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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: September 30, 2009

OR

For the transition period from:                 to                 

Commission file number: 333-71094

HERBST GAMING, INC.

(Exact name of registrant as specified in its charter)

(702) 889-7695

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

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

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

Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. YES o  NO o   Not Applicable x

Applicable Only to Corporate Issuers

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

Common Stock, no par value, 300 outstanding shares

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FORM 10-Q

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PART I — FINANCIAL INFORMATION

ITEM 1                                FINANCIAL STATEMENTS

HERBST GAMING, INC. AND SUBSIDIARIES

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

 CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

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HERBST GAMING, INC. AND SUBSIDIARIES

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of these

 unaudited condensed consolidated financial statements.

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HERBST GAMING, INC. AND SUBSIDIARIES

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

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these

 unaudited condensed 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 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.             CHAPTER 11 REORGANIZATION AND GOING CONCERN

On March 22, 2009 (the “Petition Date”), Herbst Gaming, Inc. (“Herbst” or the “Company”) and certain of its subsidiaries (the “Subsidiary Guarantors”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”), in the United States Bankruptcy Court for the District of Nevada, Northern Division (the “Bankruptcy Court”) under case numbers 09-50746-gwz through 09-50763-gwz.  The Chapter 11 Cases are being jointly administered.  The Company and the Subsidiary Guarantors (collectively, the “Debtors”) are continuing to operate their businesses and manage their properties as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  In general, we are authorized under the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

On October 30, 2009, the Bankruptcy Court orally confirmed the Debtors’ First Amended Joint Plan of Reorganization (the “Plan”), which provides for the following restructuring of the Debtors (the “Restructuring”), to be consummated on the Substantial Consummation Date (as defined below):

·      Conversion of all allowed claims under the Company’s $860.0 million senior credit facility (the “amended Credit Agreement”) into debt and equity of the Debtors, through ownership of a new holding company (“Reorganized Herbst Gaming”).

·      Termination of all outstanding obligations under our 81/8% senior subordinated notes due 2012 (the “81/8% Notes”) and our 7% senior subordinated notes due 2014 (the “7% Notes” and, collectively with the 8 1/8 % Notes, the “Subordinated Notes”).

·      Cancellation of 100% of the existing equity in the Company.

The Bankruptcy Court is expected to enter written findings of fact and conclusions of law and an order with respect to the confirmation of the Plan in the ordinary course.  The Plan will become effective on the 11th day following the date on which the order confirming the Plan is docketed (the “Effective Date”) provided the conditions to effectiveness set forth in the Plan are satisfied or waived.  The Plan generally will be implemented on the third business day following the satisfaction or waiver of all conditions to substantial consummation of the Plan, which are described in the paragraph below (the “Substantial Consummation Date”).  However, the Plan provides that certain payments will be made on the Effective Date, including payment of certain allowed priority claims, certain secured claims and general unsecured claims, in some cases with interest from the Petition Date, as described in the Plan and the Second Amended Disclosure Statement to Accompany the Plan filed with the Bankruptcy Court on July 23, 2009 (the “Disclosure Statement”).  Additionally, under the Plan, between the Effective Date and the Substantial Consummation Date, the Company will make adequate protection payments to the lenders under the amended Credit Agreement (the “Lenders”) in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured as of the end of every third full calendar month following the Effective Date, and to be paid 30 days thereafter).

The Restructuring will not be complete until the Substantial Consummation Date.  The Substantial Consummation Date will not occur until the Restructuring and the individuals proposed as officers, directors and key employees of the reorganized Debtors have received all requisite governmental and regulatory approvals, and the satisfaction or waiver of the following conditions: (i) none of the Debtors and Lenders are in material breach of the Plan; and (ii) the Bankruptcy Court has authorized the assumption and rejection of certain contracts of the Debtors.  We currently expect that the Substantial Consummation Date will occur in the fourth quarter of 2010, although we cannot assure you that all conditions to the Substantial Consummation Date will be satisfied by that date, or at all, or that we will be successful in implementing the Restructuring in the form contemplated by the Plan or at all.  The Plan provides that the Substantial Consummation Date must occur no later than one year following the Effective Date, unless extended by mutual agreement of the Debtors and required Lenders.  In the event that the Substantial Consummation Date does not occur within that time, the confirmation of the Plan would be vacated and all claims (except for allowed priority claims, certain secured claims unrelated to the Lenders or the Subordinated Noteholders, and general unsecured claims) would be restored as though the Effective Date had never occurred.

The Debtors and Lenders holding, in the aggregate, approximately 61% of all of the outstanding claims under the amended Credit Agreement are parties to an amended and restated lockup agreement (the “Lockup Agreement”).  Pursuant to the Lockup Agreement, the parties thereto are contractually obligated to use commercially reasonable efforts to successfully consummate the Restructuring and achieve the expeditious consummation of the Plan.  The Lockup Agreement will automatically terminate, pursuant to its terms, if the Substantial Consummation Date does not occur within one year of the Effective Date, unless such termination event is waived by the required Lenders within five days.  In the event that the Substantial Consummation Date does not occur within that time, the Lenders would no longer be obligated to support the Restructuring.

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The Plan provides that, from the Effective Date through the Substantial Consummation Date, the Debtors will continue to be managed by the existing officers and directors and the Company’s COO/Gaming, who will work, subject to all applicable gaming laws and regulations and Bankruptcy Court supervision, in consultation with the Lenders regarding the management of operations, maintenance of working capital and utilization of cash flows of the Debtors.

The continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) obtain substantial consummation of the Plan or another plan of reorganization under the Bankruptcy Code; (ii) return to profitability; (iii) generate sufficient cash flow from operations; and (iv) obtain financing sources to meet our future obligations.  These matters create uncertainty relating to our ability to continue as a going concern.  The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of assets or liabilities that might result from the outcome of these uncertainties.  In addition, the Restructuring could materially change amounts reported in our consolidated financial statements, which do not give effect to any adjustments of the carrying value of assets and liabilities that may be necessary as a consequence of reorganization under Chapter 11 of the Bankruptcy Code.

2.             DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Principles of Consolidation—The accompanying condensed consolidated financial statements of the Company include the accounts 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 Paradise Gaming, LLC (“FPG”), HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HGI-SJ”), HGI-Mark Twain (“HGI-MT”), The Sands Regent and subsidiaries (“The Sands Regent”) and the Primadonna Company, LLC (“Primadonna”). The financial statements of ETT are consolidated and include the following wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc. and Corral Country Coin, Inc. The financial statements of The Sands Regent are consolidated and include the following direct and indirect wholly-owned subsidiaries: Zante, Inc., Last Chance, Inc., California Prospectors, Ltd. (which is a wholly owned subsidiary of Last Chance, Inc.), Plantation Investments, Inc. and Dayton Gaming, Inc.

All significant intercompany balances and transactions between and among Herbst, ETT, MGI, E-T-T Enterprises, FPG, HGI-L, HGI-SJ, HGI-MT, The Sands Regent and Primadonna have been eliminated in the condensed consolidated financial statements.

ETT and MGI conduct business in the gaming industry and generate revenue principally from gaming machine route operations and casino operations. Gaming machine route operations involve the installation, operation and service of gaming machines owned by the Company that are located in licensed, leased or subleased space in retail stores (supermarkets, convenience stores, etc.), bars and restaurants throughout the State of Nevada. The Company owns and operates Terrible’s Town Casino & Bowl in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada and Terrible’s Town Casino and Terrible’s Lakeside Casino & RV Park, both of which are located in Pahrump, Nevada. The operations of the subsidiaries of the Company are as follows:

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

·      FPG owns and operates Terrible’s Hotel & Casino (“Terrible’s Casino”) in Las Vegas, Nevada, which began operations in December 2000.

·      HGI-L owns and operates Terrible’s Lakeside Casino (“Lakeside Iowa”), as well as a hotel, gas station and convenience store, all located in Osceola, Iowa, which were acquired in February 2005.

·      HGI-SJ owns and operates Terrible’s St. Jo Frontier Casino (“St. Jo”) in St. Joseph, Missouri, which was acquired in February 2005.

·      HGI-MT owns and operates Terrible’s Mark Twain Casino in La Grange, Missouri (“Mark Twain”), which was acquired in February 2005.

·      The Sands Regent and its direct and indirect wholly-owned subsidiaries own and operate Terrible’s Rail City Casino in Sparks, Nevada (“Rail City”), the Sands Regency Casino Hotel in Reno, Nevada (the “Sands Regency”), the Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada (the “Gold Ranch”) and Terrible’s Dayton Casino, each of which is in Dayton, Nevada (collectively, the “Sands Casinos”).

·      Primadonna owns and operates Whiskey Pete’s Hotel and Casino (“Whiskey Pete’s”), Buffalo Bill’s Hotel and Casino (“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley,” and together with Whiskey Pete’s and Buffalo Bill’s, together the “Primm Casinos”), a California lottery station located on the Nevada/California border, three gasoline stations and the Primm Travel Center (such properties, together with the Primm Casinos, the “Primm Properties”), all of which are located in Primm, Nevada.

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

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The gaming industries in the States of Nevada, Iowa and Missouri are subject to extensive state and local government regulation. The Company’s gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada Gaming Control Board, the Iowa Racing and Gaming Commission and the Missouri Gaming Commission, as well as local jurisdictions.

Basis of Presentation—The condensed consolidated financial statements of Herbst Gaming, Inc. as of September 30, 2009, and for the nine months ended September 30, 2009 and 2008 are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of the financial results for the interim periods. Our results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2009. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”).

During the three months ended September 30, 2009, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162, (the “Codification”) (previously “SFAS 168”) became effective. Accordingly, the Financial Accounting Standards Board (the “FASB”) Accounting Standards CodificationTM became the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The implementation of the Codification did not have an impact on our consolidated financial statements, as it did not modify any existing authoritative GAAP.

In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), the Company has applied Accounting Standards Codification (“ASC”) Section 852, Reorganizations — Other Presentation Matters (“ASC 852”), in preparing the consolidated financial statements.  ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain expenses (including professional fees), are recorded in reorganization items in the accompanying consolidated statement of operations.  In addition, pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified in the consolidated balance sheet at September 30, 2009 as liabilities subject to compromise.  These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts (see Note 5).

Subsequent Events—The Company has evaluated subsequent events through November 16, 2009, the filing date of this Form 10-Q.

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

Accounts Receivable—Receivables consist primarily of amounts due from customers as a result of normal business operations. The Company periodically performs credit evaluations of its customers. The Company reviews accounts receivable balances in order to determine an allowance for potential credit losses based on our collections experience and the age of the receivables. At December 31, 2008 and September 30, 2009, the allowance for potential credit losses was $840,000 and $579,000, respectively.

Goodwill—The Company has approximately $3,255,000 in goodwill as of September 30, 2009.  We evaluate our goodwill and indefinite-lived intangible assets in accordance with the applications of ASC Topic 350, Intangibles - Goodwill and Other (“ASC-350”). Goodwill and indefinite-lived intangible assets are not subject to amortization, but they are subject to an annual impairment test in the fourth quarter of each year and between annual test dates in certain circumstances.

Fair Value of Financial Instruments

On January 1, 2008, we adopted ASC Topic 820 Fair Value Measurments and Disclosures based on Financial Accounting Standards (“FAS”) 157, Fair Value Measurements  (“ASC 820”).  ASC 820 does not determine or affect the circumstances under which fair value measurements are used, but defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These two types of inputs create the following fair value hierarchy:

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

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We adopted previously issued FASB Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which has been subsequently classified in Codification Topic 820, Section 65, Transition Related to FASB Staff Position No. 157-4, and provides additional guidance for estimating fair value in accordance with Codification Topic 820, when the volume and level of activity for the asset or liability have significantly decreased. This standard also includes guidance on how to identify circumstances that indicate that a transaction is not orderly and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. FSP FAS 157-4 was effective for the interim period ended September 30, 2009 and, as applied prospectively, did not have a material impact on our consolidated financial statements.

The fair values of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, and other current liabilities, approximate their recorded carrying amount because of their short term nature.  See Note 3, Long-Term Debt, for further discussions of the valuations of certain of our financial instruments.

Restructuring Costs—Restructuring costs are comprised of expenses related to the evaluation of financial and strategic alternatives and include special legal and other advisor fees associated with the Company’s  prepetition reorganization efforts, including preparation for the bankruptcy filing, as well as costs and expenses of legal and other advisors to be paid by the Company during the Chapter 11 Cases as authorized by the Bankruptcy Court.

Recently Issued Accounting Standards

Subsequent to the adoption of the Codification, any change to the source of authoritative GAAP will be communicated through an Accounting Standards Update (“ASU”). ASUs will be published by the FASB for all authoritative GAAP promulgated by the FASB, regardless of the form in which such guidance may have been issued prior to release of the Codification. Prior to inclusion in an ASU, the standard-setting organizations and regulatory agencies continue to issue proposed changes to the accounting standards in previous form (e.g., FASB Statements of Financial Accounting Standards, Emerging Issues Task Force (“EITF”) Abstracts, FASB Staff Positions, SEC Staff Accounting Bulletins, etc.).

In September 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – An Amendment to FASB Statement No. 140 (“SFAS 166”). SFAS 166 is a revision of SFAS No. 140, Accounting for Transfers and Servicing Financial Assets and Extinguishments of Liabilities, which is presently included in Codification Topic 860, Transfers and Servicing. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We do not believe that the adoption of SFAS 166 will have a material impact on our consolidated financial statements.

A variety of additional proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our consolidated financial statements.

3.             LONG-TERM DEBT

The Company is in default under the amended Credit Agreement and the indentures pursuant to which the Subordinated Notes were issued.  The Debtors have entered into the Lockup Agreement and have filed the Chapter 11 Cases and the Plan with the Bankruptcy Court.  On October 30, 2009, the Bankruptcy Court orally confirmed the Plan and is expected to enter written findings of fact and conclusions of law and a confirmation order in the ordinary course. The Restructuring will not be complete until the Substantial Consummation Date, which will not occur until certain conditions, including approval of gaming authorities in Nevada, Iowa and Missouri, have been satisfied.  See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements.  We cannot assure you that all conditions to the Substantial Consummation Date will be satisfied or that we will be successful in implementing the Restructuring in the form contemplated by the Plan or at all.

Due to the occurrence and continuation of events of default, the amounts outstanding under the amended Credit Agreement and the indentures pursuant to which the Subordinated Notes were issued are immediately due and payable, subject to an automatic stay of any action to collect, assert or recover a claim against the Company under applicable bankruptcy law.  Based on the filing of the Chapter 11 Cases, the entire balance outstanding under the amended Credit Agreement and all of the amounts outstanding under the indentures pursuant to which the Subordinated Notes were issued are included in liabilities subject to compromise at September 30, 2009.  The Company classifies liabilities subject to compromise as a long-term liability.  We cannot assure you that we will be successful in implementing the Restructuring in the form contemplated by the Plan or at all.

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The outstanding balance under the amended Credit Agreement was $857.9 million on September 30, 2009.  The amended Credit Agreement includes a revolving credit facility in the amount of $100.1 million and $757.8 million of term loans.  As described above, these amounts are immediately due and payable, subject to an automatic stay related to the Chapter 11 Cases.  Our revolving credit facility was fully drawn at September 30, 2009, and the commitments of the Lenders have been terminated.  The Plan provides, in part, that the Lenders will receive 100% of the equity of Reorganized Herbst Gaming in addition to a $350 million new senior secured bank loan issued by Reorganized Herbst Gaming.

Interest accrued on borrowings under the amended Credit Agreement based on a floating rate until the Petition Date.  This floating rate is based upon a variable interest rate (a base rate or LIBOR, at our option) plus a leverage grid-based spread.  Our average floating rate on debt incurred under the amended Credit Agreement was 12.5% at September 30, 2009.  However, based on the filing of the Chapter 11 Cases, the Company will not make payments under the amended Credit Agreement, other than certain adequate protection payments, as provided in (i) the Final Order Approving the Amended and Restated Stipulation Authorizing Use of Cash Collateral by Debtors and Granting Adequate Protection, which was entered by the Bankruptcy Court on May 21, 2009 and remains in effect until the Effective Date (the “Cash Collateral Order”), and (ii) the Plan, which provides for adequate protection payments for the period from the Effective Date through the Substantial Consummation Date.

The Cash Collateral Order provides for adequate protection payments to be made to the Lenders during the period commencing on the Petition Date and ending on the Effective Date in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured as of the last day of each fiscal quarter and to be paid on the 30th day thereafter) reduced by certain unpaid restructuring costs, as well as costs and expenses of the professionals retained by the administrative agent.  Based on the Company’s cash and cash equivalents as of September 30, 2009, taking into account the required Effective Date payments described above in Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, no adequate protection payment was made on October 30, 2009. The Plan provides for adequate protection payments to be made to the Lenders during the period commencing on the Effective Date and ending on the Substantial Consummation Date in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured as of the end of every third full calendar month following the Effective Date, and to be paid 30 days thereafter). For the nine months ended September 30, 2009, the Company made adequate protection payments of $18.0 million.

Pursuant to the Plan and the Lockup Agreement, all outstanding obligations under the Subordinated Notes will be terminated on the Substantial Consummation Date.

Subject to the automatic stay associated with the Chapter 11 Cases, “liabilities subject to compromise,” are expected to mature as follows (dollars in thousands):

The following table provides the fair value measurement information about our long-term debt at September 30, 2009.  For additional information regarding ASC 820 and the fair value hierarchy, see Note 2,  Summary of Significant Accounting Policies. The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities.  Based on the borrowing rates currently available to the Company for debt with similar terms and average maturities, the estimated fair value of current debt outstanding is approximately $471 million as of September 30, 2009.

The estimated fair value of our bank credit facility is based on bid prices on or about September 30, 2009.  The estimated fair values of our senior subordinated notes are based on quoted market prices as of September 30, 2009.

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4.             REORGANIZATION ITEMS

Reorganization items represent expenses incurred as a result of the Chapter 11 proceedings and are presented separately in the unaudited Condensed Consolidated Statements of Operations.

Professional fees include financial advisory, legal, real estate and valuation services directly attributed to the reorganization process and are subject to Bankruptcy Court approval.

5.             LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise refer to both secured and unsecured obligations that will be accounted for under a plan of reorganization.  Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 liabilities are stayed.  ASC 852-10-45  requires pre-petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  These liabilities represent the estimated amount expected to be allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, 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 be assumed under the plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  The Company has included the amounts due under the amended Credit Agreement and indentures pursuant to which the Subordinated Notes were issued as liabilities subject to compromise.  Although the Plan has been orally confirmed and we expect the Bankruptcy Court to enter a confirmation order in the ordinary course, completion of the Plan will not occur until the Substantial Consummation Date.  The Substantial Consummation Date will not occur until certain conditions, including approval of gaming authorities in Nevada, Iowa and Missouri, have been satisfied.  See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements.  We cannot assure you that all conditions to the Substantial Consummation Date will be satisfied or that we will be successful in implementing the Restructuring in the form contemplated by the Plan or at all.

6.             BUSINESS SEGMENTS

The Company operates through two business segments: slot route operations and casino operations.  The slot route operations involve the installation, operation and service of slot machines at strategic, high traffic non-casino locations such as grocery stores, drug stores, convenience stores, bars and restaurants.  Casino operations are broken into geographic segments: casinos located in Nevada and casinos located in other states.  The Nevada locations include: Terrible’s Town Casino in Henderson, Nevada, Terrible’s Casino Searchlight in Searchlight, Nevada, Terrible’s Town Casino and Terrible’s Lakeside Casino, both of which are located in Pahrump, Nevada, Terrible’s Casino, the Sands Casinos and the Primm Casinos.  Casinos located in other states are:  Lakeside Iowa, the Mark Twain and St. Jo.  These segment results are regularly provided to the Company’s Office of the Chief Executive Officer, the members of which are the chief operating decision-makers of the Company.

Net revenues, income from operations, depreciation and amortization and segment EBITDA (as defined in footnote 1 below) for these segments are as follows (dollars in thousands):

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(1)         Slot route and Casino segment EBITDA, a non-GAAP measure used by management to measure segment profits and losses, are disclosed as non-GAAP measures in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”  Segment EBITDA consists of income from segment operations plus depreciation and amortization and is calculated before allocation of overhead.  Slot route and Casino EBITDA have certain limitations in that they do not take into account the impact of certain expenses.  The above table reconciles Segment EBITDA to net income (loss), the comparable GAAP measure.

(2)         Represents non-gaming revenues, general and administrative expenses and interest income.

7.             COMMITMENTS AND CONTINGENCIES

On February 17, 2006, the Clark County Circuit Court entered judgment of a jury verdict delivered on January 14, 2006 against ETT for $4.1 million in compensatory damages and $10.1 million in punitive damages.  The jury verdict was delivered in connection with an action brought by the family of an individual that alleged that ETT had negligently retained and negligently supervised a temporary employee who in 2001 stole a truck from ETT and, while drunk, hit and killed the individual.  The punitive damage award was subsequently lowered to $4.1 million in a post-trial ruling.  The Company believes the award of compensatory and punitive damages against ETT, the liability of ETT, and the amount thereof, is not supportable in either law or in fact and plans to vigorously pursue all appropriate post-trial and other remedies, including exercising its right to appeal. Based on a review of the legal opinions and facts available to the Company at this time, the Company believes it is adequately reserved for any potential liability

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related to this incident which is included in Liabilities subject to compromise. The lawsuit is currently on appeal. The Supreme Court of the State of Nevada has set a hearing date of December 9, 2009.

The Company was party to an arbitration in 2008 in Las Vegas, Nevada involving the termination of an employee.  The former employee alleged he was terminated without cause and was therefore due amounts pursuant to his employment agreement.  On March 10, 2009, the arbitrator issued an interim award that awarded the former employee $1.3 million.  The award is currently under appeal; however, the Company fully recognized the award and approximately $0.2 million for attorneys fees in the 2008 fiscal year.

The Debtors are currently operating pursuant to Chapter 11 of the Bankruptcy Code and continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) obtain substantial consummation of the Plan or another plan of reorganization under the Bankruptcy Code; (ii) return to profitability; (iii) generate sufficient cash flow from operations; and (iv) obtain financing sources to meet our future obligations.  The Restructuring is subject to various regulatory, Bankruptcy Court and third party approvals.  We cannot assure you that we will be successful in implementing the Restructuring in the form contemplated by the Plan or at all.

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

Nevada Use Tax Refund Claims

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

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

OVERVIEW

We are a diversified gaming company that focuses on two business lines: slot route operations and casino operations.  Our route operations involve the exclusive installation and, as of September 30, 2009, operation of approximately 6,300 slot machines in strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants.  Our casino operations consist of sixteen casinos located in Nevada, Iowa and Missouri.  Other than the Sands located in Reno, Nevada our casinos are operated under the “Terrible’s” brand.

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

Our revenues are primarily derived from gaming revenues, which include revenues from slot machines and table games.  Gaming revenues are generally defined as gaming wins less gaming losses.  Our largest component of revenues is from our slot machines.  Promotional allowances consist primarily of food and beverages furnished gratuitously to customers.  The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances.  We calculate income from operations as net revenues less total operating costs and expenses.  Income from operations represents only those amounts that relate to our operations and excludes interest income, interest expense and other non-operating income and expenses. Segment EBITDA consists of income from segment operations plus depreciation and amortization, and is calculated before an allocation of overhead.

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

The Bankruptcy Court orally confirmed the Plan on October 30, 2009 and is expected to enter written findings of fact and conclusions of law and an order with respect to the confirmation of the Plan in the ordinary course.  The Restructuring will not be complete until the Substantial Consummation Date, which will not occur until certain conditions, including approval of gaming authorities in Nevada, Iowa and Missouri, have been satisfied.  We cannot assure you that all conditions to the Substantial Consummation Date will be satisfied or that we will be successful in implementing the Restructuring in the form contemplated by the

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Plan or at all.  Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a more detailed discussion of the Chapter 11 Cases and the Restructuring.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2009

Route Operations

Route operations accounted for 25% of total revenues during the three months ended September 30, 2009, compared to 27% of total revenues during the three months ended September 30, 2008.  Total revenues from route operations were $47.5 million for the three months ended September 30, 2009, a decrease of $10.8 million, or 19%, from $58.3 million for the three months ended September 30, 2008.  At September 30, 2009, we were operating approximately 6,300 slot machines, which is 500 less than the approximately 6,800 we operated at September 30, 2008.  The decrease in machines reflects the closures of some taverns, grocery and drug store chain clients and the elimination of certain underperforming route locations.  These factors, coupled with general economic weakness in Nevada, contributed to the decline in route revenue in the third quarter of 2009.

Route operating costs were $43.9 million, or 93% of route revenues, for the three months ended September 30, 2009.  This compares to $51.8 million, or 89% of route revenues, for the same period in 2008.  The increase in the expenses as a percentage of route revenues is due to the fixed nature of many of the route costs.  The decrease in the absolute amount of route operating expenses was primarily associated with the store closures discussed above and their respective space lease payments, as well as lower revenues at our participation locations, which are based on operating contracts that provide for a decrease in revenue share costs in proportion to revenue decline.

As a result of the above factors, route EBITDA for the three months ended September 30, 2009 was $3.5 million, a decrease of $3.0 million, or 46%, from $6.5 million for the three months ended September 30, 2008.

Casino Operations

Casino operations accounted for 62% of total revenues for the three-month period ended September 30, 2009 and 58% of total revenues for the three months ended September 30, 2008.  Total revenues derived from casino operations were $114.6 million for the three months ended September 30, 2009, a decrease of $8.2 million, or 7%, from $122.8 million for the three months ended September 30, 2008.  The decrease is primarily attributable to the continuing impact on the Nevada casino properties of the general economic downturn.

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Casino Operations — Nevada

Nevada casino operations accounted for 43% of total revenues for the three months ended September 30, 2009 and 41% of total revenues for the three months ended September 30, 2008.  Revenues derived from Nevada casino operations were $79.3 million for the three months ended September 30, 2009, a decrease of $8.2 million, or 9%, from $87.5 million for the three months ended September 30, 2008.  The decrease is attributable primarily to reduced customer volume and spending associated with the general economic downturn.

Nevada casino operating costs were $61.8 million, or 78% of revenues, for the three months ended September 30, 2009, compared to $68.4 million, or 78% of revenues, for the three months ended September 30, 2008.  The decrease was due to reductions to variable costs of sales related to revenue decreases and lower staffing levels.

Nevada casino promotional spending was up $1.0 million, or 8%, due to increased competition in the challenging economic environment, requiring more aggressive promotional campaigns to attract and maintain the revenue.  Promotional allowances increased from 14% of revenues for the three months ended September 30, 2008 to 17% of revenues for the three months ended September 30, 2009 as revenue declined despite increased promotional spending.

Depreciation and amortization expense was $7.4 million for the three months ended September 30, 2009, an increase of $0.1 million from $7.3 million for the three months ended September 30, 2008. 

Nevada casino EBITDA was $4.3  million for the three months ended September 30, 2009, a decrease of $2.6 million, or 38%, from $6.9 million for the three months ended September 30, 2008.  The Northern Nevada properties had EBITDA of $2.2 million for the three months ended September 30, 2009, down $1.0 million from the three months ended September 30, 2008.  The Southern Nevada casinos had EBITDA of $1.7 million for the three months ended September 30, 2009, down $1.7 million from the same period in 2008.

Casino Operations — Other States

Casino operations in other states accounted for 19% of total revenues for the three months ended September 30, 2009 and 16.5% of total revenues for the three months ended September 30, 2008.  Total revenues derived from casino operations located in states other than Nevada were $35.3 million for the three months ended September 30, 2009 and for the three months ended September 30, 2008.

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Promotional allowances for the three months ended September 30, 2009 were $4.4 million compared to $4.7 million for the three months ended September 30, 2008, a decrease of $0.3 million, or 6%, which was due primarily to the decrease in slot club expenses at the Mark Twain and St Joseph Missouri casinos as a result of lower player participation in the slot club at those casinos.

Other state casino operating costs were $21.5 million, or 61% of revenues, for the three months ended September 30, 2009, a decrease of $0.2 million, compared to $21.7 million, or 62% of revenues, for the three months ended September 30, 2008.  Expenses as a percentage of revenue were slightly lower as a result of reduced volume-related expenses such as cost of sales, as well as with a decrease in payroll and related expenses that resulted from lower staffing levels implemented in response to reduced business volume at the Lakeside Iowa casino.

Due to the lower promotional expenses and reduced payroll and related expenses, other state casino EBITDA was $9.3 million for the three months ended September 30, 2009, an increase of $0.4 million, or 4.5%, from $8.9 million for the three months ended September 30, 2008.

Promotional Allowances

Promotional allowances were $17.7 million, or 9.5% of total revenues, for the three months ended September 30, 2009, an increase of $0.8 million, or 5%, from $16.9 million, or 7.9% of total revenues, for the three months ended September 30, 2008.  The increase in promotional allowances was primarily due to increased competition in the Nevada market and the weak economic environment, requiring more aggressive promotional campaigns to attract and maintain the revenue.

Other Operations

Revenue from other operations consists of revenue from sources such as gasoline and convenience store sales, ATM fees, pay phone charges, rental income and other miscellaneous items unrelated to route and casino operations.  Our gas station operations include our 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 $24.3 million for the three months ended September 30, 2009 compared to $32.3 million for the three months ended September 30, 2008, a decrease of $8.0 million, primarily as a result of the significant decrease in gasoline prices.

Costs of Revenues

Costs associated with these revenues were $19.3 million for the three months ended September 30, 2009 and $26.2 million for the three months ended September 30, 2008, a decrease of $6.9 million primarily associated with decreased gasoline prices.

General and administrative (“G&A”) expenses were $5.0 million for the three months ended September 30, 2009, compared to $4.9 million for the three months ended September 30, 2008.   G&A expenses as a percentage of revenue were 2.7% for the third quarter of 2009, as compared to 2.3% for the third quarter of 2008.

Depreciation and amortization expense was $13.7 million, or $0.8 million lower, for the three months ended September 30, 2009, as compared to $14.5 million for the three months ended September 30, 2008.

The Company incurred restructuring costs, primarily advisory and legal fees, associated with the Restructuring and the Chapter 11 Cases.  These costs were incurred in prior periods associated with the negotiation of amendments to the Lockup Agreement and the Chapter 11 Cases.

Income from Operations

As a result of the factors discussed above, income from operations was $3.3 million for the three months ended September 30, 2009, a decrease of $2.6 million from $5.9 million for the three months ended September 30, 2008.

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Other Expenses

Other expense was $2.9 million for the three months ended September 30, 2009, a decrease of $25.4 million from $28.3 million for the three months ended September 30, 2008.  This was primarily associated with adequate protection payments made in the Chapter 11 Cases and the reorganization items incurred in connection with the Chapter 11 Cases.

Our interest costs decreased from $28.5 million during the three months ended September 30, 2008 to zero during the three months ended September 30, 2009.  As a result of the Chapter 11 Cases, the Company no longer incurs contractual interest costs and instead makes certain adequate protection payments.

Net Income (Loss)

Net income for the three months ended September 30, 2009 was $0.4 million compared to net loss of $22.4 million for the three months ended September 30, 2008.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2009

Route Operations

Route operations accounted for 27% of total revenues during the nine months ended September 30, 2009 compared with 29% of total revenues for the nine months ended September 30, 2008.  Total revenues from route operations were $153.5 million for the nine months ended September 30, 2009, a decrease of $33.4 million, or 18%, from $186.9 million for the nine months ended September 30, 2008.  At September 30, 2009, we were operating approximately 6,300 slot machines, which is 500 less than the approximately 6,800 we were operating as of September 30, 2008.  The decrease in machines reflects the closures of some taverns, grocery and drug store chain clients and the elimination of certain underperforming route locations.  These factors, coupled with general economic weakness in Nevada, contributed to the decline in route revenue in 2009.

Route operating costs were $137.9 million, or 90% of route revenues, for the nine months ended September 30, 2009.  This compares to $161.7 million, or 87% of route revenues, for the same period in 2008.  The increase in expenses as a percentage of route revenues is due to the fixed nature of many of the route costs.  The decrease in absolute amount of route operating expenses was primarily associated with lower revenues at our participation locations, which are based on operating contracts that provide for a decrease in revenue share costs in proportion to revenue decline.  Additional expense reductions resulted from the elimination of certain underperforming locations referenced above.

Primarily as a result of the issues discussed above, route EBITDA for the nine months ended September 30, 2009 was $15.6 million, a decrease of $9.6 million, or 38%, from $25.2 million for the nine months ended September 30, 2008.

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Casino Operations