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EX-31.2 - CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Affinity Gamingex31230jun14.htm
EX-32 - CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Affinity Gamingex3230jun14.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
 
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
Commission File Number 000-54085  
 
Affinity Gaming
 
 
Nevada
 
02-0815199
 
 
State of Incorporation
 
IRS Employer Identification Number
 
3755 Breakthrough Way, Suite 300
Las Vegas, Nevada 89135
(Address, including zip code, of principal executive offices)
702-341-2400
(Registrant's telephone number, including area code)
 

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  R    No  £

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  R    No  £

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.
Large accelerated filer
£
 
Accelerated filer
£
Non-accelerated filer
þ
 
Smaller reporting company
£


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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  R    No  £

No established public trading market for our common stock currently exists. As of August 14, 2014, 20,243,262 of the registrant's shares of common stock were outstanding.




 



TABLE OF CONTENTS






CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  You can identify forward-looking statements by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” “may,” “will” or “should,” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties, and similar references to future periods.
 
We base forward-looking statements on our current expectations and assumptions regarding our business, the economy and other future conditions; however, our actual results may differ materially from those contemplated by the forward-looking statements.  We caution you, therefore, that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance.  Forward-looking statements, which by their nature relate to the future, are subject to inherent uncertainties, risks and changes in circumstances which we cannot easily predict. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) the adequacy of cash flows from operations, available cash and available amounts under our credit facility to meet future liquidity needs; (ii) expectations regarding the operation of slot machines at our casino properties; or (iii) our continued viability, our operations and results of operations.  Additional important factors that could cause actual results to differ materially and adversely from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, as well as the following:

our debt service requirements may adversely affect our operations and ability to complete,

our ability to generate cash to service our substantial indebtedness depends on many factors that we cannot control,

rising gasoline prices,

intense competition,

extensive regulation from gaming and other government authorities,

changes to applicable gaming and tax laws,

severe weather conditions and other natural disasters that affect visitation to our casinos,

environmental contamination and remediation costs,

pending and potential litigation,

the global financial crisis and, in particular, the economic downturn in Nevada and California,

changes in income and payroll tax laws,

changes in health care benefits laws,

additional gaming licenses being granted in or adjacent to jurisdictions where we operate,

breaches of our information systems resulting in loss or compromise of customer data,

results of noncompliance with, and subsequent curative amendment to, the terms of our existing credit agreement,

changes in the smoking laws, and

other factors as described in “Part I. Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”).

Any forward-looking statement made by us in this report speaks only as of the date of this report.  Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.  We



undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.




PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS





AFFINITY GAMING
Condensed Consolidated Balance Sheets
(in thousands)


 
June 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
138,347

 
$
140,857

Restricted cash
939

 
608

Accounts receivable, net of reserve of $605 and $537, respectively
3,637

 
3,371

Income tax receivable
361

 
420

Prepaid expense
9,150

 
9,858

Inventory
2,765

 
2,977

Deferred income taxes

 
3,640

Total current assets
155,199

 
161,731

Property and equipment, net
262,128

 
271,729

Other assets, net
11,589

 
12,719

Intangibles, net
127,793

 
129,044

Goodwill
68,516

 
68,516

Total assets
$
625,225

 
$
643,739

LIABILITIES AND OWNERS’ EQUITY
 
 
 
Accounts payable
$
12,279

 
$
15,825

Accrued interest
2,322

 
2,468

Accrued expense
20,342

 
22,141

Deferred income taxes
861

 

Current maturities of long-term debt

 
9,961

Other current liabilities
30

 
187

Total current liabilities
35,834

 
50,582

Long-term debt
381,495

 
379,833

Other liabilities
3,232

 
3,232

Deferred income taxes
14,397

 
5,573

Total liabilities
434,958

 
439,220

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued or outstanding

 

Common stock, $0.001 par value; 200,000,000 shares authorized; 20,243,262 shares issued and outstanding
20

 
20

Additional paid-in-capital
205,794

 
205,726

Retained earnings
(15,547
)
 
(1,227
)
Total owners’ equity
190,267

 
204,519

Total liabilities and owners’ equity
$
625,225

 
$
643,739

See notes to consolidated financial statements


AFFINITY GAMING
Unaudited Condensed Consolidated Statements of Operations
(in thousands)

 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
REVENUE
 
 
 
 
 
 
 
Casino
$
76,415

 
$
77,634

 
$
152,369

 
$
155,722

Food and beverage
12,777

 
11,487

 
25,295

 
22,888

Lodging
6,756

 
7,038

 
13,663

 
13,647

Fuel and retail
15,786

 
14,393

 
29,305

 
29,472

Other
3,780

 
3,917

 
7,469

 
7,166

Total revenue
115,514

 
114,469

 
228,101

 
228,895

Promotional allowances
(15,893
)
 
(14,157
)
 
(31,910
)
 
(27,537
)
Net revenue
99,621

 
100,312

 
196,191

 
201,358

EXPENSE
 
 
 
 
 
 
 
Casino
31,864

 
29,877

 
63,137

 
60,280

Food and beverage
12,305

 
11,269

 
24,166

 
22,891

Lodging
3,989

 
4,699

 
8,381

 
9,121

Fuel and retail
12,591

 
12,021

 
23,479

 
25,113

Other
1,981

 
2,028

 
4,136

 
3,961

General and administrative
20,254

 
18,656

 
39,383

 
36,828

Depreciation and amortization
7,109

 
6,647

 
14,175

 
13,518

Corporate
4,057

 
4,400

 
6,994

 
7,990

Write downs, reserves and recoveries
(472
)
 
1,641

 
(449
)
 
1,641

Total expense
93,678

 
91,238

 
183,402

 
181,343

Operating income from continuing operations
5,943

 
9,074

 
12,789

 
20,015

Other expense
 
 
 
 
 
 
 
Interest expense, net
(7,007
)
 
(7,374
)
 
(13,784
)
 
(14,903
)
Total other expense, net
(7,007
)
 
(7,374
)
 
(13,784
)
 
(14,903
)
Income (loss) from continuing operations before income tax
(1,064
)
 
1,700

 
(995
)
 
5,112

Provision for income taxes
(13,303
)
 
(576
)
 
(13,325
)
 
(1,772
)
Income (loss) from continuing operations
$
(14,367
)
 
$
1,124

 
$
(14,320
)
 
$
3,340

 
 
 
 
 
 
 
 
Discontinued operations (Note 13):
 
 
 
 
 
 
 
Loss from discontinued operations before income tax

 

 

 
(369
)
Benefit from income taxes

 

 

 
133

Loss from discontinued operations
$

 
$

 
$

 
$
(236
)
Net income (loss)
$
(14,367
)
 
$
1,124

 
$
(14,320
)
 
$
3,104

See notes to consolidated financial statements


AFFINITY GAMING
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(14,320
)
 
$
3,104

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations, before income taxes

 
369

Depreciation and amortization
14,175

 
13,518

Amortization of debt costs and discounts
790

 
1,084

Gain on sale of property and equipment
(2
)
 
(46
)
Share-based compensation
119

 
744

Deferred income taxes
13,325

 
1,775

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(266
)
 
872

Prepaid expense
708

 
(820
)
Inventory
212

 
125

Other assets
505

 
689

Accounts payable
(404
)
 
2,485

Accrued interest
(146
)
 
(192
)
Accrued expense
(1,799
)
 
659

Income tax payable/receivable
59

 
(980
)
Other liabilities
(78
)
 
(49
)
Net cash provided by operating activities
12,878

 
23,337

Cash flows from investing activities:
 
 
 
Restricted cash
(331
)
 
(10,761
)
Proceeds from sale to Truckee Gaming, LLC

 
17,447

Proceeds from sale of property and equipment
360

 
70

Purchases of property and equipment
(6,714
)
 
(16,685
)
Net cash used in investing activities
(6,685
)
 
(9,929
)
Cash flows from financing activities:
 
 
 
Payment on long-term debt
(8,703
)
 
(6,339
)
Loan origination fees

 
(253
)
Net cash used in financing activities
(8,703
)
 
(6,592
)
Net increase (decrease) in cash and cash equivalents
(2,510
)
 
6,816

Cash and cash equivalents:
 
 
 
Beginning of period
140,857

 
126,873

End of period
$
138,347

 
$
133,689

 
 
 
 
Cash flows from discontinued operations:
 
 
 
Cash flows from operating activities
$

 
$
36

Cash flows from investing activities

 
(4,695
)
Cash flows from discontinued operations
$

 
$
(4,659
)
Supplemental cash flow information:
 
 
 
Cash paid during the period for interest
$
13,230

 
$
14,441

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment financed through accounts payable
$
270

 
$
1,669

Acquisition of property and equipment under capital lease
82

 

Non-cash loan origination fees

 
17

See notes to consolidated financial statements.


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements




NOTE 1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

Organization and Business

Affinity Gaming (together with its subsidiaries, “Affinity” or “we”) is a Nevada corporation, headquartered in Las Vegas, which owns and operates 11 casinos, five of which are located in Nevada, three in Colorado, two in Missouri and one in Iowa. We also provide consulting services to Hotspur Casinos Nevada, Inc. (“Hotspur”), the operator of the Rampart Casino at the JW Marriott Resort in Las Vegas.  Under the terms of the consulting agreement, Hotspur pays us a fixed annual fee in monthly installments. In addition to the monthly installments, we are entitled to an incentive fee in any year in which EBITDA (as defined in the consulting agreement) equals or exceed the threshold EBITDA for that year.

On February 1, 2013, we completed the sale to Truckee Gaming, LLC (“Truckee Gaming”) of the Sands Regency Casino Hotel in Reno, Nevada, the Gold Ranch Casino & RV Resort in Verdi, Nevada, and the Dayton Depot Casino in Dayton, Nevada (“Truckee Disposition”). In December 2013, we closed the Henderson Casino.


Consolidation

We include all of our subsidiaries in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.


Basis of Presentation

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"). While preparing our financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenue and expense during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include the fair values of assets and liabilities related to depreciation and amortization, the estimated allowance for doubtful accounts receivable and the estimated cash flows we use in assessing the recoverability of long-lived assets, as well as the estimated fair values of certain assets related to write downs and impairments, contingencies and litigation, and claims and assessments.

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2014, with the audited Consolidated Balance Sheet amounts as of December 31, 2013 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.

Management believes our unaudited condensed consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our unaudited Condensed Consolidated Balance Sheet as of June 30, 2014, our unaudited Condensed Consolidated Statements of Operations and our unaudited Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within our 2013 Form 10-K.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Changes to Significant Accounting Policies

We recognize deferred tax assets and liabilities, which result from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using enacted tax rates expected to apply to



taxable income in the years in which we expect those temporary differences to be recovered or settled. Any effect on deferred tax assets or liabilities resulting from a change in enacted tax rates is included in income during the period that includes the enactment date.

We reduce the carrying amounts of deferred tax assets by a valuation allowance if we determine that, more likely than not, we will be unable to realize such assets. Such assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, our forecasts of future profitability, the duration of statutory carryforward periods, and our experience with the utilization of operating loss and tax credit carryforwards before expiration.

Excluding the above clarification regarding our income tax accounting policy, we have made no material changes to our significant accounting policies as reported in our 2013 Form 10-K.

 
Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board modified the Accounting Standards Codification by issuing Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 stipulate that an entity should recognize revenue in an amount which reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers, and they provide a five-step process to assist entities with achieving that core principle. The ASU also specifies the accounting for some costs to obtain or fulfill a contract with a customer. With regard to disclosures, ASU 2014-09 states that entities should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, and it requires qualitative and quantitative disclosures concerning contracts with customers, significant judgments and changes therein, and assets recognized from the costs incurred to obtain or fulfill a contract. For us, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods therein, and they permit either retrospective application to all prior periods or retrospective application with the cumulative effect of application recognized on the initial application date. We are currently evaluating what effect(s), if any, the ASU will have.

We have reviewed all other recently issued accounting pronouncements and, other than those we have disclosed above or in previous filings with the Securities and Exchange Commission, we do not believe any of such pronouncements will have a material effect on our operations.


NOTE 3. RESTRICTED CASH

Restricted cash balances at June 30, 2014 and at December 31, 2013 include cash or certificates of deposit required for gaming activity in certain jurisdictions in which we operate, and for self-insured retention obligations under some of our workers compensation policies. The balance at June 30, 2014 also includes $0.3 million that represents the net proceeds from the sale of our land in Henderson, Nevada.





NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
 
Estimated Life
(Years)
 
June 30,
2014
 
December 31, 2013
Building and improvements
7 - 40
 
$
182,964

 
$
180,333

Gaming equipment
3 - 10
 
57,600

 
55,277

Furniture, fixtures, and equipment
3 - 10
 
42,399

 
40,183

Leasehold improvements
7
 
196

 
196

Land
 
39,493

 
39,848

Barge
30
 
15,019

 
15,019

Construction-in-progress
 
 
2,370

 
5,964

Total property and equipment
 
 
340,041

 
336,820

Less accumulated depreciation
 
 
(77,913
)
 
(65,091
)
Total property and equipment, net
 
 
$
262,128

 
$
271,729



NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

We determine the fair value of the indefinite-lived intangible assets other than goodwill using the discounted cash flow method, a form of the income approach.  In determining the fair values, we make significant assumptions relating to variables based on past experiences and judgments about future performance.  These variables include, but are not limited to: (1) the forecast earnings growth rate of each market, (2) risk-adjusted discount rate and (3) expected growth rates in perpetuity to estimated terminal values.
 
The following table summarizes intangible assets by category (dollars in thousands):
 
June 30, 2014
 
December 31, 2013
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Customer loyalty programs
$
12,164

 
$
(5,581
)
 
$
6,583

 
$
12,164

 
$
(4,580
)
 
$
7,584

Trademarks
2,982

 
(1,649
)
 
1,333

 
2,982

 
(1,399
)
 
1,583

 
$
15,146

 
$
(7,230
)
 
$
7,916

 
$
15,146

 
$
(5,979
)
 
$
9,167

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Gaming license rights
$
110,646

 
 
 
$
110,646

 
$
110,646

 

 
$
110,646

Local tradenames
9,231

 
 
 
9,231

 
9,231

 

 
9,231

 
$
119,877

 

 
$
119,877

 
$
119,877

 

 
$
119,877

Total intangible assets
$
135,023

 

 
$
127,793

 
$
135,023

 

 
$
129,044




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements




The following table summarizes the changes in goodwill by reportable segment during the quarter ended June 30, 2014:
 
Nevada
 
Midwest
 
Colorado
 
Total
Balance at December 31, 2013
$
33,665

 
$
14,622

 
$
20,229

 
$
68,516

Impairment of goodwill

 

 

 

Balance at June 30, 2014
$
33,665

 
$
14,622

 
$
20,229

 
$
68,516



We amortize definite-lived intangible assets ratably over their expected lives which, for customer loyalty programs, approximate seven years and, for trademarks, approximate 3.75 years. Overall, we are amortizing definite-lived intangible assets over a weighted-average expected life of approximately 6.5 years.

We obtain gaming license rights when we acquire gaming entities that operate in gaming jurisdictions where competition is limited, such as states where the law only allows a certain number of operators.  We do not currently amortize gaming license rights and local tradenames because we have determined they have an indefinite useful life.


NOTE 6. OTHER ASSETS

Other assets consist of the following (in thousands):
 
June 30, 2014
 
December 31, 2013
Capitalized loan fees, net
$
7,654

 
$
8,279

Long-term deposits
3,400

 
3,855

Other assets
535

 
585

Total
$
11,589

 
$
12,719

 
 
 
 


NOTE 7. ACCRUED EXPENSE

Accrued expense consists of the following (in thousands):
 
June 30, 2014
 
December 31, 2013
Progressive jackpot liabilities
$
3,106

 
$
3,294

Accrued payroll and related
7,061

 
7,353

Slot club point liability
3,798

 
3,574

Litigation reserves
3,100

 
3,100

Other accrued expense
3,277

 
4,820

Total
$
20,342

 
$
22,141





AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



NOTE 8. LONG-TERM DEBT

The following table presents long-term debt balances (in thousands):
 
June 30, 2014
 
December 31, 2013
9% Senior Unsecured Notes due 2018
$
200,000

 
$
200,000

Unamortized discount
(1,287
)
 
(1,452
)
9% Senior Unsecured Notes due 2018, net
198,713

 
198,548

Term loan due 2017
182,745

 
191,246

Total debt, including current portion
381,458

 
389,794

Less: current maturities

 
(9,961
)
Plus: long-term portion of capital leases
37

 

Total long-term debt
$
381,495

 
$
379,833

 
 
 
 


On May 9, 2012, we repaid all of the $342.1 million debt then outstanding under the senior secured loans under our credit agreement dated December 31, 2010 (the “Old Credit Facility”).  We obtained the funds used to repay the Old Credit Facility by (i) issuing $200 million of 9.00% senior unsecured notes due 2018 (the “2018 Notes”), and (ii) borrowing under our new Credit Agreement, dated May 9, 2012, which provides for a $200 million term loan (the “Initial Term Loan”) due in 2017, the entirety of which the lenders disbursed to us on the closing date of the Credit Agreement, and a $35 million revolving credit facility (the “Revolving Credit Facility” and, together with the Initial Term Loan, the “New Credit Facility”) which remained undrawn on the closing date of the Credit Agreement. Approximately $38.6 million of cash from the issuance of the 2018 Notes and our borrowings under the New Credit Facility remained after we paid related transaction expense and repaid our Old Credit Facility.

We incur and pay interest on the Initial Term Loan under the Amended Credit Agreement at an uncommitted floating rate of LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%.  The Amended Credit Agreement also requires us to pay commitment fees related to the Revolving Credit Facility equal to an annualized rate of 0.50% on undrawn amounts when the Total Net Leverage Ratio is greater than 3.50 to 1.00, or equal to an annualized rate of 0.375% on undrawn amounts when the Total Net Leverage Ratio is less than or equal to 3.50 to 1.00.  The New Credit Facility provides an accordion feature which allows us to seek additional borrowings of up to $80 million subject to certain customary terms and conditions, including pro forma compliance with a maximum leverage ratio, as defined in the Amended Credit Agreement. Total unamortized loan fees as of June 30, 2014 totaled $7.7 million, inclusive of $1.8 million in fees and pre-payment penalties attributable to lenders that participated in both the original and refinanced debt.  We are amortizing capitalized loan fees over the life of the 2018 Notes and the Initial Term Loan.

Under the Amended Credit Agreement, we must make a mandatory repayment of amounts outstanding under the Initial Term Loan in an amount equal to the net cash proceeds from any asset sale within five business days after receipt of such proceeds.  However, we do not have to make such mandatory prepayment if (i) no event of default or specified default (each as defined in the Amended Credit Agreement) then exists and (ii) such net cash proceeds are used to purchase assets (other than working capital) used or useful in the business (x) within 548 days following receipt of the net cash proceeds or (y) if a legally binding commitment to purchase assets is entered into within such 548 day period, within 180 days after the end of such 548 day period.  In the case of non-core asset sales (as defined in the Amended Credit Agreement), any resulting net cash proceeds must be deposited into an account subject to an account control agreement.

Under the Amended Credit Agreement, a change of control would occur in certain circumstances, including (i) when any person or group acquires 50% or more on a fully diluted basis of our voting equity interests, or (ii) when there is a change in the majority of continuing directors. A continuing director, as defined in the Amended Credit Agreement, is a director on the date of borrowing or a director nominated by a majority of directors which existed on the date of borrowing.  A change of control would constitute an event of default under the Amended Credit Agreement and permit the acceleration by the lenders of all outstanding borrowings thereunder.



AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



The Amended Credit Agreement contains customary covenants including a maximum total net leverage ratio, a maximum secured leverage ratio, a minimum interest coverage ratio and maximum total annual capital expenditures.  Additionally, the Initial Term Loan is subject to mandatory annual prepayments based on generation of excess cash flow (as defined), equal to 50% of excess cash flow when the Total Net Leverage Ratio is greater than 4.00 to 1.00, equal to 25% of excess cash flow when the Total Net Leverage Ratio is greater than 3.00 to 1.00, but less than or equal to 4.00 to 1.00, and equal to zero when the Total Net Leverage Ratio is less than or equal to 3.00 to 1.00.  The excess cash flow payment for the year ended December 31, 2013 was $8.0 million, which we paid on April 3, 2014. As discussed in Note 15, we completed an amendment (the “Second Amendment”) of the Amended Credit Agreement in July 2014. Retroactively to June 30, 2014, the Second Amendment changed the leverage ratio requirement from a calculation based on total net leverage to a calculation based on only outstanding first lien senior secured debt (with an increase in the amount of cash we can use to calculate the leverage ratio), as well as reducing the minimum interest expense coverage ratio threshold. At June 30, 2014, the First Lien Senior Secured Net Leverage Ratio was 2.55 to 1.00, and the Interest Expense Coverage Ratio was 2.02 to 1.00. With regard to all covenants, including those amended by the Second Amendment, we remained in compliance as of June 30, 2014.
 
We issued the 2018 Notes pursuant to an indenture dated May 9, 2012 ("2018 Notes Indenture"). Under the 2018 Notes Indenture, we may choose to redeem some or all of the 2018 Notes at any time prior to May 15, 2015, upon providing notice to holders of the 2018 Notes, at a price equal to 100% of the principal amount of the 2018 Notes redeemed plus a “make-whole” premium as of the applicable redemption date, plus accrued interest.  Additionally, at any time prior to May 15, 2015, upon providing notice to holders of the 2018 Notes, the Issuers may choose to redeem up to 35% of the 2018 Notes with the net cash proceeds from one or more equity offerings at a redemption price equal to 109% of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest to the redemption date, as long as at least 65% of the aggregate principal amount of the 2018 Notes originally issued remains outstanding immediately after giving effect to any such redemption and the redemption occurs not more than 180 days after the date of the closing of the equity offering.  On and after May 15, 2015, the Issuers are entitled to redeem all or a portion of the 2018 Notes upon providing not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on May 15 of the years set forth in the table below.
Year
 
Percentage
2015
 
104.50
%
2016
 
102.25
%
2017 and thereafter
 
100.00
%
 

All of our current and future domestic subsidiaries that guarantee the Senior Secured Credit Facility also fully and unconditionally guarantee the Issuers' payment obligations under the 2018 Notes on a senior unsecured basis.
 
The terms of the 2018 Notes Indenture, among other things, limit our ability to incur additional debt, issue preferred stock, pay dividends or make other restricted payments, make certain investments, create liens, allow restrictions on the ability of restricted subsidiaries to pay dividends or make other payments, sell assets, merge or consolidate with other entities, and enter into transactions with affiliates.
 
If we experience certain kinds of changes in control, the Issuers must make an offer to purchase the 2018 Notes at a price equal to 101% of the aggregate principal amount of the 2018 Notes plus accrued and unpaid interest, if any, to but excluding the date of repurchase. A change of control, as defined in the 2018 Notes Indenture, occurs when we become aware of (i) any person or group becoming the beneficial owner of more than 50% of the total voting power of our voting stock, or (ii) the sale or other disposition of all or substantially all of our assets. In addition, the Issuers, under certain circumstances, must make an offer to repurchase 2018 Notes with the proceeds of certain asset sales that they do not use to purchase new assets or otherwise apply in accordance with the terms of the 2018 Notes Indenture.

The 2018 Notes Indenture further provides that if any gaming authority requires a holder of the 2018 Notes to be licensed, qualified or found suitable under any applicable gaming law and such holder fails to apply for, or is denied, such license, qualification or not found suitable, the Issuers have the right, at their option, to (i) require such holder to dispose of its 2018 Notes or (ii) redeem such 2018 Notes at the applicable redemption price specified in the 2018 Notes Indenture. The Issuers will


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



not be required to pay or reimburse any holder of the 2018 Notes who is required to apply for such license, qualification or finding of suitability.

We based the estimated fair value of the 2018 Notes and the Senior Secured Credit Facility on Level 2 inputs using quoted prices in inactive markets and observable market data for similar, but not identical, instruments. The following table presents the carrying values and estimated fair values of our long-term debt at June 30, 2014 (in thousands):
 
Carrying Value
 
Estimated Fair
Value
9% Senior Unsecured Notes due 2018
$
198,713

 
$
209,145

Term loan due 2017
182,745

 
183,896

Total
$
381,458

 
$
393,041



NOTE 9. INCOME TAXES

We evaluated our deferred tax assets to determine if any portion of those assets would not be realized in a future period. Based on our analysis of all available evidence, which included consideration of our consolidated pre-tax losses in the 2013 and 2012 fiscal years as well as other data, we concluded that it is more likely than not that we will be unable to realize all of our net deferred tax assets and, as a result, recorded a valuation allowance of $13.6 million during the quarter ended June 30, 2014. We had not previously recorded a valuation allowance related to any of our net deferred tax assets. Establishing the valuation allowance caused our effective income tax rates for the quarter and the six months ended June 30, 2014 to vary significantly from the federal statutory rate and from our effective income tax rates for the same periods in 2013. As a result, our provisions for income taxes were $13.3 million and $0.6 million for the quarters ended June 30, 2014 and 2013, respectively, and were $13.3 million and $1.8 million for the six months ended June 30, 2014 and 2013, respectively.

We have analyzed our filing positions in each jurisdiction where we are required to file income tax returns. We believe our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments which will result in a material change to our financial position.

We filed income tax returns in the United States federal jurisdiction and in several state jurisdictions. Our federal income tax returns for fiscal years 2011 and 2012 are currently under examination.


NOTE 10. SHARE-BASED COMPENSATION

We designed our share-based compensation arrangements to advance our long-term interests; for example, by allowing us to attract employees and directors, to retain them and by aligning their interests with those of our stockholders. The amount, frequency, and terms of share-based awards may vary based on competitive practices, our operating results, government regulations and availability under our equity incentive plans. Depending upon the form of the share-based award, new shares of our common stock may be issued upon grant, option exercise or vesting of the award.



AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



The following table summarizes the activity related to our outstanding and non-vested stock options and restricted stock units for the period ended June 30, 2014:
 
Stock Options
 
Restricted Stock
 
Outstanding
 
Non-Vested
 
Non-Vested
 
Shares
 
Weighted Average Exercise Price Per Share
 
Shares
 
Weighted Average Fair Value Per Share
 
Shares
 
Weighted Average Fair Value Per Share
December 31, 2013
348,399

 
$
10.05

 
44,171

 
$
4.88

 
52,361

 
$
11.86

Granted
55,148

 
11.61

 
55,148

 
5.25

 

 

Vested

 

 
(31,501
)
 
3.02

 
(36,272
)
 
11.83

Canceled
(43,842
)
 
10.12

 

 

 

 

Forfeited
(12,670
)
 
10.25

 
(12,670
)
 
4.74

 

 

June 30, 2014
347,035

 
$
10.28

 
55,148

 
$
5.25

 
16,089

 
$
11.91



As of June 30, 2014, awards representing 590,296 shares or potential shares of our common stock remained outstanding; therefore, awards representing 409,704 shares or potential shares of our common stock remained available for issuance under our 2011 LTIP.

We account for stock option awards as liabilities. As of June 30, 2014, we have reported a $2.2 million share-based compensation liability in the Other liabilities line item.


NOTE 11. COMMITMENTS AND CONTINGENCIES

Data Security Event

In late October 2013, Affinity was contacted by law enforcement regarding fraudulent credit and debit card charges which may have been linked to a data security breach in Affinity’s information technology system. We immediately initiated a thorough investigation, supported by a professional forensic investigative firm, to determine the nature and scope of the compromise. In December 2013, we issued a press release advising that our payment processing system became infected by malware, which resulted in a compromise of credit card and debit card information belonging to individuals who used their cards at restaurants, hotels and gift shops at our facilities between March 14 and October 16, 2013. As of November 14, 2013, our third-party forensics expert advised us that our credit card processing systems were free of functioning malware. We encouraged our patrons to protect against possible identity theft or other financial loss by reviewing account statements for potential fraudulent activity during the period of exposure. In April 2014, we again learned that an unauthorized intrusion and installation of malware compromising the credit card processing environment occurred. We then hired a different professional forensics investigation firm with globally-recognized expertise in data security to conduct a thorough investigation of the more recently discovered event, and the security of our entire information technology environment as it relates to both incidents. As a result of the investigation, we have reason to believe that credit card and debit card information from individuals who used their cards at restaurants, hotels and gift shops at our properties between December 7, 2013 and April 28, 2014, may have been compromised. In May 2014, we issued another press release and encouraged our patrons to protect against possible identity theft or other financial loss by reviewing account statements for potential fraudulent activity during the period of exposure.

Affinity carries insurance coverage of $5.0 million for liability resulting from network security events. We cannot estimate the total amount which we will ultimately incur because, although the investigation has concluded, we have not received all of the assessments and evaluations from the credit card processors and issuing banks seeking to recover the cost of replacement cards and a portion of fraudulent charges, nor have we received any third-party claims as of this date.




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



Litigation
  
On March 5, 2013, shareholder Z Capital Partners, L.L.C. and certain of its affiliates (collectively “Z Capital”), individually as well as derivatively on behalf of Affinity Gaming, filed a complaint (the “Complaint”) against us as a nominal party and our directors as defendants in the District Court, Clark County, Nevada (the “District Court”), seeking (A) a judgment, among other things: (i) declaring that the conversion of Affinity Gaming, LLC from a Nevada limited liability company into a Nevada corporation (the “Corporate Conversion”) was ineffective and void ab initio and that Affinity Gaming, LLC remains in existence as a Nevada limited liability company governed by its Operating Agreement dated as of December 31, 2010 (the “Operating Agreement”); or in the alternative (ii) striking and invalidating, and enjoining the recognition or enforcement of the agreements and governing documents purportedly entered into in connection with the Corporate Conversion, and reforming them to comply with the requirements of the Operating Agreement; (iii) enjoining defendants from taking any action inconsistent with the Operating Agreement and refusing to take any action required by the Operating Agreement; and (iv) declaring that the Rights Agreement, dated effective December 21, 2012, between Affinity Gaming and American Stock Transfer & Trust Company, LLC, as Rights Agent is void ab initio and unenforceable, as well as (B) related general, special, consequential and punitive damages. Based on our preliminary review of the complaint, we and our Board of Directors believe that the claims brought by Z Capital are without merit and we intend to defend against them vigorously.

Z Capital filed a motion on April 9, 2013 for a preliminary injunction which would enjoin the enforcement of the Rights Agreement as well as a provision in our Articles of Incorporation pertaining to the right of the Board of Directors to find a stockholder unsuitable to gaming regulators and to redeem that stockholder's shares. On May 3, 2013, the District Court granted the motion in part, enjoining Affinity and its Board of Directors from enforcing the Rights Agreement, while denying the remainder of the motion. The defendants filed an appeal of the District Court's decision to the Nevada Supreme Court. Despite the District Court's ruling on the preliminary injunction motion, we could neither evaluate the likelihood of an unfavorable outcome nor estimate the potential loss or range of loss because discovery had just begun and plaintiffs had not articulated their theory of the case with respect to monetary damages.

In July 2014, representatives of Z Capital, shareholder SPH Manager, LLC (“SPH Manager”) and certain other large shareholders reached an agreement to settle the Complaint (see Note 15 for more information).

In March 2012, the Clarke County Development Corp. (“CCDC”), the local non-profit Iowa licensee for which we manage the Lakeside Resort & Casino (“Lakeside Iowa”) in Osceola, Iowa, filed an action in Iowa state court against Affinity Gaming and Lakeside Iowa, seeking a declaratory judgment that the management contract between CCDC and Lakeside Iowa is non-assignable. We removed the case to federal court and contested CCDC's position even though we had no plans to assign the agreement. CCDC also named Lakeside Iowa, Affinity Gaming and the Iowa Racing & Gaming Commission (“IRGC”)  in a separate petition in Iowa state court seeking judicial review of the IRGC's ruling, in November 2010, which approved the Predecessor's creditors to become the owners of Affinity Gaming, LLC, and thereby the indirect owners of Lakeside Iowa, prior to our emergence from bankruptcy and notwithstanding CCDC’s objection that an assignment of the management agreement had occurred which required its consent.  On July 29, 2013, just two weeks before the hearing on judicial review, CCDC filed a voluntary dismissal without prejudice of the petition for judicial review.  On July 30, 2013, CCDC filed a motion to dismiss the federal court action without prejudice, which was granted.  CCDC’s dismissal of the state court petition and the federal court action was based upon its filing in Iowa state court on August 5, 2013 of a third lawsuit in which it seeks to enforce a settlement agreement it alleges was reached with us during a non-binding mediation held in June 2013.  The mediation resulted in a written memorandum of understanding (“MOU”) pursuant to which the state court petition and federal court action were to be dismissed upon Lakeside Iowa’s payments of $600,000 to CCDC and $2.5 million to an account controlled by the Clarke County Reservoir Commission; Lakeside Iowa was to incrementally reduce to zero over a period of ten years a 0.5% capital improvement set-off against the 2.5% of adjusted gross revenue (“AGR”) the casino pays to CCDC and its local government affiliates; and, for a period of five years, CCDC would not unreasonably withhold its consent to the assignment of the management agreement to a third party, provided the assignee agrees to immediately eliminate the capital improvement set-off and to pay the greater of 3% or the state maximum percentage of AGR.  However, subsequent to the mediation, when the parties exchanged drafts of the formal written settlement agreement contemplated by the MOU, it became apparent that a meeting of the minds regarding settlement had not occurred, as CCDC took the position that any assignee of the management agreement would have to increase its percentage of AGR payment by 1.5% more than what Lakeside pays, rather than the 0.5% to which we believed we had agreed.  Because discovery in the matter has just commenced, an evaluation of the likelihood of an unfavorable outcome cannot be made; however, we estimate the potential loss to be the $3.1 million in payments set forth in the MOU.

On June 25, 2012, the Nevada Tax Commission adopted a regulation requiring gaming companies to pay sales tax on customer complimentary meals and employee meals. The adoption of this regulation stemmed from a February 15, 2012 Nevada Tax Commission decision concerning another gaming company which stated that complimentary meals provided to


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



customers are subject to sales tax at the retail value of the meal and employee meals are subject to use tax at the cost of the meal. The other gaming company filed in District Court a petition for judicial review of the Nevada Tax Commission decision, and as a result we began accruing the applicable sales and use tax from the date of the most recent Nevada Department of Taxation ruling. In June 2013, substantially all the gaming companies in Nevada, including certain of our subsidiaries, entered into a settlement agreement with the Nevada Tax Commission which effectively provided, among other things, that the complimentary meals furnished to customers and employees would neither be subject to sales and use tax retroactively nor prospectively. As a result, we reversed the $1 million we had recorded and presented in accrued expense, $0.6 million of which we had accrued during the second half of 2012.

Chartwell Advisory Group, Ltd. (“Chartwell”), a professional services firm that facilitated filing refund requests with the Nevada Tax Commission for sales and use tax paid by certain casinos on the cost of complimentary meals for periods beginning in 2004, has filed a lawsuit against numerous Nevada casino operators, including one of our subsidiaries, alleging that it is owed a percentage of the tax casinos did not have to pay as a result of the 2012 regulation and related settlement agreement. Our subsidiary entered into an agreement with this firm prior to the bankruptcy whereby Chartwell would receive a percentage of any refund we received from the state of sales tax previously paid by our subsidiary. Although Chartwell asserts that we owe them approximately $0.275 million, we do not believe any amounts are due to Chartwell and accordingly, we have not recorded an accrual. We intend to vigorously defend the lawsuit and our subsidiary has recently filed a motion to dismiss the claims against it, which motion is pending.

We are 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 we filed. We believe that our defenses are substantial in each of these matters and that we can successfully defend our legal position without material adverse effect on our consolidated financial statements.


Environmental Remediation

During the excavation phase at the site of our new travel center in Primm, Nevada, we encountered several contaminated sites on the property which required soil remediation and groundwater testing. Much of the contamination resulted from underground fuel storage tanks related to a gas station operated more than 30 years ago, as well as from abandoned underground fuel lines. We also began testing at the direction of the Nevada Division of Environmental Protection (the “NDEP”) to determine the extent to which the contamination has affected the groundwater, and we have agreed to continue monitoring the groundwater for a period of at least three years.

Through June 30, 2014, we have incurred approximately $3.7 million on remediation work at the Whiskey Pete’s site. We have an insurance policy which provides coverage for environmental remediation costs of up to $5.0 million. We received $1 million from our insurer in 2013, and $0.5 million during the second quarter of 2014.

Although we believe that incurring additional cost related to the testing and ongoing monitoring of groundwater for contamination is probable, we cannot reasonably estimate an amount to accrue at this time because the NDEP has not told us what additional work, if any, it will require us to perform. Additionally, we believe some or all of the ongoing monitoring costs will be reimbursed by insurance as part of our initial claim. We also intend to pursue a claim for partial recovery against the environmental consultant that managed the initial remediation. The ultimate cost to us will depend on the extent of contamination found, if any, as a result of our ongoing testing, the amount of remediation we are required to perform, and the amount we are reimbursed. As we complete our ongoing monitoring obligation, we intend to analyze any cost incurred, and we will expense or capitalize it as necessary.


Asset Retirement Obligation

We continue to accrete an asset retirement obligation in association with a lease for real property at our Primm, Nevada location. The Predecessor recorded a liability of $0.5 million in 2007, using a 6.7% discount rate and a 3.0% inflation rate, related to costs it expected to incur to return the leased land to its original state at the end of the lease agreement.



AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



The following table reconciles the value of the asset retirement obligation for the periods presented.
 
June 30, 2014
 
December 31, 2013
Balance at beginning of period
$
773

 
$
724

Accretion expense
26

 
49

Balance at end of period
$
799

 
$
773

 
 
 
 


NOTE 12. SEGMENT INFORMATION

The following table presents the components of net revenue by segment (in thousands):
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Gross revenue
 
 
 
 
 
 
 
Nevada
$
68,703

 
$
69,611

 
$
136,591

 
$
138,128

Midwest
34,704

 
34,853

 
67,783

 
69,402

Colorado
12,107

 
10,005

 
23,727

 
21,365

Total gross revenue
115,514

 
114,469

 
228,101

 
228,895

Promotional allowances
 
 
 
 
 
 
 
Nevada
(10,258
)
 
(9,833
)
 
(21,077
)
 
(18,447
)
Midwest
(3,462
)
 
(3,032
)
 
(6,679
)
 
(5,860
)
Colorado
(2,173
)
 
(1,292
)
 
(4,154
)
 
(3,230
)
Total promotional allowances
(15,893
)
 
(14,157
)
 
(31,910
)
 
(27,537
)
Net revenue
 
 
 
 
 
 
 
Nevada
58,445

 
59,778

 
115,514

 
119,681

Midwest
31,242

 
31,821

 
61,104

 
63,542

Colorado
9,934

 
8,713

 
19,573

 
18,135

Total net revenue
$
99,621

 
$
100,312

 
$
196,191

 
$
201,358



We use earnings before interest expense; income tax; depreciation and amortization; share-based compensation expense; pre-opening costs; write offs, reserves and recoveries; loss on extinguishment or modification of debt; loss on impairment of assets; gains or losses on the disposition of assets; and restructuring and reorganization costs ("Adjusted EBITDA") as a measure of profit and loss to manage the operational performance of our segments.



AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



The following table presents Adjusted EBITDA by segment and by corporate and other (in thousands):
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Adjusted EBITDA
 
 
 
 
 
 
 
Nevada
$
6,583

 
$
9,650

 
$
13,939

 
$
18,318

Midwest
8,900

 
10,119

 
17,156

 
20,533

Colorado
1,154

 
1,993

 
2,414

 
4,313

Corporate and other
(3,985
)
 
(3,989
)
 
(6,875
)
 
(7,246
)
Total Adjusted EBITDA
12,652

 
17,773

 
26,634

 
35,918



The following tables reconcile Adjusted EBITDA to operating income (in thousands):
 
Quarter Ended June 30, 2014
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
6,583

 
(3,644
)
 

 
472

 
3,411

Midwest
8,900

 
(1,888
)
 

 

 
7,012

Colorado
1,154

 
(1,279
)
 

 

 
(125
)
Corporate and other
(3,985
)
 
(298
)
 
(72
)
 

 
(4,355
)
Continuing operations
12,652

 
(7,109
)
 
(72
)
 
472

 
5,943


 
Quarter Ended June 30, 2013
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
9,650

 
(3,581
)
 

 

 
6,069

Midwest
10,119

 
(1,719
)
 

 
(3,100
)
 
5,300

Colorado
1,993

 
(1,091
)
 

 

 
902

Corporate and other
(3,989
)
 
(256
)
 
(411
)
 
1,459

 
(3,197
)
Continuing operations
17,773

 
(6,647
)
 
(411
)
 
(1,641
)
 
9,074




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



 
Six Months Ended June 30, 2014
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
13,939

 
(7,308
)
 

 
449

 
7,080

Midwest
17,156

 
(3,708
)
 

 

 
13,448

Colorado
2,414

 
(2,569
)
 

 

 
(155
)
Corporate and other
(6,875
)
 
(590
)
 
(119
)
 

 
(7,584
)
Continuing operations
26,634

 
(14,175
)
 
(119
)
 
449

 
12,789


 
Six Months Ended June 30, 2013
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
18,318

 
(7,171
)
 

 

 
11,147

Midwest
20,533

 
(3,476
)
 

 
(3,100
)
 
13,957

Colorado
4,313

 
(2,398
)
 

 

 
1,915

Corporate and other
(7,246
)
 
(473
)
 
(744
)
 
1,459

 
(7,004
)
Continuing operations
35,918

 
(13,518
)
 
(744
)
 
(1,641
)
 
20,015



The following table presents total assets by reportable segment (in thousands):
 
June 30, 2014
 
December 31, 2013
Total assets by reportable segment
 
 
 
Nevada
$
223,264

 
$
228,956

Midwest
210,336

 
213,671

Colorado
79,940

 
83,149

Reportable segment total assets
513,540

 
525,776

Corporate and other
111,685

 
117,963

Total assets
$
625,225

 
$
643,739



Total assets in the Corporate and other line consist primarily of cash at the corporate entity.



AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



The following table presents capital expenditures by reportable segment (in thousands):
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Capital expenditures by reportable segment
 
 
 
 
 
 
 
Nevada
$
1,200

 
$
3,430

 
$
1,233

 
$
5,983

Midwest
891

 
1,448

 
1,556

 
2,025

Colorado
487

 
4,681

 
636

 
6,087

Reportable segment capital expenditures
2,578

 
9,559

 
3,425

 
14,095

Corporate
8

 
309

 
280

 
313

Total capital expenditures
$
2,586

 
$
9,868

 
$
3,705

 
$
14,408



NOTE 13. DISCONTINUED OPERATIONS

During the quarter ended March 31, 2013, we recorded the final adjustments related to the Truckee Disposition, which closed on February 1, 2013. Net of selling expense, we recorded a gain of $21,000. Including the impairment losses we recognized in the second half of 2012 related to the Truckee Disposition, we recognized an overall loss, net of selling expense, of $14.8 million. We have presented the operating results for the casinos subject to the Truckee Disposition in discontinued operations in the accompanying unaudited condensed consolidated statements of operations for the six months ended June 30, 2014.

The following table summarizes operating results for discontinued operations (in thousands):
 
Six Months Ended June 30,
 
2014
 
2013
Net revenue
$

 
$
3,289

Pretax income (loss) from discontinued operations
$

 
$
(369
)
Discontinued operations, net of tax
$

 
$
(236
)


NOTE 14. CONDENSED CONSOLIDATED GUARANTOR DATA

All of our current and future domestic subsidiaries which guarantee the New Credit Facility also fully and unconditionally guarantee our payment obligations under the 2018 Notes on a senior unsecured basis (see Note 8 for more information regarding our debt). All of the guarantees are joint and several, and all of the guarantor subsidiaries are wholly-owned by us.

We prepared and are presenting the condensed consolidating financial statements in this footnote using the same accounting policies which we used to prepare the financial information located elsewhere in our condensed consolidated financial statements and related footnotes. Although Affinity Gaming Finance Corp. (“AG Finance”) is a co-issuer of the 2018 Notes, we present our indebtedness as an obligation of Affinity Gaming only. AG Finance reflects no activity during any period presented, and we did not have any non-guarantor subsidiaries during any period presented.



AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



Affinity Gaming and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet
June 30, 2014
(000s)

 
Affinity Gaming
(Co-Issuer)
 
Guarantor
Subsidiaries
 
Eliminating
Entries
 
Total
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
95,936

 
$
42,411

 
$

 
$
138,347

Restricted cash
800

 
139

 

 
939

Accounts receivable, net
548

 
3,089

 

 
3,637

Income tax receivable
361

 

 

 
361

Prepaid expense
967

 
8,183

 

 
9,150

Inventory

 
2,765

 

 
2,765

Total current assets
98,612

 
56,587

 

 
155,199

Property and equipment, net
3,050

 
259,078

 

 
262,128

Intercompany receivables

 
150,860

 
(150,860
)
 

Investment in subsidiaries
618,862

 

 
(618,862
)
 

Other assets, net
10,023

 
1,566

 

 
11,589

Intangibles

 
127,793

 

 
127,793

Goodwill

 
68,516

 

 
68,516

Total assets
$
730,547

 
$
664,400

 
$
(769,722
)
 
$
625,225

 
 
 
 
 
 
 
 
LIABILITIES AND OWNERS’ EQUITY
 
 
 
 
 
 
 
Accounts payable
$
2,057

 
$
10,222

 
$

 
$
12,279

Intercompany payables
150,860

 

 
(150,860
)
 

Accrued interest
2,322

 

 

 
2,322

Accrued expense
797

 
19,545

 

 
20,342

Deferred income taxes
38

 
823

 

 
861

Other current liabilities

 
30

 

 
30

Total current liabilities
156,074

 
30,620

 
(150,860
)
 
35,834

Long-term debt, less current portion
381,457

 
38

 

 
381,495

Other liabilities
2,433

 
799

 

 
3,232

Deferred income taxes
316

 
14,081

 

 
14,397

Total liabilities
540,280

 
45,538

 
(150,860
)
 
434,958

 
 
 
 
 
 
 
 
Common stock
20

 

 

 
20

Other equity
190,247

 
618,862

 
(618,862
)
 
190,247

Total owners’ equity
190,267

 
618,862

 
(618,862
)
 
190,267

Total liabilities and owners’ equity
$
730,547

 
$
664,400

 
$
(769,722
)
 
$
625,225




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



Affinity Gaming and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2013
(000s)

 
Affinity Gaming
(Co-Issuer)
 
Guarantor
Subsidiaries
 
Eliminating
Entries
 
Total
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
98,296

 
$
42,561

 
$

 
$
140,857

Restricted cash
469

 
139

 

 
608

Accounts receivable, net
510

 
2,861

 

 
3,371

Income tax receivable
420

 

 

 
420

Prepaid expense
586

 
9,272

 

 
9,858

Inventory

 
2,977

 

 
2,977

Deferred income taxes
267

 
3,373

 

 
3,640

Total current assets
100,548

 
61,183

 

 
161,731

Property and equipment, net
3,395

 
268,334

 

 
271,729

Intercompany receivables

 
36,129

 
(36,129
)
 

Investment in subsidiaries
523,859

 

 
(523,859
)
 

Other assets, net
10,648

 
2,071

 

 
12,719

Intangibles

 
129,044

 

 
129,044

Goodwill

 
68,516

 

 
68,516

Total assets
$
638,450

 
$
565,277

 
$
(559,988
)
 
$
643,739

 
 
 
 
 
 
 
 
LIABILITIES AND OWNERS’ EQUITY
 
 
 
 
 
 
 
Accounts payable
$
2,097

 
$
13,728

 
$

 
$
15,825

Intercompany payables
36,129

 

 
(36,129
)
 

Accrued interest
2,468

 

 

 
2,468

Accrued expense
832

 
21,309

 

 
22,141

Current maturities of long-term debt
9,961

 

 

 
9,961

Other current liabilities

 
187

 

 
187

Total current liabilities
51,487

 
35,224

 
(36,129
)
 
50,582

Long-term debt, less current portion
379,833

 

 

 
379,833

Other liabilities
2,459

 
773

 

 
3,232

Deferred income taxes
152

 
5,421

 

 
5,573

Total liabilities
433,931

 
41,418

 
(36,129
)
 
439,220

 
 
 
 
 
 
 
 
Common stock
20

 

 

 
20

Other equity
204,499

 
523,859

 
(523,859
)
 
204,499

Total owners’ equity
204,519

 
523,859

 
(523,859
)
 
204,519

Total liabilities and owners’ equity
$
638,450

 
$
565,277

 
$
(559,988
)
 
$
643,739




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



Affinity Gaming and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations
Quarter ended June 30, 2014
(000s)

 
Affinity Gaming
(Co-Issuer)
 
Guarantor
Subsidiaries
 
Eliminating
Entries
 
Total
REVENUE
 
 
 
 
 
 
 
Casino
$

 
$
76,415

 
$

 
$
76,415

Food and beverage

 
12,777

 

 
12,777

Lodging

 
6,756

 

 
6,756

Fuel and retail

 
15,786

 

 
15,786

Other

 
3,780

 

 
3,780

Total revenue

 
115,514

 

 
115,514

Promotional allowances

 
(15,893
)
 

 
(15,893
)
Net revenue

 
99,621

 

 
99,621

EXPENSE
 
 
 
 
 
 
 
Casino

 
31,864

 

 
31,864

Food and beverage

 
12,305

 

 
12,305

Lodging

 
3,989

 

 
3,989

Fuel and retail

 
12,591

 

 
12,591

Other

 
1,981

 

 
1,981

General and administrative

 
20,254

 

 
20,254

Depreciation and amortization
298

 
6,811

 

 
7,109

Corporate
4,057

 

 

 
4,057

Write downs, reserves and recoveries

 
(472
)
 

 
(472
)
Total expense
4,355

 
89,323

 

 
93,678

Operating income (loss) from continuing operations
(4,355
)
 
10,298

 

 
5,943

Other income (expense)
 
 
 
 
 
 
 
Interest expense, net
(7,007
)
 

 

 
(7,007
)
Intercompany interest income
7,048

 

 
(7,048
)
 

Intercompany interest expense

 
(7,048
)
 
7,048

 

Income from equity investments in subsidiaries
91,402

 

 
(91,402
)
 

Total other income (expense), net
91,443

 
(7,048
)
 
(91,402
)
 
(7,007
)
Loss from continuing operations before income tax
87,088

 
3,250

 
(91,402
)
 
(1,064
)
Benefit from (provision for) income taxes
(101,455
)
 
88,152

 

 
(13,303
)
Net income (loss)