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EX-31.2 - CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Affinity Gamingex31231dec14.htm
EX-99.2 - COMPENSATION COMMITTEE CHARTER - Affinity Gamingex99231dec14.htm
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EX-32 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Affinity Gamingex3231dec14.htm
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EX-23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - Affinity Gamingex23131dec14.htm
EX-10.8 - FOURTH AMENDMENT TO THE AMENDED AND RESTATED GROUND LEASE AGREEMENT - Affinity Gamingex10831dec14.htm
EX-99.3 - GOVERNANCE AND NOMINATING COMMITTEE CHARTER - Affinity Gamingex99331dec14.htm
EX-31.1 - CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Affinity Gamingex31131dec14.htm
EX-99.1 - AUDIT COMMITTEE CHARTER - Affinity Gamingex99131dec14.htm
EX-23.2 - CONSENT OF ERNST & YOUNG LLP - Affinity Gamingex23231dec14.htm


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

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 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
 
702-341-2400
 
 
Address, including zip code, of principal executive offices
 
Registrant's telephone number, including area code
 
 

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
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
As of June 30, 2014, the aggregate market value of voting and non-voting common equity held by non-affiliates of Affinity Gaming could not be calculated as no established public trading market for our equity exists.

Applicable only to registrants involved in bankruptcy proceedings during the preceding five years
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 March 27, 2015, 20,320,464 shares of our common stock were outstanding.

Documents Incorporated By Reference
Information required by Part III of this Annual Report on Form 10-K is incorporated by reference to portions of our definitive proxy statement for our 2014 annual meeting of stockholders which we will file with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2014.
 



TABLE OF CONTENTS


PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
 
 
 




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. Examples of forward-looking statements include, but are not limited to, statements we make regarding:

our ability to attract and retain customers;

our expectation that customers will continue to face economic uncertainty and that their discretionary spending will remain at reduced levels in the near term;

expectations regarding the operation of slot machines and table games at our casino properties;

our anticipation that growth will come from the improvement and expansion of our existing properties and through strategic acquisitions;

our ability to stabilize or improve cash flows from our properties by making project investments;

implementation of business initiatives, including mobile gaming, our player loyalty club and “A-Play” card, rebranding away from the “Terrible’s” trade name and our ability to leverage business intelligence;

implementation and results of key cost controls and expense savings programs, including player loyalty club points refinements, minimum balances for redemptions, energy efficiency projects and outsourcing restaurants to strategically-branded third parties;

competition, including our casinos’ competitive advantages, the threat of new market entrants in our existing locations, increases in popularity of internet gambling, the potential issuance of additional gaming licenses in Midwest Markets and potential introduction of video lottery terminals in Colorado;

potential imposition by state and local licensing authorities of limits, conditions or suspension of gambling or liquor licenses for violations of laws or regulations;

the potential need to make additional expenditures to remain in, or to achieve, compliance with environmental laws;

the impact of new laws or regulations, or material differences in interpretations by courts or governmental authorities;




estimated and projected costs, capital expenditures and expense savings;

the adequacy of cash flows from operations, available cash and available amounts under our credit facility to meet future liquidity needs; and

our continued viability, our operations and results of operations.

We base these and other 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. 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 which may adversely affect our operations and ability to react to changes in our business;

our ability to generate cash to service our substantial indebtedness which depend on many factors that we cannot control;

the impact of restrictions under, and results of noncompliance with, the terms of our credit agreement;

inherent construction project risks may hinder expansion and renovation projects;

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;




reductions in spending as a result of economic downturns and other factors;

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;

changes in the smoking laws; and

other factors as described in “Risk Factors” of this Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 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

ITEM 1.
BUSINESS.

OUR COMPANY

We are a Nevada corporation, headquartered in Las Vegas, which owns and operates 11 casinos in four states—five in Nevada, three in Colorado, two in Missouri and one in Iowa. In addition to our diverse, multi-jurisdictional casino operations, we provide consulting services to the operator of the Rampart Casino at the JW Marriott Resort in Las Vegas, for which we receive a fixed monthly fee and are eligible to receive a percentage of revenue in excess of specified thresholds. That consulting arrangement expires April 1, 2015.

On December 20, 2012, we converted Affinity Gaming, LLC from a Nevada limited liability company into a Nevada corporation (the “Conversion”), and for purposes of Rule 12g-3(a), we are the successor issuer to Affinity Gaming, LLC. In relation to our emergence from Chapter 11 bankruptcy proceedings on December 31, 2010 we use the term “Successor” to refer to Affinity Gaming and the term “Predecessor” to refer to Herbst Gaming, Inc. and its subsidiaries. Each of these transactions is described further in our previous filings with the U.S. Securities and Exchange Commission.





OUR BUSINESS STRATEGY

We focus on earning the loyalty of our patrons, primarily local, value-oriented gaming customers who gamble frequently. Because such patrons represent a high potential for repeat visits, generating customer satisfaction and loyalty is a critical component of our strategy. We also cater to the drive-in tourist patrons whom we can entice to repeat their visits.

Local patrons are typically sophisticated gaming customers who seek convenient locations, high payouts, a good meal and a pleasant atmosphere. Although perceived value initially attracts a customer to our casino properties, actual value generates customer satisfaction and loyalty. We therefore seek to provide attentive customer service in a friendly, casual atmosphere, recognizing that consistent quality and a comfortable atmosphere stem from the collective care and friendliness of each employee.

During 2012 and the first month of 2013, we divested of a slot machine route operation and six Nevada casinos, while acquiring three casinos in Black Hawk, Colorado. Also in 2013, we closed Henderson Casino Bowl in Henderson, Nevada which was unprofitable. These acquisition and disposition transactions were consistent with our long-term strategic vision.

We anticipate that our growth will come from the improvement and expansion of our existing properties and through strategic acquisitions. Our key focus remains on expanding the operating margins of our existing properties through a combination of top-line revenue growth and stringent expense management. We continuously review the operating performance of each of our existing properties to assess the feasibility of enhancing their performance through targeted marketing campaigns designed to competitively reward our repeat customers and expense management programs. We also assess growth opportunities through capital investments in our properties. In doing so, we analyze the anticipated relative costs and benefits of the projects or capital expenditures under consideration against the availability of cash flows generated through operations and available debt financing along with competitive and other relevant factors.





OUR PROPERTIES

Casino Operations

The majority of our casino properties focus on local customers, with an emphasis on slot machine play. The following table summarizes our casino operations as of December 31, 2014:
Property
 
Location
 
Year Built1
 
Gaming Square Feet
 
Slots
 
Table Games
 
Hotel Rooms
 
Additional Gaming Information
Nevada
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Silver Sevens
 
Las Vegas
 
2006
 
25,000

 
834

 
8

 
327

 
Race and sports book; bingo; poker
Primm Valley
 
Primm
 
1990
 
38,000

 
789

 
26

 
626

 
Race and sports book; California lottery store
Buffalo Bill’s
 
Primm
 
1994
 
62,000

 
888

 
28

 
1,243

 
Race and sports book
Whiskey Pete’s
 
Primm
 
1977
 
36,000

 
562

 
10

 
779

 
Sports betting kiosk
Rail City
 
Sparks
 
2007
 
24,000

 
887

 
7

 

 
Sports book; keno
Total Nevada
 
 
 
 
 
185,000

 
3,960

 
79

 
2,975

 
 
Midwest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
St Jo Frontier
 
St. Joseph, MO
 
2005
 
13,000

 
574

 
10

 

 
 
Mark Twain2
 
LaGrange, MO
 
2001
 
18,000

 
650

 
12

 

 
 
Lakeside 2, 3
 
Osceola, IA
 
2005
 
36,000

 
1,009

 
13

 
150

 
 
Total Midwest
 
 
 
 
 
67,000

 
2,233

 
35

 
150

 
 
Colorado
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Black Hawk Casinos
 
Black Hawk, CO
 
4 
 
36,391

 
1,125

 
19

 

 
Poker
Total
 
 
 
 
 
288,391

 
7,318

 
133

 
3,125

 
 

(1)    This column presents the year the property was built or most recently remodeled.
(2)    Mark Twain and Lakeside also have 8 and 47 RV spaces, respectively.
(3)    In 2012, Lakeside expanded from 60 to 150 hotel rooms.
(4)    Golden Mardi Gras Casino, Golden Gulch Casino and Golden Gate Casino were built or remodeled in 2000, 2003 and 1992, respectively.





Nevada Casinos

Silver Sevens

Silver Sevens Hotel & Casino in Las Vegas, Nevada (“Silver Sevens”), formerly known as Terrible’s Hotel & Casino, has approximately 25,000 square feet of gaming space with 834 slot machines, eight table games, a race and sports book operated by a third party, a 195-seat bingo facility, a buffet and a 24-hour café. The property currently operates 327 hotel rooms with standard amenities. Silver Sevens is conveniently located approximately one mile east of the Las Vegas Strip, which we believe appeals to locals who wish to avoid the congestion of the Strip. Silver Sevens’ favorable location also has made it popular with Strip casino employees. Although not a tourist destination due to the limited number of rooms, the property receives some tourist traffic through the casino due to its proximity to the airport, the Las Vegas Strip, the University of Nevada - Las Vegas and the Las Vegas Convention Center.


Primm Casinos

Affinity Gaming owns the improvements and leases the real estate on which Primm Valley Resort & Casino (“Primm Valley”), Buffalo Bill’s Resort & Casino (“Buffalo Bill’s”) and Whiskey Pete’s Hotel & Casino (“Whiskey Pete’s” and together with Primm Valley and Buffalo Bill’s, the “Primm Casinos”) are located in Primm, Nevada. Primm is on the Nevada-California state line along Interstate 15, the major interstate route between Los Angeles and Las Vegas. The Primm Casinos collectively own and manage three gas station/convenience stores, which include two Starbucks Coffee outlets and other nationally-known quick-serve restaurants, as well as one California Lottery store. Two 18-hole, Tom Fazio-designed golf courses with a full-service restaurant and club house, leased and managed by a third-party, are located nearby.


Primm Valley. Primm Valley offers approximately 38,000 square feet of gaming space, with 789 slot machines, 26 table games and a race and sports book operated by a third party. Additionally, Primm Valley has a 626-room hotel and 21,000 square feet of convention space. Primm Valley has a full-service coffee shop operated by a third party, an Original House of Pancakes, a buffet and the GP Steakhouse. The resort has a swimming pool and a 13,000 square foot full-service spa. Primm Valley is connected to the “Fashion Outlets of Las Vegas,” a retail complex owned by a third party which houses over 100 designer outlet stores, including a Neiman Marcus “Last Call,” a Williams Sonoma Outlet store, Coach, Tommy Bahama, Banana Republic and Versace factory outlet stores. A Chevron gas station and convenience store is also located on site.





Buffalo Bill’s. Buffalo Bill’s offers approximately 62,000 square feet of gaming space, with 888 slot machines, 28 table games and a race and sports book operated by a third party. In addition to a 1,243 room hotel, Buffalo Bill’s has a Denny’s operated by a third party, a buffet and a Mexican restaurant. The western-themed property also has extensive entertainment amenities, including the 6,800 seat “Star of the Desert” arena, which features a variety of entertainment throughout the year. Buffalo Bill’s has a roller coaster as well as water park log rides, a pool, a movie theater and a midway-style arcade.


Whiskey Pete’s. Whiskey Pete’s offers approximately 36,000 square feet of gaming space, with 562 slot machines, 10 table games and two full service bars. Additionally, Whiskey Pete’s has a 779-room hotel, a travel center branded with Flying J diesel fuel and Chevron gasoline, a full service coffee shop operated by a third party, a weekend buffet, a McDonald’s restaurant, an International House of Pancakes, an 8,000 square foot special events and concert venue with 650 seats, and a swimming pool.


Rail City

Rail City Casino in Sparks, Nevada (“Rail City”) has approximately 24,000 square feet of gaming space housing 887 slot machines, seven table games, keno, a sports book operated by a third party, a 24-hour family-style restaurant and an ale house and brew pub.


Midwest Casinos

St Jo

The St Jo Frontier Casino (“St Jo”), a riverboat casino located in a man-made basin adjacent to the Missouri River in St. Joseph, Missouri, offers approximately 13,000 square feet of gaming space, with 574 slot machines and 10 table games. St Jo also has a coffee-shop-style restaurant/buffet and lounge, as well as 2,400 total square feet of conference and meeting space. The casino and its amenities have a locally-popular western theme based on St. Joseph’s heritage as the founding location and headquarters of the Pony Express. St Jo owns 54 acres of land, 32 acres of which are undeveloped.


Mark Twain

Mark Twain Casino (“Mark Twain”), a riverboat casino located in a man-made basin adjacent to the Mississippi River in LaGrange, Missouri, offers approximately 18,000 square feet of gaming space, with 650 slot machines and 12 table games, as well as eight RV parking spots. Mark Twain also has a coffee shop style restaurant/bar and an additional bar in the casino. The casino has a locally popular theme based on Mark Twain, who grew up in and wrote about nearby Hannibal, Missouri.


Lakeside

Lakeside Casino Resort (“Lakeside”), a riverboat casino located on West Lake in Osceola, Iowa, 40 miles southwest of Des Moines, offers approximately 36,000 square feet of gaming space, with 1,009 slot machines and 13 table games. Lakeside also offers a 150-room hotel, 10,000 square feet of conference and meeting facilities that may also be used for concerts, a fitness center, an outdoor concert/entertainment venue, an indoor pool and a gift shop. In addition, Lakeside has a coffee-shop-style restaurant/buffet and lounge located in the main lobby, two bars located in the casino, a convenience store and a Pilot truck stop and gas station located adjacent to the casino, and 47 RV spaces with utility hookups. Lakeside owns 109 acres of land, 75 acres of which are undeveloped.


Black Hawk Casinos

The Golden Mardi Gras Casino, Golden Gates Casino and Golden Gulch Casino together, the (“Black Hawk Casinos”) are located in close proximity to one another along a half-mile strip of casino and casino-hotel properties in the historic mining



town of Black Hawk, Colorado. The Black Hawk Casinos collectively offer approximately 36,391 square feet of gaming space, with 1,125 slot machines, 19 table games and 17 live poker games, as well as three restaurants, four bars, a Dunkin’ Donuts kiosk and one of the only parking garages in the market, offering 693 spaces. The casinos are well-positioned within the market with their large parking garage located in the center of the main gaming district at a key intersection between other properties.

COMPETITION

Nevada Market

Silver Sevens primarily competes for local gaming customers with other locals-oriented casino/hotels in Las Vegas. Although Silver Sevens does not directly compete with many of the large resort/casino properties on the Las Vegas Strip, which focus primarily on attracting tourist players, we do believe Silver Sevens competes with the smaller, value-oriented Strip hotel/casino properties. Silver Sevens competes on the basis of desirability of location; payout rates; a more personalized approach to customer service; casino promotions; the availability, comfort and value of restaurants and hotel rooms; and the variety and value of entertainment.

Our properties in Primm compete for value-oriented customers with casinos in the Las Vegas market and outside of the Las Vegas market in places like Henderson, Jean, Laughlin and Mesquite, Nevada. The Primm casinos also compete with Native American properties in Southern California, which have become an increasingly attractive alternative for customers seeking Las Vegas style casinos. Our Primm casinos rely heavily upon the number of customers they can draw from Interstate 15, which stretches between Las Vegas, Nevada and Los Angeles, California. We compete with other gaming companies as well as other hospitality companies which provide accommodations and amenities for leisure and business travelers. In many cases, our competitors have greater name recognition and financial resources to reinvest in their properties; they offer similar restaurant, entertainment and other amenities and they target the same demographic group we target. The proximity of Native American casinos to our Primm properties, including the threat of new market entrants in areas such as Barstow, California, could significantly impact our business.

The Reno/Sparks market is characterized by intense competition among casinos. Rail City operates in the Reno/Sparks market, and it must compete for local gaming customers with other locals-oriented casinos, casino/hotels and with Native American gaming operations in Northern California. In addition, a new competitor recently opened in Sparks, further adding to the competition. Many of our direct competitors in the Reno market have greater financial and other resources than we do.

Our Nevada properties face increased competition from online poker services in Nevada, including mobile gaming applications for smart phones and tablet computers, which allow customers to wager via the Internet. In February 2013, Nevada, the first state in the U.S. to legalize online poker on an intrastate basis, expanded its existing interactive gaming laws which permit and regulate online gambling. Nevada’s current interactive gaming laws allow the State to enter into agreements with other states which authorize online poker to increase player liquidity by facilitating games between players located inside and outside Nevada, and in February 2014, Delaware and Nevada entered into the first such agreement. The law in this area has been rapidly evolving and additional legislative developments, in Nevada and elsewhere, may accelerate the proliferation in Nevada and throughout the United States of certain forms of online gambling, including, but not limited to, poker. In addition, many of our competitors in the Nevada market have greater financial resources than we do and have already applied or been approved for interactive gaming licenses in Nevada to provide online poker services. Increases in the popularity of and competition from such services could negatively impact our results of operations and financial condition.


Midwest Market

Each of Lakeside, Mark Twain and St Jo competes for local gaming customers with other casinos in their respective markets.

Lakeside is located along Interstate 35, approximately 40 miles southwest of Des Moines, Iowa. Its primary competitors are the Prairie Meadows Casino, the Riverside Casino and Golf Resort and the Meskwaki Bingo Casino Hotel. The Prairie Meadows Casino is located in the Altoona/Des Moines market approximately 60 miles from Lakeside, and approximately 10 miles northeast of Des Moines. Riverside Casino and Golf Resort is located in Riverside, Iowa, approximately 175 miles from Osceola. The Meskwaki Bingo Casino Hotel is located in Tama, Iowa and is approximately 110 miles from Lakeside. In



August 2015, a new Casino and Hotel will open in Jefferson, Iowa, approximately 62 miles from Lakeside, northwest of Des Moines.

Mark Twain, in LaGrange, Missouri, is the only casino in northeast Missouri and is approximately 15 miles from Quincy, Illinois and approximately 25 miles from Hannibal, Missouri. The closest casino to Mark Twain is the Catfish Bend Casino, located in Burlington, Iowa, which is approximately 75 miles from LaGrange. To a lesser extent, Mark Twain also competes with gaming operation in the St. Louis, Missouri market. Illinois has approved the addition of video lottery terminals (“VLTs”) in bars throughout the state. The competition and potential expansion of VLTs in Illinois could adversely affect the results of operations at Mark Twain.

St Jo is approximately 50 miles north of Kansas City, Missouri. St Jo primarily targets residents of St. Joseph, Missouri and is the only casino in St. Joseph. However, St Jo competes indirectly with five casinos in and around Kansas City, Missouri. To a lesser extent, St Jo also competes with several Native American casinos, the closest of which is approximately 45 miles from St. Joseph.

Certain states have recently legalized, and other states are considering legalizing, casino gaming in certain areas. In addition, states such as Illinois and Kansas have awarded additional gaming licenses or are considering expanding permitted gaming. The award of one or more additional licenses in Iowa or in other locations close to Lakeside, Mark Twain or St Jo would be expected to adversely affect our results of operations and financial condition.


Colorado Market

Our Black Hawk casinos compete with approximately 25 other gaming operations located in the Black Hawk/Central City gaming market. The Black Hawk/Central City gaming market is insulated from other casino gaming markets, with no casinos within 50 miles. In the past, proposals have been made for the development of Native American, racetrack and video lottery terminal casinos throughout the state. Neither the state’s electorate nor the state’s legislature has adopted any of these proposals. Most recently, in March 2014, a ballot initiative was introduced in Colorado to amend the Colorado state constitution to allow VLTs at exclusive locations which include an existing racetrack in Arapahoe County and race tracks to be constructed in Pueblo and Mesa counties, and to allow expanded gaming, including table games, at those facilities. In each case, the number of VLTs in the facility would have been at least 2,500, and use of the VLT’s would have commenced no later than November 1, 2015. Arapahoe, Pueblo and Mesa counties are each suburbs of Denver, the key feeder market for the Black Hawk/Central City gaming market. The initiative was soundly defeated by Colorado voters in November 2014. Any form of additional gaming authorized in the Denver metropolitan area would adversely affect the Black Hawk Casinos.


INTELLECTUAL PROPERTY

The development of intellectual property is part of our overall business strategy, and we regard our intellectual property as an important element of our success. While our business as a whole is not substantially dependent on any one mark or combination of our marks or other intellectual property, we seek to establish and maintain our proprietary rights in our business operations and technology through the use of trademarks and trade secret laws. We file applications for and obtain patents, copyrights and trademarks in the United States. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements.

We own or have applied for, among others, the following registered trademarks and respective design logos: “Affinity Gaming,” “Silver Sevens,” “Buffalo Bill's Resort & Casino,” “A-Play,” “Desperado,” “Primm Center,” “Primm Valley Casino Resorts,” “Primm Valley Lotto Store,” “Primm Valley Resort & Casino,” “Star of the Desert Arena,” “Whiskey Pete's,” “Whiskey Pete's Hotel Casino,” “Rail City,” “Rail City Ale House,” “Golden Mardi Gras Casino,” “Golden Gates Casino,” and “Golden Gulch Casino.”

We consider all of these marks, and the associated name recognition, to be valuable to our business, and we are not aware of any third party claims against the use or registration of our trademarks at this time.





SEASONALITY

Our casinos in Northern Nevada, the Midwest and Colorado experience extreme weather conditions that interrupt our operations. Additionally, our casinos in Missouri are subject to flooding depending on the water levels of the Missouri and Mississippi Rivers. Snow and other adverse weather resulted in a significant number of days with lost or reduced business at our Midwest and Colorado properties during the winter of 2013-2014. If there is a prolonged disruption at any of our properties or if there are a disproportionate number of weekends affected by extreme weather, our results of operations and financial condition could be materially adversely affected.


ENVIRONMENTAL LAWS

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 which served 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 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 December 31, 2014, we have incurred approximately $3.8 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 $0.6 million in 2014. Additionally, we may be required to make additional expenditures to remain in, or to achieve, compliance with environmental laws in the future and such expenditures may be material.


GOVERNMENTAL REGULATION

The gaming industry is highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. Each of our casinos is subject to extensive regulation under the laws, rules and regulations of the jurisdiction where it is located. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions.

Our businesses are subject to various federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, tobacco, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results.


Nevada

The ownership and operation of casino gaming facilities in Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder, or the Nevada Act, and various local regulations.

Our gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board, the Clark County Liquor and Gaming Licensing Board, and other local regulatory authorities (collectively, the “Nevada Gaming Authorities”).

The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things:

the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;




the establishment and maintenance of responsible accounting practices and procedures;

the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenue, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;

the prevention of cheating and fraudulent practices; and

providing a source of state and local revenue through taxation and licensing fees.


Any changes in Nevada’s gaming and liquor laws, regulations and procedures could have an adverse effect on our gaming operations in Nevada.

The Nevada Gaming Authorities require entities which operate casinos in Nevada to obtain a gaming license, which requires the periodic payment of fees and taxes and is not transferable. Affinity Gaming is registered by the Nevada Gaming Commission as a publicly-traded corporation (a “registered corporation”). As a registered corporation, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information which the Nevada Gaming Commission may require. The Nevada Gaming Commission found Affinity Gaming suitable to own the membership interests of various licensed limited liability companies which own and operate casinos licensed by the Nevada Gaming Commission (all of which are collectively referred to as the “Gaming Subsidiaries”). No person may become a member of, or receive any percentage of the profits from, any of the Gaming Subsidiaries without first registering with or obtaining licenses and approvals from the Nevada Gaming Authorities. Additionally, the Clark County Liquor and Gaming License Board, which has jurisdiction over four of our five Nevada casinos, has taken the position that it has the authority to approve all persons owning or controlling the stock of any entity controlling a gaming license. Affinity Gaming and all of its Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required to engage in the various gaming businesses which each respectively operates in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Affinity Gaming or any of the Gaming Subsidiaries to determine whether such individual is suitable or should be licensed as a business associate of a gaming license. Officers, directors, managers and certain key employees of Affinity Gaming or any of the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and are required to be licensed by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. Either the applicant or the gaming licensee with whom the applicant is employed or for whom the applicant serves bears all costs associated with the license, including investigative fees. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove any change in corporate position.

If the Nevada Gaming Authorities were to find an officer, director, manager or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

Affinity Gaming and the Gaming Subsidiaries are required to submit detailed financial and operating reports to the Nevada Gaming Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by Affinity Gaming and its Gaming Subsidiaries must be reported to and/or approved by the Nevada Gaming Commission.

If it were determined that Affinity Gaming or any of its Gaming Subsidiaries violated the Nevada gaming laws, our gaming licenses and registrations with the Nevada Gaming Commission could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, Affinity Gaming, the Gaming Subsidiaries and the persons involved could be subject to substantial fines for each separate violation of the Nevada laws at the discretion of the Nevada Gaming Commission. Further, the Nevada Gaming Commission could appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of our gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any



gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect our operations.

Any beneficial holder of Affinity Gaming's voting or non-voting securities, regardless of the number of shares owned, may be required to file an application, be investigated and have his or her suitability as a beneficial holder of Affinity Gaming's voting or non-voting securities determined if the Nevada Gaming Commission has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada. If such beneficial holder who must be found suitable is a corporation, limited liability company, partnership or trust, it must submit detailed business and financial information including a list of its beneficial owners. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in connection with conducting such investigation.

The Nevada Act requires any person who acquires more than 5% of a registered corporation's voting securities to report the acquisition to the Nevada Gaming Commission. The Nevada Act requires beneficial owners of more than 10% of a registered corporation's voting securities apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada State Gaming Control Board mails the written notice requiring such filing. However, an “institutional investor,” as defined in the Nevada Act, which beneficially owns more than 10%, but not more than 11%, of a registered corporation's voting securities as a result of a stock repurchase by the registered corporation may not be required to file such an application. Further, an institutional investor which acquires more than 10%, but not more than 25%, of a registered corporation's voting securities may apply to the Nevada Gaming Commission for a waiver of a finding of suitability if that institutional investor holds the voting securities for investment purposes only. An institutional investor which has obtained a waiver may hold more than 25%, but not more than 29%, of a registered corporation's voting securities and maintain its waiver if the additional ownership results from a stock repurchase by the registered corporation. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered corporation, any change in the corporate charter, bylaws, management, policies or operations of the registered corporation, or any of its gaming affiliates or any other action which the Nevada Gaming Commission finds to be inconsistent with holding the registered corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:

voting on all matters voted on by stockholders;

serving as a member of any committee of creditors or security holders formed in connection with a debt restructuring;

accepting appointment or election as a member of the board of directors in connection with a debt restructuring and serving in that capacity until the conclusion of the member’s term;

making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and

other activities as the Nevada Gaming Commission may determine to be consistent with such investment intent.


Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or by the Chairman of the Nevada State Gaming Control Board, or who refuses or fails to pay the investigative fees incurred by the Nevada Gaming Authorities in connection with such person’s application, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. Affinity Gaming and the Gaming Subsidiaries may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be a stockholder or to have any other relationship with Affinity Gaming or the Gaming Subsidiaries, Affinity Gaming or the Gaming Subsidiaries:

pays that person any dividend or interest upon voting securities;

allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;




pays remuneration in any form to that person for services rendered or otherwise; or

fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities including, if necessary, purchasing the voting securities for cash at fair market value.


Affinity Gaming may be required to disclose to the Nevada State Gaming Control Board and the Nevada Gaming Commission the identities of all holders of its debt securities. The Nevada Gaming Commission may, in its discretion, require the holder of any debt or similar security of a registered corporation to file applications, be investigated and be found suitable to own the debt or other security of a registered corporation. If the Nevada Gaming Commission determines that a person is unsuitable to own the security, then pursuant to Nevada law, the registered corporation can be sanctioned, including the loss of its approvals, if, without the prior approval of the Nevada Gaming Commission, it:

pays to the unsuitable person any dividend, interest, or any distribution whatsoever;

recognizes any voting right by the unsuitable person in connection with the debt securities;

pays the unsuitable person remuneration in any form; or

makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.


Affinity Gaming is required to maintain a current stock ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial holder to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Gaming Commission has the power to require our securities to bear a legend indicating that the securities are subject to the Nevada Act.

Affinity Gaming may not make a public offering of securities without the prior approval of the Nevada Gaming Commission if the proceeds from the offering are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or similar transactions. Furthermore, any such approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Gaming Commission or the Nevada State Gaming Control Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.

Changes in the control of Affinity Gaming through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on the pledged shares), may not occur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control or ownership of a registered corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in a variety of stringent standards prior to assuming control of such registered corporation. The Nevada Gaming Commission may also require the stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees and registered corporations which are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Gaming Commission has established regulations to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (1) assure the financial stability of corporate gaming licensees and their affiliates; (2) preserve the beneficial aspects of conducting business in the corporate form; and (3) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Gaming Commission before the registered corporation can make exceptional repurchases of voting securities above the current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the registered corporation's board of directors in response to a tender offer made directly to the registered corporation's stockholders for the purposes of acquiring control of the registered corporation.




License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either:

a percentage of the gross revenue received;

the number of gaming devices operated; or

the number of table games operated.


The tax on gross gaming revenue is generally 6.75%. A live entertainment tax is also paid by gaming operations where entertainment is furnished in connection with admission fees, the selling of food or refreshments, or the selling of merchandise. The live entertainment tax rate is 10% of all amounts paid for food, refreshment, merchandise, and admission or similar charges while the licensee is in live entertainment status.

Any person who is licensed, required to be licensed, registered, required to be registered or is under common control with such persons or licensees (collectively, “licensees”), and who is or who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expense of investigation by the Nevada State Gaming Control Board of the licensees' participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter, licenses are also required to comply with certain reporting requirements imposed by the Nevada gaming laws. Licensees are also subject to disciplinary action by the Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to a foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations which are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability or has been found guilty of cheating at gambling.

The sale of alcoholic beverages in gaming establishments is subject to strict licensing, control and regulation by local regulatory authorities. Affinity and the Gaming Subsidiaries have obtained the necessary liquor licenses to sell alcoholic beverages. Local regulatory authorities have full power to limit, condition, suspend or revoke any such licenses, and any such disciplinary action could, and revocation would, have a material adverse effect on our operations.


Missouri

On November 3, 1992, a statewide referendum authorized gaming in the State of Missouri on the Missouri and the Mississippi Rivers. On April 29, 1993, Missouri enacted revised legislation (as amended, the “Missouri Gaming Law”) which amended the existing legislation. In a decision handed down on January 25, 1994, the Missouri Supreme Court held that games of chance were prohibited under the Missouri constitution. In a statewide election held on November 8, 1994, Missouri voters approved the adoption of an amendment to the Missouri Constitution which permits the legislature to allow games of chance to be conducted on excursion boats and floating facilities on the Mississippi River and the Missouri River. As a result of the amendment, games of chance are also permitted, subject to Missouri Gaming Law. Pursuant to the Missouri Gaming Law, there are thirteen operating riverboat gaming facility sites in Missouri: one in Caruthersville; one in Boonville; four in the St. Louis area; four in the Kansas City area; one in LaGrange; one in St. Joseph and one in Cape Girardeau.

Opponents of gaming in Missouri have brought several legal challenges to gaming in the past and may possibly bring similar challenges in the future. On November 25, 1997, the Missouri Supreme Court overturned a state lower court and held that a portion of the Missouri Gaming Law which authorized excursion gaming facilities in “artificial basins” up to 1,000 feet from the Mississippi or Missouri rivers was unconstitutional. This ruling created uncertainty as to the legal status of several excursion gaming riverboat facilities in the state. On November 3, 1998, a statewide referendum was held, whereby the voters amended the constitution to allow “artificial basins” for existing facilities, effectively overturning the above Missouri Supreme Court decision. We cannot provide assurance that any future challenges, if brought, would not further interfere with gaming operations in Missouri, including the operations of Mark Twain in LaGrange and St. Jo in St. Joseph.




Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. Affinity Gaming; HGI-St Jo, LLC, our subsidiary which owns St Jo and the current licensee for that facility; and HGI-Mark Twain, LLC, our subsidiary which owns Mark Twain and the current licensee for that facility; any subsidiaries, and some of their officers and employees are and will be subject to specific regulations, including ongoing licensing requirements. As part of the application and licensing process for a gaming license, the applicant must submit detailed financial, operating and other reports to the Missouri Gaming Commission. Each applicant has an ongoing duty to update the information provided to the Missouri Gaming Commission in the application, usually within seven days of a material change in the information on file with the Missouri Gaming Commission. Each of St Jo and Mark Twain has frequently updated its application materials since it was initially licensed. In addition to the information required of the applicant, directors, officers, affiliated business entities and other defined “key persons” (which include individuals and companies designated by the Missouri Gaming Commission) must submit Personal Disclosure Forms, which include detailed financial information, and are subject to thorough investigations. In addition, some officers and directors of Affinity Gaming, as well as Affinity Gaming itself, have submitted Personal Disclosure Forms and applications to the Missouri Gaming Commission. All gaming employees must obtain an occupational license issued by the Missouri Gaming Commission. Suppliers are also subject to licensing requirements of the Missouri Gaming Commission. An institutional investor holding an interest of 20% or less in Affinity Gaming for only passive investment purposes, may be exempted from these licensure requirements by the Missouri Gaming Commission.

Effective May 30, 2008, certain amendments were made to Missouri's gaming regulations which provide for the division of Missouri gaming licenses into Class A and Class B Licenses. Affinity Gaming now holds a Class A License which allows Affinity Gaming to own and operate the HGI-St Jo and HGI-Mark Twain business entities. HGI-St Jo, LLC and HGI-Mark Twain, LLC now hold Class B Licenses allowing them to operate St Jo and Mark Twain, respectively.

In January 2013, following a full licensing investigation and hearing, the Class A and Class B licenses for Affinity Gaming, HGI-St Jo and HGI-Mark Twain were renewed for four-year terms by the Missouri Gaming Commission, which continues to require, among other things:

suitability investigations into an applicant's character, financial responsibility, experience and qualifications;

suitability investigations into each designated key person or affiliated business entity's character, financial responsibility, experience and qualifications;

disclosure of required financial (see above) and other personal information on each key person or designated affiliated business entity;

disclosure of detailed information about the applicant's history, business, affiliations, officers, directors and owners;

an affirmative action plan for the (a) hiring and training of minorities and women, and (b) purchase of goods and services from businesses owned by minorities and women; and

an economic development or impact report.


License fees cover all related costs of the Missouri Gaming Commission investigation and are a minimum of $50,000 for the initial application and $25,000 annually thereafter.

The Missouri Gaming Law and implementing regulations impose restrictions on the use of and do not permit the transfer of the gaming licenses, as well as limitations on transactions engaged in by licensees. The licenses issued by the Missouri Gaming Commission may not be transferred nor pledged as collateral. The Missouri Gaming Law regulations bar a licensee from taking any of the following actions without prior notice to the Missouri Gaming Commission, after which notice the Commission may reopen and reconsider the licensee’s suitability under the Missouri Gaming Law:

any transfer or issuance of an ownership interest in a gaming licensee that is not a publicly held company;

any transfer or issuance of an ownership interest of five percent or more of the issued and outstanding ownership interest of Affinity Gaming which is publicly traded and is a holding company;




any private incurrence of debt by the licensee or any holding company of $1,000,000 or more;

any public issuance of debt by a licensee or its holding company; and

defined “significant related party transactions.”


Affinity Gaming must obtain advance approval of the Missouri Gaming Commission to enter into any contract or arrangement, whereby a person or group of persons acting in concert (a) owns, controls, or has power to vote 25 percent or more of the ownership interest its licensed entities, or (b) controls the election of a majority of the directors or managers of its licensed entities. A Missouri licensee must notify the Missouri Gaming Commission of other transactions which include the transfer of five percent or more of an ownership interest in the licensee or holding company if publicly held and any transaction of at least $1,000,000. In Missouri, the granting of a security interest to a lender in the ownership of a Missouri licensee is subject to the approval of the Missouri Gaming Commission if the lender is not a financial institution.

The restrictions on transfer of ownership apply to Class A licensee, Affinity Gaming, as well as the direct Class B licensees, HGI-St Jo and HGI-Mark Twain. Gaming equipment may not be pledged except under very limited circumstances where possession is limited to defined licensed entities. Corporate stock and/or equity ownership of some licensees may not be pledged except in narrow circumstances and subject to regulatory conditions following notification to the Missouri Gaming Commission.

Missouri statutes and administrative rules contain detailed requirements and conditions concerning the operation of a licensed excursion gambling boat facility, including but not limited to the following:

a charge of two dollars per gaming customer per excursion which licensees must either collect from each customer or pay itself to the Missouri Gaming Commission;

minimum payouts;

the payment of a 21% tax on adjusted gross receipts;

strict regulation of the granting of credit to gaming customers by the Class B Licensee;

the use of credit cards and cashing of checks by customers;

providing security on the excursion gambling boat, including a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff, including Missouri Highway Patrol Officers, necessary to protect the public on the licensee's riverboat;

the receipt of liquor licenses from the Missouri Gaming Commission and local jurisdictions; and

the adoption of minimum control standards for the conduct of gaming and the operation of the facility approved by the Missouri Gaming Commission.


The Missouri Gaming Commission has the power, as well as broad discretion in exercising this power, to revoke or suspend gaming or occupational licenses and impose other penalties for violations of the Missouri Gaming Law and the rules and regulations promulgated thereunder, including without limitation, forfeiture of all gaming equipment used for improper gaming and fines of up to three times a licensee's highest daily gross receipts during the preceding twelve months.

Although the Missouri Gaming Law provides no limit on the amount of riverboat space which may be used for gaming, the Missouri Gaming Commission is empowered to impose space limitations through the adoption of rules and regulations.

Previously, the Missouri Gaming Law imposed as to each customer a $500 loss limit per two-hour period established by each licensee with the approval of the Missouri Gaming Commission. However, by vote of Missouri registered voters on November 8, 2008, the Missouri Gaming Law was amended to provide that the Missouri Gaming Commission shall not establish any regulations or policies which limit the amount of wagers, losses or buy-in amounts.




In addition, the Missouri Gaming Commission is empowered to determine on a city and county‑specific basis where “dockside” or permanently‑docked gaming is appropriate and may be permitted. The Missouri Gaming Commission has authorized all thirteen licensed sites to operate all or a portion of their facilities on a continuously docked basis.

The sale of alcoholic beverages in gaming establishments is subject to strict licensing, control and regulation by the Missouri Gaming Commission. The Missouri Gaming Commission has full power to limit, condition, suspend or revoke any such license. The Commission has also issued strict regulations concerning the sale and use of alcoholic beverages upon an excursion gambling boat or facility immediately adjacent to an excursion gambling boat.

An ordinance was adopted by Initiative Petition by the voters of the City of St. Joseph, Missouri on April 8, 2014, which modified the local health and sanitation code to provide smoke-free indoor workplaces and public places. The ordinance includes an exemption allowing smoking in casino gaming areas, which exemption, as applied, includes the casino at the St. Jo Frontier. The exemption, under the ordinance, will remain in place unless and until smoking in casino areas is prohibited in all non-Native American casinos located in the Missouri and Kansas counties of the Greater Kansas City area.


Iowa

In 1989, the State of Iowa legalized riverboat gaming on the Mississippi River and other waterways located in Iowa. Under Iowa gaming law (“Iowa Gaming Law”), a license to conduct gaming may be issued in a county only if the county electorate has approved gaming. The electorate of Clarke County, Iowa, where Osceola is located, approved gaming on February 28, 1995 by referendum. Gaming conducted by Lakeside was approved by referendum on November 18, 1997. In addition, a referendum must be held every eight years in each of the counties where gambling games are conducted and the proposition to continue to allow gambling games in such counties must be approved by a majority of the county electorate voting on the proposition. Such referenda took place on November 5, 2002 and November 2, 2010, with the majority of the electorate voting each time in favor of continued gaming in Clarke County. The next referendum is scheduled for 2018. If any reauthorization referendum is defeated, Iowa Gaming Law provides that any previously issued gaming license will remain valid and subject to renewal for a total of nine years from the date of original issuance of the license, subject to earlier non-renewal or revocation under Iowa Gaming Law and regulations applicable to all licenses.

In addition, Iowa Gaming Law authorizes the granting of riverboat gaming licenses to non-profit corporations which, in turn, are permitted to enter into operating agreements with qualified persons who also actually conduct the gaming operations. Such operators must likewise be approved and licensed by the Iowa Racing and Gaming Commission (the “Iowa Gaming Commission”).

In July 1997, Clarke County Development Corporation (“CCDC”), a non-profit corporation organized for the purpose of facilitating riverboat gaming in Osceola, Iowa, entered into a management agreement, since amended, for Lakeside for a term of up to 50 years. Under the management agreement, as amended, CCDC is paid a monthly fee equal to 1.5% of the adjusted gross receipts from gaming (“AGR”) of Lakeside. In September 2004, HGI-Lakeside, LLC (the Company's subsidiary which owns and operates Lakeside, formerly HGI-Lakeside, Inc.) entered into an agreement whereby upon the later of Predecessor obtaining approval from the Iowa Gaming Commission or its closing the transactions then pending with Southern Iowa Gaming Company, Southern Iowa would immediately pay $3.2 million to an escrow fund controlled by the City of Osceola. Beginning February 2013, and continuing for so long as the management agreement, remains in effect, we are required to pay into the escrow fund an additional 1% of annual AGR from Lakeside. We are entitled, however, to offset up to 50% of this additional 1% annual payment with any expenditures we have made for capital improvements (excluding gaming devices and improvements to the gaming facility, casino floor, development of a truck stop and general repairs and maintenance) (the “Offset”). Further, pursuant to a dock site lease agreement executed in August 1997 (which also has a term of up to 50 years) (the “Lakeside Lease”), Lakeside is required to pay a monthly fee to the City of Osceola and the Water Works Board of Trustees equal to 1.25% of the AGR of Lakeside plus an annual fee, to be paid in equal monthly installments, equal to approximately $160,000, with such amount to increase each year by 1% until termination of the Lakeside Lease. Pursuant to a settlement agreement approved by the Iowa Gaming Commission at its March 2012 meeting, the annual fee under the Lakeside Lease was increased to $245,000, with such amount to further increase each year by 1%, and Lakeside is required to employ no fewer than 290 full-time employees.

In March 2012, CCDC initiated legal proceedings against both us and the Iowa Racing Commission. In one case, CCDC sought a declaratory judgment ruling that the management agreement is non-assignable. We contested CCDC's position even



though there were no plans to seek to assign the agreement. In a separate case, CCDC also named both the Iowa Racing Commission and us in a petition for judicial review of the Commission's ruling in November 2010, approving Predecessor's creditors to become owners of Affinity Gaming, prior to our emergence from bankruptcy. We vigorously defended this lawsuit as well. In July and August 2013, CCDC dismissed both lawsuits without prejudice.  CCDC’s dismissals of the declaratory judgment action and petition for judicial review were based upon its filing in August 2013 in Iowa state court (later removed to federal court) 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 had resulted in a written memorandum of understanding (“MOU”) pursuant to which the declaratory judgment action and petition for judicial review were to be dismissed upon the following terms and conditions: (i) Lakeside was to pay $600,000 to CCDC and $2.5 million to an account controlled by the Clarke County Reservoir Commission; (ii) Lakeside was to incrementally reduce the Offset to zero over a period of ten years; and, (iii) for a period of five years, CCDC would not unreasonably withhold its consent to the assignment of the operator’s contract to a third party, provided the assignee agreed to immediately eliminate the Offset and to pay the greater of 3% or the state minimum 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 by 1.5%, rather than the 0.5% to which we believed we had agreed.  As of March 2015, the dispute remains ongoing and an evaluation of the likelihood of an unfavorable outcome cannot be made at this time; however, we estimate the maximum potential loss to be the $3.1 million in payments set forth in the MOU.

Iowa gaming law permits gaming licensees to offer unlimited stakes gaming on games approved by the Iowa Gaming Commission on a 24-hour basis. Dockside casino gaming is authorized by the Iowa Gaming Commission and the Iowa Legislature, subject to certain limitations not applicable to Lakeside, eliminated the requirement that gaming licensees cruise, effective May 6, 2004. The legal age for gaming is 21.

Lakeside's excursion gambling boat license was approved for renewal at a March 5, 2015 meeting of the Iowa Gaming Commission. This license is not transferable and will need to be renewed annually and prior to the commencement of each subsequent annual renewal period. Accordingly, Lakeside’s excursion gambling boat license will be considered for renewal at the March 2016, meeting of the Iowa Gaming Commission. A limitation, condition or suspension of Lakeside’s gaming license could (and revocation of its gaming license would) have a material adverse effect on operations. In connection with Lakeside’s 2011 license renewal, the Iowa Gaming Commission required us to (i) appear at the June 2011 Iowa Gaming Commission meeting and present a detailed development plan for a hotel expansion project, which we represented would cost approximately $10.0 million, and (ii) commence construction of the hotel expansion project by October 2011. We met both requirements and completed the hotel expansion during 2012.

The ownership and operation of gaming facilities in Iowa are subject to extensive state laws, regulations of the Iowa Gaming Commission and various county and municipal ordinances, concerning the responsibility, financial stability and character of gaming operators and persons financially interested or involved in gaming operations. Iowa Gaming Law seeks to:

prevent unsavory or unsuitable persons from having direct or indirect involvement with gaming at any time or in any capacity;

establish and maintain responsible accounting practices and procedures;

maintain effective control over the financial practices of licensees (including the establishment of minimum procedures for internal fiscal affairs, the safeguarding of assets and revenue, the provision of reliable record keeping and the filing of periodic reports with the Iowa Gaming Commission);

prevent cheating and fraudulent practices; and

provide a source of state and local revenue through taxation and licensing fees.


Changes in Iowa Gaming Law could have a material adverse effect on the Iowa gaming operations.

Gaming licenses granted to individuals must be renewed every year, and licensing authorities have broad discretion with regard to such renewals. Licenses are not transferable. The Iowa gaming operations must submit detailed financial and



operating reports to the Iowa Gaming Commission. Certain contracts of licensees in excess of $100,000, which exceed three years in term or which involve related parties must be submitted to and approved by the Iowa Gaming Commission.

Officers, directors, managers and employees of the Iowa gaming operations are required to be licensed by the Iowa Gaming Commission. Employees associated with gaming must obtain a license and these licenses are subject to immediate suspension under specific circumstances. In addition, anyone having a material relationship or involvement with the Iowa gaming operations may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Gaming Commission in connection with the investigation. The Iowa Gaming Commission may deny an application for a license for any cause deemed reasonable. In addition to its authority to deny an application for license, the Iowa Gaming Commission has jurisdiction to disapprove a change in position by officers or key employees and the power to require the Iowa gaming operations to suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Gaming Commission finds unsuitable to act in such capacities.

The Iowa Gaming Commission may revoke a gaming license if the licensee:

has been suspended from operating a gaming operation in another jurisdiction by a board or commission of that jurisdiction;

has failed to demonstrate financial responsibility sufficient to meet adequately the requirements of the gaming enterprise;

is not the true owner of the enterprise;

has failed to disclose ownership of other persons in the enterprise;

is a corporation 10% of the stock of which is subject to a contract or option to purchase at any time during the period for which the license was issued, unless the contract or option was disclosed to the Iowa Gaming Commission and the Iowa Gaming Commission approved the sale or transfer during the period of the license;

knowingly makes a false statement of a material fact to the Iowa Gaming Commission;

fails to meet a monetary obligation in connection with an excursion gaming boat;

pleads guilty to, or is convicted of, a felony;

loans to any person, money or other thing of value for the purpose of permitting that person to wager on any game of chance;

is delinquent in the payment of property taxes or other taxes or fees or a payment of any other contractual obligation or debt due or owed to a city or county; or

assigns, grants or turns over to another person the operation of a licensed excursion boat (this provision does not prohibit assignment of a management contract approved by the Iowa Gaming Commission) or permits another person to have a share of the money received for admission to the excursion boat.


If it were determined that an Iowa Gaming Law was violated by a licensee, the gaming licenses held by a licensee could be limited, made conditional, suspended or revoked. In addition, the licensee and the persons involved could be subject to substantial fines for each separate violation of an Iowa Gaming Law in the discretion of the Iowa Gaming Commission. Limitations, conditioning or suspension of any gaming license could (and revocation of any gaming license would) have a material adverse effect on operations.

The Iowa Gaming Commission may also require any individual who has a material relationship with the Iowa gaming operations to be investigated and licensed or found suitable. The Iowa Gaming Commission, prior to the acquisition, must approve any person who acquires 5% or more of a licensee's equity securities in the event that approval by the Iowa Gaming



Commission is not otherwise contemplated by the operative acquisition document. The applicant stockholder is required to pay all costs of this investigation.

Iowa imposes a gaming tax on the AGR received by licensees each fiscal year at a rate of 5% for the first $1,000,000 and 10% for AGR between $2,000,000 and $3,000,000. Gaming taxes approximating 22% of AGR above $3,000,000 will be payable by each licensee on its operations to the State of Iowa. In addition, there was a prepaid assessment due on June 1, 2005 and another prepaid assessment paid on June 1, 2006, in an aggregate amount equal to 2.152% of each licensee's estimated adjusted gross receipts for fiscal year 2004. These assessments will be offset by future state gaming taxes paid by each licensee with a credit for 20% of the assessments paid allowed each year beginning July 1, 2010 for five consecutive years. The state of Iowa is also reimbursed by the licensees for all costs associated with monitoring and enforcement by the Iowa Gaming Commission and the Iowa Department of Criminal Investigation.

The sale of alcoholic beverages in gaming establishments is subject to strict licensing, control and regulation by the State. The State has full power to limit, condition, suspend or revoke any such licenses.


Colorado

As prescribed by the Colorado Limited Gaming Act of 1991 (the “Colorado Act”), the ownership and operation of limited-stakes gaming facilities in Colorado are subject to the Colorado Gaming Regulations (the “Colorado Regulations”) and final authority of the Colorado Limited Gaming Control Commission (the “Colorado Commission”). The Colorado Act also created the Colorado Division of Gaming (the “Division of Gaming”) within the Colorado Department of Revenue to license, supervise and enforce the conduct of limited stakes gaming in Colorado.

On October 18, 2012, the Colorado Commission granted Affinity Gaming Black Hawk, LLC, our subsidiary which owns the Black Hawk Casinos (collectively with Affinity Gaming Black Hawk, LLC, referred to as the “Colorado Casinos”), retail gaming licenses for the Black Hawk Casinos and a manufacturer/distributor license for the Golden Mardi Gras casino. The licenses expire every two years from their date of issuance, and the Colorado Act requires that applications for renewal be filed with the Colorado Commission not less than 120 days prior to their expiration. No person may offer limited gaming to the public unless such person holds a valid retail gaming license. The licenses were renewed by the Colorado Commission most recently on October 16, 2014.

The Colorado Act declares public policy on limited stakes gaming to be that:

the success of limited stakes gaming is dependent upon public confidence and trust that licensed limited stakes gaming is conducted honestly and competitively, the rights of the creditors of licensees are protected and gaming is free from criminal and corruptive elements;

public confidence and trust can be maintained only by strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments and the manufacture or distribution of gaming devices and equipment;

all establishments where limited gaming is conducted and where gambling devices are operated, and all manufacturers, sellers and distributors of certain gambling devices and equipment, must therefore be licensed, controlled and assisted to protect the public health, safety, good order and the general welfare of the inhabitants of the state to foster the stability and success of limited stakes gaming and to preserve the economy, policies and free competition in Colorado; and

no applicant for a license or other affirmative Colorado Commission approval has any right to a license or to the granting of the approval sought; any license issued or other Colorado Commission approval granted pursuant to the Colorado Act is a revocable privilege, and no holder acquires any vested rights therein.


Pursuant to an amendment to the Colorado Constitution (the “Colorado Amendment”), limited-stakes gaming became lawful in the cities of Central City, Black Hawk and Cripple Creek on October 1, 1991. Currently, limited-stakes gaming means a maximum single bet of $100 on slot machines and in the games of blackjack, poker, craps and roulette. Gaming is permitted to be conducted 24 hours each day.




Limited-stakes gaming is confined to the commercial districts of these cities as defined by Central City ordinance on October 7, 1981, by Black Hawk ordinance on May 4, 1978, and by Cripple Creek ordinance on December 3, 1973. In addition, the Colorado Amendment restricts limited-stakes gaming to structures which conform to the architectural styles and designs which were common to the areas prior to World War I and that conform to the requirements of applicable city ordinances regardless of the age of the structures. Under the Colorado Amendment, no more than 35% of the square footage of any building and no more than 50% of any one floor of any building may be used for limited-stakes gaming. Persons under the age of 21 cannot participate in limited-stakes gaming.

The Colorado Commission has the authority to impose fines, and has broad discretion to issue, condition, suspend for up to six months, revoke, limit or restrict at any time the following licenses: slot machine manufacturer or distributor, operator, associated equipment supplier, retail gaming, support and key employee gaming licenses. The Colorado Commission has delegated authority to the Division of Gaming to issue certain types of licenses and approve certain changes in ownership. The licenses are revocable and non-transferable. With limited exceptions applicable to licensees which are publicly traded entities, no person may sell, lease, purchase, convey or acquire any interest in a retail gaming, manufacturer or distributor, or operator license or business without the prior approval of the Colorado Commission or the Division of Gaming.

The failure or inability of the Colorado Casinos, or the failure or inability of others associated with the Colorado Casinos, including us, to maintain necessary gaming licenses or approvals would have a material adverse effect on our operations. All persons employed by any of the Colorado Casinos, and involved, directly or indirectly, in gaming operations in Colorado are required to obtain a Colorado support or key employee gaming license, which must be renewed every two years. As a general rule, the Colorado Act prohibits any person from having an “ownership interest” in more than three retail gaming licenses in Colorado. The Colorado Commission has ruled that a person does not have an ownership interest in a retail gaming licensee for purposes of the multiple license prohibition if any of the following apply:

A person has less than a 5% ownership interest in an institutional investor that has an ownership interest in a publicly traded licensee or publicly traded company affiliated with a licensee; 

A person has a 5% or more ownership interest in an institutional investor, but the institutional investor has less than a 5% ownership interest in a publicly traded licensee or publicly traded company affiliated with a licensee; 

An institutional investor has less than a 5% ownership interest in a publicly traded licensee or publicly traded company affiliated with a licensee; 

An institutional investor possesses voting securities in a fiduciary capacity for another person and does not exercise voting control over 5% or more of the outstanding voting securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee;

A registered broker or dealer retains possession of voting securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee for its customers and not for its own account, and exercises voting rights for less than 5% of the outstanding voting securities of a publicly traded licensee or publicly traded company affiliated with a licensee; 

A registered broker or dealer acts as a market maker for the stock of a publicly traded licensee or of a publicly traded company affiliated with a licensee and exercises voting rights in less than 5% of the outstanding voting securities of the publicly traded licensee or publicly traded company affiliated with a licensee; 

An underwriter is holding securities of a publicly traded licensee or publicly traded company affiliated with a licensee as part of an underwriting for no more than 90 days after the beginning of such underwriting if it exercises voting rights of less than 5% of the outstanding voting securities of a publicly traded licensee or publicly traded company affiliated with a licensee; 

A book entry transfer facility holds voting securities for third parties, if it exercises voting rights with respect to less than 5% of the outstanding voting securities of a publicly traded licensee or publicly traded company affiliated with a licensee; or 




A person's sole ownership interest is less than 5% of the outstanding voting securities of the publicly traded licensee or publicly traded company affiliated with a licensee.


Under state law, no manufacturer or distributor of slot machines, associated equipment, or related equipment may, without notifying the Division of Gaming within ten days, knowingly have an interest in any casino operator, allow any of its officers or any other person with a substantial interest in such business to have such an interest, employ any person if that person is employed by a casino operator, or allow any casino operator or person with a substantial interest therein to have an interest in manufacturer’s or distributor’s business.

The Colorado Constitution provides for a tax on the total amount wagered less all payouts to players. The gaming tax rates in effect as of July 1, 2008 can only be increased by amendment to the Colorado Constitution by voters in a statewide election. With respect to games of poker, the tax is calculated based on the sums wagered which are retained by the licensee as compensation, which must be consistent with the minimum and maximum amounts established by the Colorado Commission. Effective July 1, 2012, the Colorado Commission reinstated the annual tax rates which were in effect prior to July 1, 2011, increasing the rate tiers as follows:

0.25% up to and including $2 million of the subject amounts;

2.0% on amounts from $2 million to $5 million;

9.0% on amounts from $5 million to $8 million;

11.0% on amounts from $8 million to $10 million;

16.0% on amounts from $10 million to $13 million; and

20.0% on amounts over $13 million.


These rates were renewed effective July 1, 2013, and were valid until June 30, 2014. On May 15, 2014, the Colorado Commission voted unanimously to retain the current gaming tax rates, which were renewed effective July 1, 2014, and are valid until June 30, 2015. The City of Black Hawk has imposed an annual device fee of $945 per gaming device, effective January 1, 2014, and may revise it from time to time. The City of Black Hawk also has imposed other fees, including a monthly transportation fee of $6.42 per device. The Colorado Commission has enacted Rule 4.5, which imposes requirements on publicly traded corporations holding gaming licenses in Colorado and on gaming licenses owned directly or indirectly by a publicly traded corporation, whether through a subsidiary or intermediary company. The term “publicly traded corporation” includes corporations, firms, limited liability companies, trusts, partnerships and other forms of business organizations. Such requirements automatically apply to any ownership interest held by a publicly traded corporation, holding company or intermediary company thereof, where the ownership interest directly or indirectly is, or will be upon approval of the Colorado Commission, 5% or more of the entire licensee. In any event, if the Colorado Commission determines that a publicly traded corporation or a subsidiary, intermediary company or holding company has the actual ability to exercise influence over a licensee, regardless of the percentage of ownership possessed by such entity, the Colorado Commission may require the entity to comply with the disclosure regulations and requirements contained in Rule 4.5.

Under Rule 4.5, gaming licensees, affiliated companies and controlling persons commencing a public offering of voting securities must notify the Colorado Commission no later than 10 business days after the initial filing of a registration statement with the Securities and Exchange Commission. Licensed publicly traded corporations are also required to send proxy statements to the Division of Gaming within five days after their distribution. Licensees to whom Rule 4.5 applies must include in their charter documents provisions which restrict the rights of the licensees to issue voting interests or securities except in accordance with the Colorado Act and the Colorado Regulations; limit the rights of persons to transfer voting interests or securities of licensees except in accordance with the Colorado Act and the Colorado Regulations; and provide that holders of voting interests or securities of licensees found unsuitable by the Colorado Commission may, within 60 days of such finding of unsuitability, be required to sell their interests or securities back to the issuer at the lesser of the cash equivalent of the holders' investment or the market price as of the date of the finding of unsuitability. Alternatively, the holders may, within 60 days after the finding of unsuitability, transfer the voting interests or securities to a suitable person, as determined by the Colorado Commission. Until the voting interests or securities are held by suitable persons, the issuer may not pay dividends or interest,



the securities may not be voted and may not be included in the voting or securities of the issuer, and the issuer may not pay any remuneration in any form to the holders of the securities.

Pursuant to Rule 4.5, persons who acquire direct or indirect beneficial ownership of (a) 5% or more of any class of voting securities of a publicly traded corporation which is required to include in its articles of incorporation the Rule 4.5 charter language provisions; or (b) 5% or more of the beneficial interest in a gaming licensee directly or indirectly through any class of voting securities of any holding company or intermediary company of a licensee, referred to as “qualifying persons,” shall notify the Division of Gaming within 10 days of such acquisition, are required to submit all requested information and are subject to a finding of suitability as required by the Division of Gaming or the Colorado Commission. Licensees also must notify any qualifying persons of these requirements. A qualifying person other than an institutional investor whose interest equals 10% or more must apply to the Colorado Commission for a finding of suitability within 45 days after acquiring such securities. Licensees must also notify any qualifying persons of these requirements. Regardless of whether they have been notified, qualifying persons are responsible for complying with these requirements.

A qualifying person who is an institutional investor under Rule 4.5 and who, individually or in association with others, acquires, directly or indirectly, the beneficial ownership of 15% or more of any class of voting securities must apply to the Colorado Commission for a finding of suitability within 45 days after acquiring such interests.

The Colorado Regulations provide for exemption from the requirements for a finding of suitability when the Colorado Commission finds such action to be consistent with the purposes of the Colorado Act.

Pursuant to Rule 4.5, persons found unsuitable by the Colorado Commission must be removed from any position as an officer, director or employee of a licensee, or from a holding or intermediary company. Such unsuitable persons also are prohibited from any beneficial ownership of the voting securities of any such entities. Licensees, or affiliated entities of licensees, are subject to sanctions for paying dividends or distributions to persons found unsuitable by the Colorado Commission, or for recognizing voting rights of, or paying a salary or any remuneration for services to, unsuitable persons. Licensees or their affiliated entities also may be sanctioned for failing to pursue efforts to require unsuitable persons to relinquish their interest. The Colorado Commission may determine that anyone with a material relationship to, or material involvement with, a licensee or an affiliated company must apply for a finding of suitability or must apply for a key employee license.

The Colorado Regulations require that every officer, director and stockholder of private corporations or equivalent office or ownership holders for non-corporate applicants, and every officer, director or stockholder holding either a 5% or greater interest or controlling interest of a publicly traded corporation or owners of an applicant or licensee, shall be a person of good moral character and submit to, and pay for, a full background investigation conducted by the Division of Gaming and the Colorado Commission. The Colorado Commission may require any person having an interest in a license to undergo a full background investigation and pay the cost of investigation in the same manner as an applicant.

Licensees are required to provide information and file periodic reports with the Division of Gaming, including identifying those who have a 5% or greater ownership, financial or equity interest in the licensee, or who have the ability to control the licensee, or who have the ability to exercise significant influence over the licensee, or who loan money or other things of value to a licensee, or who have the right to share in revenue derived from limited gaming, or to whom any interest or share in profits of limited gaming has been pledged as security for a debt or performance of an act. A licensee, and any parent company or subsidiary of a licensee, who has applied to a foreign jurisdiction for licensure or permission to conduct gaming operations, or who possesses a license to conduct foreign gaming, is required to notify the Division of Gaming. All persons licensed by the Colorado Commission and any associated person of a licensee must report criminal convictions and criminal charges to the Division of Gaming.

The Colorado Commission maintains the right to request information from any person directly or indirectly interested in, or employed by, a licensee, and to investigate the honesty, integrity, moral character, prior activities, criminal record, reputation, habits and associations of:

all persons licensed pursuant to the Colorado Act;

all officers, directors and stockholders of a licensed privately held corporation;




all officers, directors and stockholders holding either a 5% or greater interest or a controlling interest in a licensed publicly traded corporation;

all general and limited partners of a licensed partnership;

all persons maintaining a position similar to that of an officer, director or stockholder of corporation, e.g., members and managers of a limited liability company;

all persons providing financing or loaning money to any licensee in relation to the establishment or operation of limited gaming;

all persons having a contract, lease or ongoing financial or business arrangement with any licensee which relates to limited gaming operations, equipment devices or premises; and

all persons contracting with or supplying any goods and services to the Colorado Commission or the Division of Gaming.


Under the Colorado Regulations, every person who is a party to a “gaming contract,” as defined below, or a lease with an applicant for a license, or with a licensee, upon the request of the Colorado Commission or the Division of Gaming, must promptly provide the Colorado Commission or the Division of Gaming all information which may be requested regarding the financial history, financial holdings, real and personal property ownership, interests in other companies, criminal history, personal history and associations, character, reputation in the community and all other information which might be relevant to a determination of whether a person would be suitable to be licensed by the Colorado Commission. Failure to provide all information requested constitutes sufficient grounds for the Colorado Commission or the Division of Gaming to require a licensee or applicant to terminate its gaming contract or lease with any person who failed to provide the information requested. In addition, the Colorado Commission or the Division of Gaming may require changes to a gaming contract before an application is approved or participation in the contract is allowed. A “gaming contract” means an agreement in which a person does business with or on the premises of a licensed entity.

The Colorado Commission and the Division of Gaming have interpreted the Colorado Regulations to permit the Colorado Commission to investigate and find suitable persons or entities providing financing to or acquiring securities from us. As previously noted, any person or entity required to file information, be licensed or be found suitable would be required to pay the costs thereof as well as the costs of the corresponding investigation. Although the Colorado Regulations do not require prior approval for the execution of credit facilities or issuance of debt securities, the Colorado Commission reserves the right to approve, require changes to or require the termination of any financing, including, but not limited to, situations where a person or entity is required to be found suitable and is not found suitable. In any event, note holders, lenders and others providing financing will not be able to exercise certain rights and remedies without the prior approval of the Colorado Commission or the Division of Gaming. Information regarding lenders and holders of securities will be periodically reported to the Colorado Commission or the Division of Gaming.

The sale of alcoholic beverages in gaming establishments is subject to strict licensing, control and regulation by State and local authorities. All persons who directly or indirectly hold a 10% or greater interest in, or 10% or more of the issued and outstanding capital stock of, the Colorado Casinos, through their ownership of us, must file applications and may possibly be investigated by the Colorado state and local liquor authorities. The Colorado liquor authorities also may investigate persons who, directly or indirectly, loan money to or have any financial interest in liquor licensees. In addition, there are restrictions on stockholders, directors and officers of liquor licensees preventing such persons from being a stockholder, director, officer or otherwise interested in certain persons who lend money to liquor licensees and from making loans to other liquor licensees. Persons directly or indirectly interested in any of the Colorado Casinos may be limited with regard to certain other types of liquor licenses in which they may have an interest, and specifically cannot have an interest in a retail liquor store license. No person can hold more than three retail gaming tavern liquor licenses. In addition, the remedies of certain lenders may be limited by applicable liquor laws and regulations. Alcoholic beverage licenses are revocable and nontransferable. State and local licensing authorities have full power to limit, condition, suspend for as long as six months or revoke any such licenses for violations of the liquor and regulatory requirements, which could have a material adverse effect upon our operations of us or the applicable Colorado Casino.




There are various classes of retail liquor licenses which may be issued under the Colorado Liquor Code. A retail gaming tavern licensee may sell malt, vinous or spirituous liquors only by the individual drink for consumption on the premises. An application for an alcoholic beverage license in Colorado requires notice, posting and a public hearing before the local liquor licensing authority prior to approval. The Colorado Department of Revenue's Liquor Enforcement Division must also approve the application on behalf of the state. Each Colorado Casino has been approved for and holds a retail gaming tavern liquor license for its casino, hotel and restaurant operations.

Under Colorado state law, smoking is not permitted in any indoor area, including limited gaming facilities and any other facilities in which any gaming or gambling activity is conducted.


COMPETITIVE STRENGTHS

Diversified Asset Portfolio

As previously noted, our casino operations consist of 11 casinos, five of which are located in Nevada, three in Colorado, two in Missouri and one in Iowa. As of December 31, 2014, our casinos offered 7,318 slot machines and 133 table games in four states.


Stabilized Portfolio

We worked hard to manage our portfolio through the recent economic downturn, expending great effort to improve efficiency and increase profitability in markets which have experienced stagnant to decreasing total revenue. We have also focused on making modest investments in projects intended to stabilize or improve the cash flow from our properties.


STRATEGIC INVESTMENTS

Our key focus remains on improving the operating margins of our existing properties through a combination of top-line revenue growth and disciplined expense management. Our properties are unique in their offerings and we undertook our recent initiatives, as summarized below, to realize what we believe are the greatest opportunities to improve profitability.


Primm

During 2013, we completed construction of a new travel center adjacent to the Whiskey Pete’s hotel and casino. The travel center includes a Flying J-branded diesel fuel operation, full-service truck weight and maintenance station, Chevron-branded gasoline, a convenience store and several branded quick-serve restaurants, including a Q’doba, Subway, Starbucks and Dairy Queen. We designed the travel center to attract customers traveling South on the I-15 to Los Angeles.


Colorado

During 2013, we completed expansion and renovation of the Golden Mardi Gras, our largest property in Black Hawk. The expansion included the addition of approximately 7,000 square feet of gaming space and extended the main entry by approximately 75 feet, improving the ingress and egress to the properties and capitalizing on the pedestrian traffic accessing the property from the main strip. Our properties are situated directly across the street from the Ameristar on one corner and The Lodge on the other, in the heart of the casino corridor. We also added escalators, significantly improving access to the properties from the street. Additionally, we improved the food offerings by adding a combination buffet/cafe, and a Dunkin Donuts outlet, and we refreshed the casino floor by replacing the aged slot product with the latest, in-demand slot machines.


Rampart Consulting Contract




During 2012, we began providing consulting services to Hotspur, the operator of the JW Marriott Resort’s Rampart Casino in Las Vegas, under a three-year contract which expires April 1, 2015.

Annual minimum consulting fee of $2.0 million, which is recorded as a credit against corporate expense, with potential increases based on a percentage of EBITDA achieved at the Rampart Casino above defined thresholds.


MARGIN-ENHANCEMENT PROGRAMS

Payroll and Related

Full time employees and related payroll expense is closely monitored across the enterprise to minimize operating expenses and maximize operating margins

Management incentive program has been revamped to include both cash and equity compensation, which ensures alignment of shareholder and management goals


Player Club Reinvestment Savings

Improved business intelligence has been implemented to enhance player reinvestment strategies and ensure a competitive level of promotional spend for each segment of the database

Direct reinvestments into the player loyalty club has been re-evaluated to focus promotional spend on areas with the highest returns


Key Cost Controls

Player loyalty club point refinements to redemption periods, minimum balance for redemptions

Cost of sales reduction

Energy efficiency projects implemented across the portfolio to reduce energy costs

Outsourced restaurants to strategically-branded third parties

Payroll efficiencies


Mobile Gaming

Implemented A-Play for Fun, an on-line video gaming experience for A-Play customers, with a third-party partner

Implemented A-Play Connect, a virtual gaming application for smart phones

Implemented A-Play Sports, a real-money sports wagering application for smart phones in the State of Nevada, with a third-party partner


High-Level Business Strategy

During 2012 and 2013, our management team executed a sound business plan to divest of non-core operations and invest in the strengths of the organization. The divestitures of six smaller Nevada casinos and slot route during that period freed up capital and management time to focus on the efficient operation of core assets and profitable growth opportunities. Management is committed to selectively seeking development and expansion opportunities, including entering into new markets, investing in existing operations where it sees opportunities to promote growth, and leveraging its established platform



to grow revenue through management and consulting contracts. We will continue to evaluate opportunities to further diversify our portfolio, maximize profits from existing operations, incorporate business intelligence, efficiently allocate capital and strategically hire skilled and experienced individuals for key positions.

Additionally, we have invested in a unified operating strategy, rebranding assets away from Predecessor’s “Terrible’s” trade name and repositioning them back to the casino brand name each local community is familiar with, as well as rolling out a singular player’s club with our “A-Play” card.


REFINANCING TRANSACTIONS

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 (the “Credit Agreement”), 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”), which among other things, changed the interest rates for the Initial Term Loan.

On July 22, 2014, we completed an amendment and waiver (the “Second Amendment”) to the Credit Agreement. The Second Amendment increased the applicable LIBOR rate floor for the Initial Term Loan from 1.00% to 1.25% and increased the applicable margin from 3.25% to 4.00% in the case of Eurodollar term loans and from 2.25% to 3.00% in the case of base rate term loans. The Second Amendment also adjusted financial covenants by changing a maximum Total Net Leverage Ratio of 6.5x through June 30, 2014 (calculated using total leverage, net of $25 million cash) to a maximum First Lien Net Leverage Ratio of 3.75x through March 31, 2016 (calculated using outstanding first lien senior secured debt, net of $40 million cash), and by lowering the minimum required interest coverage ratio from 2.0x through December 31, 2014 and 2.15x thereafter to a constant minimum ratio of 1.5x.




CORPORATE INFORMATION

Affinity Gaming is a Nevada corporation. Our principal executive offices are located at 3755 Breakthrough Way, Suite 300, Las Vegas, NV 89135 and our telephone number at that address is (702) 341‑2400. Our website is located at http://www.affinitygaming.com.


ITEM 1A.
RISK FACTORS

RISKS RELATED TO OUR INDEBTEDNESS

We have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to react to changes in our business.

We have a substantial amount of debt, which requires significant principal and interest payments. As of December 31, 2014, we had approximately $382.7 million of debt outstanding, excluding original issue discount and including approximately $200 million outstanding under the 2018 Notes and $182.7 million of secured debt outstanding under our Initial Term Loan.




Our significant amount of debt could have important consequences. For example, it could:

make it more difficult for us to satisfy our obligations with respect to the instruments governing our then outstanding indebtedness;

increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings, including those under our New Credit Facility, are and will continue to be at variable rates of interest;

require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures, strategic acquisitions or other general corporate purposes;

limit our flexibility in planning for, or reacting to, competitive pressures and changes in the business and industry in which we operate;

place us at a disadvantage compared to competitors that may have proportionately less debt;

limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements; and

increase our cost of borrowing.


We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations, or that these actions would be permitted under the terms of our existing or future debt agreements. In the absence of such cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our debt instruments restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them, and any proceeds may not be adequate to meet any debt service obligations then due.

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

our debt holders could declare all outstanding principal and interest to be due and payable;

the lenders under our New Credit Facility could terminate their commitments to loan us money and foreclose against the assets securing their borrowings; and

we could be forced into bankruptcy or liquidation.





The agreements and instruments governing our debt contain restrictions and limitations that impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.

The New Credit Facility and the indenture governing the 2018 Notes impose significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:

pay dividends or make certain redemptions, repurchases or distributions (other than customary tax distributions) or make certain other restricted payments or investments;

incur or guarantee additional indebtedness or issue certain preferred stock, disqualified stock or create subordinated indebtedness that is not subordinated to the Notes or the guarantees;

create liens;

transfer and sell assets;

merge, consolidate, or sell, transfer or otherwise dispose of all or substantially all of our assets;

enter into certain transactions with affiliates;

make certain investments; and

create restrictions on dividends or other payments by our restricted subsidiaries.


In addition, the New Credit Facility contains certain financial covenants, including a minimum interest coverage ratio covenant, a first lien secured net leverage ratio covenant, a maximum capital expenditures covenant and a total secured leverage ratio covenant.

As a result of these covenants and restrictions, we are limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The restrictions caused by such covenants could also place us at a competitive disadvantage to less leveraged competitors. The terms of any future indebtedness we may incur could include more restrictive covenants. Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross default provisions.  A default, if not cured or waived, would permit lenders to accelerate the maturity of the indebtedness under these agreements, terminate any funding commitments to extend future credit, require us to apply all available cash to repay the borrowings, and/or foreclose upon any collateral securing such indebtedness, including pledges of equity interests of entities owning our casino properties, which could result in the lenders owning, and controlling, the equity of certain of our casino properties. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. We would, therefore, be required to seek alternative sources of funding, which may not be available on commercially reasonable terms, terms as favorable as our current agreements or at all, or face bankruptcy. If we are unable to refinance our indebtedness or find alternative means of financing our operations, we may be required to curtail our operations or take other actions that are inconsistent with our current business practices or strategy. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could intensify the risks described above.

Although the terms of the agreements governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. The terms of the indenture governing the 2018 Notes do not fully prohibit us or our subsidiaries from incurring such additional indebtedness. In addition, the indenture governing the 2018 Notes allows us to issue additional notes under the indenture and will allow us to incur certain other secured indebtedness. Our New Credit Facility allows us to incur capital lease obligations and purchase money indebtedness for fixed or capital assets in an aggregate amount not to exceed $50 million (with such indebtedness being secured by the assets leased or acquired), and they allow us to incur other indebtedness in an amount not to exceed $5 million, of which only $1



million may be secured by a lien on our property or assets. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

The state of the financial markets may impact our ability to obtain sufficient financing and credit in the future.

In addition to earnings and cash flows from operations, we may rely on borrowed money to finance our business, which may be constrained if we are unable to borrow additional capital or refinance existing borrowings on reasonable terms. Over the past several years, financial markets and banking systems experienced disruption which had a dramatic impact on the availability and cost of capital and credit. The United States and other governments have enacted legislation and taken other actions to help alleviate these conditions, although there is no assurance that such steps will have the effect of easing the conditions in credit and capital markets over the long term. Therefore, we have no assurance that such steps will facilitate us being able to obtain financing or access the capital markets for future debt or refinancing opportunities in a timely manner, or on acceptable terms, or at all. If we are unable to borrow funds, we may be unable to make the capital expenditures necessary for us to compete with other casino operators or take advantage of new business opportunities. As a result, the lack of such funding could have a material adverse effect on our business, results of operations and financial condition and our ability to service our indebtedness.


RISKS RELATED TO INVESTING IN OUR EQUITY

There is not currently, and may not be, a viable public market for our common stock.

No established public trading market currently exists for our common stock, and aside from the Registration Rights Agreement described below, we have no plans, proposals, arrangements or understandings with any person with regard to developing such a market for our common stock.

On February 7, 2012, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with SPH Investment, LLC (“SPH”), in connection with the Conversion. Pursuant to the Registration Rights Agreement, among other things, we granted SPH and its transferees certain demand and piggyback registration rights relating to the resale of equity securities held by SPH and the right to demand the listing of any such securities on the NADSAQ Stock Market or the New York Stock Exchange within 365 days after receipt of the applicable listing demand notice. On October 1, 2012, we received a listing demand notice from SPH pursuant to section 4.2 of the Registration Rights Agreement requiring us to use our reasonable best efforts to consummate the listing of our equity securities on the NASDAQ Stock Market. However, given that our common stock is held of record, or beneficially, in the hands of a limited number of holders, we have not applied to list our common stock listed on the NASDAQ Stock Market or any other national securities exchange, and do not plan on doing so unless and until we can reasonably anticipate having an application approved.

Issuance of equity interests to our executive officers and directors will dilute our equity holders.

The Compensation Committee approved the Affinity Gaming Amended and Restated 2011 Long-Term Incentive Plan (the “2011 LTIP”). We grant awards of stock options, restricted common stock, or both, under the 2011 LTIP as incentive to employees, officers, directors and consultants. The issuance of restricted common stock shares or of common stock shares underlying exercised options will dilute the percentage ownership of any holders of our common stock shares. At December 31, 2014, 300,464 shares of restricted common stock shares and options to purchase 177,497 shares of our common stock shares remain outstanding under the 2011 LTIP and awards with respect to 1,522,039 shares remained available for future issuance.


RISKS RELATED TO OUR BUSINESS

The failure to maintain a regular schedule of capital improvements, whether that includes expansion or renovation projects, could put us at a competitive disadvantage, and our expansion and renovation projects may face significant risks inherent in construction projects.

Our casino and casino/hotel properties have an ongoing need for renovations and other capital improvements, including the occasional replacement of furniture, fixtures and equipment, to remain competitive. Applicable laws and regulations may also require us to make capital expenditures.




Renovations and other capital improvements of the casino properties usually generate little or no cash flow while work is underway, but they require large capital expenditures. We may not be able to fund such projects solely from cash provided from operating activities; therefore, we may have to rely upon the availability of debt or equity financing for project funding. Project funding will be limited if we cannot obtain satisfactory debt or equity financing, which will depend upon market conditions, among other factors. We cannot provide assurance that we will be able to obtain debt or equity financing for project funding on favorable terms.

Further, any development projects we may undertake will be subject to many risks inherent in the expansion or renovation of an existing enterprise or construction of a new enterprise, including unanticipated design, construction, regulatory, environmental and operating problems and lack of demand for our projects. The occurrence of any of development and construction risks could increase the total costs of our construction projects or delay or prevent the construction or opening or otherwise affect the design and features of our construction projects, which could materially adversely affect our plan of operations, financial condition and ability to satisfy our debt obligations.

In addition, actual costs and construction periods for any of our projects can differ significantly from initial expectations. Our initial project costs and construction periods are based upon budgets, conceptual design documents and construction schedule estimates prepared at inception of the project in consultation with architects and contractors. Many of these costs can increase over time as the project is built to completion. We can provide no assurance that any project will be completed on time, if at all, or within established budgets, or that any project will result in increased earnings to us. Significant delays, cost overruns, or failures of our projects to achieve market acceptance could have a material adverse effect on our business, financial condition and results of operations.

Although we design our projects to minimize disruption of our existing business operations, expansion and renovation projects require, from time to time, all or portions of affected existing operations to be closed or disrupted. Any significant disruption in operations of a property could have a significant adverse effect on our business, financial condition and results of operations.

Other factors, such as when the bankruptcy of Predecessor delayed or canceled many capital improvement projects, may create deferred capital expenditure needs which we may not be able to fully address. Addressing deferred capital needs may adversely affect our ability to complete renovations and other capital improvements at our casino and casino/hotel properties. Our failure to maintain a regular schedule of capital improvements, whether the failure is caused by lack of financing or by other factors, may put us at a competitive disadvantage which would have an adverse effect on our results of operations.

Our operations, and the gaming industry as a whole, are particularly sensitive to reductions in consumer spending as a result of downturns in the economy and other factors.

The gaming industry as a whole is highly sensitive to consumers' disposable incomes, and a general decline in economic conditions, including businesses downsizing their workforces for various reasons, the 2013 repeal of the payroll tax reductions, and the increased cost of health insurance as a result of the Affordable Care Act may lead to our potential customers having less discretionary income with which to wager. Many of our customers have also experienced prolonged impact from persistently high unemployment rates and reduced housing values as a result of the Great Recession. The State of Nevada, one of our primary markets, has been among the highest in the nation in terms of the unemployment rate and has seen among the largest real estate declines and number of foreclosures in recent years. These developments lead to a reduction in revenue and materially adversely affected the operating results of our properties. Recently, we are seeing improving economies in our local and regional markets. However, we cannot say when, if ever, or to what extent, customer behavior in our various markets will fully-revert to pre-recession behavior trends. In addition, further reductions in discretionary spending could significantly harm our operations and we may not be able to lower our costs rapidly enough, or at all, to offset additional declines in revenue.

We face intense competition from other gaming operations and Internet gaming, and may experience a loss of market share.

The gaming industry is highly competitive. We compete for gaming customers with other locals-oriented casino-hotels, other casinos located in the vicinity of these properties, as well as competition from new forms of gaming which exist or may be legalized in the future, including Internet gaming. Our casino operations face competitors that include land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American reservations, and racing and pari-mutuel operations.

Southern California provides the largest number of customers for the Primm Casinos, including a large number of customers who drive to Las Vegas from the San Bernardino and Barstow metropolitan areas. The expansion of Native



American casinos in California, Oregon and Washington continues to have an impact on casino revenue in Nevada in general, and such impact may be significant on the markets in which the Rail City and our Primm casinos operate.

In March 2014, ballot initiative petitions were introduced in Colorado which, should they survive legal challenges and a rigorous certification process, would allow the state’s voters to decide in November 2014 whether amend the Colorado state constitution to allow video lottery terminals (“VLTs”) at exclusive locations which include an existing racetrack in Arapahoe County and race tracks to be constructed in Pueblo and Mesa counties, and whether to allow expanded gaming, including table games, at those facilities. In each case, the number of VLTs in the facility would be at least 2,500, and use of the VLT’s would commence no later than November 1, 2015. Arapahoe, Pueblo and Mesa counties are each suburbs of Denver, the key feeder market for the Black Hawk/Central City gaming market.

If our competitors operate more successfully, if their existing properties are enhanced or expanded, or if additional competitors are established in and around the locations in which we conduct business, we may lose market share. In particular, the expansion of casino gaming in or near any geographic area from which we attract or expect to attract a significant number of our customers could have a material adverse effect on our business, financial condition and results of operations.

Additionally, as a result of the United States Justice Department's December 2011 opinion concerning the applicability of the Wire Act to Internet gaming, certain states, including Nevada, have moved forward with legislation to authorize various forms of intrastate Internet gaming. Nevada’s current Internet gaming laws permit Nevada-licensed Internet providers to commence Internet poker, and they allow the State to enter into agreements with other states to create multi-state poker wagering, and in February 2014, Delaware and Nevada entered into the first such agreement. Many of our competitors in the Nevada market have greater financial resources than we do and have already applied for, or been approved for, interactive gaming licenses in Nevada to provide online poker services. Our ability to compete in a marketplace containing multiple virtual casino platforms will depend on our ability to effectively market future Internet gaming products to our customers in face of stiff competition as well as the availability of Internet gaming in jurisdictions in which we operate casinos. We may not have the expertise or the financial resources which our competitors have with regard to interactive gaming via the Internet. In most markets, we compete directly with other casino facilities operating in the immediate and surrounding market areas. In some markets, we face competition from nearby markets in addition to direct competition within our market areas as well as the threat from new, emerging markets. With Internet gaming, our land based casinos will also potentially be competing in virtual markets that may not be constrained by geographical limitations. Increases in the popularity of, and competition from, interactive gaming services and daily fantasy sports contests, where permitted, could negatively impact our results of operations and financial condition.

Some Native American casinos have a lower minimum age requirement for gambling, which may increase their market share at the expense of our market share.

Some Native American casinos in Southern California and Iowa allow customers at least 18 years old to gamble, whereas our gambling establishments require our customers to be at least 21 years old. This could lead to a reduced market for us as those Native American casinos would have an earlier opportunity to create loyal customers. If our competitors are able to retain these customers after they turn 21, thereby causing them to continue gambling at those establishments rather than try our establishments, we may experience reduced market share.

Any increase in the price of gasoline may have an adverse impact on the results of our operations.

Most of our customers drive themselves to our properties; therefore, an increase in gasoline prices may adversely affect our customers’ discretionary income and, ultimately, our revenue. In recent years, gasoline prices have increased at times, and we cannot assure you that gasoline prices will hold steady or decline.

We may be subject to litigation which, if adversely determined, could expose us to significant liabilities, damage our reputation and result in substantial losses.

During the ordinary course of operating our businesses, we will occasionally be subject to various litigation claims and legal disputes. Without limitation, such claims and legal disputes may include contract, lease, employment and regulatory claims, as well as claims made by visitors to our properties. Certain litigation claims may not be covered entirely or at all by our insurance policies or our insurance carriers may seek to deny coverage. In addition, litigation claims can be expensive to defend and may divert our attention from the operations of our businesses. Further, litigation involving visitors to our properties, even if without merit, can attract adverse media attention.




We evaluate all litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and/or disclose the relevant litigation claims or legal proceedings, as appropriate. Our assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. We caution you that actual outcomes or losses may differ materially from those envisioned by its current assessments and estimates. As a result, litigation can have a material adverse effect on our businesses and, because we cannot predict the outcome of any action, it is possible that adverse judgments or settlements could significantly reduce our earnings or result in losses.

Acquisitions, new venture investments and divestitures may not be successful.

As part of our strategy, we may seek to increase growth through strategic acquisitions and any such acquisition may be significant. Not only is the identification of good acquisition candidates difficult and competitive, but these transactions also involve numerous risks, including the inability to:

successfully integrate acquired companies, properties, systems or personnel into our existing business;

minimize any potential interruption to our ongoing business;

successfully enter markets in which we may have limited or no prior experience;

achieve expected synergies and obtain the desired financial or strategic benefits from acquisitions;

retain key relationships with employees, customers, partners and suppliers of acquired companies; and

maintain uniform standards, controls, procedures and policies throughout acquired companies.


Companies, businesses or operations acquired or joint ventures created may not be profitable, may not achieve revenue levels and profitability which justify the investments made or they may carry other risks associated with such transactions. For example, in connection with our acquisition of the land and buildings of the three Black Hawk Casinos on February 29, 2012, we simultaneously leased the casinos back to Golden Gaming through October 31, 2012, earning lease revenue while we waited for approval of our Colorado gaming licenses. We began operating the Black Hawk Casinos on November 1, 2012, after obtaining our Colorado gaming licenses.

Future acquisitions could result in the incurrence of indebtedness, the assumption of contingent liabilities, material expense related to certain intangible assets and increased operating expense, which could adversely affect our results of operations and financial condition. In addition, to the extent that the economic benefits associated with any of our acquisitions diminish in the future, we may be required to record additional write downs of goodwill, intangible assets or other assets associated with such acquisitions, which could adversely affect our operating results.

We may also decide to divest certain assets, businesses or brands which do not meet our strategic objectives or growth targets, such as with the sale of our slot route, two Pahrump, Nevada casinos and our Searchlight, Nevada casino in February 2012 and the sale of the Sands Regency, Gold Ranch and the Dayton Casino in January 2013. With respect to any divestiture, we may encounter difficulty finding potential acquirers or other divestiture options on favorable terms. Any divestiture could affect our profitability, either as a result of the gains or losses on such sale of a business or brand, the loss of the operating income resulting from such sale or the costs or liabilities which are not assumed by the acquirer which may negatively impact profitability subsequent to any divestiture. We may also be required to recognize impairment charges as the result of a divesture.

Any potential future acquisitions, new ventures or divestitures may divert the attention of management and may divert resources from matters which are core or critical to the business.

We may face potential successor liability.

As the successor to Predecessor, we may be subject to certain liabilities of Predecessor not provided for in the joint plan of reorganization confirmed by order of the United States Bankruptcy Court for the District of Nevada, Northern Division on January 22, 2010 (the “Bankruptcy Plan”). Such liabilities may arise in a number of circumstances, including those where:




a creditor of Predecessor did not receive proper notice of the pendency of the bankruptcy case relating to the Bankruptcy Plan or the deadline for filing claims therein;

the injury giving rise to, or source of, a creditor’s claim did not manifest itself in time for the creditor to file the creditor’s claim;

a creditor did not timely file the creditor’s claim in such bankruptcy case due to excusable neglect;

we are liable for Predecessor’s tax liabilities under a federal and/or state theory of successor liability; or

the order of confirmation for the Bankruptcy Plan was procured by fraud.

Although we have no reason to believe that we will become subject to liabilities of Predecessor which are not provided for in the Bankruptcy Plan, if we should become subject to such liabilities, it could materially adversely affect our business, financial condition and results of operations.

The inability of the applicable parties under our recent acquisition and sale agreements to fulfill their indemnification obligations could affect our results of operations and financial position.

On February 27, 2012, we sold our casino in Searchlight, Nevada, and the portion of our slot route operations relating solely to the Terrible Herbst convenience stores to JETT Gaming, LLC, a Las Vegas based slot route operator. On February 29, 2012, we sold the remainder of our slot route operations, as well as our two Pahrump, Nevada casinos, to Golden Gaming, LLC (formerly known as Golden Gaming, Inc), a Las Vegas based casino, tavern and slot route operator. In addition, as part of the transaction with Golden Gaming, we acquired the land and buildings of the Golden Mardi Gras Casino, Golden Gates Casino and Golden Gulch Casino—all located in Black Hawk, Colorado. On February 1, 2013, we completed the sale of the Sands Regency, Gold Ranch and the Dayton Casino to Truckee Gaming. In connection with the applicable acquisition and sale agreements, we, Golden Gaming and Truckee Gaming agreed to retain responsibility for and indemnify the purchasing party against damages resulting from certain third-party claims or other liabilities, such as workers’ compensation liabilities and certain environmental liabilities. Our indemnification obligations with respect to breaches of our representations and warranties in the agreements related to the sale of our slot route and Pahrump, Nevada casinos and our Sands Regency, Gold Ranch and Dayton Casino will, in each case, terminate upon expiration of the applicable indemnification period, are generally subject to deductible amounts and will not cover damages in excess of applicable coverage limits. The indemnification obligations of Golden Gaming with respect to breaches of its representations and warranties in the agreement related to the sale of its Black Hawk, Colorado casinos will terminate upon expiration of the applicable indemnification period, are also generally subject to deductible amounts and will not cover damages in excess of applicable coverage limits. If claimants successfully assert, either before or after the expiration of the applicable indemnification period, that we are liable for claims and/or retained liabilities that arise under the relevant acquisition and sale agreements, or if Golden Gaming or Truckee Gaming fails to satisfy their indemnification obligations to us with respect to claims and/or retained liabilities covered by the relevant acquisition agreements, it could have an adverse effect on our results of operations and financial position.

Several provisions of Nevada corporate law, our articles of incorporation, and our bylaws could discourage, delay or prevent a merger or acquisition, even in situations that may be viewed as desirable by our shareholders.

The Nevada Revised Statutes, our articles of incorporation and our bylaws contain provisions which may make the acquisition of the Company more difficult without the approval of our board of directors. These provisions include (i) authorizing our Board of Directors to issue “blank check” preferred stock having superior rights without shareholder approval, (ii) advance notice requirements for shareholder proposals and nominations, (iii) limitations on the ability of shareholders to amend, alter or repeal our bylaws, (iv) prohibiting us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder unless certain requirements are met, and (v) requiring disinterested stockholder approval for certain “controlling interest” acquisitions.

Our future financial results will be affected by the adoption of fresh-start reporting and may not reflect historical trends.

We were formed to acquire substantially all of the assets of the Predecessor as a result of Predecessor’s bankruptcy. As of December 31, 2010, we became a new reporting entity and adopted fresh-start accounting. Under fresh-start accounting, we adjusted Predecessor's assets and liabilities to measured value, and recognized certain assets and liabilities not previously recognized in Predecessor's financial statements. Accordingly, our financial condition and results of operations from and after



January 1, 2011 may not be comparable to the financial condition and results of operations reflected in Predecessor's historical consolidated financial statements.


The bankruptcy filing has had a negative impact on Predecessor's image which may negatively impact our business going forward.

As a result of the Chapter 11 cases, Predecessor was the subject of negative publicity which has had an impact on its image and the images of the operations we acquired. This negative publicity may have an effect on the terms under which some customers and suppliers are willing to continue to do business with us and could materially adversely affect our business, financial condition and results of operations.

Our operations may be adversely impacted by increases in energy prices.

The casino properties use significant amounts of electricity, natural gas and other forms of energy. Although no energy shortages have been experienced, any such occurrences or other events which cause energy price increases in the geographic areas in which we operate could result in a decline in the disposable incomes of potential customers and a corresponding decrease in visitation and spending at our casino operations, which could negatively impact revenue.

A write-off of all or a part of our identifiable intangible assets or goodwill would hurt our operating results and reduce our net worth.

Under generally accepted accounting principles, we review our identifiable intangible assets, including goodwill, for impairment at least annually or when events or changes in circumstances indicate their carrying value may not be recoverable. Factors which may be considered a change in circumstances, indicating that the carrying value of our goodwill or other identifiable intangible assets may not be recoverable, include a sustained decline in the value of shares of our common stock, reduced future cash flow estimates, a disposal of a portion of our business and slower growth rates in our industry. We may be required to record a significant non-cash impairment charge in our financial statements during the period in which any impairment of our goodwill or other identifiable intangible assets is determined, negatively impacting our results of operations and stockholders’ equity.

As of December 31, 2014, we had approximately $126.5 million of total identifiable intangible assets, as well as $68.5 million of goodwill, which represented approximately 11% of our total assets. We amortize definite-lived intangible assets such as customer loyalty programs based on estimated useful lives. We do not amortize indefinite-lived intangible assets, such as gaming license rights in jurisdictions where a limited number of licenses are issued. As of December 31, 2014, definite-lived intangible assets totaled $6.7 million and indefinite-lived intangible assets totaled $119.9 million.

Because valuation methodologies used in impairment testing include forecast information and assumptions about future performance, the likelihood and severity of impairment charges increases during periods of market volatility, such as the one which recently occurred as a result of the general weakening of the global economy. If we are unable to retain our existing customers, or if average customer spending or customer traffic decreases, we may incur future impairment charges. In the event we identify an impairment of indefinite lived intangible assets or goodwill, we would record a charge to earnings. Although it would not affect our cash flow, a write-off in future periods of all or a part of our intangible assets could adversely affect our business, financial condition and results of operations.

We depend upon our key employees and certain members of our management.

Our success is substantially dependent upon the efforts and skills of our senior executives: Michael Silberling, our Chief Executive Officer joined us in August 2014 following the departure of our prior Chief Executive Officer, David D. Ross, in July 2014. In addition, Donna Lehmann, our Senior Vice President, Chief Financial Officer and Treasurer, has announced her resignation effective March 31, 2015, and she will be succeeded in that role by Walter Bogumil, and our Senior Vice President, General Counsel and Secretary., Marc H. Rubinstein, in February 2015 transitioned from an employment to a consultant relationship. The loss of the services rendered by any of these senior executives could adversely affect our operations. In addition, we compete with other potential employers for employees, and we may not succeed in hiring and retaining the executives and other employees that we need. A failure to hire quality employees could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to protect the security of confidential customer information, including credit card data, we could be exposed to data loss, litigation and liability and our reputation could be significantly harmed.




We rely on information technology and other systems to maintain and transmit personal customer information, credit card settlements, credit card funds transmissions, mailing lists and reservations information. In connection with credit card sales, we transmit confidential credit card information securely over public networks and store it in our data warehouse. Third parties may have the opportunity, technology or know-how to breach the security of this customer information, and our security measures may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations, and any resulting negative publicity could significantly harm our reputation. We maintain an insurance policy which provides $5.0 million of coverage, subject to a $250,000 deductible, for information system breaches; however, we cannot provide absolute assurance that the coverage will be sufficient to cover all claims arising from the recent breach of our systems, including any assessments imposed by the payment card industry.

For example, in late 2013, we learned 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. In April 2014, we learned that another 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. We have 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.

As of December 31, 2014, we have incurred $1.2 million in expense, including deductibles, for the two security breaches. We do not expect to incur additional material expenses that are not covered by insurance. However, we cannot estimate the total amount which we will ultimately incur and be reimbursed by insurance carriers 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.

We face extensive regulation from gaming and other government authorities.

As owners and operators of gaming facilities, we are subject to extensive state and local regulations in Nevada, Iowa and Missouri and Colorado. Certain approvals from gaming authorities must be obtained before we can take certain actions with respect to our properties in these jurisdictions. In addition, the Nevada Gaming Commission, the Iowa Racing and Gaming Commission, the Missouri Gaming Commission and the Colorado Limited Gaming Control Commission require us and our subsidiaries to obtain gaming licenses and require our officers, key employees and business entity affiliates to demonstrate suitability to hold gaming licenses. Such state and local government authorities may limit, condition, suspend or revoke a license for any cause deemed reasonable by the respective licensing agency. They may also levy substantial fines against us or our subsidiaries or the entities or individuals involved in violating any gaming laws or regulations. The violation of any such state and local regulations could have a material adverse effect on our business, financial condition and results of operations.

In Nevada, the Nevada Gaming Commission could request that a state court appoint a supervisor to operate any non-restricted gaming establishment operated by us if the licenses held by us are revoked, suspended or otherwise lapse. In such extraordinary circumstances, earnings generated by gaming operations during a supervisor’s appointment (except for reasonable rental value) could be forfeited to the State of Nevada. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

On February 28, 1995, the electorate of Clarke County, Iowa (the county in which the Lakeside Casino is located) approved an excursion boat gambling referendum permitting such gaming operations in Clarke County. Every eight years a majority of the Clarke County electorate must reauthorize the excursion boat gambling referendum to allow gambling games to continue in Clarke County. Such a referendum took place on November 2, 2010, with the electorate voting on the proposition favoring continued gaming on riverboats in Clarke County. The next referendum is scheduled for November 2018. If the reauthorization referendum is defeated it would have a material adverse effect on our operations and financial condition.

In addition, Lakeside's excursion gambling boat license was approved for renewal at a March 5, 2015 meeting of the Iowa Racing and Gaming Commission. This license is not transferable and will need to be renewed annually and prior to the



commencement of each subsequent annual renewal period. The Class A and Class B licenses in Missouri were renewed for a four-year term in January 2013. The Black Hawk Casinos had their retail operator's licenses renewed in October 2014 for two-year terms.

Any future public offering of debt or equity securities by us will require review of and prior approval by the Nevada Gaming Commission, the Iowa Racing and Gaming Commission, the Missouri Gaming Commission and the Colorado Limited Gaming Control Commission. The Missouri Gaming Commission also requires notice of the intended incurrence of any private debt exceeding $1 million and reserves the right to elect to have prior review and approval.



State gaming laws and regulations may require holders of our debt or equity securities to undergo a suitability investigation, which may result in redemption of their securities.

Many jurisdictions require any person who acquires beneficial ownership of debt or equity securities of a casino gaming company to apply for qualification or a finding of suitability. Generally, any person who fails or refuses to apply for a finding of suitability or a license within the prescribed period after being advised by gaming authorities that it is required to do so may be denied a license or found unsuitable or unqualified, as applicable. Any holder of securities that is found unsuitable or unqualified or denied a license, and who holds, directly or indirectly, any beneficial ownership of a gaming entity’s securities beyond such period of time as may be prescribed by the applicable gaming authorities may be guilty of a criminal offense. Furthermore, a gaming entity may be subject to disciplinary action if such gaming entity, after receiving notice that a person is unsuitable to be a holder of securities or to have any other relationship with such gaming entity or any of its subsidiaries:

pays that person any dividend or interest upon the securities;

allows that person to exercise, directly or indirectly, any voting ownership right conferred through securities held by that person;

pays remuneration in any form to that person for services rendered or otherwise; or

fails to pursue all lawful efforts to require such unsuitable person to relinquish the securities including, if necessary, the immediate purchase of such securities for the lesser of fair value at the time of repurchase or fair value at the time of acquisition by the unsuitable holder.

In the event that disqualified holders fail to divest themselves of such securities, gaming authorities have the power to revoke or suspend the casino license or licenses related to the regulated entity that issued the securities. In addition, the Articles of Incorporation of Affinity Gaming provide that we may redeem our stock from an Unsuitable Person (as such term is defined in the Articles of Incorporation).

The approval of the Nevada Gaming Commission, Iowa Racing and Gaming Commission, Missouri Gaming Commission and Colorado Limited Gaming Control Commission is required for change of control transactions and certain acquisitions of equity interests in the Company.

Changes in the control of Affinity Gaming through merger, consolidation, equity or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control, may not occur without the approval of the Nevada Gaming Commission, the Iowa Racing and Gaming Commission, the Missouri Gaming Commission and the Colorado Limited Gaming Control Commission. The Nevada Gaming Commission, the Iowa Racing and Gaming Commission, the Missouri Gaming Commission and the Colorado Limited Gaming Control Commission may also require the equity holders, officers, directors and other persons having a material relationship or involvement with the entity acquiring control to be investigated and licensed as part of the approval process relating to the transaction.

Under Nevada law, any person who acquires more than 5% of our voting securities will be required to report such acquisition to the Nevada Gaming Commission. Any beneficial owner of more than 10% of our voting securities will be required to apply to the Nevada Gaming Commission for a finding of suitability. Under certain circumstances, an “institutional investor” as defined under the regulations of the Nevada Gaming Commission, which acquires beneficial ownership of more than 10%, but not more than 25%, of our voting securities (subject to certain additional holdings as a result of certain debt restructurings or stock repurchase programs under the Nevada Act), may apply to the Nevada Gaming Commission for a waiver of such finding of suitability requirement if the institutional investor holds our voting securities only for investment purposes. In addition, any beneficial owner of our voting securities, regardless of the number of shares beneficially owned, may be



required at the discretion of the Nevada Gaming Commission to file an application for a finding of suitability as such. In either case, a finding of suitability is comparable to licensing and the applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting the investigation.

Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or by the Chair of the Nevada State Gaming Control Board may be found unsuitable. Any equity holder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the equity of a registered corporation beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense and the Company and the gaming subsidiaries may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be an equity holder or to have any other relationship with the Company or the gaming subsidiaries, the Company pays that person any dividend or interest upon voting securities, allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, pays remuneration in any form to that person for services rendered or otherwise; or fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value.

Under Missouri law, institutional and passive investors that do not take an active role in management and own less than a 20% ownership interest and more than a 5% ownership interest in the Company may either file for a key person license or seek a waiver of licensure. However, a passive investor owning more than a 5% ownership interest in the Company that desires to take an active role in the management or operations of the Company, or any investor that owns more than a 20% ownership interest in the Company, will be required to file an application for key person licensure. In addition, any investor wishing to acquire more than a 25% ownership interest in the Company will be required to apply for approval of the acquisition as a change in control; failure to obtain such approval before a change in control may result in immediate and automatic loss of the license to conduct gaming. If the investor is not found suitable, the investor will be required to divest its interest in the Company. In addition, we will be required to provide the Missouri Gaming Commission with prior notice if we intend to transfer, issue, grant a security interest in, or pledge 5% or more of our equity.

Under Iowa law, any person who intends to acquire 5% or more of the equity securities of a licensed entity must, prior to such acquisition, obtain approval from the Iowa Racing and Gaming Commission. As a matter of policy, the Iowa Racing and Gaming Commission has granted institutional investor waivers.

Under Colorado law, persons who acquire direct or indirect beneficial ownership of (a) 5% or more of any class of voting securities of a publicly traded corporation that is required to include in its articles of incorporation the Rule 4.5 charter language provisions; or (b) 5% or more of the beneficial interest in a gaming licensee directly or indirectly through any class of voting securities of any holding company or intermediary company of a licensee, referred to as “qualifying persons,” shall notify the Division of Gaming within 10 days of such acquisition, are required to submit all requested information and are subject to a finding of suitability as required by the Division of Gaming or the Colorado Commission. Licensees also must notify any qualifying persons of these requirements. A qualifying person other than an institutional investor whose interest equals 10% or more must apply to the Colorado Commission for a finding of suitability within 45 days after acquiring such securities. Licensees must also notify any qualifying persons of these requirements. Whether or not notified, qualifying persons are responsible for complying with these requirements.

A qualifying person who is an institutional investor under Rule 4.5 and who, individually or in association with others, acquires, directly or indirectly, the beneficial ownership of 15% or more of any class of voting securities must apply to the Colorado Commission for a finding of suitability within 45 days after acquiring such interests.

Such requirement to be found suitable to hold our voting securities may discourage or delay trading of our securities and, in particular, change of control transactions.

Changes to applicable gaming laws could have a material adverse effect on our operations and financial condition.

Gaming laws are generally based upon declarations of public policy which are concerned with, among other things:

the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;

the establishment and maintenance of responsible accounting practices and procedures;




the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenue, providing reliable record keeping and requiring the filing of periodic reports;

the prevention of cheating and fraudulent practices; and

providing a source of state and local revenue through taxation and licensing fees.


Changes in these laws, regulations and procedures could have an adverse effect on our proposed gaming operations.

Our operations are subject to numerous laws and regulations resulting from our diverse operating activities

We are subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws, regulations and permits that govern the serving of alcoholic beverages and the smoking of tobacco products. Any changes to these laws could have a material adverse effect on our business, financial condition and results of operations.

Potential changes in legislation and regulation could negatively impact our gaming operations.

From time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations in the jurisdictions in which we operate. Any such change to the regulatory environment or the adoption of new federal, state or local government legislation could have a material adverse effect on our business.

Our operations could be adversely affected due to the adoption of certain anti-smoking regulations.

Although, not permitted at casino locations in Colorado, smoking is currently permitted at casino locations in Nevada, Missouri, and Iowa. From time to time, bills which would restrict or ban smoking in casinos are introduced in state legislatures and in city/town councils. For example, a proposed ordinance was approved by the voters of the City of St. Joseph, Missouri in April 2014, which amended the local health and sanitation code to provide smoke-free indoor workplaces and public places. The ordinance includes an exemption allowing smoking in casino gaming areas, which exemption includes the casino at the St. Jo Frontier and will remain in place unless and until smoking in casino areas is prohibited in all non-Native American casinos located in the Missouri and Kansas counties of the Greater Kansas City area. This ordinance currently is undergoing legal challenges by local tavern owners. We cannot determine the manner, nature or likelihood of changes in the current laws relating to smoking in public places or the effect of regulations regarding secondhand smoke. New anti-smoking laws, if adopted, could have a material adverse effect on our business, financial condition and results of operations.

Changes to applicable tax laws could have a material adverse effect on our financial condition.

We expect to pay substantial taxes and fees in connection with our operations as a gaming company. From time to time, federal, state and local legislators and other government officials have proposed and adopted changes in tax laws, or in the administration of those laws affecting the gaming industry. For example, in 2011, legislation was introduced in Iowa to increase the gross gaming revenue tax in that state from 22% to 36%. In 2012, the Colorado Limited Gaming Control Commission voted to reduce the gross gaming revenue tax in that state from 20% to 19%, causing the Governor of Colorado to replace the commissioners; the replacement commissioners reinstated the tax at 20%. In 2014, Nevada voters defeated a referendum to impose a 2% gross margins tax on all businesses, including casinos. In 2015, the Governor of Nevada has proposed the implementation of a broad business license fee that would impact all of our non-gaming operations. The Governor’s bill is currently under consideration by the Nevada Legislature. It is not possible to determine the likelihood of changes in tax laws or in the administration of those laws. If adopted, changes to applicable tax laws could have a material adverse effect on our business, financial condition and results of operations. Due to the continued pressures on the state legislatures to address shortfalls in their budgets associated with the global financial crisis, there may be more support to look to increased taxation which could affect all of our gaming properties directly, or indirectly by taxing our customers. Any increase in taxes would have a material adverse effect on our business, financial condition and results of operations.

Environmental legislations or regulations, if enacted, could lead to an adverse impact on our results of operations and financial condition if such legislations or regulations result in a smaller drive-in tourist market.

Global climate change issues have received an increased focus on the federal and state government levels, which could potentially lead to additional environmental rules and regulations that impact how our drive-in tourist market is able to come to our facilities. The ultimate impact on our business would be dependent upon the specific rules and regulations adopted and we



cannot predict the effects of any such legislation at this time. However, if such legislations or regulations result in increased costs to motor vehicle drivers, then we may as a result see fewer drive-in tourists, which could adversely impact our operations and financial condition.

The business of the Primm Casinos may be adversely impacted if their use of water exceeds allowances permitted by federal and local governmental agencies or if such governmental agencies impose additional requirements in connection with such use of water, which in each case could lead to an adverse impact on our operations and financial condition.

The Primm Casinos are not served by a municipal water system. As a result, the water supply of such casinos is dependent on rights they have been granted to water in various wells located on federal land in the vicinity of the Primm Casinos and permits that allow the delivery of water to the Primm Casinos. These permits and rights are subject to the jurisdiction and ongoing regulatory authority of the U.S. Bureau of Land Management, the States of Nevada and California and local governments. While we believe that adequate water for the Primm Casinos is available, the future water needs of the Primm Casinos may exceed the permitted allowance. In such an event, future requests for additional water may not be approved or may be approved with terms or conditions that are more onerous. Any such denial or any such additional terms and conditions may have a material adverse effect on the results of operations of the Primm Casinos, thereby adversely affecting our results of operations and financial condition.


Compliance with environmental laws and other government regulations could impose material costs.

We are subject to numerous environmental laws and regulations that impose various environmental controls on our business operations, including, among other things, the discharge of pollutants into the air and water and the investigation and remediation of soil and groundwater affected by hazardous substances. Such laws and regulations may otherwise relate to various health and safety matters that impose burdens upon our operations. These laws and regulations govern actions that may have adverse environmental effects and also require compliance with certain practices when handling and disposing of hazardous wastes. These laws and regulations also impose strict, retroactive and joint and several liability for the costs of, and damages resulting from, cleaning up current sites, past spills, disposals and other releases of hazardous substances. Additionally, as an owner or operator, we could also be held responsible to a governmental entity or third parties for property damage, personal injury and investigation and cleanup costs incurred by them in connection with any contamination.

For example, we recently completed construction of and opened a new travel center at Whiskey Pete’s in Primm, Nevada. In connection with the construction, we encountered contaminated soil requiring remediation. Much of the contamination resulted from a gas station operated more than 30 years ago, and from abandoned underground fuel lines. We also began testing at the direction of the Nevada Division of Environmental Protection 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. From the beginning of construction through December 31, 2014, we have incurred approximately $3.8 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 $0.6 million in 2014. We may be required to make additional expenditures to remain in, or to achieve, compliance with environmental laws in the future and such expenditures may be material.

We cannot assure you that we have been or will be in compliance with environmental and health and safety laws at all times. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators. We may be required to incur further costs to comply with current or future environmental and safety laws and regulations. In addition, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result and any such liability could exceed our resources. We believe that our expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on our business, financial condition or results of operations. However, the environmental laws under which we operate are complicated and often increasingly more stringent, and may be applied retroactively. Accordingly, we may be required to make additional expenditures to remain in, or to achieve, compliance with environmental laws in the future and such additional expenditures may have a material adverse effect on our business, financial condition or results of operations.

Adverse winter weather conditions in Colorado, the Midwest, the Sierra Nevada Mountains and Reno-Lake Tahoe area have and could continue to have a material adverse effect on the results of operations and financial condition of our casinos, which could lead to an adverse impact on our results of operation and financial condition.

Adverse winter weather conditions, particularly snowfall, can deter customers of Rail City, the Midwest casinos and Colorado casinos from traveling or make it difficult for them to frequent our facilities. If these locations were to experience



prolonged adverse winter weather conditions, the results of operations and financial condition of these casinos could also be materially adversely affected, thereby adversely affecting our overall results of operations and financial condition. We experienced severe weather conditions in the winter of 2013 which continued through first quarter 2014. The prolonged snowfall and record low temperatures negatively impacted visitation and results of operations at our facilities. Continued adverse weather may have a greater negative effect on our operations.

Riverboats and dockside facilities are subject to risks relating to weather and must comply with applicable regulations.

We own and operate riverboat and dockside casino facilities, which are subject to risks in addition to those associated with land-based casinos, including loss of service due to casualty, extended or extraordinary maintenance, flood or other severe weather. Reduced patronage and the loss of a dockside or riverboat casino from service for any period of time could adversely affect our results of operations. We experienced a flood at our St. Joseph, Missouri riverboat which resulted in the facility being closed for nearly all of the third quarter of 2011. Additionally, we have experienced road closures related to flooding that have restricted access to our riverboats at intermittent periods. The riverboats are subject to inspection every year and were inspected in November 2013 in Missouri. Our only vessel is the boat located in Lakeside, Iowa, and this boat had its turbines removed in late 2008, as riverboats in Iowa are no longer required to cruise.


ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.


ITEM 2.
PROPERTIES

Our principal properties consist of the following:


NEVADA

Corporate Office

We lease our corporate office space. The five-year lease commenced on May 1, 2012.


Silver Sevens

We own the ten-acre site in Las Vegas on which Silver Sevens is located.


Rail City

We own the land and building on which Rail City is located in Sparks, Nevada. The Rail City Casino sits on approximately 7.5 acres.


Buffalo Bill's, Whiskey Pete's and Primm Valley

We lease approximately 170 acres of land on which Buffalo Bill's, Whiskey Pete's and Primm Valley are located in Primm, Nevada. The lease ends on June 30, 2043, with an option to renew the lease for one additional 25-year term. An independent third party leases and manages two 18-hole Tom Fazio golf courses with a full-service restaurant and club house near our properties. Another third party leases and manages a retail outlet mall adjacent to the Primm Valley Resort. Additionally, we own approximately 16 acres of land adjacent to the leased parcels.





MIDWEST

St Jo

We own a total of 72 acres of land in St. Joseph, Missouri. We also own the building and improvements on the developed portion of this land where certain facilities of St Jo are located.
 

Mark Twain

We own a total of 122 acres of land in LaGrange, Missouri. We also own the building and improvements on the developed portion of this land where certain facilities of Mark Twain are located. We lease a very small parcel of land adjacent to the property from the city of LaGrange.


Lakeside

We own a total of 121 acres of land in Osceola, Iowa, which includes the land on which certain facilities of Lakeside are located, including the hotel, convention facilities, and RV park. We lease the use of West Lake and certain real estate surrounding West Lake from the City of Osceola, Iowa and its water works board. The lease expires on May 19, 2019, and we have an option to extend for six additional successive terms of five years each. We lease 11 acres of the land we own adjacent to our facility, to Pilot for operation of a Pilot branded truck stop and gas station.


COLORADO

Black Hawk Casinos

We own approximately 1.5 acres in Black Hawk, Colorado on which the Golden Mardi Gras Casino, Golden Gates Casino and Golden Gulch Casino—all in close proximity to one another—operate. We also own 1.9 acres of land adjacent to the properties which contain a parking structure and surface parking lot.


ITEM 3.
LEGAL PROCEEDINGS

For a brief description of material pending legal proceedings, refer to Note 13 to the accompanying consolidated financial statements.
 
We are party to other ordinary and routine litigation incidental to our business. We do not expect the outcome of any pending litigation to have a material adverse effect on our consolidated financial position or results of operations.


ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our outstanding common stock is privately held. No established public trading market exists for our common stock, and, aside from the Registration Rights Agreement (described in “Risk Factors”), we have no plans, proposals, arrangements or understandings with any person with regard to developing such a market for our common stock.




At December 31, 2014, 177,497 shares of our common stock were subject to options related to our share-based compensation plan. Each option is convertible into one share of our common stock upon exercise, and the holder could sell each such share of common stock pursuant to Rule 144 of the Securities Act of 1933.


HOLDERS OF COMMON STOCK

We had 67 holders of record of our common stock as of March 27, 2015.


DIVIDENDS

We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and the development and growth of our business; therefore, we do not anticipate paying any cash dividends.

Restrictions imposed by our debt instruments significantly restrict us from making dividends or distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2014
The following table presents certain information as of December 31, 2014 regarding the Affinity Gaming Amended and Restated 2011 Long Term Incentive Plan (“2011 LTIP”). Our shareholders authorized our Board to design a plan under which the Board can issue equity awards collectively representing as many as 2,000,000 shares of our common stock to our officers, directors, employees and consultants. The Board approved such a plan, our 2011 LTIP, in March 2011, as amended in November 2014. As of December 31, 2014, the Board had only issued stock options and restricted stock shares under our 2011 LTIP.
Plan category
 
Restricted Stock Shares Awarded and Outstanding
 
Number of Common Stock Shares to be Issued upon Exercise of Outstanding Options
 
Weighted Average Exercise Price of Outstanding Options
 
Number of Securities Remaining Available for Future Issuance under 2011 LTIP
Approved by security holders
 
300,464

 
177,497

 
$
10.99

 
1,522,039

Not approved by security holders
 

 

 
$

 



As of December 31, 2014, 68,182 options and 230,403 restricted stock shares had vested.


ISSUER SALES OF EQUITY SECURITIES

During 2014, we did not conduct any unregistered sales of our equity securities, nor did we have any repurchase plan or program under which shares may yet be purchased.


ISSUER PURCHASES OF EQUITY SECURITIES

We neither purchased any shares of our common stock during the fourth quarter nor have we made any plans or established any programs to purchase any shares of our common stock.




ITEM 6.
SELECTED FINANCIAL DATA

The following tables set forth a summary of our selected consolidated historical financial data from continuing operations as of and for the periods presented (in thousands). We derived the summary consolidated historical balance sheet data as of December 31, 2014 and 2013, and the summary historical consolidated data for results of operations for the years ended December 31, 2014, 2013 and 2012, from our audited consolidated financial statements included elsewhere in this 2014 Form 10-K. We derived the summary consolidated historical balance sheet data as of December 31, 2012, 2011 and 2010, and the summary historical consolidated data for results of operations for our year ended December 31, 2011, and for Predecessor’s year ended December 31, 2010, from audited consolidated financial statements not included in this 2014 Form 10-K.

We adjusted certain amounts in the prior years’ financial information from the amounts originally reported in the respective Forms 10-K to account for discontinued operations and to account for the reclassification of unamortized debt issuance costs incurred with lenders to conform to the 2014 presentation.

You should read this information together with the information included under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our historical consolidated financial statements and related notes included elsewhere in this 2014 Form 10-K. For a discussion of matters affecting comparability of our results, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview.

 
Successor
 
 
Predecessor
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
 
2010
Net revenue
$
387,991

 
$
390,488

 
$
403,176

 
$
378,587

 
 
$
380,392

Income (loss) from continuing operations
$
(23,677
)
 
$
(991
)
 
$
4,634

 
$
7,872

 
 
$
419,185



 
December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Cash and cash equivalents
$
135,175

 
$
140,857

 
$
126,873

 
$
45,956

 
$
59,781

Total assets
614,178

 
637,944

 
651,922

 
603,740

 
589,237

Total debt 1
374,701

 
383,999

 
396,716

 
348,400

 
350,000

Stockholders’ equity (deficit)
$
182,455

 
$
204,519

 
$
207,130

 
$
206,235

 
$
198,033


1 Net of original issue discount and unamortized debt issuance costs incurred with lenders.


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




EXECUTIVE OVERVIEW

Headquartered in Las Vegas, Nevada, Affinity Gaming (together with its subsidiaries, “Affinity” or “we” ) is a diversified, multi-jurisdictional Nevada corporation which operates casinos through wholly-owned subsidiaries in Nevada, Missouri, Iowa and Colorado. Casino operations as of December 31, 2014 included the following wholly-owned casinos (by segment):

Nevada
 
 
 
 
Silver Sevens Hotel & Casino
 
Las Vegas, NV
 
(“Silver Sevens”)
Primm Valley Casino, Resort & Spa
 
Primm, NV
 
(“Primm Valley”)
Buffalo Bill’s Resort & Casino
 
Primm, NV
 
(“Buffalo Bill’s”)
Whiskey Pete’s Hotel & Casino
 
Primm, NV
 
(“Whiskey Pete’s”)
Rail City Casino
 
Sparks, NV
 
(“Rail City”)
 
 
 
 
 
Midwest
 
 
 
 
St Jo Frontier Casino
 
St. Joseph, MO
 
(“St Jo”)
Mark Twain Casino
 
La Grange, MO
 
(“Mark Twain”)
Lakeside Hotel & Casino
 
Osceola, IA
 
(“Lakeside”)
 
 
 
 
 
Colorado
 
 
 
 
Golden Mardi Gras Casino
 
Black Hawk, CO
 
(“Golden Mardi Gras”)
Golden Gulch Casino
 
Black Hawk, CO
 
(“Golden Gulch”)
Golden Gate Casino
 
Black Hawk, CO
 
(“Golden Gate”)


As of December 31, 2014, casino operations collectively offered approximately 288,400 square feet of gaming space with approximately 7,318 slot machines and 133 table games, while lodging operations offered approximately 3,125 hotel rooms.

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, which will terminate on April 1, 2015, 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 exceeds the threshold EBITDA for that year.


Seasonality
 
Our casinos in Northern Nevada, the Midwest and Colorado experience extreme weather conditions which occasionally interrupt our operations. Additionally, our casinos in Missouri are subject to flooding depending on the water levels of the Missouri and Mississippi Rivers. Snow and other adverse weather resulted in a significant number of days with lost or reduced business at our Midwest and Colorado properties during the winter of 2013-2014. If there is a prolonged disruption at any of our properties or if there are a disproportionate number of weekends affected by extreme weather, our results of operations and financial condition could be materially adversely affected.


Outlook

Recent improvement in consumer confidence, employment data and other macroeconomic indicators are viewed as positive for regional gaming operations. However, potential changes to federal and state tax rates, payroll taxes, the cost of



health care, and other uncertainty related to ongoing political deadlock on fiscal issues are expected to continue to affect our business. Many of our customers continue to face uncertainty, and we expect that discretionary spending will remain at reduced levels over the near term. However, we believe that our strategy of offering value-oriented, friendly, convenient locations with consistent marketing programs and service supports our business growth efforts. Perceived value, customer satisfaction and loyalty are critical to our success.

Should the economic recovery continue, we believe we are well-positioned to capitalize on high repeat patronage from our local and drive-in tourist gaming markets. Our business strategy focuses on attracting and fostering repeat business from our local gaming patrons. Local gaming patrons are typically sophisticated gaming customers who seek convenient locations, high payouts and a pleasant atmosphere. We believe our continued commitment to providing a value-oriented, quality casino entertainment experience for our customers will allow us to gain market share and improve profitability.


Matters Affecting Comparability of Results

Significant factors or events have had a material impact on our results of operations for the periods discussed below and affect the comparability of our results of operations from period to period.

Debt and Interest Expense. On December 13, 2013, we completed the First Amendment to the Credit Agreement, which, among other things, reduced the interest rate applicable to our Initial Term Loan, which as of June 30, 2014 was 1.25% less than prior to the First Amendment.

On July 22, 2014, we completed the Second Amendment to the Credit Agreement (“Second Amended Credit Agreement”). In addition to other changes, the Second Amendment increased the interest rate applicable to our Initial Term Loan, which as of September 30, 2014 was 1% more than that specified in the First Amendment and 0.25% less than prior to the First Amendment. The Second Amendment also adjusted the financial covenants by changing a maximum Total Net Leverage Ratio of 6.5x through June 30, 2014 (calculated using total leverage, net of $25 million cash) to a maximum First Lien Net Leverage Ratio of 3.75x through March 31, 2016 (calculated using outstanding first lien senior secured debt, net of $40 million cash) and by lowering the minimum required interest coverage ratio from 2.0x through December 31, 2014 and 2.15x thereafter to a constant minimum ratio of 1.5x.

Discontinued Operations. 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 February 2012, we completed the sale of our slot route, two Pahrump, Nevada casinos and our Searchlight, Nevada casino. The results of operations of each of the properties sold is presented in discontinued operations for the years presented. Results of operations for the properties sold were previously reported in the Nevada Segment results.

Acquisition. On February 29, 2012, we acquired three casinos located in Black Hawk, Colorado, which we leased from the previous owners until we obtained our Colorado gaming licenses. On November 1, 2012, we began operating the casinos in Black Hawk. We recorded rental income in our consolidated results of operations beginning March 1, 2012 pursuant to the terms of the lease agreement until such time as we obtained gaming approval and began operating the casinos on November 1, 2012.


Key Performance Indicators
 
We assess a variety of financial and operational performance indicators to manage our business, but the key performance indicators which we use include gross gaming revenue, promotional allowances and marketing expense, net revenue and controllable operating costs.
 
Key volume indicators such as slot machine win per unit per day, table games win per unit per day, and promotional allowances as a percentage of gross gaming revenue are analyzed in connection with our casino operations.  In addition to the volume indicators, we also analyze the number of patron trips and the amount of money spent per patron trip. The industry uses the term “average daily rate” (“ADR”) to define the average amount of hotel revenue per occupied room per day, and the term “occupancy percentage” to define the total percentage of rooms occupied (i.e., the number of rooms occupied divided by the total number of rooms available). We use ADR and occupancy percentage to analyze the performance of our hotel



operations. Fuel and retail operations include revenue from gas stations and convenience stores which we own and operate.  Management measures the performance of fuel operations based on gallons sold and profit margin per gallon.

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 each geographical region in which we operate, and to discuss our results with the investment community.

Adjusted EBITDA is a measure which does not conform to generally accepted accounting principles in the United States (“GAAP”). You should not consider this information as an alternative to any measure of performance as promulgated under GAAP, such as operating income and net income. Our calculation of Adjusted EBITDA may be different from the calculations used by other companies; therefore, comparability may be limited. We have included a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, which in our case is operating income from continuing operations.


RESULTS OF OPERATIONS

Reportable Segment Results

The following tables present financial information by reportable segment and by corporate and other (in thousands):

 
Year Ended December 31,
 
2014
 
2013
 
2012
Net revenue
 
 
 
 
 
Nevada
227,516

 
230,840

 
262,585

Midwest
122,064

 
122,292

 
127,893

Colorado
38,411

 
37,356

 
12,698

Total net revenue
$
387,991

 
$
390,488

 
$
403,176

 
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
 
Nevada
$
26,182

 
$
28,609

 
$
32,784

Midwest
34,130

 
37,041

 
40,820

Colorado
4,593

 
8,322

 
7,718

Corporate and other
(14,359
)
 
(11,064
)
 
(10,651
)
Total Adjusted EBITDA
$
50,546

 
$
62,908

 
$
70,671






The following tables reconcile Adjusted EBITDA to operating income (in thousands):
 
Year Ended December 31, 2014
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
$
26,182

 
$
(14,650
)
 
$

 
$
448

 
$
11,980

Midwest
34,130

 
(7,582
)
 

 

 
26,548

Colorado
4,593

 
(5,124
)
 

 

 
(531
)
Corporate and other
(14,359
)
 
(1,223
)
 
(455
)
 
(24
)
 
(16,061
)
Continuing operations
$
50,546

 
$
(28,579
)
 
$
(455
)
 
$
424

 
$
21,936


 
Year Ended December 31, 2013
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Write Downs, Reserves and Recoveries
 
Loss on Impairment of Assets
 
Operating Income from Continuing Operations
Nevada
$
28,609

 
$
(14,729
)
 
$

 
$
(3,125
)
 
$
(165
)
 
$
10,590

Midwest
37,041

 
(7,023
)
 

 
(3,100
)
 

 
26,918

Colorado
8,322

 
(5,058
)
 

 

 

 
3,264

Corporate and other
(11,064
)
 
(999
)
 
(1,169
)
 
1,459

 

 
(11,773
)
Continuing operations
$
62,908

 
$
(27,809
)
 
$
(1,169
)
 
$
(4,766
)
 
$
(165
)
 
$
28,999


 
Year Ended December 31, 2012
 
Adjusted EBITDA
 
Depreciation and Amortization
 
Share-Based Compensation
 
Pre-Opening Expense
 
Write Downs, Reserves and Recoveries
 
Operating Income from Continuing Operations
Nevada
$
32,784

 
$
(14,150
)
 
$

 

 
$

 
$
18,634

Midwest
40,820

 
(6,663
)
 

 

 
78

 
34,235

Colorado
7,718

 
(2,042
)
 

 

 

 
5,676

Corporate and other
(10,651
)
 
(411
)
 
(2,075
)
 
(421
)
 
707

 
(12,851
)
Continuing operations
$
70,671

 
$
(23,266
)
 
$
(2,075
)
 
(421
)
 
$
785

 
$
45,694



Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Overall. We recorded net revenue from continuing operations of $388.0 million, compared to net revenue from continuing operations of $390.5 million during the prior year, a decrease of $2.5 million, or 0.6%. Adjusted EBITDA was $50.5 million, compared to $62.9 million during the prior year, a decrease of $12.4 million, or 19.7%. Adjusted EBITDA, excluding corporate expense, decreased $9.1 million, or 12.3%.





Nevada. Nevada operations include Rail City, Silver Sevens and our three Primm casinos. In addition to casino, lodging and food and beverage operations, our results from Primm include the operation of three gas station/convenience stores and a California lottery outlet.  Nevada operations accounted for approximately 60% of our gross revenue from continuing operations during the years ended December 31, 2014 and 2013.

In our Nevada segment, net revenue decreased $3.3 million, or 1.4%, primarily as a result of a decline in gross casino revenue and an increase in promotional allowances offered to casino patrons. Nevada Adjusted EBITDA declined $2.4 million, or 8.5% when compared to the prior year. The Adjusted EBITDA contribution from casino operations decreased $5.6 million, or 10.8%, offset primarily by an increase in the Adjusted EBITDA contribution from fuel and retail operations of $2.2 million, or 22.5%. 2014 operating results were most significantly impacted by declines in revenue and increased marketing expenses seen in the first half of the year. During the latter half of the year, we analyzed the effectiveness of our promotional campaigns and refined marketing programs, resulting in fourth quarter improvement in year-over-year performance which offset some of the declines seen earlier in the year.

Midwest. Midwest operations include St Jo and Mark Twain in Missouri, and Lakeside in Iowa. Midwest operations accounted for approximately 30% of our gross revenue from continuing operations during the years ended December 31, 2014 and 2013.

Net revenue from our Midwest segment decreased $0.2 million, or 0.2%. Adjusted EBITDA from our Midwest segment decreased $2.9 million, or 7.9%. Results in the Midwest were primarily impacted by severe winter weather seen in the first quarter of 2014 and the constrained discretionary spending of our customers. We are encouraged by our Midwest properties’ performance as gross gaming revenue outperformed the markets in which we operate in each jurisdiction. Reducing marketing and other operating expenses lead to an increase in both Adjusted EBITDA and the Adjusted EBITDA operating margin during the fourth quarter of 2014, reversing the trends seen in the first three quarters of the year.


Colorado. Colorado operations include the Golden Gates, the Golden Gulch and the Golden Mardi Gras casinos in Black Hawk. Colorado operations accounted for approximately 10% of our gross revenue from continuing operations during the years ended December 31, 2014 and 2013.

Net revenue from our Colorado segment increased $1.1 million, or 2.8%, primarily due to aggressive promotional offers and free slot play initiatives which increased visitation to the newly renovated properties. Colorado Adjusted EBITDA decreased $3.7 million, or 44.8%. The declines in Colorado Adjusted EBITDA were mainly driven by an increase in operating expenses, including increased marketing expenses, as the property completed its first full year of operations post acquisition and renovation impact. Operating results were negatively impacted as marketing expenses, including promotional free play, were increased to re-attract and retain patrons that had not visited the property during the nearly two year period since the properties were acquired.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Overall. We recorded net revenue from continuing operations of $390.5 million, compared to net revenue from continuing operations of $403.2 million during 2012, a decrease of $12.7 million, or 3.1%. Adjusted EBITDA was $62.9 million, compared to $70.7 million during 2012, a decrease of $7.8 million, or 11.0%. Adjusted EBITDA, excluding corporate expense, decreased $7.4 million, or 9.0%.
 

Nevada. Nevada operations accounted for approximately 60% and 66% of our gross revenue from continuing operations during the years ended December 31, 2013 and 2012, respectively.

Gross revenue from our Nevada segment declined $34.1 million, or 11.3%, led by the decline of $16.0 million in fuel and retail revenue at Whiskey Pete’s. The decline in fuel and retail revenue resulted from the new equipment leasing agreement related to diesel fuel and the maintenance station. Despite the revenue decline, the Adjusted EBITDA contribution from fuel and retail operations remained essentially comparable to the prior year. Casino revenue decreased $10.3 million, or 6.7%, primarily due to declines in visitation and slot revenue at our Primm casinos. We experienced declines in unrated, or “transient”, play and declines in rated play which we attribute to macroeconomic factors which impact discretionary income and the gaming budgets of our customers. Additionally, we continue to see intense competition in the Las Vegas locals market. Our Nevada casinos cater to locals and drive-in traffic, including Las Vegas visitors who typically visit our casinos for an



experience which they consider a value in comparison to the Las Vegas Strip. During periods of intense promotion in the Las Vegas market, we experience declines in visitation at Primm and Silver Sevens as customers take advantage of values offered by higher-end Las Vegas properties with which we compete. Declines in occupancy, primarily at Primm, drove a decrease in lodging revenue of $3.4 million, or 12.6%.  Food and beverage revenue also decreased $2.8 million, or 8.2%, as a result of the decreased occupancy and visitation. Other revenue declined $1.6 million, or 12.3%, due to reduced revenue from entertainment offerings at Primm.

Nevada Adjusted EBITDA decreased $4.2 million, or 12.7%. The Adjusted EBITDA contribution from casino operations declined by $4.4 million, or 7.9%, as a result of the factors discussed above which lead to a decline in the number of trips and spend per trip by our patrons. The Adjusted EBITDA contribution from lodging operations decreased $2.8 million, or 28.1%, primarily due to reduced room occupancy at Primm. The loss of a significant group of lodgers which contributed to Primm’s 2012 occupancy, coupled with the intense competition for the value-driven Las Vegas tourist, contributed to the decreased room occupancy. The contributions to Adjusted EBITDA from food and beverage operations and fuel and retail operations did not show significant fluctuation. Additional cost reductions, including payroll efficiencies, resulted in general and administrative expense reductions of $2.7 million, or 5.6%.


Midwest. Midwest operations accounted for approximately 30% and 31% of our gross revenue from continuing operations during the years ended December 31, 2013 and 2012, respectively.

Gross revenue from our Midwest segment decreased $5.8 million, or 4.1%, almost entirely in the casino division. Revenue from our Midwest segment declined due to the slow economic recovery and the adverse effect it had on our customers’ discretionary spending. During 2013, we saw a decline in the number of admissions at each of our properties and a consistent spend per trip. We primarily attribute the decline in admissions to fewer unrated, or transient, customers visiting our properties. Gross revenue from hotel operations at our Lakeside property, and food and beverage operations across all three properties, remained relatively flat compared to 2012.

The decline in revenue from unrated slot play was almost entirely responsible for the decrease of $3.8 million, or 9.3%, in Midwest Adjusted EBITDA. An increase in general and administrative expense totaling $0.6 million, primarily due to increased marketing efforts targeting new or transient customers, also contributed to the decline. Modest increases in the Adjusted EBITDA contributions from food and beverage operations (approximately $0.3 million) and from lodging operations (approximately $0.3 million) partially offset the decreased contribution from casino operations and the increase in general and administrative expense.


Colorado. Colorado operations accounted for approximately 10% of our gross revenue from continuing operations during the year ended December 31, 2013. We did not operate the Black Hawk casinos prior to November 1, 2012, while our gaming licenses were pending approval.

The Colorado segment earned Adjusted EBITDA totaling $8.3 million, compared to Adjusted EBITDA of $7.7 million during 2012, which included $6.5 million of rental income we collected from the prior owner of the properties and Adjusted EBITDA of $1.2 million earned during November and December 2012, once we were licensed and began operating the properties. We completed renovations at the Golden Mardi Gras, our largest property, and held a grand re-opening on August 3, 2013. Renovations at the Golden Mardi Gras had the most significant effect on Colorado Adjusted EBITDA, as access to the property was restricted while we constructed the new front entrance. During the renovation period, we also operated fewer slot machines while the casino floor and food outlets were remodeled. Although we completed the remodel and grand re-opening in early August, statewide flooding which occurred in September and a disproportionate number of weekend days affected by the extreme snowy weather in December caused visitation and revenue declines, negatively impacting our operating results.





Revenue and Expense by Category

The following table presents detail of our consolidated continuing operations gross revenue and expense by category (in thousands):
 
Year Ended December 31,
 
Percent Change
 
2014
 
2013
 
2012
 
Current Year
 
Prior Year
Total revenue
 
 
 
 
 
 
 
 
 
Casino
$
298,275

 
$
301,134

 
$
285,169

 
(0.9
)%
 
5.6
 %
Food and beverage
49,029

 
45,494

 
45,784

 
7.8
 %
 
(0.6
)%
Lodging
26,302

 
26,166

 
29,227

 
0.5
 %
 
(10.5
)%
Fuel and retail
58,893

 
59,011

 
74,971

 
(0.2
)%
 
(21.3
)%
Other
14,482

 
13,775

 
21,210

 
5.1
 %
 
(35.1
)%
Total revenue
446,981

 
445,580

 
456,361

 
0.3
 %
 
(2.4
)%
Promotional allowances
(58,990
)
 
(55,092
)
 
(53,185
)
 
7.1
 %
 
3.6
 %
Net revenue
$
387,991

 
$
390,488

 
$
403,176

 
(0.6
)%
 
(3.1
)%
 
 
 
 
 
 
 
 
 
 
Departmental cost and expense
 
 
 
 
 
 
 
 
 
Casino
$
123,803

 
$
119,357

 
$
110,267

 
3.7
 %
 
8.2
 %
Food and beverage
48,137

 
45,375

 
46,395

 
6.1
 %
 
(2.2
)%
Lodging
16,281

 
17,551

 
18,006

 
(7.2
)%
 
(2.5
)%
Fuel and retail
46,825

 
49,094

 
64,707

 
(4.6
)%
 
(24.1
)%
Other
7,921

 
7,704

 
9,649

 
2.8
 %
 
(20.2
)%
General and administrative
80,119

 
77,435

 
72,830

 
3.5
 %
 
6.3
 %
Depreciation and amortization
28,579

 
27,809

 
23,266

 
2.8
 %
 
19.5
 %
Corporate
14,814

 
12,233

 
12,726

 
21.1
 %
 
(3.9
)%
Write downs, reserves and recoveries
(424
)
 
4,766

 
(785
)
 
(108.9
)%
 
(707.1
)%
Departmental cost and expense
$
366,055

 
$
361,324

 
$
357,061

 
1.3
 %
 
1.2
 %
 
 
 
 
 
 
 
 
 
 
Departmental Adjusted EBITDA Margins
 
 
 
 
 
 
 
 
 
Gaming
58.5
%
 
60.4
%
 
61.3
 %
 
 
 
 
Food and beverage
1.8
%
 
0.3
%
 
(1.3
)%
 
 
 
 
Lodging
38.1
%
 
32.9
%
 
38.4
 %
 
 
 
 
Fuel and retail
20.5
%
 
16.8
%
 
13.7
 %
 
 
 
 
Other
45.3
%
 
44.1
%
 
54.5
 %
 
 
 
 





Gross Revenue. Generally, the industry defines gaming revenue as gaming wins less gaming losses.  We derive the majority of our gaming revenue, which we report in the Casino line item, from slot machines. Casino revenue also includes table game revenue and bingo, keno and poker revenue, where offered. Our gross revenue also includes:

food and beverage revenue, which we earn from sales in restaurants and outlets we own and operate at our casinos and from room service sales;

lodging revenue, which we earn from rooms we provide to customers;

fuel and retail revenue, which we earn from sales of fuel, food and beverage items at franchised food outlets, lottery tickets and other retail items at facilities we own at the Primm Casinos, and at facilities we own and lease to third-parties at the Primm Casinos and Lakeside; and

other revenue, which we earn from sources such as consulting agreements, leasing agreements, entertainment services, and ATMs at our casino properties.


We recognize revenue at the time we provide the product, room or service to the guest or the third-party.

Promotional allowances consist primarily of free play and promotional credits redeemed at our slot machines, as well as food, beverage, lodging and entertainment furnished gratuitously to customers. We include the retail value of items or services furnished gratuitously to customers in the respective revenue classifications, then we deduct the total amount of promotional allowances from total revenue. The cost of complimentary items or services is recorded as a casino expense.


Cost and Expense. We aggregate our direct costs and expense, including selling, general and administrative expense for each of our operations, and include them in the expense of our reportable segments, as discussed in “Reportable Segment Results.”

Corporate expense represents unallocated payroll, professional fees and other expense which we do not directly attribute to our reportable segments, as well as share-based compensation. We present corporate expense net of management fees or expense charged to our properties and cash fees earned under our consulting agreement with the operator of the Rampart Casino at the JW Marriott Resort in Las Vegas, from which we collected $2.0 million, $2.0 million and $1.8 million in management fees during the years ended December 31, 2014, 2013 and 2012, respectively.


Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Corporate expense, excluding share-based compensation, increased by $3.3 million, or 29.8%, primarily as a result of unusual expense we incurred as part of activities that we do not consider part of regular operations. During 2014, such activities included evaluating strategic initiatives, searching for a new CEO and reconstituting our Board of Directors, remediating the recent data breach, and incurring lobbying expenses in connection with the casino industry’s opposition to the Colorado racing initiative. We are permitted to add back such unusual expense to EBITDA, as defined in the Second Amended Credit Agreement, when determining compliance with our debt covenants. We incurred $4.1 million of unusual expense, compared to unusual expense of $1.1 million during the prior year. Excluding the unusual expense items and share-based compensation, we incurred $10.3 million and $9.9 million of corporate expense during the years ended December 31, 2014 and 2013, respectively.

Depreciation and amortization expense increased $0.8 million or 2.8% when compared to prior year primarily due to asset additions which include the completion of the Primm travel center and Colorado renovations.

Net interest expense attributable to continuing operations decreased $0.6 million, or 2.0%, primarily as a result of the reduced interest rate on our New Credit Facility. Previously capitalized fees were expensed to the debt modification line in connection with the second amendment to the New Credit Facility and the modification of the indenture governing the 2018 Notes which occurred in July, 2014. In connection with the modifications to the New Credit Facility and the indenture governing the 2018 Notes, we incurred consent fees totaling $0.9 million, and expensed third party and other fees of $0.8 million and $2.0 million, respectively.




In the prior-year period, the line item write-downs, reserves and recoveries included an accrual of $3.1 million for our estimated exposure in relation to settlement of the CCDC litigation (as described in Note 11), the write off of $2.7 million of previously-capitalized environmental remediation costs, and the reversal of the remaining $1.5 million we had accrued for IRS-imposed taxes, penalties and interest originating from the bankruptcy estate. In the current-year period, the same line item reflects the net effect of our receipt of $0.4 million from our insurers related to our environmental remediation work at Primm (as described in Note 11).
 
During 2014, we evaluated our deferred tax assets and 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 $18.0 million. Establishing the valuation allowance caused our effective income tax rate for 2014 to vary significantly from the federal statutory rate and from our effective income tax rate for 2013 and 2012. Our income tax provision for the year ended December 31, 2014 and income tax benefit for the year ended December 31, 2013 were approximately $15.5 million and $0.5 million, respectively. The provision in 2014 was primarily due to the establishment of the valuation allowance. Income tax receivable as of December 31, 2014 consists primarily of estimated tax payments which we expect to be refunded.


Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Depreciation and amortization expense increased during 2013 by $4.5 million, or 19.5%, primarily due to the addition of depreciation for our Colorado properties, which we acquired on November 1, 2012.

Inclusive of share-based compensation expense, corporate expense decreased $0.5 million, or 3.9%, in 2013. Share-based compensation expense declined $0.9 million primarily due to a decline in performance-based vesting of common stock and options granted to our CEO. Excluding share-based compensation expense, corporate expense increased $0.4 million, primarily related to unusual expense we incurred as part of activities that we do not consider part of regular operations. During 2013, such activities included executing strategic initiatives, including the recent asset acquisitions and dispositions, as well as defending against the shareholder litigation and addressing the effects of the data security breach which occurred during 2013. We incurred unusual expense of this nature totaling approximately $1.1 million during the year ended December 31, 2013.

Write downs, reserves and recoveries during 2013 represented a net expense of $4.8 million, as compared to the recovery of $0.8 million during 2012. As described in the previous section, during 2013 we made a litigation accrual, wrote off previously-capitalized environmental remediation costs, and reversed the accrual of certain expense that originated during the Predecessor’s bankruptcy.

Net interest expense attributable to continuing operations increased $0.7 million, or 2.3%, primarily as a result of the increased interest rate pursuant to the Second Amended Credit Agreement compared to the First Amendment. In July, 2014, we completed the Second Amendment which, among other things, increased the interest rate applicable to our Initial Term Loan by 1%, effective September 1, 2014.

The income tax benefit attributable to continuing operations during 2013 was approximately $0.5 million, while the income tax benefit attributable to discontinued operations was $0.1 million. Income tax receivable as of December 31, 2013 consisted primarily of estimated tax payments which we expect to be refunded.


LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
We rely on cash flows from operations as our primary source of liquidity.  The New Credit Facility (described in “Business—Refinancing Transactions”) permits us to incur limited indebtedness for trade payables and capital leases in the ordinary course of business and provides an accordion feature, whereby we may borrow up to an additional $80.0 million subject to certain terms and conditions, including compliance with a maximum leverage ratio (as defined in the Second Amended Credit Agreement).  We cannot assure you that, if required, we will be able to obtain the necessary approval for additional borrowing under 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 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 net leverage ratio is less than or equal to 3.50 to 1.00.  Unamortized loan fees, which we are amortizing over the life of the 2018 Notes and the Initial Term Loan, totaled $9.0 million at December 31, 2014, inclusive of both the amount we report in Other assets and the amount we report as an offset to the related debt. As of December 31, 2014, we remained in compliance with all covenants specified in the Second Amended Credit Agreement.

As more fully described in Note 8, the Second Amended Credit Agreement requires us to make a mandatory repayment of amounts outstanding under certain circumstances. The agreement also requires that we deposit proceeds from the sale of non-core assets into an account subject to an account control agreement.

The New Credit Facility and the 2018 Notes contain various covenants which limit our ability to take certain actions including, among other things, our ability to:

incur additional debt;

issue preferred stock;

pay dividends or make other restricted payments;

make 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.


                Our primary cash needs for the next twelve months of operation include interest payments on our debt and capital expenditures. Our capital expenditure needs include maintenance capital and capital for the acquisition of slot machines and of other equipment required to keep our facilities competitive. The Second Amended Credit Agreement potentially requires an annual principal prepayment based on excess cash flow (as defined in such agreement) calculated at the end of each calendar year.  For the year ended December 31, 2014, we were not required to make an excess cash flow repayment. The most significant components of our working capital are current accounts receivable, accounts payable and other current liabilities.  Our liquidity position benefits from the fact that we generally collect cash from transactions with customers the same day or, in the case of credit or debit card transactions, within a few days of the related transaction.
 
A variety of factors, many of which are outside of our control, affect our cash flow; those factors include litigation, regulatory issues, competition, financial markets and other general business conditions.  We believe that we will have sufficient liquidity through available cash which, as of December 31, 2014, was $135.2 million, the $35 million Revolving Credit Facility (described in “Business—Refinancing Transactions”), trade credit and cash flow to fund our cash requirements and maintenance capital expenditures for at least the next twelve months.  However, we cannot assure you that we will generate sufficient income and cash flow to meet all of our liquidity requirements.
 

Cash Flows from Operating Activities
 
Operating activities provided $22.8 million through December 31, 2014, compared to $36.8 million provided through December 31, 2013. The decrease in cash provided by operating activities was driven by the decline in net income and payment timing related to the elements of working capital. Net income during 2014 included income tax expense related to the deferred tax asset valuation allowance, which has no net effect on cash flow.





Cash Flows from Investing Activities
 
Investing activities used $16.9 million through December 31, 2014, compared to using $14.2 million through December 31, 2013.  Net cash used in investing activities is primarily comprised of capital expenditures, which were $17.2 million and $31.7 million during the years ended December 31, 2014 and 2013, respectively. Cash flows used in investing activities during 2013 include proceeds from the Truckee Disposition, which partially offset capital expenditures.


Cash Flows from Financing Activities
 
Financing activities used $11.6 million and $8.6 million during the years ended December 31, 2014 and 2013, respectively, which primarily represented repayments of long-term debt. The current period also included approximately $2.9 million of fees paid in connection with the second amendment to the New Credit Facility and the consent obtained under the 2018 Notes.
 

Off-Balance Sheet Arrangements
 
We currently have no material off-balance sheet arrangements.

 
Critical Accounting Policies
 
Management’s discussion and analysis of our results of operations and liquidity and capital resources is based upon our financial statements. We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Certain of our accounting policies require that we apply significant judgment in determining the estimates and assumptions for calculating estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We use, in part, our historical experience, terms of existing contracts, observance of trends in the gaming industry and information obtained from independent valuation experts or other outside sources to make our judgments. We cannot assure you that our actual results will conform to our estimates. We regularly evaluate these estimates and assumptions, particularly in areas we consider to be critical accounting estimates, where changes in estimates and assumptions could have a material impact on our results of operations, financial position and, generally to a lesser extent, cash flows.

Senior management and the Audit Committee of the Board of Directors have reviewed the disclosures included herein about our critical accounting estimates, and have reviewed the processes to determine those estimates.


Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Estimates incorporated into our consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated cash flows we use in assessing the recoverability of long-lived assets, as well as contingencies and litigation reserves, reserves for claims and assessments, and the estimated fair values we use to test certain assets for impairment. Actual results could differ from those estimates.


Long-Lived Assets

When events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, we evaluate long-lived assets for potential impairment, basing our testing method upon whether the assets are held for sale or held for use. For assets classified as held for sale, we recognize the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, offers received, or a discounted cash flow model. For assets held and used, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, we recognize an impairment loss for the difference between the carrying value of the asset and its fair value.




We must make several estimates, assumptions and decisions when testing long-lived assets for impairment. First, management must determine the usage of the asset. Because we must test assets at the lowest level for which identifiable cash flows exist, some assets must be grouped, and management has some discretion when choosing how to group assets. Also, we must estimate future cash flows which, by their nature, are subjective and could lead to actual results that differ materially from our estimates.

On a quarterly basis, we review our major long-lived assets to determine if events have occurred or circumstances exist that indicate a potential impairment. Potential factors which could trigger an impairment include poor performance compared to historical or projected operating results, negative industry or economic factors, or significant changes to our operating environment. We estimate future cash flows using our internal budgets. When appropriate, we discount future cash flows using a weighted-average cost of capital which we develop using a standard capital asset pricing model based on an industry peer group.


Goodwill and Intangible Assets

In the fourth quarter of each year, we test goodwill and other indefinite-lived intangible assets for impairment. We also conduct tests between our annual tests if events occur or circumstances change which would, more likely than not, indicate a reduction in the fair values of the indefinite-lived intangible assets below their carrying values. When testing for impairment, we may choose to evaluate qualitative factors first to determine whether events and circumstances indicate that, more likely than not, an indefinite-lived intangible asset is impaired. If, after evaluating the totality of events and circumstances and their potential effect on significant inputs to the fair value determination, we determine that, more likely than not, an indefinite-lived intangible asset is impaired, we then quantitatively test for impairment.

Indefinite-lived intangible assets consist primarily of license rights, which we test for impairment using a discounted cash flow approach, and trademarks, which we test for impairment using the relief-from-royalty method. Goodwill represents the excess of purchase price over fair market value of net assets acquired in business combinations. We test goodwill for relevant reporting units for impairment using a discounted cash flow analysis based on our budgeted future results which are discounted using a weighted average cost of capital. The weighted average cost of capital is developed using a standard capital asset pricing model, based on guideline companies in our industry and market indicators of terminal year capitalization rates.

We make several estimates when evaluating indefinite-lived intangible assets for impairment. In particular, future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. In addition, the determination of capitalization rates and the discount rates used in the impairment tests are highly judgmental and dependent in large part on expectations of future market conditions.


Accounting for Share-Based Compensation

We grant share-based awards to employees and non-employees in exchange for services; we have neither made share-based payments in exchange for goods nor do we currently have plans to do so. For share-based payments to employees and non-employees, we recognize compensation expense over the vesting period during which the employee or non-employee provides services in exchange for the award and, in the case of share-based payments to non-employees, we recognize a prepaid asset representing the portion of total estimated compensation expense for which the non-employee has not yet provided services.

To measure compensation expense related to stock options awarded, we use information available as of the reporting date to estimate the fair value of awards. We estimate the fair value of stock options using the Black-Scholes-Merton option pricing model, which requires estimates for expected volatility, expected dividends, the risk-free interest rate and the expected term of the share-based award. To measure compensation expense related to restricted stock shares awarded to employees, we use an estimate of the fair market value of our common stock on the grant date, while we use an estimate of the fair market value of our common stock on the reporting date for awards granted to non-employees. We include an estimate of the number of awards which we expect will be forfeited, and we update that number based on actual forfeitures.

During the fourth quarter of 2013, we changed our accounting for stock options from classifying them as equity instruments to classifying them as liabilities.





Contractual Obligations

The following table presents our contractual obligations as of December 31, 2014 (in thousands):

 
 
Payments Due In:
 
 
Less Than One Year
 
One to Three Years
 
Three to Five Years
 
After Five Years
 
Total
Long-term debt
 
$

 
$
182,745

 
$
200,000

 
$

 
$
382,745

Interest payments on long-term debt
 
25,767

 
50,433

 
6,750

 

 
82,950

Operating leases
 
7,928

 
15,616

 
15,059

 
169,483

 
208,086

Purchase obligations
 
13,514

 
9,495

 
1,999

 
3,604

 
28,612

Total contractual obligations
 
$
47,209

 
$
258,289

 
$
223,808

 
$
173,087

 
$
702,393

 

Recently Issued Accounting Pronouncements
 
Please refer to Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this report for a discussion regarding recently issued accounting pronouncements which may affect us.


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk, primarily related to interest rate exposure of our debt obligations that bear interest based on floating rates. None of our cash or cash equivalents as of December 31, 2014 are subject to market risk based on changes in interest rates. We are exposed to market risk due to floating or variable interest rates on our indebtedness under the New Credit Facility.  Both the Initial Term Loan and the Revolving Credit Facility bear interest at an uncommitted floating rate of LIBOR plus 4.00%, subject to a LIBOR floor of 1.25%.  At December 31, 2014, the principal amount of the related borrowings under our New Credit Facility was $182.7 million. A hypothetical 1.0% increase in LIBOR (or base rate) above the current floor would result in an approximately $1.8 million annual increase in interest expense.
 
The carrying values of our cash, trade receivables, and trade payables approximate their fair value primarily because of the short maturities of these instruments. We estimate the fair value of our long-term debt based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. Based on the borrowing rates currently available to us for debt with similar terms and average maturities, we estimated the fair value of current debt outstanding at approximately $364.4 million as of December 31, 2014.


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We have included the required financial statements and schedules in this 2014 Form 10-K