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CASINO COMPANIES: Herbst Gaming faces hurdles

Filings suggest company must restructure debt payments or face bankruptcy

Casino operator and slot machine route manager Herbst Gaming may be forced to file for bankruptcy protection unless the company can reorganize a payment structure for its more than $1.146 billion debt, according to documents filed with the U.S. Securities and Exchange Commission.

The Las Vegas-based company said its Southern Nevada operations have been negatively affected by failing economic conditions, a statewide ban on smoking in taverns and restaurants, and competition from American Indian casinos in Southern California.


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  • Herbst Gaming operates 16 casinos in Southern and Northern Nevada, including the three Primm resorts along Interstate 15 at the California-Nevada border, 35 miles south of Las Vegas, and the off-Strip Terrible's on East Flamingo Road. The company also owns three casinos in Missouri and Iowa and operates approximately 7,200 slot machines through its Nevada route operation.

    The company is privately held by brothers Ed, Tim and Troy Herbst, but roughly $800 million of its debt is through publicly traded bonds.

    In its Form 10-K annual report filed late Monday with the SEC, Herbst Gaming said the poor financial results the company experienced during the second half of 2007 have carried over into the first few months of 2008.

    Herbst's overall revenues were $849.2 million in 2007, almost 43 percent higher than 2006, because the company spent $543 million to acquire two major casino companies, almost doubling the size of its casino holdings.

    However, a 20 percent loss in revenues from its slot route business, coupled with a doubling of the company's costs, expenses and interest payments, sent Herbst Gaming to a net loss of $127.2 million last year.

    In February, Herbst hired Wall Street investment house Goldman Sachs to evaluate strategic alternatives for the company, which could include anything from a debt recapitalization to a sale of some of its businesses.

    According to an independent audit of the company's finances by Deloitte & Touche, Herbst Gaming has "going concern" qualification, which is a default under its credit agreement with its bond holders. The company plans to discuss the matter soon with its bond holders to try and restructure the debt.

    "We and our advisers are actively working toward such a transaction that would address the decline in our operating results and our capital structure, including our outstanding indebtedness," the company said in the filing.

    If Herbst Gaming cannot complete a refinancing or restructuring, the company may be required to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

    Herbst Gaming general counsel Sean Higgins declined comment Tuesday, saying the 10-K filing would speak for the company. Herbst Gaming is not planning to hold a conference call to discuss its 2007 year-end and fourth-quarter earnings.

    Gaming Control Board Chairman Dennis Neilander said casinos operated by Herbst Gaming would be placed on a different status than other licensees because of the company's financial warnings. Additional audits of the finances and bankrolls at each location will be conducted.

    Neilander said the control board became aware of Herbst's financial issues as they mounted over the last six months.

    "This is not a new scenario for us," Neilander said, saying the Aladdin on the Strip and Fitzgeralds in Reno were the last casinos to operate under bankruptcy protection. "It's tough because they were hit by so many factors at the same time. At this point, technically, this is the process we have to take."

    An investment source with knowledge of the situation said Herbst Gaming wants to resolve the matter without filing for bankruptcy. The source said banks that control about $320 million of Herbst's debt are pushing for some sort of resolution. The source said the bank debt is currently worth about 70 cents on the dollar while the bond debt is worth about 14 cents on the dollar.

    Several sources said Herbst's downfall began with last April's $394 million purchase of the three Primm casinos from MGM Mirage.

    "They overpaid, pure and simple," said a gaming source who asked not to be named.

    In January 2007, Herbst paid $149 million to acquire five Northern Nevada casinos, including the Sands Regency in Reno.

    During Nevada licensing hearings in March 2007, Herbst executives admitted cash flow at the Primm casinos had fallen from $75 million in 2000 to about $30 million in 2003 because of Indian gaming competition. Executives told regulators they were confident they could win back lost business. A year later, it hasn't happened.

    Sources confirmed that Primm executive Michael Puggi, who had been operating the resorts for MGM Mirage and was retained by Herbst, was recently let go. In the 10-K, the company said the Primm casinos continue to lose business to the expanding California Indian casinos in Riverside County and San Bernardino County.

    "The Primm casinos derive a significant amount of their business from the Inland Empire region of Southern California, the economies of which have been negatively impacted due to a number of factors, including the subprime mortgage crisis and higher gasoline costs," Herbst Gaming stated.

    In its slot machine route operation, Herbst blamed a voter-enacted statewide ban on smoking in places that serve food with sending its tavern and restaurant customers to traditional casinos if they want to smoke and gamble. The ban started in January 2007.

    Not only have revenues in the route operation fallen, $276.9 million in 2007 compared with $347 million in 2006, but cash flow from the division was off more than 56 percent, $32.8 million in 2007 compared with $75.5 million in 2006.

    Herbst Gaming said it has renegotiated several lease agreements and has decreased its annual rent payments by approximately $20 million.

    "However, if we are not able to offset decreased patron play, or patron play continues to decrease, there may be a material adverse effect on our business, financial condition and results of operations," the company stated. "The success of our route operations is dependent on our ability to renew our contracts."

    Contact reporter Howard Stutz at hstutz@reviewjournal.com or (702) 477-3871.

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    Jack Grainger wrote on August 15, 2008 11:13 AM: Check out yuo tube videos entertainment,type in bet your life,see how Wendover Nugget treats a senior citizen when he complains after being cheated out of a $1,000.00 "royal flush"


    None wrote on April 23, 2008 09:38 PM: for the people that say the Herbst Kids need to start their own biz? Please , what do you think the slot route is? ETT? Ed, Tim, & Troy , they started the company! Get real , if you dont think the smoking ban had anythign to do with the biz your wrong! It effected all slot route operators in town , which is over 100 operators! Once they restructure the company , things will be fine , its people that bad mouth the herbst because they hate to see people do so well.

    get a life.



    AngryGambler wrote on April 21, 2008 10:31 AM: It's always the damn kids. The Binion kids trashed that empire. The Vacation Village kids ran that casino into the ground in record time. Now it's the Herbst kids' turn to destroy their fathers legacy. It's the Vegas way baby!


    jj wrote on April 17, 2008 12:59 AM: jerry herbst just bought a house for $35,000,000.00 and they have to file for bankruptcy ???


    maqmood wrote on April 13, 2008 09:38 PM: may be the cigarette smoke that they used to have in the workplace got to there heads!


    sandy t. wrote on April 06, 2008 04:31 AM: I have worked for the Herbst Oil Co. As with most businesses that are slowly turned over to the children, we see Herbst Oil Co. having problems. They need to get the spoiled brats out of the loop and get a real management team. Mr. Herbst built the company, he shouldn't let the boys ruin what he built. The Herbst boys need to build their own businesses. Then maybe the boys and their spouses would have something to really stick their noses in the air about. I have great respect for the senior Herbst, but the children need a reality check.


    Dan Hartzell wrote on April 04, 2008 08:00 PM: I work at Primm, which is now owned by the Herbst's. All we hear is that we have to cut back to save money, but the price of health insurance is going up, bus tickets went up and for the people how live in the apartments at primm, they have to pay more. But, Ed Herbst, now has a contract to be payed over $970.000 a year with a 5% raise at the first of next year. As of right now, we have been told that all raises are on hold, for reevaluation. They do not care about us, all they wanted Primm for was so they could do their off-road racing. They try to put the blame on everything, but were it should be, on them selves. I for one would like to see them loss it all, so maybe we would get taking over by someone that knows what to do with a real casino. Needless to say I'm no fan of the Herbst.


    Lv wrote on April 03, 2008 08:56 AM: I can tell you they do NOT give to charitable organizations. When was the last time you seen a PBS spot sponsored by Herbst? or a PSA sponsored by Herbst? Unless you consider "giving to the community" buying million dollar homes in California. Bottom line is the Herbst made "terrible" business decisions. They knew about the smoking ban AND the indian casinos before they made these over priced purchases against advice of many experts. No sympathy here! but I sure they will get bailed out by taxpayers and still be able to pay the morgages on those million dollar homes and not pay a dime in taxes


    J.S wrote on April 02, 2008 09:33 PM: I agree with bits and pieces of everyone so far, but by up close and personal experience with this company it has been no walk in the park. There are so many unethical practices within this company, any employee that studied the legal books back and forth could have cases so personally, I say what goes around comes around. On the more positive side, Herbst Gaming "had" and still can have a lot of potential to be an outstanding small time company within the casino industry but they dug their own graves by taking what could also be interpreted as the "Nazi" approach to their employees and even guests. Word of mouth will kill reputation more than anything. Let's face it. The smoking ban did cause business to slump, but how is it that every other business has been able to recoup BUT Herbst? You have to stop pointing fingers at the smoking ban for everything. If that were true then isn't it a double standard to say business is suffering due to the Indian Casinos and the smoking ban? As for the properties, you would be amazed at how much more of a positive and successful business you could have by obtaining experienced and dedicated management and staff. Without that, you are destined for failure because what do they personally have to lose?That is just my opinion and once again what I know from "personal experience". Obviously there's so much more but we are limited in space. P.S There is no reason to call anyone ignorant nor unaware. Everyone just views things in many different ways and we are all entitled to our opinions just as you are.
    Thanks


    douglas wrote on April 02, 2008 07:50 PM: as to payout percentages being controlled by gcb, last time i looked at my gaming manuals, "approved" devices need only return 75%. slots typically are bought by percentage "hold", much like an investor buys a bank c.d. most slots seem to be bought in the 5-10% hold, not the permitted 25% hold. at many competitive, "locals" joints there are more player favorable exceptions than the 5-10% hold though not usually found in slot route venues.

    always an amusing exception is the "flip it" device. i'm not sure that any flip it has returned 75% to the player. many sections of the gaming regs state that the gcb chairman can approve exceptions.


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