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LAS VEGAS, Nevada -- The acquisition last spring of three casinos in Primm helped Herbst Gaming significantly grow its overall net revenues. Nevada's 10-month-old ban on smoking in bars, restaurants and taverns, however, continued to eat away at the company's profits.
Herbst Gaming reported a net loss of $28.9 million for the quarter ended Sept. 30, reversing net income of $8.2 million a year ago. Revenues in the period, however, were $219 million, a 58.6 percent increase compared with $138.1 million in the third quarter last year.
Over the first nine months of 2007, Herbst had net revenues of $583.6 million, an increase of 38.4 percent from 2006. However, the company has recorded a net loss of $34.1 million, reversing net income of $36.7 million for the first nine months of 2006.
Costs associated with the company's April acquisition of the three Primm casinos on the Nevada-California border from MGM Mirage offset earnings. The smoking ban, which sent tavern customers who like to smoke while they gamble to casinos and locations unaffected by the ban, had a larger impact on Herbst's financial results.
The company operates more than 7,000 slot machines in some 700 locations around Nevada, mostly inside restaurants, taverns, convenience stores and bars that can have up to 15 slot machines. Revenues from the route operations fell roughly 20 percent in the quarter.
"There is no question the smoking ban had a dramatic impact on our route operations and has fundamentally changed the slot route industry," Herbst Gaming President Ed Herbst said in a conference call with analysts. Herbst is privately owned, but the company has publicly held debt.
Herbst spent the better part of the year renegotiating contracts with the some of the company's largest slot machine route customers, such as supermarkets, to reduce the rate Herbst pays for leasing space. The savings is expected to be $20 million annually and the company is continuing to negotiate contract changes with its smaller customers, but the savings is expected to be another $1 million or $2 million annually.
Herbst Chief Financial Officer Mary Beth Higgins said the smoking ban affected all slot-route operators, but the steps taken in the past year has set the company up to compete in the changing market. She said the company continues to seek potential locations for expanding the route operations.
"We're the best prepared company to benefit in the changing market," Higgins said.
The company paid MGM Mirage $400 million for the Primm casinos, but revenues from the properties were lower than anticipated. Nevertheless, Herbst saw revenues from its Nevada casinos jump nearly five times over the same period in 2006, also due to the Sands Regent in Reno, which was acquired in January, and the recently remodeled Terrible's, an off-Strip casino on East Flamingo Road.
Herbst executives said economic concerns in Southern California, particularly the Inland Empire where the bulk of Primm's customer base resides, have affected spending habits. Visitation to the Primm properties is still strong, but the average amount being wagered is down slightly.
The company is changing out slot machines and refurbishing the public areas at the Primm resorts.
"Primm had a large and complicated integration," Herbst said. "But there is a lot of upside and potential out there."
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