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Acquisition | 9 Months Ended
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Sep. 30, 2013
Acquisition [Abstract] |
Acquisition | 3.ACQUISITION Casinos Poland On April 8, 2013, the Company’s subsidiary CCE acquired from LOT Polish Airlines an additional 33.3% ownership interest in CPL for cash consideration of $6.8 million. The acquisition of CPL furthers the Company’s mission to grow and develop mid-size casinos and increase company value. CPL is the owner and operator of nine casinos throughout Poland with a total of 354 slot machines and 69 gaming tables. The Company paid for the purchase through borrowings under its credit agreement with the Bank of Montreal (“BMO Credit Agreement”) (Note 6). There was no contingent consideration for the transaction. Prior to April 8, 2013, the Company owned 33.3% of CPL and accounted for the ownership interest as an equity investment. The Company currently own s a 66.6% interest in CPL and on April 8, 2013 began consolidating CPL financial information as a majority-owned subsidiary for which the Company has a c ontrolling financial interest. As a result, the Company changed its accounting for CPL from an equity method investment to a consolidated subsidiary. CPL contributed a total of $22.0 million in net operating revenue and $0.4 million in earnings from the date of acquisition through September 30, 2013. Polish Airports Company (“Polish Airports”) owns the remaining 33.3% ownership interest in CPL and the Company accounts for and reports the Polish Airports ownership interest as a non-controlling financial interest. Upon consolidation, the fair value of the Company’s initial 33.3% equity investment was determined to be $5.2 million as of the acquisition date. The $5.2 million was greater than the carrying value of the equity investment, resulting in a gain of $2.1 million, net of foreign currency translation. The Company recorded the gain in “Gain on business combination” in the second quarter 2013 consolidated statement of earnings. The fair value was determined based on the controlling interest obtained through the additional 33.3% interest acquired and on the Company’s internal valuation of CPL using the following methods, which the Company believes provide the most appropriate indicators of fair value:
· | relief from royalty method;
· | replacement cost method;
· | direct market value approach and direct and indirect cost approach; and
· | sales comparison approach, income approach and cost approach.
Amounts in thousands (in USD) | Total
Investment fair value - April 8, 2013 | $ 5,214
Investment book value at April 8, 2013 | (3,027)
Gain on business combination including foreign currency translation | 2,187
Less: foreign currency translation | (113)
Gain on business combination | $ 2,074
Details of the purchase in the table below are based on estimated fair values of assets and liabilities as of April 8, 2013, the date of acquisition. Allocation of the purchase consideration is preliminary and subject to adjustment as the Company obtains additional information during the measurement period (a period up to one year from the date of acquisition) that could change the fair value allocation as of the acquisition date.
Acquisition Date | April 8, 2013
Amounts in thousands |
Purchase consideration: |
Cash paid | $ 6,780
Acquisition-date fair value of the previously held equity interest | 5,214
Total purchase consideration, including fair value of previously held equity interest | $ 11,994
The assets and liabilities recognized as a result of the acquisition are as follows:
Cash | $ 2,200
Accounts receivable | 638
Deferred tax assets - current | 201
Prepaid expenses | 222
Inventory | 155
Other current assets | 3
Property and equipment | 17,922
Licenses | 2,533
Trademark | 1,924
Deferred tax assets, non-current | 1,034
Other long-term assets | 448
Current portion of long-term debt | (4,033)
Accounts payable and accrued liabilities | (2,236)
Contingent liability | (5,500)
Accrued payroll | (1,272)
Taxes payable | (2,073)
Long-term debt, less current portion | (1,921)
Deferred income taxes, non-current | (1,258)
Net identifiable assets acquired | 8,987
Less: Non-controlling interest | (5,214)
Add: Goodwill | 8,221
Net assets acquired | $ 11,994
The Company accounted for the transaction as a step acquisition, and accordingly, CPL's assets of $27.3 million (including $2.2 million in cash) and liabilities of $18.3 million were included in the Company's consolidated balance sheet at April 8, 2013. The goodwill is attributable to the expected synergies and economies of scale of incorporating CPL with the Company. The acquisition also combines the specialties of the Company’s management expertise in the gaming industry with the brand awareness of Casinos Poland. Goodwill is not a tax deductible item for the Company. Non-controlling interest T he Company recognized the Polish Airports non-controlling interest in CPL at its fair value as of the acquisition. The Company estimated the fair value of the non-controlling interest by determining the value of a controlling interest in the entity. Having control over a company gives additional rights to the holder of the controlling interest as opposed to the holder of the non-controlling interest. The Company then applied a 22.5% discount for lack of control to determine the value of the non-controlling interest. The discount for lack of control was estimated based on an analysis of the transactions in the casinos and gaming industry in the past five years. The resulting value of the non-controlling interest was PLN 16.5 million ($5.2 million). Purchase Consideration – cash outflow
Outflow of cash to acquire subsidiary, net of cash acquired |
Cash consideration | $ 6,780
Less: balances acquired | (2,200)
Outflow of cash - investing activities | $ 4,580
Acquisition-related costs The Company incurred acquisition costs of approximately $0.2 million during the second and third quarters of 2013. These costs include lega l, accounting and valuation fees and have been recorded as general and administrative expenses. Contingent liability In March 2011, the Polish Internal Revenue Service (“Polish IRS”) conducted a tax audit of CPL to review the calculation and payment of personal income tax by CPL employees covering January 2011. Based on this audit, the Polish IRS concluded that CPL should calculate, collect and remit to the Polish IRS personal income tax on tips received by CPL employees from casino customers. After proceedings between CPL and the Polish IRS, the Director of the Tax Chamber in Warsaw confirmed the opinion of the Polish IRS on November 19, 2012, and on November 30, 2012 CPL paid PLN 125,269 (less than $0.1 million) to the Polish IRS resulting from the decision. CPL appealed the decision to the Regional Administrative Court in Warsaw on December 21, 2012. On September 16, 2013, the Regional Administrative Court in Warsaw denied CPL’s appeal. CPL plans to appeal the decision to the Supreme Administration Court. If the Supreme Administration Court ultimately decides against CPL, the Company believes that the Polish IRS may seek to assess a liability for all periods from January 2007 to present. A final decision is not expected in 2013. Similar litigation involving competitors concerning the treatment of tips is ongoing. Management has determined that it is reasonably possible that the litigation will be unfavorable for CPL. Accounting guidance requires pre-acquisition contingent liabilities to be recognized at fair value at the acquisition date if the liability can be determined. Based on management’s assessment using a probability weighted cash flow analysis, the fair value of the potential liability for all open periods is estimated at PLN 18.3 million ($5.9 million). As a result, PLN 18.3 million ($5.9 million) has been recorded as a contingent liability as of September 30, 2013 on the condensed consolidated balance sheets. Pro Forma Results The following table provides unaudited pro forma information of the Company as if the acquisition of CPL had occurred at the beginning of the periods presented. This pro forma information is not necessarily indicative of the combined results of operations that actually would have been realized had the acquisition been consummated during the periods for which the pro forma information is presented, or of future results.
|  | For the three months ended September 30, |  | For the nine months ended September 30,
|  | 2013 |  | 2012 |  | 2013 |  | 2012
Net operating revenue |  | $ 28,826 |  | $ 28,676 |  | $ 80,595 |  | $ 85,392
Net earnings |  | $ 974 |  | $ 910 |  | $ 6,245 |  | $ 3,459
Basic and diluted earnings per share |  | $ 0.04 |  | $ 0.04 |  | $ 0.25 |  | $ 0.14

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e6996-128479 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1524-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1383-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7000-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Paragraph F4 -Subparagraph e -Appendix F Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4934-128472 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141 -Paragraph 51, 52 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 88-16 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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