XML 40 R22.htm IDEA: XBRL DOCUMENT v3.3.1.900
Note 16 - Financial Instruments and Fair Value Measurements
 12 Months Ended
Dec. 31, 2015
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
16. Financial Instruments and Fair Value Measurements
 
Overview
Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
 
 
●
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
●
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
●
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
 
The Company’s financial instruments consist of cash and cash equivalents, short-term investments, cost method investments, accounts payable and debt.
 
For the Company’s cash and cash equivalents, accounts payable and current portion of debt, the carrying amounts approximate fair value because of the short duration of these financial instruments. As of December 31, 2015 and December 28, 2014, the fair value of the Company’s long-term debt approximates the carrying value based upon the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
 
Balances Measured at Fair Value on a Recurring Basis
The following table shows certain of the Company’s financial instruments measured at fair value on a recurring basis using Level 2 inputs, as they are priced principally by independent pricing services using observable inputs:
 
 
 
December 31,
 
 
December 28,
 
 
 
2015
 
 
2014
 
 
(In thousands)
Short-Term Investments
                
Commercial paper
   $ –     $ 23,984  
Corporate bonds
     –       21,693  
Certificates of deposit
     –       961  
 
Balances Disclosed at Fair Value
The fair value of the Company’s cost method investment in Rock Ohio Ventures was estimated to be approximately $0.8 million as of December 28, 2014 based on the negotiated selling price of this investment. In January 2015, the Company sold its investment in Rock Ohio Ventures for approximately $0.8 million
. The Company’s cost method investment in Dania Entertainment was redeemed and sold during the year ended December 28, 2014. See Note 8,
Cost Method Investments
, for a discussion of the Company’s former cost method investments
.
 
Balances Measured at Fair Value on a Non-recurring Basis
Land, land improvements and building and improvements acquired in connection with the Merger were measured using unobservable (Level 3) inputs at an estimated fair value of $37.8 million. This fair value estimate was calculated considering each of the three generally accepted valuation methodologies including the cost, the sales comparison and the income capitalization approaches. Significant inputs included consideration of highest and best use, replacement cost, recent transactions of comparable properties and the properties’ ability to generate future benefits (see Note 3,
Merger with Sartini Gaming, Inc.
).
 
Leasehold improvements, furniture, fixtures and equipment, and construction in process acquired in connection with the Merger were measured using unobservable (Level 3) inputs at an estimated fair value of $46.3 million. This fair value estimate was calculated with primary reliance on the cost approach with secondary consideration being placed on the market approach. Significant inputs included consideration of highest and best use, replacement cost and market comparables (see Note 3,
Merger with Sartini Gaming, Inc.
).
 
The identified intangible assets acquired in connection with the Merger have been valued on a preliminary basis using unobservable (Level 3) inputs at a fair value of $80.8 million (see Note 3,
Merger with Sartini Gaming, Inc.
). Included in these intangible assets were the following:
 
Trade names
– Trade names were preliminarily valued at $12.2 million determined based on the relief-from-royalty method under the income approach, which requires an estimate of a reasonable royalty rate, identification of relevant projected revenues and expenses, and the selection of an appropriate discount rate. Royalty rates of 1.0% to 2.5% were used in the valuations which gave consideration to third-party license agreements that involve trade names and trademarks that can be considered reasonably comparable, the age and profitability of the casinos, nature of the business and degree of competition, and a return on assets analysis to determine an implied royalty rate.
 
Player relationships
– The $7.6 million preliminary fair value estimate of the player relationships was determined based on the excess earnings method under the income approach. Based on management’s experience with historical attrition rates, an annual attrition range of 10.0% to 20.0% was utilized for tavern player relationships. After-tax cash flows were calculated by applying cost, expense, income tax and contributory asset charge assumptions to the estimated player relationships revenue stream. The after-tax cash flows were discounted to present value utilizing a 12.0% to 13.0% discount rate.
 
Customer relationships
– The $59.2 million preliminary fair value estimate of the customer relationships was determined based on the excess earnings method under the income approach. An annual attrition factor range of 5.0% to 12.5% was utilized depending on the specific customer. After-tax cash flows were calculated by applying cost, expense, income tax and contributory asset charge assumptions to the estimated customer relationships revenue stream. The after-tax cash flows were discounted to present value utilizing an 11.0% discount rate.
 
Gaming licenses
– The $1.0 million preliminary fair value estimate of the gaming licenses was determined based on the cost approach. In performing the cost approach, management used estimates for explicit and implicit costs to obtain the gaming licenses.
 
Other intangible assets
– Other intangible assets includes software and non-compete agreements. The $0.5 million preliminary fair value estimate of the software was determined based on the cost approach, which included estimates for fully burdened salaries and the number of hours needed to complete the software as it relates to the latest version of the software. The preliminary fair value estimate of the non-compete agreements was determined based on the lost profits method under the income approach. A “With” scenario was based on projections, which assumed that the non-compete agreements were in place. In contrast, a “Without” scenario assumed the non-compete agreements did not exist and competition began immediately after consummation of the transaction. The difference in after-tax cash flows between the “With” and “Without” scenarios was calculated and then discounted to present value utilizing a 9.8% discount rate, which was based on the Company’s overall internal rate of return. A probability factor of 10.0% was applied to derive a fair value of $0.3 million for the non-compete agreements.