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Note 13 - Financial Instruments and Fair Value Measurements
9 Months Ended
Sep. 30, 2015
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
13. 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). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured according to a hierarchy that includes:
 
 
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 long-term debt, the carrying amounts approximate fair value because of the short duration of these financial instruments. As of September 30, 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:
 
 
 
September 30,
 
 
December 28,
 
 
 
2015
 
 
2014
 
                 
 
(In thousands)
Short-term investments
               
Commercial paper
  $     $ 23,984  
Corporate bonds
          21,693  
Certificates of deposit
          961  
 
Balances Measured at Fair Value on a Non-recurring Basis
 
Land, land improvements and building and improvements acquired in connection with the Company’s acquisition of Sartini Gaming during the third quarter of 2015 were measured using unobservable (Level 3) inputs at a fair value of $37.8 million. This fair value 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 also, Note 2,
Merger with Sartini Gaming, Inc
.).
 
Leasehold improvements, furniture, fixtures and equipment, and construction in process acquired in connection with the Company’s acquisition of Sartini Gaming during the third quarter of 2015 were measured using unobservable (Level 3) inputs at a fair value of $46.3 million. This fair value 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 also Note 2,
Merger with Sartini Gaming, Inc
.).
 
The identified intangible assets acquired in connection with the acquisition of Sartini Gaming during the third quarter of 2015 were measured using unobservable (Level 3) inputs at a fair value of $80.7 million (see also, Note 2,
Merger with Sartini Gaming, Inc.).
Included in these intangible assets were the following:
 
Trade names
– Trade names were 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 r
elationships
– The $7.6 million fair value 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 fair value 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
l
icense
s
– The $0.9 million fair value 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 a
ssets
– Other intangible assets includes software and non-compete agreements
.
The $0.5 million fair value 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 fair value 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.
 
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. Effective January 25, 2015, the Company sold its investment in Rock Ohio Ventures for approximately $0.8 million (see Note 6,
Cost Method Investments
).