registration Statement for a further description of thereorganization of Predecessors.

* *

*Predecessors*

 

Inthe tables below, we provide Predecessors’ financial data as of and for theperiods indicated.  Predecessors preparedthis information using audited financial statements for the fiscal years endedDecember 31, 2009 and unaudited financial statements for the three andnine months ended September 30, 2010 and September 30, 2009.  Predecessors elected to be taxed under theprovisions of Subchapter S of the Internal Revenue Code of 1986.  Under those provisions, the owners of HGI payincome taxes on its taxable income. Accordingly, a provision for income taxes is not included in Predecessors’financial data.

 

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** **

**PART I — FINANCIAL INFORMATION**

 

ITEM1 FINANCIAL STATEMENTS

 

**HERBST GAMING**, **INC. AND SUBSIDIARIES(Debtor and Debtor**-**in**-**Possession as of March 22**,**2009)**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

 
| ** **                                                                               | ** ** | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                               | ** ** | **(in thousands)**     | ** ** |
| **Assets**                                                                               |       |                        |       |                         |       |
| Current assets                                                                           |       |                        |       |                         |       |
| Cash and cash equivalents                                                                |       | $                           | 116,894    |                         | $          | 114,519 |   |
| Accounts receivable, net                                                                 |       | 2,599                       |       | 3,379                        |       |
| Notes and loans receivable                                                               |       | 955                         |       | 331                          |       |
| Prepaid expenses                                                                         |       | 14,405                      |       | 14,482                       |       |
| Inventory                                                                                |       | 4,396                       |       | 4,335                        |       |
| Total current assets                                                                     |       | 139,249                     |       | 137,046                      |       |
| Property and equipment, net                                                              |       | 517,063                     |       | 506,159                      |       |
| Lease acquisition costs, net                                                             |       | 14,746                      |       | 10,155                       |       |
| Due from related parties                                                                 |       | 868                         |       | 236                          |       |
| Other assets, net                                                                        |       | 6,373                       |       | 6,266                        |       |
| Intangibles, net                                                                         |       | 202,474                     |       | 201,164                      |       |
| Goodwill                                                                                 |       | 3,255                       |       | 3,255                        |       |
| Total assets                                                                             |       | $                           | 884,028    |                         | $          | 864,281 |   |
|                                                                                     |       |                        |       |                         |       |
| **Liabilities and stockholders’  deficiency**                                       |       |                        |       |                         |       |
| Liabilities not subject to compromise                                                    |       |                        |       |                         |       |
| Current liabilities                                                                      |       |                        |       |                         |       |
| Accounts payable                                                                         |       | $                           | 18,474     |                         | $          | 11,315 |   |
| Accrued expenses                                                                         |       | 20,415                      |       | 21,804                       |       |
| Total current liabilities not subject to  compromise                                     |       | 38,889                      |       | 33,119                       |       |
| Other liabilities                                                                        |       | 2,628                       |       | 2,785                        |       |
| Total liabilities not subject to compromise                                              |       | 41,517                      |       | 35,904                       |       |
| Liabilities subject to compromise (Note 5)                                               |       | 1,230,756                   |       | 1,199,634                    |       |
|                                                                                     |       |                        |       |                         |       |
| Commitments and contingencies (Note 7)                                                   |       |                        |       |                         |       |
|                                                                                     |       |                        |       |                         |       |
| Stockholders’ deficit                                                               |       |                        |       |                         |       |
| Common stock (no par value; 2,500 shares  authorized; 300 shares issued and outstanding) |       | 2,368                       |       | 2,368                        |       |
| Additional paid-in capital                                                               |       | 1,631                       |       | 1,631                        |       |
| Accumulated deficit                                                                      |       | (392,244                    | )          | (375,256                     | )          |
| Total stockholders’ deficit                                                         |       | (388,245                    | )          | (371,257                     | )          |
| Total liabilities and stockholders’ deficit                                         |       | $                           | 884,028    |                         | $          | 864,281 |   |

 

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

 

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**HERBST GAMING**, **INC. AND SUBSIDIARIES(Debtor and Debtor**-**in**-**Possession as of March 22**,**2009)**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                                                         | ** ** | **Three months ended   September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2009**                                                   | ** ** | **2010**                                                  | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                                                                                         | ** ** | **(in thousands)**                                    | ** ** |
| **Revenues**                                                                                                       |       |                                                       |       |                                                      |       |   |   |   |   |
| Route operations                                                                                                   |       | $                                                          | 47,455     |                                                      | $          | 42,866 |   | 153,537 |   | $ | 137,681 |   |
| Casino operations                                                                                                  |       | 114,587                                                    |       | 109,582                                                   |       | 347,507 |   | 324,540 |   |
| Other operations                                                                                                   |       | 24,339                                                     |       | 26,026                                                    |       | 64,597 |   | 71,982 |   |
| Total revenues                                                                                                     |       | 186,381                                                    |       | 178,474                                                   |       | 565,641 |   | 534,203 |   |
| Promotional allowances                                                                                             |       | (17,684                                                    | )          | (17,837                                                   | )          | (52,543 | ) | (49,682 | ) |
| Net revenues                                                                                                       |       | 168,697                                                    |       | 160,637                                                   |       | 513,098 |   | 484,521 |   |
| **Costs of revenues**                                                                                              |       |                                                       |       |                                                      |       |   |   |   |   |
| Route operations                                                                                                   |       | 43,898                                                     |       | 41,645                                                    |       | 137,888 |   | 131,534 |   |
| Casino operations                                                                                                  |       | 83,335                                                     |       | 76,602                                                    |       | 250,530 |   | 222,751 |   |
| Other operations                                                                                                   |       | 19,428                                                     |       | 20,819                                                    |       | 50,112 |   | 56,518 |   |
| General and administrative                                                                                         |       | 5,012                                                      |       | 4,768                                                     |       | 15,005 |   | 14,965 |   |
| Depreciation and amortization                                                                                      |       | 13,736                                                     |       | 12,499                                                    |       | 42,045 |   | 38,172 |   |
| Restructuring costs                                                                                                |       | —                                                     |       | —                                                    |       | 9,814 |   | — |   |
| Total costs and expenses                                                                                           |       | 165,409                                                    |       | 156,333                                                   |       | 505,394 |   | 463,940 |   |
| Income from operations                                                                                             |       | 3,288                                                      |       | 4,304                                                     |       | 7,704 |   | 20,581 |   |
| **Other income (expense)**                                                                                         |       |                                                       |       |                                                      |       |   |   |   |   |
| Interest income                                                                                                    |       | 58                                                         |       | 28                                                        |       | 130 |   | 87 |   |
| Interest expense (contractual interest for the  periods were $33,862, $32,510, $100,645 and $97,954, respectively) |       | (1                                                         | )          | (4                                                        | )          | (29,529 | ) | (25 | ) |
| Reorganization items                                                                                               |       | (2,960                                                     | )          | (996                                                      | )          | (6,297 | ) | (3,655 | ) |
| Total other expense                                                                                                |       | (2,903                                                     | )          | (972                                                      | )          | (35,696 | ) | (3,593 | ) |
| Net income (loss)                                                                                                  |       | $                                                          | 385        |                                                      | $          | 3,332 |   | $ | (27,992 | ) | $ | 16,988 |   |
|                                                                                                                    |            |                                                            |            |                                                           |            |  |  |  |  |  |  |  |  |

 

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

 

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**HERBST GAMING**, **INC. AND SUBSIDIARIES(Debtor and Debtor**-**in**-**Possession as of March 22**,**2009)**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                                                | ** ** | **2010** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**                                 | ** ** |
| Cash flows from operating activities                                                 |       |                                                    |       |   |   |
| Net (loss) income                                                               |       | $                                                       | (27,992    | ) | $ | 16,988 |   |
| Adjustments to reconcile net loss to net cash  provided by operating activities |       |                                                    |       |   |   |
| Depreciation and amortization                                                        |       | 42,045                                                  |       | 38,172 |   |
| Amortization of debt issuance costs                                                  |       | 900                                                     |       | — |   |
| Debt discount amortization                                                           |       | 32                                                      |       | — |   |
| Gain (loss) on sale of property and equipment                                   |       | 16                                                      |       | 46 |   |
| Decrease (increase) in operating assets:                                             |       |                                                    |       |   |   |
| Accounts receivable                                                                  |       | 517                                                     |       | (325 | ) |
| Prepaid expenses                                                                     |       | 325                                                     |       | (95 | ) |
| Inventory                                                                            |       | (521                                                    | )          | 61 |   |
| Due from related parties                                                             |       | (223                                                    | )          | 608 |   |
| Other assets                                                                         |       | (1,161                                                  | )          | 142 |   |
| Increase (decrease) in operating liabilities:                                        |       |                                                    |       |   |   |
| Accounts payable                                                                     |       | 812                                                     |       | (145 | ) |
| Liabilities subject to compromise                                                    |       | —                                                  |       | (1,454 | ) |
| Accrued interest                                                                     |       | 20,493                                                  |       | — |   |
| Accrued expenses                                                                     |       | 2,164                                                   |       | 1,389 |   |
| Other liabilities                                                                    |       | 392                                                     |       | 127 |   |
| Reorganization items                                                                 |       | 1,832                                                   |       | (6,076 | ) |
| Net cash provided by operating activities                                            |       | $                                                       | 39,631     |   | $ | 49,438 |   |
| Cash flows from investing activities                                                 |       |                                                    |       |   |   |
| Additions to notes and loans receivable                                              |       | $                                                       | (741       | ) | $ | (218 | ) |
| Collection on notes and loans receivable                                             |       | 870                                                     |       | 406 |   |
| Proceeds from sale of property and equipment                                         |       | 182                                                     |       | 98 |   |
| Purchases of property and equipment                                                  |       | (11,843                                                 | )          | (21,980 | ) |
| Lease acquisition costs                                                              |       | (5,206                                                  | )          | (451 | ) |
| Net cash used in investing activities                                                |       | $                                                       | (16,738    | ) | $ | (22,145 | ) |
| Cash flows from financing activities                                                 |       |                                                    |       |   |   |
| Reorganization items                                                                 |       | $                                                       | (17,976    | ) | $ | (29,668 | ) |
| Net cash used in financing activities                                                |       | $                                                       | (17,976    | ) | $ | (29,668 | ) |
| Net increase (decrease) in cash and cash  equivalents                                |       | 4,917                                                   |       | (2,375 | ) |
| Cash and cash equivalents                                                            |       |                                                    |       |   |   |
| Beginning of period                                                                  |       | 105,990                                                 |       | 116,894 |   |
| End of period                                                                        |       | $                                                       | 110,907    |   | $ | 114,519 |   |
| Supplemental cash flow information:                                                  |       |                                                    |       |   |   |
| Cash paid during the period for interest                                             |       | $                                                       | 8,102      |   | $ | — |   |
| Cash paid for reorganization items                                                   |       | $                                                       | 4,465      |   | $ | 7,662 |   |
| Supplemental schedule of non cash investing  and financing activities:          |       |                                                    |       |   |   |
| Purchase of property and equipment financed  through accounts payable                |       | $                                                       | 637        |   | $ | 65 |   |

 

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

 

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**HERBST GAMING**, **INC. AND SUBSIDIARIES**

 

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

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

 

**1.****             ****Chapter 11Reorganization and Going Concern**

 

OnMarch 22, 2009 (the “Petition Date”), Herbst Gaming, Inc. (“Herbst”or “HGI”) and certain of its subsidiaries (the “Subsidiary Guarantors”,and together with HGI, the “Debtors” or “Predecessors”) filed voluntarypetitions for relief (the “Chapter 11 Cases”) under Chapter 11 of theUnited States Bankruptcy Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”),in the United States Bankruptcy Court for the District of Nevada, NorthernDivision (the “Bankruptcy Court”) under case numbers 09-50746-gwz through09-50763-gwz.  From the period commencingon the Petition Date up to and including the Effective Date (as defined below),the Debtors operated their businesses and managed their properties asdebtors-in-possession subject to the jurisdiction of the Bankruptcy Court andin accordance with the applicable provisions of the Bankruptcy Code.  Pursuant to an order of the Bankruptcy Court,the Chapter 11 Cases are being jointly administered.

 

Priorto the Petition Date, HGI and certain of the lenders (the “Consenting Lenders”) under its$860.0 million senior credit facility (the “HGI Credit Facility”) entered into a lockup agreement (asamended and restated on June 29, 2009, the “Lockup Agreement”) which set forth the material terms of HGI’srestructuring. In exchange for Predecessors agreeing to meet certain timingmilestones and to file a plan of reorganization and supporting disclosuresatisfactory to Consenting Lenders holding at least two-thirds in amount of theHGI Credit Facility claims held by all of the Consenting Lenders (the “Requisite Lenders”), the ConsentingLenders agreed to vote in support of a plan of reorganization with the termsand conditions described herein during the bankruptcy balloting process.

 

OnJuly 22, 2009, the Debtors filed with the Bankruptcy Court an amendedjoint plan of reorganization.  OnJanuary 22, 2010, the Bankruptcy Court issued an Amended Order ConfirmingDebtors’ First Amended Joint Plan of Reorganization (the “Order”), confirmingthe amended joint plan of reorganization, as modified by the Findings of Factand Conclusions of Law in Support of Order Confirming Debtors’ First AmendedJoint Plan of Reorganization (the “Findings of Fact”) entered contemporaneouslywith the Order (the amended joint plan of reorganization as modified by theFindings of Fact, the “Plan”).  The Planbecame effective on February 5, 2010 (the “Effective Date”), but will notbe fully implemented until the Substantial Consummation Date (as definedbelow).  Since the Effective Date, theDebtors have been operating as reorganized entities pursuant to the terms andprovisions of the Plan and, except as otherwise specifically provided for inthe Plan, outside the jurisdiction of the Bankruptcy Court.

 

Upon the Substantial Consummation Date, (i) HerbstGaming, LLC (the “Company,”“we,” “us,” or “our”)will acquire substantially all of the assets of Predecessors in considerationfor $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 SeniorSecured Loans and Common Units will be distributed by HGI to its lenders (“Lenders”) under the HGI CreditFacility on a pro rata basis in accordance with the Plan, (iii) all ofPredecessors’ approximately $1.1 billion in outstanding long-term debtobligations consisting of borrowings under its HGI Credit Facility,$160.0 million of outstanding principal amount of 8.125% seniorsubordinated notes due 2012 (the “8.125%Notes”) and $170.0 million of outstanding principal amount of 7%senior subordinated notes due 2014 (the “7%Notes”, together with the 8.125% Notes, the “Subordinated Notes”) will be terminated and (iv) 100% ofthe existing equity in HGI will be cancelled (clauses (i) through(iv) referred to herein as the “Restructuring”).

 

The Plan generally will be fully implemented on the third business dayfollowing the satisfaction or waiver of all conditions to substantialconsummation of the Plan (the “SubstantialConsummation Date”), which are described below.  However, pursuant to the Plan certainpayments were made on or shortly after the Effective Date, including payment ofallowed priority claims, certain allowed secured claims and allowed generalunsecured claims, in some cases with interest from the Petition Date, asdescribed in the Plan and the Second Amended Disclosure Statement to Accompanythe Plan filed with the Bankruptcy Court on August 7, 2009.

 

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Additionally,under the Plan, between the Effective Date and the Substantial ConsummationDate HGI will make adequate protection payments to its Lenders in the amount ofthe Debtors’ cash and cash equivalents in excess of $100 million (measuredinitially as of the end of the third full calendar month following theEffective Date, and then as of the end of every third full calendar monththereafter, and paid 30 days thereafter).

 

ThePlan will not be fully implemented until the Substantial Consummation Date. Inaccordance with the Plan, on the Substantial Consummation Date HGI willcontribute all of its assets, including ownership interests in itssubsidiaries, to the Company in exchange for all of the Common Units and theSenior Secured Loans. HGI will then transfer such Common Units and the Senior SecuredLoans to the Lenders in satisfaction of the Lenders’ claims against HGI. Afterthe transfer of HGI’s assets to the Company on the Substantial ConsummationDate, all of HGI’s subsidiaries (other than E-T-T Enterprises L.L.C. and CorralCoin, Inc., which will be dissolved) will be wholly-owned by the Company.

 

TheSubstantial Consummation Date is also subject to the satisfaction or waiver ofthe following conditions: (i) none of Predecessors or the Lenders shall bein material breach of the Plan and (ii) documents necessary to implementthe transactions contemplated by the Plan shall be in form and substancereasonably acceptable to the Company and the Requisite Lenders. A materialbreach of the Plan would occur if any of the Debtors failed to comply with anyof the requirements set forth in the Plan. The Bankruptcy Court has previouslyapproved the assumption by the Company of all of Predecessors’ materialcontracts. The Company currently expects that the Substantial Consummation Datewill occur in the fourth quarter of 2010, although the Company cannot assureyou that the required regulatory approvals will be obtained or that allconditions to the Substantial Consummation Date will be satisfied by that date,or at all, or that Predecessors will be successful in implementing theRestructuring in the form contemplated by the Plan or at all.

 

ThePlan provides that the Substantial Consummation Date must occur no later thanFebruary 5, 2011, the first anniversary of the Effective Date, unlessextended by mutual agreement of Predecessors and the Requisite Lenders.Further, any material changes to the Plan or the Lockup Agreement require theconsent of Requisite Lenders.

 

Inthe event that the Substantial Consummation Date does not occur byFebruary 5, 2011, or such later date as may be agreed to by Predecessorsand the Requisite Lenders, the confirmation of the Plan would be vacated andall claims (except for allowed priority claims, certain allowed secured claimsunrelated to the Lenders or the Subordinated Notes, and allowed generalunsecured claims) would be restored as though the Effective Date had neveroccurred.

 

ThePlan provides that, from the Effective Date through the SubstantialConsummation Date, Predecessors will continue to be managed by its currentofficers and directors.

 

OnJanuary 28, 2010, the Indenture Trustee, as defined in the Findings ofFact, filed a notice of appeal from the Order (the “Indenture Trustee Appeal”).  On January 29, 2010, the Debtors electedto have the Indenture Trustee Appeal heard by the U.S. District Court forthe District of Nevada (the “District Court”) and not the U.S. BankruptcyAppellate Panel for the Ninth Circuit Court of Appeals.  On April 2, 2010, the Indenture Trusteefiled its opening brief in the Indenture Trustee Appeal and also filed a motionwith the District Court requesting that the Order be stayed pending a decisionon the merits of the Indenture Trustee Appeal. On April 7, 2010, theDebtors and the Administrative Agent under the HGI Credit Facility filed theirjoint opposition to the Indenture Trustee’s request that the Order be stayed.On April 21, 2010, the Debtors and the Administrative Agent under the HGICredit Facility filed their respective answering briefs in the IndentureTrustee Appeal. On May 4, 2010, the Indenture Trustee filed its replybrief, thereby completing the briefing on the Indenture Trustee Appeal. As ofNovember 9, 2010, the District Court has not ruled on the IndentureTrustee’s request for a stay pending appeal or the merits of the IndentureTrustee Appeal, and has also not scheduled oral arguments in the IndentureTrustee Appeal. On June 23, 2010, the Bankruptcy Court entered an orderdenying the Indenture Trustee’s request for a stay of the Order.  The Indenture Trustee has not appealed theBankruptcy Court’s order denying its request for a stay pending appeal but doeshave a separate request pending before the District Court for a stay pending adecision on the merits of the Indenture Trustee Appeal.

 

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OnNovember 16, 2009, the Indenture Trustee filed its First Amended Complaintfor Declaratory Judgment (the “Amended Complaint”) against the Debtors and theAdministrative Agent under the HGI Credit Facility seeking, among other relief,a judgment of the Bankruptcy Court determining that the Subordinated Notesentitled to pari passu treatment with the obligations due under the HGI CreditFacility.  The Debtors and theAdministrative Agent filed motions to dismiss the Amended Complaint.  On February 23, 2010, the BankruptcyCourt dismissed the Amended Complaint without prejudice to seek leave tore-file the Amended Complaint if the Order is set aside in the IndentureTrustee Appeal.  The Indenture Trusteehas not appealed the Bankruptcy Court’s order dismissing its AmendedComplaint.  There can be no assurancethat a stay pending appeal from the Order will not be granted during thependency of the Indenture Trustee Appeal and prior to the SubstantialConsummation Date.  There can be noassurance that the Order will not be overturned and the Plan set aside.  Finally, there can be no assurance regardingthe timing of the District Court’s decision on either the request for a staypending appeal or a decision on the merits of the appeal itself.

 

Asnoted above, the Restructuring is subject to various regulatory approvals.  There can be no assurance that HGI will besuccessful in consummating the Plan.

 

Dueto the occurrence and continuation of events of default, the amountsoutstanding under the HGI Credit Facility and the indentures pursuant to whichthe Subordinated Notes were issued are immediately due and payable, subject toan automatic stay of any action to collect, assert or recover a claim againstHGI under applicable bankruptcy law. Based on the filing of the Chapter 11 Cases, the entire balanceoutstanding under the HGI Credit Facility and all of the amounts outstandingunder the indentures pursuant to which the Subordinated Notes were issued areincluded in liabilities subject to compromise at September 30, 2010.  HGI classifies liabilities subject tocompromise as a long-term liability.

 

AtSeptember 30, 2010, the outstanding balance under the HGI Credit Facilitywas $828 million.  The Planprovides, in part, that the Lenders will receive 100% of the equity of theCompany, and that the Company and the Reorganized Debtors will borrow$350 million pursuant to the Senior Secured Loan Credit Facility.

 

Priorto the filing of the Chapter 11 Cases, interest accrued on borrowingsunder the HGI Credit Facility was based on a floating rate.  This floating rate was based upon a variableinterest rate (a base rate or LIBOR, at HGI’s option) plus a leverage grid-basedspread.  HGI’s average floating rate ondebt incurred under the HGI Credit Facility was 12.5% as of September 30,2010.  However, based on the filing ofthe Chapter 11 Cases, after the Petition Date HGI did not make paymentsunder the HGI Credit Facility, other than certain adequate protection payments,as provided in the Final Order Approving the Amended and Restated StipulationAuthorizing Use of Cash Collateral by Debtors and Granting Adequate Protection,which was entered by the Bankruptcy Court on May 21, 2009 and remained ineffect until the Effective Date (the “Cash Collateral Order”).

 

TheCash Collateral Order provided for adequate protection payments to be made tothe Lenders during the period commencing on the Petition Date and ending on theEffective Date in the amount of the Debtors’ cash and cash equivalents inexcess of $100 million (measured as of the last day of each fiscal quarterand to be paid on the 30th day thereafter) reduced by certain unpaidrestructuring costs, as well as costs and expenses of the professionalsretained by the administrative agent. Based on HGI’s cash and cash equivalents as of December 31, 2009and taking into account the required Effective Date payments described in thisNote 1 of Notes to Condensed Consolidated Financial Statements (Unaudited), HGImade adequate protection payments of $29.7 million during the nine monthsended September 30, 2010. Additionally, under the Plan, between the Effective Date and theSubstantial Consummation Date HGI will make adequate protection payments to theLenders in the amount of the Debtors’ cash and cash equivalents in excess of$100 million (measured initially as of the end of the third full calendarmonth following the Effective Date, and then as of the end of every third fullcalendar month thereafter, and paid 30 days thereafter).  For 2009, HGI made adequate protectionpayments of $18.0 million.

 

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

 

***Description of Business andPrinciples of Consolidation***— The accompanying condensedconsolidated financial statements of Herbst Gaming, Inc. include theaccounts of Herbst and its subsidiaries: E-T-T, Inc. and subsidiaries (“ETT”),Market Gaming, Inc. (“MGI”),E-T-T Enterprises L.L.C. (“E-T-T Enterprises”), Flamingo ParadiseGaming, LLC (“FPG”), HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HG St. Jo”),HGI-Mark Twain (“HG Mark Twain”), The Sands Regent and subsidiaries (“Sands”)and The Primadonna Company LLC (“Primadonna”). The financial statements ofETT are consolidated and include the following wholly-owned subsidiaries:Cardivan Company, Corral Coin, Inc. and Corral Country Coin, Inc. Thefinancial statements of Sands are consolidated and include the following directand indirect wholly-owned subsidiaries: Zante, Inc., LastChance, Inc., California Prospectors, Ltd. (which is a wholly ownedsubsidiary of Last Chance, Inc.), Plantation Investments, Inc. andDayton Gaming, Inc.

 

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All significant intercompany balances and transactions between andamong Herbst, ETT, MGI, E-T-T Enterprises, FPG, HGI-L, HG St. Jo, HG MarkTwain, Sands and Primadonna have been eliminated in the condensed consolidatedfinancial statements. ETT and MGI conduct business in the gaming industry andgenerate revenue principally from gaming machine route operations. Gamingmachine route operations involve the installation, operation and service of gamingmachines owned by HGI that are located in licensed, leased or subleased spacein retail stores (supermarkets, convenience stores, etc.), bars andrestaurants throughout the State of Nevada. The operations of the subsidiariesof HGI are as follows:

 

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

 

·                  FPG owns and operatesTerrible’s Hotel & Casino (“Terrible’s Las Vegas”) in Las Vegas,Nevada, Terrible’s Town Casino & Bowl in Henderson, Nevada, Terrible’sSearchlight Casino in Searchlight, Nevada and Terrible’s Town Casino andTerrible’s Lakeside Casino & RV Park, both of which are located inPahrump, Nevada.  These properties wereopened in December 2000, June 1996, July 2002, June 1996and March 1999 respectively.

 

·                  HGI-L owns and operatesTerrible’s Lakeside Casino (“Lakeside Iowa Casino”), as well as a hotel, gasstation and convenience store, all located in Osceola, Iowa, which wereacquired in February 2005.

 

·                  HG St. Jo owns andoperates Terrible’s St. Jo Frontier Casino (“St. Jo Casino”) inSt. Joseph, Missouri, which was acquired in February 2005.

 

·                  HG Mark Twain owns andoperates Terrible’s Mark Twain Casino in La Grange, Missouri, which wasacquired in February 2005.

 

·                  Sands and its direct andindirect wholly-owned subsidiaries, which were acquired on January 3,2007, own and operate Terrible’s Rail City Casino in Sparks, Nevada, the SandsRegency Casino Hotel in Reno, Nevada, the Terrible’s Gold Ranch Casino and RVResort in Verdi, Nevada and Terrible’s Dayton Casino in Dayton, Nevada (allsuch properties acquired pursuant to the Sands Regency Acquisition, togetherthe “Sands Regency Casinos”).

 

·                  Primadonna, which wasacquired on April 10, 2007, owns and operates Whiskey Pete’s Hotel andCasino (“Whiskey Pete’s”), Buffalo Bill’s Hotel and Casino (“Buffalo Bill’s”),Primm Valley Resort and Casino (“Primm Valley,” and together with Whiskey Pete’sand Buffalo Bill’s, together the “Primm Casinos”), a California lottery stationlocated on the Nevada/California border, three gasoline stations and the PrimmTravel Center (such properties, together with the Primm Casinos, the “PrimmProperties”), all of which are located in Primm, Nevada.

 

HGI elected to be taxed under the provisions of Subchapter S ofthe Internal Revenue Code of 1986. Under those provisions, the owners of HGIpay income taxes on its taxable income. Accordingly, a provision for income taxesis not included in HGI’s financial statements.

 

The gaming industry in the States of Nevada, Iowa, and Missouri issubject to extensive state and local government regulation. HGI’s gamingoperations are subject to the licensing and regulatory control of the NevadaGaming Commission, the Nevada Gaming Control Board, the Iowa Race and GamingCommission, the Missouri Gaming Commission as well as local jurisdictions.

 

***Basis of Presentation***—The condensedconsolidated financial statements of Herbst Gaming, Inc. as ofSeptember 30, 2010, and for the three and nine months endedSeptember 30, 2010 and 2009 are unaudited, but, in the opinion ofmanagement, include all adjustments necessary for a fair presentation of thefinancial results for the interim periods. HGI’s results of operations for the three months endedSeptember 30, 2010 are not necessarily indicative of the results to beexpected for the fiscal year ending December 31, 2010.  These interim statements should be read inconjunction with the audited financial statements of HGI and notes theretoincluded in HGI’s annual report on Form 10-K for the year endedDecember 31, 2009 (the “2009 Form 10-K”).

 

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Inaccordance with GAAP, HGI has applied ASC 852, *Reorganizations— Other Presentation Matters* (“ASC 852”), in preparing theconsolidated financial statements.  ASC852 requires that the financial statements, for periods subsequent to theChapter 11 filing, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of thebusiness.  Accordingly, certain expenses(including professional fees), are recorded in reorganization items in theaccompanying consolidated statement of operations.  In addition, pre-petition obligations thatmay be impacted by the bankruptcy reorganization process have been classifiedin the consolidated balance sheet at September 30, 2010 as liabilitiessubject to compromise.  These liabilitiesare reported at the amounts expected pursuant to the Plan, although there canbe no assurance that the Plan will be fully implemented.  (see Note 5 of Notes to CondensedConsolidated Financial Statements (Unaudited)).

 

***Use of Estimates***—The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during theperiod.  Significant estimates incorporatedinto HGI’s condensed consolidated financial statements include the estimateduseful lives for depreciable and amortizable assets, the estimated allowancefor doubtful accounts receivable and the estimated cash flows in assessing therecoverability of long-lived assets as well as estimated fair values of certainassets related to write downs and impairments, contingencies and litigation,and claims and assessments.  Actualresults could differ from those estimates.

 

***Cash and Cash Equivalents***—Cash and cashequivalents include highly liquid investments with a maturity at the date ofpurchase of three months or less.  Thecarrying value of these investments approximates their fair value due to theirshort maturities.

 

***Restructuring Costs***—Restructuringcosts are comprised of expenses related to the evaluation of financial andstrategic alternatives and include special legal and other advisor feesassociated with HGI’s reorganization efforts prior to the Petition Date,including preparation for the bankruptcy filing.

 

***Reorganization Items***—Reorganizationitems are comprised of expenses incurred after the Petition Date.  Reorganization costs include legal, advisoryand trustee fees incurred in connection with the Restructuring and theChapter 11 Cases.  Included in theseexpenses are adjustments to value the liabilities subject to compromise at theallowed claim amount in conjunction with the oral confirmation of the Plan fromthe Bankruptcy Court on October 30, 2009.

 

***Accounts Receivable***—Receivablesconsist primarily of amounts due from customers as a result of normal businessoperations.  HGI periodically performscredit evaluations of its customers.  HGIreviews accounts receivable balances in order to determine an allowance forpotential credit losses based on HGI’s collections experience and the age ofthe receivables.  At September 30,2009 and 2010, the allowance for potential credit losses was $848,500 and$576,000, respectively.

 

***Goodwill and Intangible Assets***—HGI evaluatesits goodwill and indefinite lived intangible assets in accordance with theapplications of ASC Topic 350, *Intangibles—Goodwill andOther* (“ASC Topic 350”). Goodwill and indefinite lived intangible assets are not subject toamortization, but they are subject to an annual impairment test in the fourthquarter of each year and between annual test dates in certaincircumstances.  See Note 5, Goodwill andOther Intangible Assets for a discussion of impairment charges related to HGI’sgoodwill and other intangible assets.

 

***Fair value measurements***—Fair valuemeasurements affect HGI’s accounting and impairment assessments of itslong-lived assets, goodwill, and other intangibles.  Fair value measurements also affect HGI’saccounting for certain of its financial assets and liabilities.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date and is measuredaccording to a hierarchy that includes: “Level 1” inputs, such as quoted pricesin an active market; “Level 2” inputs, which are observable inputs for similarassets; or “Level 3” inputs, which are unobservable inputs.

 

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**Recently Issued and Adopted Accounting Standards**

 

InApril 2010, the Financial Accounting Standards Board issued authoritativeaccounting guidance for companies that generate revenue from gaming activitiesthat involve base jackpots, which requires companies to accrue for a liabilityat the time the company has the obligation to pay the jackpot and record suchobligation as a reduction of gaming revenue accordingly.  The guidance is effective for interim andannual reporting periods beginning on or after December 15, 2010.  Base jackpots are currently not accrued forby HGI until it has the obligation to pay such jackpots.  As such, the application of this guidance willnot have a material effect on HGI’s financial condition, results of operationsor cash flows.

 

Avariety of proposed or otherwise potential accounting standards are currentlyunder study by standard setting organizations and certain regulatory agencies.  Because of the tentative and preliminarynature of such proposed standards, we have not yet determined the effect, ifany, that the implementation of such proposed standards would have onPredecessors’ consolidated financial statements.

 

**3.****             ****LONG-TERMDEBT**

 

HGIis in default under the HGI Credit Facility and the indentures pursuant towhich the Subordinated Notes were issued. At September 30, 2010, the current outstanding balance under the HGICredit Facility was $828 million.  ThePlan provides, in part, that the Lenders will receive 100% of the equity in theCompany and $350 million in aggregate principal amount of senior secured loans(the “Senior Secured Loans”)which will be made under a credit agreement between the Company and the Lenders(the “Senior Secured Loan Credit Facility”).

 

Dueto the occurrence and continuation of events of default, the amountsoutstanding under the HGI Credit Facility and the indentures pursuant to whichthe Subordinated Notes were issued are immediately due and payable, subject toan automatic stay of any action to collect, assert or recover a claim againstHGI under applicable bankruptcy law. Based on the filing of the Chapter 11 Cases, the entire balanceoutstanding under the HGI Credit Facility and all of the amounts outstandingunder the indentures pursuant to which the Subordinated Notes were issued areincluded in liabilities subject to compromise at September 30, 2010.  HGI classifies liabilities subject tocompromise as a long-term liability.

 

Interestaccrued on borrowings under the HGI Credit Facility was based on a floatingrate until the Petition Date.  Thisfloating rate was based upon a variable interest rate (a base rate or LIBOR, atHGI’s option) plus a leverage grid-based spread.  HGI’s average floating rate on debt incurredunder the HGI Credit Facility was 12.5% at September 30, 2010.  However, based on the filing of the Chapter 11Cases, after the Petition Date HGI did not make payments under the HGI CreditFacility, other than certain adequate protection payments, as provided in theFinal Order Approving the Amended and Restated Stipulation Authorizing Use ofCash Collateral by Debtors and Granting Adequate Protection, which was enteredby the Bankruptcy Court on May 21, 2009 and remained in effect until theEffective Date (the “Cash Collateral Order”).

 

TheCash Collateral Order provided for adequate protection payments to be made tothe Lenders during the period commencing on the Petition Date and ending on theEffective Date in the amount of the Debtors’ cash and cash equivalents inexcess of $100 million (measured as of the last day of each fiscal quarter andto be paid on the 30th day thereafter) reduced by certain unpaid restructuringcosts, as well as costs and expenses of the professionals retained by theadministrative agent.  Based on HGI’scash and cash equivalents as of December 31, 2009 and taking into account therequired Effective Date payments described in Note 1 of Notes to CondensedConsolidated Financial Statements (Unaudited), HGI made adequate protectionpayments of $29.7 million during the nine months ended September 30, 2010.  Additionally, under the Plan, between theEffective Date and the Substantial Consummation Date HGI will make adequateprotection payments to the Lenders in the amount of the Debtors’ cash and cashequivalents in excess of $100 million (measured initially as of the end of thethird full calendar month following the Effective Date, and then as of the endof every third full calendar month thereafter, and paid 30 days thereafter).

 

Pursuantto the Plan, all outstanding obligations under the Subordinated Notes will beterminated on the Substantial Consummation Date.

 

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Subjectto the automatic stay associated with the Chapter 11 Cases, long-term debtincluded in “Liabilities subject to compromise,” is expected to be settled asfollows (dollars in thousands):

 
| ** ** | ** ** | **September 30, 2010** | ** ** |
|------------|------------|------------------------|------------|
| 2011       |       | $                      | 1,129,177  |   |
| 2012       |       | —                 |       |
| 2013       |       | —                 |       |
| 2014       |       | —                 |       |
| 2015       |       | —                 |       |
| Thereafter |       | —                 |       |
| Total      |       | $                      | 1,129,177  |   |

 

Thefollowing table provides the fair value measurement information about HGI’slong-term debt at September 30, 2010. For additional information regarding ASC Topic 820, “Fair ValueMeasurements and Disclosures” and the fair value hierarchy, see Note 2 of Notesto Condensed Consolidated Financial Statements (Unaudited).

 
| ** **                                | ** ** | **Carrying  Value** | ** ** | **Estimated Fair  Value** | ** ** | **Fair Value  Hierarchy** | ** ** |
|-------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **(In thousands)**  | ** ** |
| HGI Credit Facility                       |       | $                   | 799,177    |                      | $          | 436,967                   |       | Level 2 |   |
| 8.125% Senior Subordinated Notes Due 2012 |       | 160,000             |       | —                    |       | Level 1                   |       |
| 7.00% Senior Subordinated Notes Due 2014  |       | 170,000             |       | —                    |       | Level 1                   |       |
| Total long-term debt                      |       | $                   | 1,129,177  |                      | $          | 436,967                   |       |   |   |

 

Inconnection with the accounting for the HGI Credit Facility and SeniorSubordinated Notes as discussed in Note 2, HGI estimated the fair value of theHGI Credit Facility using “Level 2” inputs, and the fair value of the SeniorSubordinated Notes using “Level 1” inputs. The estimated fair value of the HGI Credit Facility is based on bidprices on or about September 30, 2010. The estimated fair values of HGI’s Senior Subordinated Notes are basedon quoted market prices as of September 30, 2010.  There were no transfers between “Level 1” and“Level 2” measurements during the nine months ended September 30, 2010.

 

**4.****             ****REORGANIZATIONITEMS**

 

Reorganizationitems represent expense incurred as a result of the Chapter 11 proceedings andare presented separately in the Condensed Consolidated Statements of Operations(Unaudited) (dollars in thousands).

 
| ** **                 | ** ** | **For the Three  Months Ended  September 30,  2009** | ** ** | **For the Three  Months Ended  September 30,  2010** | ** ** | **For the Nine  Months Ended  September 30,  2009** | ** ** | **For the Nine  Months Ended  September 30,  2010** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Trustee Fees               |       | $                                                    | 187        |                                                 | $          | 196                                                 |       | $                                                   | 230        |   | $ | 578 |   |
| Professional Fees          |       | 2,773                                                |       | 329                                                  |       | 6,067                                               |       | 1,009                                               |       |
| Other Reorganization Items |       | —                                               |       | 471                                                  |       | —                                              |       | 2,068                                               |       |
| Total                      |       | $                                                    | 2,960      |                                                 | $          | 996                                                 |       | $                                                   | 6,297      |   | $ | 3,655 |   |

 

Inthe three months ended September 30, 2010, HGI incurred $996,000 in reorganizationitems.  Of this amount, $196,000 was forstatutorily mandated United States Trustee fees, $329,000 was for professionalfees, which include financial advisory, legal, real estate and valuationservices directly attributed to the reorganization process and $471,000 forother reorganization items.  Anyprofessional fees incurred from the bankruptcy filing on March 22, 2009 throughthe Effective Date of February 5, 2010 were subject to bankruptcy courtapproval.

 

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**5.****             ****LIABILITIESSUBJECT TO COMPROMISE**

 

Liabilitiessubject to compromise refer to both secured and unsecured obligations that willbe accounted for under a Plan. Generally, actions to enforce or otherwise effect payment of pre-Chapter11 liabilities are stayed.  ASC Topic852-10-45 requires pre-petition liabilities that are subject to compromise tobe reported at the amounts expected to be allowed, even if they may be settledfor lesser amounts.  These liabilitiesrepresent the estimated amount expected to be allowed on known or potentialclaims to be resolved through the Chapter 11 process, and remain subject tofuture adjustments arising from negotiated settlements, actions of theapplicable bankruptcy court, rejection of executory contracts and unexpiredleases, the determination as to the value of collateral securing the claims,proofs of claim, or other events. Liabilities subject to compromise also include certain items that may beassumed under the Plan, and as such, may be subsequently reclassified toliabilities not subject to compromise. HGI has included the amounts due under the HGI Credit Facility and indenturespursuant to which the Subordinated Notes were issued as liabilities subject tocompromise.  Although the Plan has beenconfirmed, the Plan will not be fully implemented until the SubstantialConsummation Date.  The SubstantialConsummation Date will not occur until certain conditions, including certainapprovals of gaming authorities in Nevada, Iowa and Missouri, have beenobtained.  See Note 1 of Notes toCondensed Consolidated Financial Statements (Unaudited).  There can be no assurances that allconditions to the Substantial Consummation Date will be satisfied or that HGIwill be successful in fully implementing the Plan or any other plan ofreorganization.

 
| ** **                              | ** ** | **As of  September 30,  2010** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **(in thousands)**             | ** ** |
| Secured debt                            |       | $                              | 799,177    |   |
| Accrued interest on secured debt        |       | 29,103                         |       |
| Subordinated Notes                      |       | 330,000                        |       |
| Accrued interest on Subordinated Notes  |       | 33,062                         |       |
| Accounts payable                        |       | 2,760                          |       |
| Accrued expenses                        |       | 5,532                          |       |
| Total liabilities subject to compromise |       | $                              | 1,199,634  |   |

 

**6.****             ****BUSINESSSEGMENTS**

 

HGIoperates through two business segments: slot route operations and casino operations.  The slot route operations involve theinstallation, operation and service of slot machines at strategic, hightraffic, non-casino locations, such as grocery stores, drug stores, conveniencestores, bars, and restaurants.  Casinooperations consist of two geographic areas, Nevada and other states.  The Nevada locations include:  Terrible’s Town Casino (Henderson) inHenderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada,Terrible’s Town Casino and Terrible’s Lakeside Casino, both of which arelocated in Pahrump, Nevada, Terrible’s Hotel & Casino in Las Vegas, Nevada,Rail City Casino in Sparks, Nevada, the Sands Regency Casino Hotel in Reno,Nevada, Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada, Terrible’sDayton Casino in Dayton, Nevada, and Buffalo Bill’s Hotel and Casino, PrimmValley Resort and Casino and Whiskey Pete’s Hotel and Casino, all located inPrimm, Nevada.  Casinos located in otherstates are Terrible’s Lakeside Casino in Osceola, Iowa, Terrible’s St. JoFrontier Casino in St. Joseph, Missouri and Terrible’s Mark Twain Casino in LaGrange, Missouri.  These segment resultsare regularly provided to the Office of the CEO of HGI, the members of whichare the chief operating decision makers of HGI.

 

Netrevenues, income from operations, depreciation and amortization and segmentEBITDA for these segments are as set forth in the table below (dollars inthousands).  Route and Casino segmentEBITDA are non-GAAP measures but are used by management to measure segmentprofits and losses in accordance with ASC Topic 280, *SegmentReporting* (“ASC Topic 280”). Route and Casino segment EBITDA have certain limitations in that they donot take into account the impact of certain expenses, including allocation ofoverhead.  HGI endeavors to compensatefor the limitations of the non-GAAP measures presented by also providing thecomparable GAAP measure with equal or greater prominence, financial statementsprepared in accordance with generally accepted accounting principles, anddescriptions of the reconciling items, including quantifying such items, toderive the non-GAAP measures. Accordingly, the following table also contains a reconciliation ofSegment EBITDA to net income (loss) (in thousands).

 

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| ** **                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2009**                              | ** ** | **2010**                             | ** ** | **2009** | ** ** | **2010** | ** ** |
| **Net revenues**                              |       |                                  |       |                                 |       |   |   |   |   |
| Route operations                              |       | $                                     | 47,433     |                                 | $          | 42,812 |   | $ | 153,470 |   | $ | 137,528 |   |
| Casino operations:                            |       |                                  |       |                                 |       |   |   |   |   |
| Nevada                                        |       | 66,071                                |       | 60,701                               |       | 201,177 |   | 182,931 |   |
| Other states                                  |       | 30,854                                |       | 31,098                               |       | 93,854 |   | 92,080 |   |
| Other operations—non gaming              |       | 24,339                                |       | 26,026                               |       | 64,597 |   | 71,982 |   |
| Total net revenues                            |       | $                                     | 168,697    |                                 | $          | 160,637 |   | $ | 513,098 |   | $ | 484,521 |   |
| **Income from segment operations**            |       |                                  |       |                                 |       |   |   |   |   |
| Slot route operations                         |       | $                                     | (106       | )                                    | $          | (1,891 | ) | $ | 3,741 |   | $ | (3,488 | ) |
| Casino operations:                            |       |                                  |       |                                 |       |   |   |   |   |
| Nevada                                        |       | (3,108                                | )          | (2,688                               | )          | (6,452 | ) | (819 | ) |
| Other states                                  |       | 6,683                                 |       | 8,447                                |       | 20,990 |   | 24,553 |   |
| Total income (loss) from segment operations   |       | 3,469                                 |       | 3,868                                |       | 18,279 |   | 20,246 |   |
| Other                                         |       | 4,831                                 |       | 5,204                                |       | 14,244 |   | 15,300 |   |
| General and administrative                    |       | (5,012                                | )          | (4,768                               | )          | (15,005 | ) | (14,965 | ) |
| Restructuring costs                           |       | —                                |       | —                               |       | (9,814 | ) | — |   |
| Total income (loss) from operations           |       | $                                     | 3,288      |                                 | $          | 4,304 |   | $ | 7,704 |   | $ | 20,581 |   |
| **Depreciation and amortization**             |       |                                  |       |                                 |       |   |   |   |   |
| Slot route operations                         |       | $                                     | 3,641      |                                 | $          | 3,058 |   | $ | 11,841 |   | $ | 9,482 |   |
| Casino operations:                            |       |                                  |       |                                 |       |   |   |   |   |
| Nevada                                        |       | 7,381                                 |       | 7,559                                |       | 22,043 |   | 22,335 |   |
| Other states                                  |       | 2,634                                 |       | 1,879                                |       | 7,920 |   | 6,191 |   |
| Other expenses                                |       | 80                                    |       | 3                                    |       | 241 |   | 164 |   |
| Total depreciation and amortization           |       | $                                     | 13,736     |                                 | $          | 12,499 |   | $ | 42,045 |   | $ | 38,172 |   |
| **Segment EBITDA (1)**                        |       |                                  |       |                                 |       |   |   |   |   |
| Slot route operations                         |       | $                                     | 3,535      |                                 | $          | 1,167 |   | $ | 15,582 |   | $ | 5,994 |   |
| Casino operations:                            |       |                                  |       |                                 |       |   |   |   |   |
| Nevada                                        |       | 4,273                                 |       | 4,871                                |       | 15,591 |   | 21,516 |   |
| Other states                                  |       | 9,317                                 |       | 10,326                               |       | 28,910 |   | 30,744 |   |
| Other and corporate (2)                       |       | (43                                   | )          | 467                                  |       | (10,204 | ) | 586 |   |
| Depreciation and amortization                 |       | (13,736                               | )          | (12,499                              | )          | (42,045 | ) | (38,172 | ) |
| Interest expense, net of capitalized interest |       | (1                                    | )          | (4                                   | )          | (29,529 | ) | (25 | ) |
| Loss on impairment of assets                  |       | —                                |       | —                               |       | — |   | — |   |
| Reorganization items                          |       | (2,960                                | )          | (996                                 | )          | (6,297 | ) | (3,655 | ) |
| Net income (loss)                             |       | $                                     | 385        |                                 | $          | 3,332 |   | $ | (27,992 | ) | $ | 16,988 |   |

 

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(1)          Represents non-gaming revenues, general andadministrative expenses, interest income and restructuring expense.

(2)          Segment EBITDA is used by management to measuresegment profits and losses and consists of income from segment operations plusdepreciation and amortization and is calculated before allocation of overhead.

 

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**7.****             ****COMMITMENTSAND CONTINGENCIES**

 

OnFebruary 17, 2006, the Eighth Judicial District Court of Nevada enteredjudgment of a jury verdict delivered on January 14, 2006 against ETT for $4.1 millionin compensatory damages and $10.1 million in punitive damages.  The jury verdict was delivered in connectionwith an action brought by the family of an individual that alleged that ETT hadnegligently retained and negligently supervised a temporary employee who in2001 stole a truck from ETT and, while drunk, hit and killed theindividual.  The punitive damage awardwas subsequently lowered to $4.1 million in a post-trial ruling.  HGI appealed this decision and oral argumentswere heard by a panel of the Supreme Court of Nevada on December 9, 2009.  The Supreme Court panel upheld the lowerCourt determination and the Supreme Court panel denied the HGI’s motion forre-consideration. HGI requested an en banc re-hearing soley with regards towhether the punitive damages were proper in this case on August 2, 2010.  This request is currently pending.  HGI’s insurance carrier tendered thecompensatory damages to the Plaintiffs in August 2010.  As of September 2010, HGI has adequatelyreserved for any potential liability related to the punitive damages of theincident.

 

Separatefrom the Nevada Supreme Court proceedings, ETT is also pursuing an appeal fromthe decision of the Bankruptcy Court contained in the order confirming the Planapproving the treatment of the $4.1 million punitive damages award as anunsecured claim.  Through this appeal,ETT is seeking the categorical subordination of the $4.1 million punitivedamages award through the separate classification and disparate subordinatedtreatment of the punitive damages from the other general unsecured claims inthe Plan.  This appeal, which is pendingbefore the U.S. District Court for the District of Nevada, is currently beingbriefed and has not yet been submitted for decision.

 

HGIwas party to an arbitration in 2008 in Las Vegas, Nevada involving thetermination of an employee.  The formeremployee alleged he was terminated without cause and was therefore due amountspursuant to his employment agreement.  OnMarch 10, 2009, HGI received an interim award from the arbitrator that awardedthe former employee $1.3 million as a result of this arbitration.  HGI appealed the award to the Eighth JudicialDistrict Court and the Court overturned the Arbitrators award and remanded thecase back to an arbitrator.  The formeremployee has appealed that decision to the Nevada Supreme Court.  The Nevada Supreme Court requested briefingfrom the former employee as to the basis for jurisdiction before the NevadaSupreme Court given that the Eighth Judicial District Court remanded the caseback to an arbitrator and did not enter a final judgment.  HGI has fully recognized the award andapproximately $0.2 million for legal fees in fiscal year 2008.

 

HGIis a party to certain other claims, legal actions, and complaints arising inthe ordinary course of business or asserted by way of defense or counterclaimin actions filed by the HGI.  Managementbelieves that its defenses are substantial in each of these matters and thatHGI’s legal position can be successfully defended without material adverseeffect on its consolidated financial statements.

 

*Nevada Use Tax Refund Claims*

 

OnMarch 27, 2008, the Nevada Supreme Court issued a decision in Sparks Nugget, Inc.vs.  The State of Nevada Department ofTaxation (the “Department”), holding that food purchased for subsequent use inthe provision of complimentary and/or employee meals was exempt from both salesand use tax.  On April 24, 2008, theDepartment filed a Petition for Rehearing (the “Petition”) on thedecision.  On July 17, 2008, the NevadaSupreme Court denied the Department’s Petition. HGI has been paying use tax on food purchased for subsequent use ascomplimentary and employee meals at HGI’s Nevada casino properties and are inthe process of quantifying the amount of HGI’s potential refund, which HGIestimates to be approximately $1.8 million, excluding interest, from July 1,2001 through January 1, 2008.  Based onthe denial of the petition, as of January 1, 2008, HGI no longer accrues forthese taxes, but due to the uncertainty regarding the method for reimbursementto HGI of taxes paid to date, HGI will not record any gain from previous taxyears until the tax refund is realized.

 

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

 

***Herbst Gaming, LLC***

 

***Overview***

 

Sinceour formation on March 29, 2010, we have had no operations.  The management’s discussion and analysis offinancial condition and results of operations that follows is for the Companyand Predecessors.

 

Onthe Substantial Consummation Date the Company will:

 

·                  Enter into that certain credit agreement (the“Senior Secured Loan Credit Facility”) under which $350 million in aggregateprincipal amount of senior secured loans (the “Senior Secured Loans”) will be advanced; and

 

·                  Issue 100% of its membership interests andthe Senior Secured Loans to HGI, which will distribute such interests andSenior Secured Loans to the lenders (the “Lenders”) under HGI’s $860.0 millionsenior credit facility (the “HGI Credit Facility”).

 

TheCompany is in the process of determining the number of units of membershipinterests it expects to have issued and outstanding upon emergence.

 

Thehistorical financial results of Predecessors are not indicative of our currentfinancial condition or our future results of operations following theSubstantial Consummation Date.  Ourfuture results of operations will be subject to significant business, economic,regulatory and competitive uncertainties and contingencies, some of which arebeyond our control.

 

***Liquidity and Capital Resources***

 

Ourcash flows will be affected by a variety of factors, many of which are outsideof our control, including regulatory issues, competition, financial markets andother general business conditions.  Webelieve that we will have sufficient liquidity through available cash, tradecredit and cash flow from the properties we acquire from Predecessors to fundour cash requirements and capital expenditures for at least twelve months afterthe Substantial Consummation Date.  We willendeavor to fund capital expenditures for maintenance of our properties throughfuture improvements in operating results. However, there can be no assurance that we will generate sufficientincome and liquidity to meet all of our liquidity requirements and otherobligations as our results for future periods are subject to numerousuncertainties which may result in liquidity problems, which could affect ourability to meet our obligations while attempting to meet competitive pressuresor adverse economic conditions.

 

TheSenior Secured Loan Credit Facility (i) will provide for $350.0 millionprincipal amount of Senior Secured Loans, (ii) will be secured by substantiallyall of our assets and the assets of our existing or subsequently acquireddirect or indirect subsidiaries, other than such assets that may not be pledgedpursuant to applicable gaming laws, and (iii) will be guaranteed by each suchsubsidiary.  The Senior Secured Loanswill bear interest at the rate of, at our election, either (i) the LondonInterBank Offered Rate (“*LIBOR*”) plus amargin of 7.0% or (ii) the alternative base rate (“*AlternativeBase Rate*”) plus a margin of 6.5%. Both LIBOR and the Alternative Base Rate will be subject to a fixedfloor.  The principal amount of theSenior Secured Loans will be payable on the maturity date, which shall be theearlier of the fifth anniversary of the effectiveness of the Senior SecuredLoan Credit Facility (such effectiveness, the “*SeniorSecured Loan Closing*”), or the acceleration of the Senior SecuredLoans in accordance with the terms thereof. The administrative agent under the Senior Secured Loan Credit Facilityintends to maintain a register to record the names and addresses of the Lendersand the principal amounts of the Senior Secured Loan owing to suchLenders.  Unless specifically requestedby a Lender, the Company does not intend to issue physical note certificatesevidencing the Senior Secured Loans.

 

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TheSenior Secured Loan Credit Facility will include customary covenants (includingfinancial covenants) and mandatory prepayments for these types offinancings.  The Senior Secured Loans maybe prepaid in certain minimum amounts, subject to a prepayment fee equal to (i)if such prepayment is made prior to the first anniversary of the Senior SecuredLoan Closing, 3.0% of the principal prepaid, (ii) if such prepayment is madeafter the first anniversary of the Senior Secured Loan Closing and on or priorto the second anniversary of the Senior Secured Loan Closing, 2.0% of theprincipal prepaid and (iii) if such prepayment is made after the secondanniversary of the Senior Secured Loan Closing and on or prior to the thirdanniversary of the Senior Secured Loan Closing, 1.0% of the principal prepaid.

 

**CriticalAccounting Policies**

 

Adescription of our critical accounting policies can be found in theRegistration Statement.  There have beenno material changes to our critical accounting polices during the nine monthsended September 30, 2010.

 

**FreshStart Accounting**

 

Uponconsummation of the Plan, the accounting for HGI’s assets and liabilities, asreported in the subsequent financial statements of the Company, may materiallychange.  Upon the SubstantialConsummation Date, we will adopt the “fresh start” provisions of ASC Topic 852,*Reorganizations* (“ASC Topic 350”), whichrequire that the value of Predecessors’ assets, including intangible assets,and liabilities be adjusted to their fair values, as of such SubstantialConsummation Date, with any excess of our enterprise value over our tangibleand identifiable intangible assets and liabilities reported as goodwill on ourconsolidated balance sheet.  Certain ofthese values may differ materially from the values recorded on the condensedconsolidated balance sheet of Predecessors as of September 30, 2010 includedelsewhere in this Quarterly Report on Form 10-Q.  Additionally, the Company’s results ofoperations after the application of fresh start reporting will not becomparable to HGI’s results of operations for the previous periods.  The Company may also choose to make otherchanges in accounting practices and policies as of the Substantial ConsummationDate.  For all these reasons, the Company’sconsolidated financial statements for periods subsequent to the SubstantialConsummation Date will not be comparable to HGI’s prior periods.

 

***Predecessors***

 

***Overview***

 

Predecessorsare a diversified gaming company that focuses on two business lines:  slot route operations and casinooperations.  Their route operationsinvolve the exclusive installation and operation of approximately 6,000 slotmachines as of September 30, 2010 in strategic, high traffic, non-casinolocations, such as grocery stores, drug stores, convenience stores, bars andrestaurants.  Their casino operationsconsist of fifteen casinos located in Nevada, Iowa and Missouri.  Other than the Sands Regency Casinos and thePrimm Casinos, their casinos are operated under the “Terrible’s” brand.

 

Predecessorsgenerally enter into two types of route contracts.  With chain store customers, such asAlbertsons, Vons, Safeway, SavOn, Smith’s, and Terrible Herbst, they pay afixed monthly fee for each location in which they place slot machines.  With their street accounts, such as bars,restaurants and non-chain convenience stores, they share in the revenues on apercentage basis with the location owner. Revenues from street accounts are recorded gross of amounts share.

 

Predecessors’revenues are primarily derived from gaming revenues, which include revenuesfrom slot machines and table games. Gaming revenues are generally defined as gaming wins less gaminglosses.  Their largest component ofrevenues is from their slot machines. Promotional allowances consist primarily of food and beverages furnishedgratuitously to customers.  The retailvalue of such services is included in the respective revenue classificationsand is then deducted as promotional allowances. Predecessors calculate income from operations as net revenues less totaloperating costs and expenses.  Incomefrom operations represents only those amounts that relate to their operationsand excludes interest income, interest expense and other non-operating incomeand expenses.  Segment EBITDA consists ofincome from segment operations plus depreciation and amortization, and iscalculated before an allocation of overhead.

 

Predecessorselected to be taxed under the provisions of Subchapter S of the InternalRevenue Code of 1986.  Under those provisions,the owners of HGI paid income taxes on HGI’s taxable income.  Accordingly, a provision for income taxes isnot included in Predecessors’ financial statements.

 

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Fullimplementation of the Plan on the Substantial Consummation Date is subject tovarious regulatory approvals.  There canbe no assurance that Predecessors will be successful in consummating thePlan.  Please refer to Predecessorsdiscussion under “Liquidity and Capital Resources—Cash Flows; Restructuring”for a more detailed discussion of the Chapter 11 Cases and the Restructuring.

 

***Three Months Ended September 30, 2009 Compared ToThree Months Ended September 30, 2010***

 

***Route Operations***

 
| ** **                        | ** ** | **Three months ended  September 30, 2009** | ** ** | **Three months ended  September 30, 2010** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **$**                                      | ** ** | **% of revenue**                           | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**                 | ** ** |
| Slot route revenue                |       | $                                          | 47,455     |                                       | 100.0      | % | $ | 42,866 |   | 100.0 | % |
| Promotional allowances            |       | (22                                        | )          | 0.0                                        |       | (54 | ) | 0.1 |   |
| Direct expenses                   |       | (43,898                                    | )          | 92.5                                       |       | (41,645 | ) | 97.2 |   |
| EBITDA                            |       | 3,535                                      |       | 7.5                                        |       | 1,167 |   | 2.7 |   |
| Depreciation and amortization     |       | (3,641                                     | )          | 7.7                                        |       | (3,058 | ) | 7.1 |   |
| Income from slot route operations |       | $                                          | (106       | )                                          | 0.2        | % | $ | (1,891 | ) | 4.4 | % |

 

Routeoperations accounted for 24% and 25% of total revenues for the three monthsended September 30, 2010 and 2009, respectively.  Total revenues from route operations were$42.9 million for the three months ended September 30, 2010, a decrease of $4.6million, or 10%, from $47.5 million for the three months ended September 30,2009.  This decrease was due primarily tothe continued general economic weakness in Nevada.

 

Routeoperating costs were $41.6 million, or 97% of route revenues, for the threemonths ended September 30, 2010.  Thiscompares to $43.9 million, or 93% of route revenues for the same period in2009.  The decrease in route operatingexpenses was primarily associated with various cost controls and lower revenuesat Predecessors’ participation locations, which are based on operatingcontracts that provide for a decrease in revenue share costs in proportion torevenue decline.  The increase in theexpenses as a percentage of route revenues is due to the fixed nature of manyof the route costs.

 

Primarilyas a result of the factors discussed above, route EBITDA for the three monthsended September 30, 2010 was $1.2 million, a decrease of $2.3 million, or 66%,from $3.5 million for the three months ended September 30, 2009.

 

***Casino Operations***
| ** **                    | ** ** | **Three months ended  September 30, 2009** | ** ** | **Three months ended  September 30, 2010** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **$**                                      | ** ** | **% of revenue**                           | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**                 | ** ** |
| Casino revenue                |       | $                                          | 114,587    |                                       | 100.0      | % | $ | 109,582 |   | 100.0 | % |
| Promotional allowances        |       | (17,662                                    | )          | 15.4                                       |       | (17,783 | ) | 16.2 |   |
| Direct expenses               |       | (83,336                                    | )          | 72.7                                       |       | (76,602 | ) | 69.9 |   |
| EBITDA                        |       | 13,589                                     |       | 11.9                                       |       | 15,197 |   | 13.9 |   |
| Depreciation and amortization |       | (10,015                                    | )          | 8.7                                        |       | (9,438 | ) | 8.6 |   |
| Income from casino operations |       | $                                          | 3,574      |                                       | 3.2        | % | $ | 5,759 |   | 5.3 | % |

 

Casinooperations accounted for 61% of total revenues for the three month period endedSeptember 30, 2010 and 62% of total revenues for the three months endedSeptember 30, 2009.  Total revenuesderived from casino operations were $109.6 million for the three months endedSeptember 30, 2010, a decrease of $5.0 million, or 4%, from $114.6 million forthe three months ended September 30, 2009. The decrease was due primarily to the continued general economicweakness in Nevada.

 

Casinopromotional spending increased $0.1 million, or 1%, due to marketing campaignsto generate business.  Promotionalallowances increased from 15% of revenues for the three months ended September 30,2009 to 16% of revenues for the three months ended September 30, 2010.  This increase is attributable to increasedcompetition and campaigns to entice patrons.

 

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Casinooperating costs were $76.6 million, or 70% of revenues, for the three months endedSeptember 30, 2010, compared to $83.3 million, or 73% of revenues, for thethree months ended September 30, 2009. This decrease was primarily due to reductions of $0.9 million invariable costs of sales, $0.5 million in participation expenses, $3.4 millionin payroll and related expenses, $0.4 million in other direct expenses, $0.9 millionin administrative expenses and $0.6 million in depreciation and amortizationexpenses.  The $3.4 million reduction inpayroll and related expenses is a result of targeted labor reductionsimplemented in the fourth quarter of 2009.

 

CasinoEBITDA was $15.2 million for the three months ended September 30, 2010, anincrease of $1.6 million, or 12%, from $13.6 million from the three monthsended September 30, 2009.  The increasein casino EBITDA was primarily due to the factors discussed above, most notablythe reductions in casino operating costs during the three months endedSeptember 30, 2010.

 

Thefollowing paragraphs describe the results from Predecessors’ casino operationsgeographically between casinos in Nevada and those in other states.

 

***Casino Operations — Nevada***

 
| ** **                           | ** ** | **Three months ended  September 30, 2009** | ** ** | **Three months ended  September 30, 2010** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **$**                                      | ** ** | **% of revenue**                           | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**                 | ** ** |
| Casino revenue                       |       | $                                          | 79,320     |                                       | 100.0      | % | $ | 73,835 |   | 100.0 | % |
| Promotional allowances               |       | (13,249                                    | )          | 16.7                                       |       | (13,134 | ) | 17.8 |   |
| Direct expenses                      |       | (61,798                                    | )          | 77.9                                       |       | (55,830 | ) | 75.6 |   |
| EBITDA                               |       | 4,273                                      |       | 5.4                                        |       | 4,871 |   | 6.6 |   |
| Depreciation and amortization        |       | (7,381                                     | )          | 9.3                                        |       | (7,559 | ) | 10.2 |   |
| Income (loss) from casino operations |       | $                                          | (3,108     | )                                          | 3.9        | % | $ | (2,688 | ) | 3.6 | % |

 

Revenuesderived from Nevada casino operations were $73.8 million for the three monthsended September 30, 2010, a decrease of $5.5 million, or 7%, from $79.3 millionfor the three months ended September 30, 2009. This decrease was primarily attributable to the continued economicdownturn in the Nevada and California market. The revenue at Predecessors’ casinos located in Southern Nevadadecreased by 1%, or $0.2 million, from $19.0 million for the three months endedSeptember 30, 2009 to $18.8 million for the three months ended September 30,2010.  The Primm Casinos decreased by$6.1 million, or 15%, from $41.6 million for the three months ended September 30,2009 to $35.5 million for the three months ended September 30, 2010.  The Northern Nevada casinos increased by $0.9million or 5%, from $18.7 million for the three months ended September 30, 2009to $19.5 million for the three months ended September 30, 2010.

 

Promotionalallowances for Nevada casinos increased from 16.7% for the three months endedSeptember 30, 2009 to 17.8% for the three months ended September 30, 2010.  This percentage increase is attributable toeconomic weakness, competition to attract patrons and a decrease in casinorevenue.

 

Nevadacasino operating costs for the three months ended September 30, 2010 were $55.8million, down $6.0 million, or 10%, from $61.8 million during the first quarterof 2009.  This decrease was primarily dueto reductions of $1.4 million in variable costs of sales, $0.4 million inparticipation expenses, $2.9 million in payroll and related expenses, $0.1 millionin other direct expenses, $0.9 million in administrative expenses and $0.3 millionin depreciation and amortization expenses. The $2.9 million reduction in payroll and related expenses is a resultof targeted labor reductions implemented in the fourth quarter of 2009.

 

Nevadacasino EBITDA was $4.9 million for the three months ended September 30, 2010compared to $4.3 million for the three months ended September 30, 2009.  Despite the revenue reduction at the Nevadacasinos, EBITDA increased approximately $0.6 million or 14%, in total,primarily due to the cost reduction program implemented in the fourth quarterof 2009.  The Southern Nevada Casinos andthe Northern Nevada Casinos represented $0.4 million, $0.8 million,respectively.  This was partially offsetby the Primm Casinos that represented negative $0.6 million.

 

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Depreciationand amortization expense was $7.6 for the three months ended September 30,2010, consistent with $7.4 million for the three months endedSeptember 30, 2009.

 

Thefollowing paragraphs describe the results from Predecessors’ casino operationsgeographically between casinos in Nevada and those in other states.

 

***Casino Operations — Other states***

 
| ** **                    | ** ** | **Three months ended  September 30, 2009** | ** ** | **Three months ended  September 30, 2010** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                    | ** ** | **$**                                                          | ** ** | **% of revenue**                                     | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                    | ** ** | ** **                                                     | ** ** | **(dollars in thousands)**                           | ** ** | ** ** | ** ** |
| Casino revenue                |       | $                                                              | 35,267     |                                                           | 100.0      | % | $ | 35,747 |   | 100.0 | % |
| Promotional allowances        |       | (4,413                                                         | )          | 12.5                                                           |       | (4,649 | ) | 13.0 |   |
| Direct expenses               |       | (21,538                                                        | )          | 61.1                                                           |       | (20,772 | ) | 58.1 |   |
| EBITDA                        |       | 9,316                                                          |       | 26.4                                                           |       | 10,326 |   | 28.9 |   |
| Depreciation and amortization |       | (2,634                                                         | )          | 7.5                                                            |       | (1,879 | ) | 5.3 |   |
| Income from casino operations |       | $                                                              | 6,682      |                                                           | 18.9       | % | $ | 8,447 |   | 23.6 | % |

 

Casinooperations in other states accounted for 20% of total revenues for the threemonths ended September 30, 2010 and 19% of total revenues for the threemonths ended September 30, 2009. Total revenues derived from casino operations located in states otherthan Nevada were $35.7 million for the three months endedSeptember 30, 2010, an increase of $0.4 million, or 1%, from$35.3 million for the three months ended September 30, 2009.

 

Otherstate promotional allowances were $4.6 million for the three months endedSeptember 30, 2010 and $4.4 million for the three months endedSeptember 30, 2009.  This was primarilydue to more aggressive slot promotions employed to minimize declines in revenuefor the three months ended September 30, 2010.

 

Otherstate casino operating costs were $20.8 million, or 58% of revenues, forthe three months ended September 30, 2010, a decrease of $0.7 millionfrom $21.5 million, or 61% of revenues, for the three months endedSeptember 30, 2009.  This decreasewas primarily due to reductions in variable costs, participation expenses,payroll and related expenses and other direct expenses in connection withdecreased revenue and a focus on cost efficiencies.

 

Otherstate casino EBITDA was $10.3 million for the three months endedSeptember 30, 2010, an increase from $9.3 million for the threemonths ended September 30, 2009, as declines in revenue were offset bydeclines in direct expenses.

 

Depreciationand amortization expense was $1.9 million for the three months endedSeptember 30, 2010, a decrease of $0.7 million from $2.6 millionfor the three months ended September 30, 2009.  This was due to assets being fullydepreciated.

 

***Other Operations***

 

Revenuefrom other operations consists of revenue from sources such as gasoline andconvenience store sales, ATM fees, pay phone charges, rental income and othermiscellaneous items unrelated to route and casino operations.  Predecessors’ gas station operations includePredecessors’ gas station and convenience store located in Osceola, Iowa,the Gold Ranch and the three gas stations in Primm, Nevada.  Revenues from other operations were$26.0 million for the three months ended September 30, 2010 comparedto $24.3 million for the three months ended September 30, 2009, anincrease of $1.7 million, primarily as a result of an increase in bothgasoline prices and gallons sold.

 

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***Promotional Allowances***

 

Promotionalallowances were $17.8 million, or 10.0% of total revenues, for the threemonths ended September 30, 2010, an increase of $0.1 million, or 1%,from $17.7 million, or 9.5% of total revenues, for the three months endedSeptember 30, 2009.  This increaseis attributable to increased promotional spending to attract patrons.

 

***Costs of Revenues***

 
| ** **                    | ** ** | **Three months ended  September 30, 2009** | ** ** | **Three months ended  September 30, 2010** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                    | ** ** | **$**                                                          | ** ** | **% of revenue**                                     | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                    | ** ** | ** **                                                     | ** ** | **(dollars in thousands)**                           | ** ** | ** ** | ** ** |
| Other operations              |       | $                                                              | (19,428    | )                                                              | 10.4       | % | $ | (20,819 | ) | 11.7 | % |
| General and administrative    |       | (5,012                                                         | )          | 2.7                                                            | %          | (4,768 | ) | 2.7 | % |
| Depreciation and amortization |       | (13,736                                                        | )          | 7.4                                                            | %          | (12,499 | ) | 7.0 | % |
| Restructuring costs           |       | —                                                         |       | —                                                         | %          | — |   | — | % |
|                               |            |                                                                |            |                                                                |            |  |  |  |  |  |  |

 

Thecosts represented in “other operations” consist primarily of costs related tothe gasoline service station and convenience store operations at Osceola, Iowa,the gas station and lottery at Verdi, Nevada, the gas stations at Primm, Nevadaand lottery operations at Stateline, California.  Costs of other operations increased by$1.4 million to $20.8 million for the three months endedSeptember 30, 2010, compared to $19.4 million for the three monthsended September 30, 2009, primarily as a result of increased gasolineprices.

 

Generaland administrative (“G&A”) expenses were $4.8 million for thethree months ended September 30, 2010, which was $0.2 million lowerthan $5.0 million for the three months ended September 30, 2009.  Costs remained relatively stable due tomanaging costs and although revenues were lower in 2010, G&A expenses as apercentage of revenue were 2.7% in the three months ended September 30,2010 and 2009.

 

Depreciationand amortization expense was $12.5 million for the three months endedSeptember 30, 2010, a decrease of $1.2 million, from$13.7 million for the three months ended September 30, 2009.  This decrease was due to lower route operationsdepreciation as certain assets were fully depreciated no longer incurringexpense.

 

HGI’srestructuring costs, primarily advisory and legal fees, associated with theRestructuring and the Chapter 11 Cases incurred prior to the filing of theChapter 11 Cases are included under Restructuring Costs.  These expenses ceased to be accrued onMarch 21, 2009, the date of the filing of the Chapter 11 Cases.

 

***Income from Operations***

 

HGI’sincome from operations was $4.3 million for the three months ended September 30,2010, an increase of $1.0 million from $3.3 million for the threemonths ended September 30, 2009. This was primarily due to the factors discussed above,.  Additionally, cost controls implementedduring the fourth quarter of 2009 helped to offset the decline in revenue.

 

***Other Expenses***

 

Asa result of the filing of the Chapter 11 Cases, HGI no longer incursinterest costs on long-term debt that is subject to compromise and insteadmakes certain adequate protection payments.

 

Costsassociated with the Restructuring incurred after the filing of theChapter 11 Cases are included in Reorganization Items.  Reorganization Items for the three monthsended September 30, 2010 were $1.0 million, a decrease of$2.0 million, from $3.0 million for the three months endedSeptember 30, 2009.  ReorganizationItems did not begin to accrue in 2009 until the Petition Date.

 

***Net Income***

 

Netincome for the three months ended September 30, 2010 was $3.3 millioncompared to $0.4 million for the three months ended September 30,2009.

 

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***Nine Months Ended September 30, 2009Compared To Nine Months Ended September 30, 2010***

*** ***

***Route Operations***

 
| ** **                        | ** ** | **Nine months ended  September 30, 2009** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                        | ** ** | **$**                                                         | ** ** | **% of revenue**                                    | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                        | ** ** | ** **                                                    | ** ** | **(dollars in thousands)**                          | ** ** | ** ** | ** ** |
| Slot route revenue                |       | $                                                             | 153,537    |                                                          | 100.0      | % | $ | 137,681 |   | 100.0 | % |
| Promotional allowances            |       | (67                                                           | )          | 0.0                                                           |       | (153 | ) | 0.1 |   |
| Direct expenses                   |       | (137,888                                                      | )          | 89.8                                                          |       | (131,534 | ) | 95.5 |   |
| EBITDA                            |       | 15,582                                                        |       | 10.2                                                          |       | 5,994 |   | 4.4 |   |
| Depreciation and amortization     |       | (11,841                                                       | )          | 7.7                                                           |       | (9,482 | ) | 6.9 |   |
| Income from slot route operations |       | $                                                             | 3,741      |                                                          | 2.5        | % | $ | 3,488 |   | 2.5 | % |

 

Routeoperations accounted for 26% of total revenues during the nine months endedSeptember 30, 2010 compared with 27% of total revenues for the nine monthsended September 30, 2009.  Totalrevenues from route operations were $137.7 million for the nine monthsended September 30, 2010, a decrease of $15.8 million, or 10%, from$153.5 million for the nine months ended September 30, 2009.  At September 30, 2010, Predecessors wereoperating approximately 6,100 slot machines, which was 200 less than theapproximately 6,300 Predecessors were operating as of September 30,2009.  The decrease in machines reflectsthe closures of some taverns, grocery and drug store chain clients and theelimination of certain underperforming route locations.  These factors, coupled with general economicweakness in Nevada, contributed to the decline in route revenue in 2010.

 

Routeoperating costs were $131.5 million, or 96% of route revenues, for thenine months ended September 30, 2010. This compares to $137.9 million, or 90% of route revenues, for thesame period in 2009.  The increase inexpenses as a percentage of route revenues was due to the fixed nature of manyof the route costs.  The decrease inabsolute amount of route operating expenses was primarily associated with lowerrevenues at Predecessors’ participation locations, which are based on operatingcontracts that provide for a decrease in revenue share costs in proportion torevenue decline.  Additional expensereductions resulted from the elimination of certain underperforming locationsreferenced above.

 

Primarilyas a result of the issues discussed above, route EBITDA for the nine monthsended September 30, 2010 was $6.0 million, a decrease of$9.6 million, or 62%, from $15.6 million for the nine months endedSeptember 30, 2009.

 

***Casino Operations***

 
| ** **                                | ** ** | **Nine months  ended September 30, 2009** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                | ** ** | **$**                                                         | ** ** | **% of revenue**                                    | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                                | ** ** | ** **                                                    | ** ** | **(dollars in thousands)**                          | ** ** | ** ** | ** ** |
| Casino revenue                            |       | $                                                             | 347,507    |                                                          | 100.0      | % | $ | 324,540 |   | 100.0 | % |
| Promotional allowances                    |       | (52,476                                                       | )          | 15.1                                                          |       | (49,529 | ) | 15.3 |   |
| Direct expenses                           |       | (250,531                                                      | )          | 72.1                                                          |       | (222,751 | ) | 68.6 |   |
| EBITDA                                    |       | 44,500                                                        |       | 12.8                                                          |       | 52,260 |   | 16.1 |   |
| Depreciation and amortization             |       | (29,963                                                       | )          | 8.6                                                           |       | (28,526 | ) | 8.8 |   |
| Impairment                                |       | —                                                        |       | —                                                        |       | — |   | — |   |
| Income (loss) from casino operations |       | $                                                             | 14,537     |                                                          | 4.2        | % | $ | 23,734 |   | 7.3 | % |

 

Casinooperations accounted for 61% of total revenues for the nine months endedSeptember 30, 2010 and 62% of revenues for the nine months endedSeptember 30, 2009.  Total revenuesderived from casino operations were $324.5 million for the nine monthsended September 30, 2010, a decrease of $23.0 million, or 7%, from$347.5 million for the nine months ended September 30, 2009.  The decrease is primarily attributable to thecontinuing impact of the general economic downturn on the Nevada casinoproperties.

 

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***Casino Operations — Nevada***

 
| ** **                                       | ** ** | **Nine months ended  September 30, 2009** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                       | ** ** | **$**                                                         | ** ** | **% of revenue**                                    | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                                       | ** ** | ** **                                                    | ** ** | **(dollars in thousands)**                          | ** ** | ** ** | ** ** |
| Casino revenue                                   |       | $                                                             | 240,650    |                                                          | 100.0      | % | $ | 218,878 |   | 100.0 | % |
| Promotional allowances                           |       | (39,473                                                       | )          | 16.4                                                          |       | (35,947 | ) | 16.4 |   |
| Direct expenses                                  |       | (185,586                                                      | )          | 77.1                                                          |       | (161,415 | ) | 73.7 |   |
| EBITDA                                           |       | 15,591                                                        |       | 6.5                                                           |       | 21,516 |   | 9.9 |   |
| Depreciation and amortization                    |       | (22,043                                                       | )          | 9.2                                                           |       | (22,335 | ) | 10.2 |   |
| Impairment                                       |       | —                                                        |       | —                                                        |       | — |   | — |   |
| Income (loss) from casino operations-Nevada |       | $                                                             | (6,452     | )                                                             | (2.7       | )% | $ | (819 | ) | (0.3 | )% |

 

Nevadacasino operations accounted for 41% of total revenues for the nine months endedSeptember 30, 2010 and 43% of total revenues for the nine months endedSeptember 30, 2009.  Revenuesderived from Nevada casino operations were $218.9 million for the ninemonths ended September 30, 2010, a decrease of $21.8 million, or 9%,from $240.7 million for the nine months ended September 30,2009.  The decrease was attributableprimarily to reduced customer volume and spending associated with the generaleconomic downturn.

 

Nevadacasino operating costs were $161.4 million, or 74% of revenues, for thenine months ended September 30, 2010, compared to $185.6 million, or77% of revenues, for the nine months ended September 30, 2009.  The decrease was due to reductions invariable costs of sales related to revenue decreases and lower staffing levels.

 

Nevadacasino promotional spending decreased $3.5 million, or 9%, due to costefficiencies even though increased competition in the challenging economicenvironment required more aggressive promotional campaigns to attract andmaintain the revenue.  Promotionalallowances as a percentage of revenue were stable at 16% for the nine monthsended September 30, 2010 and 2009.

 

Depreciationand amortization expense was $22.3 million for the nine months endedSeptember 30, 2010, an increase of $0.3 million, or 1% from$22.0 million for the nine months ended September 30, 2009.

 

NevadaCasino EBITDA was $21.5 million for the nine months endedSeptember 30, 2010, an increase of $5.9 million, or 38%, from$15.6 million from the nine months ended September 30, 2009.  Despite the revenue reduction at the Nevadacasinos, EBITDA increased primarily due to the cost reduction programimplemented in the fourth quarter of 2009. The Southern Nevada Casinos, the Northern Nevada Casinos and the PrimmCasinos represented $2.1 million, $2.8 million and $1.0 million,respectively.

 

***Casino Operations — Other States***

 
| ** **                                 | ** ** | **Nine months ended  September 30, 2009** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                 | ** ** | **$**                                                         | ** ** | **% of revenue**                                    | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                                 | ** ** | ** **                                                    | ** ** | **(dollars in thousands)**                          | ** ** | ** ** | ** ** |
| Casino revenue                             |       | $                                                             | 106,857    |                                                          | 100.0      | % | $ | 105,662 |   | 100.0 | % |
| Promotional allowances                     |       | (13,003                                                       | )          | 12.2                                                          |       | (13,582 | ) | 12.9 |   |
| Direct expenses                            |       | (64,945                                                       | )          | 60.8                                                          |       | (61,336 | ) | 58.0 |   |
| EBITDA                                     |       | 28,909                                                        |       | 27.0                                                          |       | 30,744 |   | 29.1 |   |
| Depreciation and amortization              |       | (7,920                                                        | )          | 7.4                                                           |       | (6,191 | ) | 5.9 |   |
| Impairment                                 |       | —                                                        |       | —                                                        |       | — |   | — |   |
| Income from casino operations-other states |       | $                                                             | 20,989     |                                                          | 19.6       | % | $ | 24,553 |   | 23.2 | % |

 

Casinooperations in other states accounted for 20% of total revenues for the ninemonths ended September 30, 2010 and 19% of total revenues for the ninemonths ended September 30, 2009. Total revenues derived from casino operations located in states otherthan Nevada were $105.7 million, a decrease of $1.2 million from$106.9 million for the nine months ended September 30, 2009.  The revenue increase occurred at both of Predecessors’Missouri properties, while revenue at Predecessors’ Lakeside Iowa casinodeclined due to continued competitive pressures in the Iowa market as well asgeneral economic weakness in the region.

 

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Otherstate casino operating costs decreased $3.6 million, or 6% to$61.3 million for the nine months ended September 30, 2010 from$64.9 million for the same period in 2009.

 

Otherstate casino EBITDA was $30.7 million for the nine months endedSeptember 30, 2010, an increase of $1.8 million, or 6.2%, from$28.9 million from the nine months ended September 30, 2009.

 

***Promotional Allowances***

 

Promotionalallowances were $49.7 million, or 9.3% of total revenues, for the ninemonths ended September 30, 2010, a decrease of $2.8 million, or 5%,from $52.5 million, or 9.3% of total revenues, for the nine months endedSeptember 30, 2009.  The decreasewas attributable to cost controls implemented in the fourth quarter of 2009.

 

***Other Operations***

 

Revenuefrom other operations consists of revenue from sources such as gasoline andconvenience store sales, ATM fees, pay phone charges, rental income and othermiscellaneous items unrelated to route and casino operations.  Predecessors’ gas station operations includePredecessors’ gas station and convenience store located in Osceola, Iowa,the Gold Ranch and the three gas stations in Primm, Nevada.  Revenues from other operations were$72.0 million for the nine months ended September 30, 2010 comparedto $64.6 million for the nine months ended September 30, 2009, anincrease of $7.4 million, as a result of an increase in both gasolineprices and gallons sold.

 

***Costs of Revenues***

 
| ** **                    | ** ** | **Nine months ended  September 30, 2009** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                    | ** ** | **$**                                                         | ** ** | **% of revenue**                                    | ** ** | **$** | ** ** | **% of revenue** | ** ** |
| ** **                    | ** ** | ** **                                                    | ** ** | **(dollars in thousands)**                          | ** ** | ** ** | ** ** |
| Other operations              |       | 50,112                                                        |       | 8.9                                                           | %          | 56,518 |   | 10.6 | % |
| General and administrative    |       | 15,005                                                        |       | 2.7                                                           | %          | 14,965 |   | 2.8 | % |
| Depreciation and amortization |       | 42,045                                                        |       | 7.4                                                           | %          | 38,172 |   | 7.1 | % |
| Restructuring costs           |       | 9,814                                                         |       | 1.7                                                           | %          | — |   | — | % |

 

Costsassociated with other revenues were $56.5 million for the nine monthsended September 30, 2010 and $50.1 million for the nine months endedSeptember 30, 2009, an increase of $6.4 million primarily associatedwith higher gasoline sales.

 

G&Aexpenses were $15.0 million for the nine months ended September 30,2010 and 2009.

 

Depreciationand amortization expense was $38.2 million for the nine months ended September 30,2010, a decrease of $3.8 million from $42.0 million for the ninemonths ended September 30, 2009 due to fully depreciated assets no longerincurring expense.

 

HGIalso incurred costs associated with the Restructuring and Chapter 11Cases, primarily associated with bank, legal and advisory fees.  None of these costs were incurred for thenine months ended September 30, 2010 and $9.8 million ofrestructuring costs were incurred for the nine months ended September 30,2009.

 

***Income from Operations***

 

Asa result of the factors discussed above, HGI had income from operations of$20.6 million for the nine months ended September 30, 2010, anincrease of $12.9 million from $7.7 million for the nine months endedSeptember 30, 2009.

 

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***Other Expenses***

 

Otherexpense was $3.6 million for the nine months ended September 30,2010, a decrease of $32.1 million from the nine months endedSeptember 30, 2009 when other expense was $35.7 million.  This was primarily associated withreorganization items incurred and adequate protection payments made in theChapter 11 Cases.

 

Predecessors’interest costs decreased from $29.5 million during the first nine monthsof 2009 to $25,000 during the first nine months of 2010.  As a result of the Chapter 11 Cases, HGIno longer incurs interest costs on long-term debt that is subject to compromiseafter the Petition Date of March 21, 2009 and instead makes certainadequate protection payments.

 

***Net Income/( Loss)***

 

Netincome for the nine months ended September 30, 2010 was$17.0 million.  This compares to anet loss of $28.0 million recorded for the nine months endedSeptember 30, 2009.

 

***Liquidity And Capital Resources***

 

***Cash Flows Restructuring***

 

Predecessorsare currently operating as reorganized debtors under Chapter 11 of theBankruptcy Code and pursuant to the Plan, which became effective on EffectiveDate.  The Plan will not be fullyimplemented until the Substantial Consummation Date.  Pursuant to the Plan certain payments weremade on or shortly after the Effective Date, including payment of allowedpriority claims, certain allowed secured claims and allowed general unsecured claims,in some cases with interest from the Petition Date, as described in the Planand the Second Amended Disclosure Statement to Accompany the Plan filed withthe Bankruptcy Court on August 7, 2009.

 

TheSubstantial Consummation Date is also subject to the satisfaction or waiver ofthe following conditions: (i) none of Predecessors or the Lenders shall bein material breach of the Plan and (ii) documents necessary to implementthe transactions contemplated by the Plan shall be in form and substance reasonablyacceptable to the Company and the Requisite Lenders. A material breach of thePlan would occur if any of the Debtors failed to comply with any of therequirements set forth in the Plan. The Bankruptcy Court has previouslyapproved the assumption by the Company of all of Predecessors’ materialcontracts. The Company currently expects that the Substantial Consummation Datewill occur in the fourth quarter of 2010, although the Company cannot assureyou that the required regulatory approvals will be obtained or that allconditions to the Substantial Consummation Date will be satisfied by that date,or at all, or that Predecessors will be successful in implementing theRestructuring in the form contemplated by the Plan or at all. The Plan providesthat, from the Effective Date through the Substantial Consummation Date,Predecessors will continue to be managed by its current officers and directors.

 

Dueto the occurrence and continuation of events of default, the amountsoutstanding under the HGI Credit Facility and the indentures pursuant to whichthe Subordinated Notes were issued are immediately due and payable, subject toan automatic stay of any action to collect, assert or recover a claim againstPredecessors under applicable bankruptcy law. Based on the filing of the Chapter 11 Cases, the entire balanceoutstanding under the HGI Credit Facility and all of the amounts outstandingunder the indentures pursuant to which the Subordinated Notes were issued areincluded in liabilities subject to compromise at September 30, 2010.  Predecessors classify liabilities subject tocompromise as a long-term liability.

 

AtSeptember 30, 2010, the outstanding balance under the HGI Credit Facilitywas $828 million.  The Planprovides, in part, that the Lenders will receive 100% of the equity of theCompany, and that the Company will issue $350 million in Senior SecuredLoans to the Lenders.

 

Priorto the filing of the Chapter 11 Cases, interest accrued on borrowingsunder the HGI Credit Facility based on a floating rate.  This floating rate was based upon a variableinterest rate (a base rate or LIBOR, at Predecessors’ option) plus a leveragegrid-based spread.  Predecessors’ averagefloating rate on debt incurred under the HGI Credit Facility was 12.5% as ofSeptember 30, 2010.  However, basedon the filing of the Chapter 11 Cases, after the Petition DatePredecessors did not make payments under the HGI Credit Facility, other thancertain adequate protection payments, as provided in the Final Order Approvingthe Amended and Restated Stipulation Authorizing Use of Cash Collateral byDebtors and Granting Adequate Protection, which was entered by the BankruptcyCourt on May 21, 2009 and remained in effect until the Effective Date (the“Cash Collateral Order”).  Contractual interestfor the three months ended September 30, 2009 and 2010 and the nine monthsended September 30, 2009 and 2010 would have been $33.9 million,$33.5 million, $100.6 million and 98.0 million, respectively, if incurredfor the entire period.

 

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Predecessorsexpect to fund existing operations and capital needs during the restructuringfrom operating cash flow and cash on hand, although that may beinsufficient.  Predecessors’ cash on handat September 30, 2010 was $114.5 million.

 

TheCash Collateral Order provided for adequate protection payments to be made tothe Lenders during the period commencing on the Petition Date and ending on theEffective Date in the amount of the Debtors’ cash and cash equivalents inexcess of $100 million (measured as of the last day of each fiscal quarterand to be paid on the 30th day thereafter) reduced by certain unpaidrestructuring costs, as well as costs and expenses of the professionalsretained by the administrative agent. Based on HGI’s cash and cash equivalents as of December 31, 2009and taking into account the required Effective Date payments described in Note1 of Notes to Consolidated Financial Statements, HGI made adequate protectionpayments of $29.7 million during the nine months ended September 30,2010.  Additionally, under the Plan,between the Effective Date and the Substantial Consummation Date HGI will makeadequate protection payments to Lenders in the amount of the Debtors’ cash andcash equivalents in excess of $100 million (measured initially as of theend of the third full calendar month following the Effective Date, and then asof the end of every third full calendar month thereafter, and paid 30 daysthereafter).

 

Predecessorsexpect to fund their existing operations and capital needs during theRestructuring from operating cash flow and cash on hand, although that may beinsufficient.  During the nine months endedSeptember 30, 2010, Predecessors monitored their capital expenditurescarefully, and delayed incurring capital expenditures where possible in orderto conserve cash.  There can be noassurance that our, or Predecessors’, cash flow will be adequate to meetanticipated working capital requirements and capital expenditures forPredecessors’ existing operations.

 

***Operating Activities***

 

Forthe nine months ended September 30, 2010, operating activities provided$49.4 million in cash flows on $17.0 million in net income comparedto $39.6 million in cash flows on $28.0 million in net loss for thenine months ended September 30, 2009. The increase in cash flows resulted from a decline in operating costs inboth of Predecessors’ operating segments as well as a decrease in cash requiredrelated to restructuring expenses and cash interest paid as a result of theChapter 11 Cases.  Based on thefiling of the Chapter 11 Cases, HGI does not make payments under the HGI CreditFacility.  Instead, HGI made adequateprotection payments of $29.7 million during the nine months endedSeptember 30, 2010, as noted below in the discussion of FinancingActivities, pursuant to the Cash Collateral Order, which remained in effectuntil the Effective Date.

 

***Investing Activities and Capital Expenditures***

 

Forthe nine months ended September 30, 2010, Predecessors used net cash of$22.1 million for investing activities primarily related to the capitalexpenditures of $22.0 million.

 

Capitalexpenditures for the remainder of the year are anticipated to be approximately$5.7 million, consisting of maintenance capital expenditures.  However, to the extent that Predecessors’results of operations do not provide sufficient cash, Predecessors may elect todelay some of the capital expenditures in order to preserve short-termliquidity.

 

***Financing Activities***

 

Forthe nine months ended September 30, 2010, Predecessors used net cash of$29.7 million for financing activities related to adequate protectionpayments required by the Cash Collateral Order. There were no cash flows provided by or used in financing activities inthe nine months ended September 30, 2010.

 

Fromthe Petition Date to the Effective Date HGI was subject to the Cash CollateralOrder that called for periodic sweeps of its cash in excess of$100 million to be paid to the Lenders. Based on HGI’s cash and cash equivalents as of December 31, 2009and taking into account the required Effective Date payments described in Note1 of Notes to Condensed Consolidated Financial Statements (Unaudited), HGI madeadequate protection payments of $29.7 million during the nine months endedSeptember 30, 2010.  Additionally,under the Plan, between the Effective Date and the Substantial Consummation DateHGI will make adequate protection payments to the Lenders in the amount of theDebtors’ cash and cash equivalents in excess of $100 million (measuredinitially as of the end of the third full calendar month following theEffective Date, and then as of the end of every third full calendar monththereafter, and paid 30 days thereafter).

 

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AtSeptember 30, 2010, Predecessors’ liabilities subject to compromise includedapproximately $160.0 million of outstanding principal amount ofPredecessors’ 8 1/8% Notes and $170.0 million of outstanding principalamount of Predecessors’ 7% Notes.  Aftergiving effect to indebtedness under Predecessors’ Subordinated Notes and borrowingsunder Predecessors’ HGI Credit Facility, Predecessors’ total liabilitiessubject to compromise were approximately $1.2 billion atSeptember 30, 2010.

 

Therewere no distributions to stockholders during nine months endedSeptember 30, 2010.  HGI does notexpect to make cash payments for stockholder distributions for the remainder ofthe 2010.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We will be exposed to market risk, primarily related to interest rateexposure of our debt obligations that are expected to bear interest based onfloating rates. The interest on the Senior Secured Loan Credit Facility to beentered into on the Substantial Consummation Date is expected to be based on afloating rate (Alternative Base Rate or LIBOR), plus a leverage grid-basedvariable amount. It is expected that interest on the Senior Secured Loanscontemplated by the Plan will also be based on a floating rate (AlternativeBase Rate or LIBOR) plus a stated amount.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this report, the Company conducted anevaluation, under the supervision and with the participation of the personperforming functions similar to principal executive officer and principalfinancial officer, of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct. Based on this evaluation, the person performing functions similar toprincipal executive officer and principal financial officer concluded that theCompany’s disclosure controls and procedures are effective and designed toensure that information required to be disclosed by the Company in reports thatit files or submits under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in SEC rules and forms, andthat such information is accumulated and communicated to management, includingthe person performing functions similar to principal executive officer andprincipal financial officer, to allow timely decisions regarding requireddisclosure. There was no change in the Company’s internal control overfinancial reporting during the Company’s most recently completed fiscal quarterthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

TheCompany is not a party to any litigation. However, Predecessors were from timeto time subject to litigation relating to routine matters incidental to itsbusiness.  We expect to be subject tosimilar litigation following the Substantial Consummation Date in connectionwith our business and operations.

 

**ITEM 1A.  RISK FACTORS**

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in “Item 1A.  Risk Factors” in our Registration Statement,which could materially affect our business, financial condition or futureresults.

 

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

 

None.

 

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**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None

 

**ITEM 6. EXHIBITS**

 

(a) Exhibits.

 

Inreviewing the agreements included as exhibits to this quarterly report, pleaseremember they are included to provide you with information regarding theirterms and are not intended to provide any other factual or disclosureinformation about the Company or the other parties to the agreements.  The agreements contain representations andwarranties by each of the parties to the applicable agreement.  These representations and warranties havebeen made solely for the benefit of the other parties to the applicableagreement and:

 

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

 

·                  Have been qualified by disclosures that weremade to the other party in connection with the negotiation of the applicableagreement, which disclosures are not necessarily reflected in the agreement;

 

·                  May apply standards of materiality in away that is different from what may be viewed as material to you or otherinvestors; and

 

·                  Were made only as of the date of theapplicable agreement or such other date or dates as may be specified in theagreement and are subject to more recent developments.

 

Accordingly,these representations and warranties may not describe the actual state ofaffairs as of the date they were made or at any other time.  Additional information about the Company maybe found elsewhere in this quarterly report and the Company’s other publicfilings, which are available without charge through the SEC’s website athttp://www.sec.gov and the Company’s website at http://www.herbstgaming.com.

 

Thefollowing exhibits are filed or furnished with this Quarterly Report on Form 10-Q:

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                     |
|---------------------|------------|--------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification  of David D. Ross pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
| 32.1                |       | Certification  of David D. Ross pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Quarterly Report on Form 10-Q to be signed on its behalfby the undersigned, thereunto duly authorized.

 
| Date:  November 15, 2010 | ** **                 |
|--------------------------|----------------------------|
|                     | ** **                 |
|                     | **HERBST  GAMING**,**LLC** |
|                     | ** **                 |
|                     | ** **                 |
|                     | By:                        | /s/  DAVID ROSS |
|                     |                       | Name:  David Ross |
|                     |                       | Title:  *Manager* |

 

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