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Arnold M. Knightly

Slot-route operations down

11 March 2007

LAS VEGAS, Nevada -- While many business and slot operators have cried foul over the new smoking ban, many have been reluctant to reveal how the new law is affecting their bottom line.

Comments made Thursday, however, during one of the state's largest slot route operator's year-end earnings conference call could be an ominous indicator of what kind of downturn in revenue small gaming operations are experiencing.

Herbst Gaming officials Thursday said that while the Clean Indoor Act "slightly impacted" its slot route operations in December, early numbers for the new year are dramatically lower.

"The impact has become more significant in 2007," said Chief Financial Officer Mary Beth Higgins during the conference call. "Although we only have a few weeks' results for 2007, the revenues appear to be declining in a range of 15 to 20 percent."

The new law, approved as Question 5 on the Nov. 7 ballot by a vote of 54 percent to 46 percent, banned smoking in most public areas, including bars that serve meals and slot machine sections of convenience stores and groceries.

Herbst Gaming operates approximately 8,400 machines in noncasino locations in Nevada affected by the ordinance.

The company also operated five casinos in Nevada with two more in Missouri and one in Iowa during the reporting period ending Dec. 31. The company could own as many as 15 by the end of 2007 through acquisitions that are awaiting approval by gaming regulators.

Ferenc Szony, president of the newly acquired Reno-based Sands Regent company, warned analysts against "trying to nail down the impact" of the new smoking ordinance too soon.

"There is going to be kind of a (shake-out) of how this is going to come out," said Szony, encouraging analysts to wait a couple of months before gauging the impact.

Revenue from slot route operations accounted for 58 percent of the company's total revenues in 2006, down from 61 percent in 2005.

The new smoking rules were originally scheduled to take effect on Dec. 8, but court battles delayed implementation in Clark County until later in December.

"The year will present some challenges to the company as we absorb the impact on our slot operation due to the smoking-ban initiative," said Herbst Gaming President and Chief Executive Officer Ed Herbst.

Herbst Gaming posted total net revenues of $562 million, a 5 percent increase, in 2006 from combined operations.

Slot route revenues rose 2.5 percent to $347 million for the year.

Company cash flow, defined as earnings before interest, taxes, depreciation and amortization, declined 4.5 percent to $119.3 million in 2006 from $124.9 million a year earlier.

Costs and expenses outpaced revenue growth, increasing 7 percent, which led to a net income decline 17.1 percent to $42.1 million from $50.8 million