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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 September 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  þ    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  þ    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  þ

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  þ    No  ¨

No established public trading market for our common stock currently exists. As of November 14, 2014, 20,303,718 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 compete,

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 tax, payroll tax and 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, filed with the SEC on March 31, 2014, as amended (“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)


 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
144,063

 
$
140,857

Restricted cash
939

 
608

Accounts receivable, net of reserve of $641 and $537, respectively
3,086

 
3,371

Income tax receivable
254

 
420

Prepaid expense
8,283

 
9,858

Inventory
2,787

 
2,977

Deferred income taxes

 
3,640

Total current assets
159,412

 
161,731

Property and equipment, net
259,900

 
271,729

Other assets, net
6,280

 
6,924

Intangibles, net
127,168

 
129,044

Goodwill
68,516

 
68,516

Total assets
$
621,276

 
$
637,944

LIABILITIES AND OWNERS’ EQUITY
 
 
 
Accounts payable
$
11,979

 
$
15,825

Accrued interest
6,827

 
2,468

Accrued expense
22,797

 
22,141

Deferred income taxes
458

 

Current maturities of long-term debt

 
9,961

Other current liabilities
30

 
187

Total current liabilities
42,091

 
50,582

Long-term debt
374,256

 
374,038

Other liabilities
2,036

 
3,232

Deferred income taxes
15,005

 
5,573

Total liabilities
433,388

 
433,425

 
 
 
 
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; 20,291,876 and 20,243,262 shares issued and outstanding for 2014 and 2013, respectively
20

 
20

Additional paid-in-capital
207,100

 
205,726

Retained earnings
(19,232
)
 
(1,227
)
Total owners’ equity
187,888

 
204,519

Total liabilities and owners’ equity
$
621,276

 
$
637,944

See notes to consolidated financial statements


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

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
REVENUE
 
 
 
 
 
 
 
Casino
$
74,892

 
$
75,032

 
$
227,261

 
$
230,754

Food and beverage
12,118

 
11,420

 
37,413

 
34,308

Lodging
6,345

 
6,661

 
20,008

 
20,308

Fuel and retail
16,461

 
16,093

 
45,766

 
45,565

Other
3,852

 
3,636

 
11,321

 
10,802

Total revenue
113,668

 
112,842

 
341,769

 
341,737

Promotional allowances
(14,206
)
 
(13,719
)
 
(46,116
)
 
(41,256
)
Net revenue
99,462

 
99,123

 
295,653

 
300,481

EXPENSE
 
 
 
 
 
 
 
Casino
30,457

 
29,713

 
93,594

 
89,993

Food and beverage
12,213

 
11,474

 
36,379

 
34,365

Lodging
4,083

 
4,406

 
12,464

 
13,527

Fuel and retail
13,183

 
13,066

 
36,662

 
38,179

Other
2,021

 
2,018

 
6,157

 
5,979

General and administrative
21,467

 
21,172

 
60,850

 
58,000

Depreciation and amortization
7,163

 
7,015

 
21,338

 
20,533

Corporate
3,626

 
1,927

 
10,620

 
9,917

Write downs, reserves and recoveries
39

 
2,679

 
(410
)
 
4,320

Total expense
94,252

 
93,470

 
277,654

 
274,813

Operating income from continuing operations
5,210

 
5,653

 
17,999

 
25,668

Other expense
 
 
 
 
 
 
 
Interest expense, net
(8,344
)
 
(7,899
)
 
(22,128
)
 
(22,802
)
Loss on extinguishment (or modification) of debt
(240
)
 

 
(240
)
 

Total other expense, net
(8,584
)
 
(7,899
)
 
(22,368
)
 
(22,802
)
Income (loss) from continuing operations before income tax
(3,374
)
 
(2,246
)
 
(4,369
)
 
2,866

Benefit from (provision for) income taxes
(311
)
 
1,040

 
(13,636
)
 
(732
)
Income (loss) from continuing operations
$
(3,685
)
 
$
(1,206
)
 
$
(18,005
)
 
$
2,134

 
 
 
 
 
 
 
 
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)
$
(3,685
)
 
$
(1,206
)
 
$
(18,005
)
 
$
1,898

See notes to consolidated financial statements


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

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(18,005
)
 
$
1,898

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

 
369

Depreciation and amortization
21,338

 
20,533

Amortization of debt costs and discounts
1,492

 
1,642

Gain on sale of property and equipment
(4
)
 
(46
)
Unamortized loan fees related to extinguishment (or modification) of debt
240

 

Share-based compensation
225

 
1,129

Environmental remediation costs

 
3,185

Deferred income taxes
13,530

 
1,002

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
285

 
866

Prepaid expense
1,575

 
391

Inventory
190

 
76

Other assets
531

 
704

Accounts payable
(1,348
)
 
776

Accrued interest
4,359

 
4,393

Accrued expense
656

 
2,091

Income tax payable/receivable
166

 
(1,254
)
Other liabilities
(86
)
 
(53
)
Net cash provided by operating activities
25,144

 
37,702

Cash flows from investing activities:
 
 
 
Restricted cash
(331
)
 
(735
)
Proceeds from sale to Truckee Gaming, LLC

 
17,447

Proceeds from sale of property and equipment
361

 
70

Purchases of property and equipment
(10,367
)
 
(23,072
)
Net cash used in investing activities
(10,337
)
 
(6,290
)
Cash flows from financing activities:
 
 
 
Payment on long-term debt
(8,711
)
 
(6,889
)
Loan origination fees
(2,890
)
 
(270
)
Repurchases of vested share-based awards

 
(318
)
Net cash used in financing activities
(11,601
)
 
(7,477
)
Net increase in cash and cash equivalents
3,206

 
23,935

Cash and cash equivalents:
 
 
 
Beginning of period
140,857

 
126,873

End of period
$
144,063

 
$
150,808

 
 
 
 
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
$
16,414

 
$
17,247

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment financed through accounts payable
$
1,205

 
$
1,707

Acquisition of property and equipment under capital lease
82

 

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 our 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 September 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.

We reclassified certain amounts in the 2013 financial statements to conform to the 2014 presentation. The reclassification, which consisted of reporting a portion of unamortized debt issuance costs as an offset against the related debt rather than reporting it as part of Other assets (see Note 8 for more information), had no impact on our results of operations, cash flows or owners’ equity as previously reported.

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 September 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 August 2014, the Financial Accounting Standards Board modified the Accounting Standards Codification by issuing Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The amendments in ASU 2014-15 place responsibility on management to determine whether substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments state that for each annual and interim reporting period, management should evaluate whether conditions or events, considered in the aggregate, raise doubt about the entity’s ability to continue as a going concern for one year after the financial statements are issued. If management determines that substantial doubt exists regarding the entity’s ability to continue as a going concern, the amendments require disclosure of the conditions or events that led to such determination, management’s evaluation of the significance of such conditions or events, and management’s plans to mitigate such conditions or events, including whether the plans alleviated substantial doubt. The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The amendments in ASU 2014-15 will not have a material effect on our financial condition, results of operations, cash flows or the reporting thereof.

In May 2014, the Financial Accounting Standards Board modified the Accounting Standards Codification by issuing 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 SEC, we do not believe any of such pronouncements will have a material effect on our operations.


NOTE 3. RESTRICTED CASH

Restricted cash balances at September 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 September 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, except estimated lives):
 
Estimated Life
(Years)
 
September 30,
2014
 
December 31, 2013
Building and improvements
7 - 40
 
$
183,144

 
$
180,333

Gaming equipment
3 - 10
 
60,969

 
55,277

Furniture, fixtures, and equipment
3 - 10
 
43,657

 
40,183

Leasehold improvements
7
 
196

 
196

Land
 
39,493

 
39,848

Barge
30
 
15,019

 
15,019

Construction-in-progress
 
 
1,915

 
5,964

Total property and equipment
 
 
344,393

 
336,820

Less accumulated depreciation
 
 
(84,493
)
 
(65,091
)
Total property and equipment, net
 
 
$
259,900

 
$
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 (in thousands):
 
September 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

 
$
(6,081
)
 
$
6,083

 
$
12,164

 
$
(4,580
)
 
$
7,584

Trademarks
2,982

 
(1,774
)
 
1,208

 
2,982

 
(1,399
)
 
1,583

 
$
15,146

 
$
(7,855
)
 
$
7,291

 
$
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

 

 
$
127,168

 
$
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 September 30, 2014:
 
Nevada
 
Midwest
 
Colorado
 
Total
Balance at December 31, 2013
$
33,665

 
$
14,622

 
$
20,229

 
$
68,516

Impairment of goodwill

 

 

 

Balance at September 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):
 
September 30, 2014
 
December 31, 2013
Capitalized debt issuance cost, net
$
2,371

 
$
2,484

Long-term deposits
3,400

 
3,855

Other assets
509

 
585

Total
$
6,280

 
$
6,924

 
 
 
 


NOTE 7. ACCRUED EXPENSE

Accrued expense consists of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Progressive jackpot liabilities
$
3,671

 
$
3,294

Accrued payroll and related
8,633

 
7,353

Slot club point liability
3,601

 
3,574

Litigation reserve
3,100

 
3,100

Other accrued expense
3,792

 
4,820

Total
$
22,797

 
$
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):
 
September 30, 2014
 
December 31, 2013
9% Senior Unsecured Notes due 2018
$
200,000

 
$
200,000

Unamortized debt issuance cost, net
(3,050
)
 
(2,970
)
Unamortized discount
(1,219
)
 
(1,452
)
9% Senior Unsecured Notes due 2018, net
195,731

 
195,578

Term loan due 2017
182,745

 
191,246

Unamortized debt issuance cost, net
(4,250
)
 
(2,825
)
Term loan due 2017, net
178,495

 
188,421

Total debt, including current portion
374,226

 
383,999

Less: current maturities

 
(9,961
)
Plus: long-term portion of capital leases
30

 

Total long-term debt
$
374,256

 
$
374,038

 
 
 
 


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 $200.0 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 $200.0 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 $35.0 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.

On December 13, 2013, we completed the first amendment to the Credit Agreement. The first amendment made several changes to the Credit Agreement (see Exhibit 10.46 to our 2013 Form 10-K), including changes to interest rates. With our completion of the second amendment, the first amendment’s changes regarding interest rates were superseded.

On July 22, 2014, we completed the second amendment to the Credit Agreement (the “Second Amended Credit Agreement”) governing our New Credit Facility. We incur and pay interest on the Initial Term Loan under the Second Amended Credit Agreement at an uncommitted floating rate of LIBOR plus 4.00%, subject to a LIBOR floor of 1.25%.  The Second 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 $80.0 million subject to certain customary terms and conditions, including pro forma compliance with a maximum leverage ratio, as defined in the Second Amended Credit Agreement.

In the table above, unamortized debt issuance cost represents payments made to entities which purchased our debt, and we reclassified the December 31, 2013 amount from Other assets to conform to the current-year presentation. Unamortized debt issuance cost, which we are amortizing over the life of the 2018 Notes and the Initial Term Loan, totaled $9.7 million at September 30, 2014, inclusive of both the amount we report in Other assets and the amount we report as an offset to the related debt.

Under the Second 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


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



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 Second 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 Second Amended Credit Agreement), any resulting net cash proceeds must be deposited into an account subject to an account control agreement.

Under the Second 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, but excluding (i) the entry into or performance of the Settlement Agreement (as described in our Current Report on Form 8-K, filed on July 28, 2014), or (ii) the formation of a “group” among all or some of the parties to the Settlement Agreement or their affiliates in connection with the performance of the Settlement Agreement or any other agreement in existence on July 14, 2014. A continuing director, as defined in the Second Amended Credit Agreement, is a director on the date of borrowing, a director nominated by a majority of directors which existed on the date of borrowing, and any directors appointed in accordance with the Settlement Agreement or by any Stockholder (as defined in the Settlement Agreement) party to the Settlement Agreement.  A change of control would constitute an event of default under the Second Amended Credit Agreement and permit the acceleration by the lenders of all outstanding borrowings thereunder.

The Second Amended Credit Agreement contains customary covenants including, but not limited to, 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. At September 30, 2014, the First Lien Senior Secured Net Leverage Ratio was 2.66 to 1.00, and the Interest Expense Coverage Ratio was 1.92 to 1.00. As of September 30, 2014, we remained in compliance with all debt covenants.
 
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, Affinity Gaming and Affinity Gaming Finance Corp. (collectively, 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 New 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


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



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 (as amended on July 24, 2014), specifically excludes certain actions taken as a result of the settlement agreement we executed with Z Capital Partners, LLC on July 28, 2014 and 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 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 New 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 September 30, 2014 (in thousands):
 
Carrying Value
 
Estimated Fair
Value
9% Senior Unsecured Notes due 2018
$
195,731

 
$
192,795

Term loan due 2017
178,495

 
177,388

Total
$
374,226

 
$
370,183



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, we 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 ended June 30, 2014 and the nine months ended September 30, 2014 to vary significantly from the federal statutory rate and from our effective income tax rates for the same period in 2013. For the quarters ended September 30, 2014 and 2013, we recorded a $0.3 million income tax provision and a $1.0 million income tax benefit, respectively, and for the nine months ended September 30, 2014 and 2013, we recorded income tax provisions of $13.6 million and $0.7 million, 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,


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



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.

The following table summarizes the activity related to our outstanding and non-vested stock options and restricted stock units for the period ended September 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
109,315

 
11.61

 
109,315

 
4.83

 
48,614

 
11.61

Vested

 

 
(31,501
)
 
5.56

 
(36,272
)
 
11.83

Canceled
(263,324
)
 
10.04

 

 

 

 

Forfeited
(12,670
)
 
10.25

 
(12,670
)
 
5.92

 

 

Expired
(4,223
)
 
$
10.25

 

 
$

 

 
$

September 30, 2014
177,497

 
$
10.99

 
109,315

 
$
4.83

 
64,703

 
$
11.69



As of September 30, 2014, awards representing 469,372 shares or potential shares of our common stock remained outstanding; therefore, awards representing 530,628 shares or potential shares of our common stock remained available for issuance under our Amended 2011 Long-Term Incentive Plan.

We account for stock option awards as liabilities. As of September 30, 2014, we have reported a $1.0 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 an independent 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 had become 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 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 had occurred. We then hired a different professional forensics investigation firm to conduct a thorough investigation of the more recently discovered event, and the security of our 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 GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



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. Various states attorneys general also continue to investigate the incidents.


Litigation
  
In March 2012, the Clarke County Development Corp. (“CCDC”), the local non-profit Iowa licensee for which we manage the Lakeside Hotel & Casino (“Lakeside”) in Osceola, Iowa, filed an action in Iowa state court against Affinity and Lakeside, seeking a declaratory judgment that the management contract between CCDC and Lakeside 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, Affinity 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, 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’s payments of $0.6 million to CCDC and $2.5 million to an account controlled by the Clarke County Reservoir Commission; Lakeside 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.

In March 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”). 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 our Current Report on Form 8-K, filed on July 28, 2014, for more information).

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 $0.3 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.




AFFINITY GAMING
Notes to Unaudited Condensed 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 September 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 $1.0 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.

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

 
$
724

Accretion expense
39

 
49

Balance at end of period
$
812

 
$
773

 
 
 
 




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



NOTE 12. SEGMENT INFORMATION

The following table presents the components of net revenue by segment (in thousands):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Gross revenue
 
 
 
 
 
 
 
Nevada
$
67,204

 
$
68,503

 
$
203,795

 
$
206,631

Midwest
34,629

 
32,715

 
102,412

 
102,117

Colorado
11,835

 
11,624

 
35,562

 
32,989

Total gross revenue
113,668

 
112,842

 
341,769

 
341,737

Promotional allowances
 
 
 
 
 
 
 
Nevada
(9,279
)
 
(9,417
)
 
(30,356
)
 
(27,864
)
Midwest
(3,397
)
 
(2,881
)
 
(10,076
)
 
(8,741
)
Colorado
(1,530
)
 
(1,421
)
 
(5,684
)
 
(4,651
)
Total promotional allowances
(14,206
)
 
(13,719
)
 
(46,116
)
 
(41,256
)
Net revenue
 
 
 
 
 
 
 
Nevada
57,925

 
59,086

 
173,439

 
178,767

Midwest
31,232

 
29,834

 
92,336

 
93,376

Colorado
10,305

 
10,203

 
29,878

 
28,338

Total net revenue
$
99,462

 
$
99,123

 
$
295,653

 
$
300,481



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.

The following table presents Adjusted EBITDA by segment and by corporate and other (in thousands):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Adjusted EBITDA
 
 
 
 
 
 
 
Nevada
$
5,527

 
$
5,959

 
$
19,466

 
$
24,277

Midwest
8,954

 
8,761

 
26,110

 
29,294

Colorado
1,557

 
2,554

 
3,971

 
6,867

Corporate and other
(3,520
)
 
(1,542
)
 
(10,395
)
 
(8,788
)
Total Adjusted EBITDA
$
12,518

 
$
15,732

 
$
39,152

 
$
51,650





AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



The following tables reconcile Adjusted EBITDA to operating income (in thousands):
 
Quarter Ended September 30, 2014
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
$
5,527

 
$
(3,656
)
 
$

 
$
(39
)
 
$
1,832

Midwest
8,954

 
(1,913
)
 

 

 
7,041

Colorado
1,557

 
(1,288
)
 

 

 
269

Corporate and other
(3,520
)
 
(306
)
 
(106
)
 

 
(3,932
)
Continuing operations
$
12,518

 
$
(7,163
)
 
$
(106
)
 
$
(39
)
 
$
5,210


 
Quarter Ended September 30, 2013
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
$
5,959

 
$
(3,709
)
 
$

 
$
(2,679
)
 
$
(429
)
Midwest
8,761

 
(1,739
)
 

 

 
7,022

Colorado
2,554

 
(1,312
)
 

 

 
1,242

Corporate and other
(1,542
)
 
(255
)
 
(385
)
 

 
(2,182
)
Continuing operations
$
15,732

 
$
(7,015
)
 
$
(385
)
 
$
(2,679
)
 
$
5,653


 
Nine Months Ended September 30, 2014
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
$
19,466

 
$
(10,964
)
 
$

 
$
410

 
$
8,912

Midwest
26,110

 
(5,621
)
 

 

 
20,489

Colorado
3,971

 
(3,857
)
 

 

 
114

Corporate and other
(10,395
)
 
(896
)
 
(225
)
 

 
(11,516
)
Continuing operations
$
39,152

 
$
(21,338
)
 
$
(225
)
 
$
410

 
$
17,999




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



 
Nine Months Ended September 30, 2013
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
$
24,277

 
$
(10,880
)
 
$

 
$
(2,679
)
 
$
10,718

Midwest
29,294

 
(5,215
)
 

 
(3,100
)
 
20,979

Colorado
6,867

 
(3,710
)
 

 

 
3,157

Corporate and other
(8,788
)
 
(728
)
 
(1,129
)
 
1,459

 
(9,186
)
Continuing operations
$
51,650

 
$
(20,533
)
 
$
(1,129
)
 
$
(4,320
)
 
$
25,668



The following table presents total assets by reportable segment (in thousands):
 
September 30, 2014
 
December 31, 2013
Total assets by reportable segment
 
 
 
Nevada
$
222,562

 
$
228,956

Midwest
208,384

 
213,671

Colorado
79,629

 
83,149

Reportable segment total assets
510,575

 
525,776

Corporate and other
110,701

 
112,168

Total assets
$
621,276

 
$
637,944



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

The following table presents capital expenditures by reportable segment (in thousands):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Capital expenditures by reportable segment
 
 
 
 
 
 
 
Nevada
$
2,433

 
$
2,271

 
$
3,666

 
$
8,254

Midwest
1,338

 
2,015

 
2,894

 
4,040

Colorado
385

 
2,197

 
1,021

 
8,284

Reportable segment capital expenditures
4,156

 
6,483

 
7,581

 
20,578

Corporate
311

 
230

 
591

 
543

Total capital expenditures
$
4,467

 
$
6,713

 
$
8,172

 
$
21,121



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,


AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



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 nine months ended September 30, 2013.

The following table summarizes operating results for discontinued operations (in thousands):
 
Nine Months Ended September 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
September 30, 2014
(000s)

 
Affinity Gaming
(Co-Issuer)
 
Guarantor
Subsidiaries
 
Eliminating
Entries
 
Total
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
100,015

 
$
44,048

 
$

 
$
144,063

Restricted cash
800

 
139

 

 
939

Accounts receivable, net
917

 
2,169

 

 
3,086

Income tax receivable
254

 

 

 
254

Prepaid expense
996

 
7,287

 

 
8,283

Inventory

 
2,787

 

 
2,787

Deferred income taxes
17

 

 
(17
)
 

Total current assets
102,999

 
56,430

 
(17
)
 
159,412

Property and equipment, net
2,979

 
256,921

 

 
259,900

Intercompany receivables

 
91,655

 
(91,655
)
 

Investment in subsidiaries
555,166

 

 
(555,166
)
 

Other assets, net
4,740

 
1,540

 

 
6,280

Intangibles

 
127,168

 

 
127,168

Goodwill

 
68,516

 

 
68,516

Total assets
$
665,884

 
$
602,230

 
$
(646,838
)
 
$
621,276

 
 
 
 
 
 
 
 
LIABILITIES AND OWNERS’ EQUITY
 
 
 
 
 
 
 
Accounts payable
$
1,915

 
$
10,064

 
$

 
$
11,979

Intercompany payables
91,655

 

 
(91,655
)
 

Accrued interest
6,827

 

 

 
6,827

Accrued expense
1,030

 
21,767

 

 
22,797

Deferred income taxes

 
475

 
(17
)
 
458

Other current liabilities

 
30

 

 
30

Total current liabilities
101,427

 
32,336

 
(91,672
)
 
42,091

Long-term debt, less current portion
374,226

 
30

 

 
374,256

Other liabilities
1,224

 
812

 

 
2,036

Deferred income taxes
1,119

 
13,886

 

 
15,005

Total liabilities
477,996

 
47,064

 
(91,672
)
 
433,388

 
 
 
 
 
 
 
 
Common stock
20

 

 

 
20

Other equity
187,868

 
555,166

 
(555,166
)
 
187,868

Total owners’ equity
187,888

 
555,166

 
(555,166
)
 
187,888

Total liabilities and owners’ equity
$
665,884

 
$
602,230

 
$
(646,838
)
 
$
621,276



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
4,853

 
2,071

 

 
6,924

Intangibles

 
129,044

 

 
129,044

Goodwill

 
68,516

 

 
68,516

Total assets
$
632,655

 
$
565,277

 
$
(559,988
)
 
$
637,944

 
 
 
 
 
 
 
 
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
374,038

 

 

 
374,038

Other liabilities
2,459

 
773

 

 
3,232

Deferred income taxes
152

 
5,421

 

 
5,573

Total liabilities
428,136

 
41,418

 
(36,129
)
 
433,425

 
 
 
 
 
 
 
 
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
$
632,655

 
$
565,277

 
$
(559,988
)
 
$
637,944




AFFINITY GAMING
Notes to Unaudited Condensed Consolidated Financial Statements



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

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

 
$
74,892

 
$

 
$
74,892

Food and beverage

 
12,118

 

 
12,118

Lodging

 
6,345

 

 
6,345

Fuel and retail

 
16,461

 

 
16,461

Other

 
3,852

 

 
3,852

Total revenue

 
113,668

 

 
113,668

Promotional allowances

 
(14,206
)
 

 
(14,206
)
Net revenue

 
99,462

 

 
99,462

EXPENSE
 
 
 
 
 
 
 
Casino

 
30,457

 

 
30,457

Food and beverage

 
12,213

 

 
12,213

Lodging

 
4,083

 

 
4,083

Fuel and retail

 
13,183

 

 
13,183

Other

 
2,021

 

 
2,021

General and administrative

 
21,467

 

 
21,467

Depreciation and amortization
306

 
6,857

 

 
7,163

Corporate
3,626

 

 

 
3,626

Write downs, reserves and recoveries

 
39

 

 
39

Total expense
3,932

 
90,320

 

 
94,252

Operating income (loss) from continuing operations