Note 3. Reno Acquisition, MTR Merger and Final Purchase Accounting

Final Purchase Price Accounting – Silver Legacy and Circus Reno

On November 24, 2015, the Company acquired all of the assets and properties of Circus Reno and the 50% membership interest in the Silver Legacy Joint Venture owned by Galleon, Inc. The total purchase consideration was $223.6 million as presented in the following table.

Purchase consideration calculation (dollars in thousands)	Silver Legacy			Circus Reno		Total
Cash consideration paid by ERI for MGM’s 50% equity interest and MGM’s member note	$	56,500		$	16,000	$	72,500
Fair value of ERI’s pre-existing 50% equity interest		56,500			—		56,500
Settlement of Silver Legacy’s long-term debt (1)		87,854			—		87,854
Prepayment penalty (1)		1,831			—		1,831
Closing Silver Legacy and Circus Reno net working capital (2)		6,124			2,111		8,235
Reverse member note (3)		(6,107	)		—		(6,107	)
Deferred tax liability		2,769			—		2,769
Purchase consideration	$	205,471		$	18,111	$	223,582

(1)

Represents $5.0 million of short-term debt, $75.5 million of long-term debt, the remaining 50% of the $11.5 million of member notes (net of discount), and accrued interest of $1.6 million. Additionally, the Company paid a $1.8 million prepayment penalty as a result of the early payoff of the Silver Legacy long-term debt.

(2)	Per the Purchase and Sale Agreement, the purchase price was $72.5 million plus the Final Closing Net Working Capital (as defined in the Purchase and Sale Agreement). As agreed by both parties, the final working capital adjustment was $8.2 million.

(3)	Represents 50% of the $11.5 million of member notes (net of discount) due to ERI, and related accrued interest. This amount was settled in conjunction with the final, agreed-upon purchase consideration.

The transaction was accounted for using the acquisition method. No goodwill resulted from the recording of this transaction.

The following table summarizes the allocation of the final purchase consideration to the identifiable assets acquired and liabilities assumed in the Circus Reno/Silver Legacy Purchase. The fair values were based on management’s analysis, including work performed by third‑party valuation specialists. The following table summarizes the final purchase price accounting of the acquired assets and assumed liabilities (dollars in thousands):

	Silver Legacy		Circus Reno		Total
Current and other assets, net	$	21,625	$	2,115	$	23,740
Property and equipment		168,037		14,996		183,033
Intangible assets (1)		5,000		1,000		6,000
Other noncurrent assets		10,809		—		10,809
Net assets acquired	$	205,471	$	18,111	$	223,582

(1)	Intangible assets consist of trade names which are non-amortizable and loyalty programs which were amortized over one year.

During the second quarter of 2016, the Company finalized its valuation procedures and adjusted the preliminary purchase price accounting, as disclosed in the March 31, 2016 Quarterly Report on Form 10-Q and December 31, 2015 Annual Report on Form 10-K, to their updated values. The finalized purchase price accounting resulted in a $1.3 million decrease in property and equipment. This change related to management refining certain assumptions used in the valuation of property and equipment to its fair value. Accordingly, the Company adjusted depreciation expense from the Reno Acquisition Date through June 30, 2016, based on the revised measurement of property and equipment. The depreciation expense adjustment was not material.

Valuation methodologies under both a market and income approach used for the identifiable net assets acquired in the Reno Acquisition make use of Level 1 and Level 3 inputs including quoted prices in active markets and discounted cash flows using current interest rates.

Trade receivables and payables, inventory as well as other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the fair value of those items at the Reno Acquisition Date, based on management’s judgments and estimates.

The fair value estimate of property and equipment utilized a combination of the cost and market approaches, depending on the characteristics of the asset classification. The fair value of land was determined using the market approach, which considers sales of comparable assets and applies compensating factors for any differences specific to the particular assets. With respect to personal property components of the assets (gaming equipment, furniture, fixtures and equipment, computers, and vehicles) the cost approach was used, which is based on replacement or reproduction costs of the asset. Building and site improvements were valued using the cost approach using a direct cost model built on estimates of replacement cost.

Trade names were valued using the relief‑from‑royalty method. The loyalty program was valued using a comparative business valuation method. Management has assigned trade names an indefinite useful life, in accordance with its review of applicable guidance of ASC Topic No. 350, Intangibles—Goodwill and Other. The standard required management to consider, among other things, the expected use of the asset, the expected useful life of other related asset or asset group, any legal, regulatory, or contractual provisions that may limit the useful life, the Company’s own historical experience in renewing similar arrangements, the effects of obsolescence, demand and other economic factors, and the maintenance expenditures required to obtain the expected cash flows. In that analysis, management determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful lives of these intangible assets. The loyalty program is being amortized on a straight‑line basis over a one year useful life.

For the period from the Reno Acquisition Date through December 31, 2015, the Silver Legacy generated net revenue of $13.5 million and a net loss of $0.3 million. Circus Reno generated net revenues of $8.3 million and net income of $1.4 million during the same period.

MTR Gaming Merger

Consideration Transferred

The MTR Merger was accounted for as a reverse acquisition of MTR Gaming by HoldCo under which HoldCo was considered the acquirer for accounting purposes. HoldCo was considered the accounting acquirer on the MTR Merger Date. The total consideration paid was $103.0 million. The purchase consideration in a reverse acquisition is determined with reference to the value of equity that the accounting acquirer, HoldCo, would have had to issue to the owners of the accounting acquiree, MTR Gaming, to give them the same percentage interest in the combined entity. However, in a reverse acquisition between a public company as the legal acquirer and a private company as the accounting acquirer, the fair value of the legal acquirer’s publicly traded stock generally is a more reliable determination of the fair value of the purchase consideration than the fair value of the accounting acquirer’s untraded equity security, and, as such, is generally used in calculating the purchase consideration.

Final Purchase Price Accounting

The following table summarizes the fair values of the assets acquired and liabilities assumed at the MTR Merger Date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. The valuation methodologies under both a market and income approach were used for the identifiable net assets acquired in the MTR Merger made use of Level 1 and Level 3 inputs including quoted prices in active markets and discounted cash flows using current interest rates. The following table summarizes the final purchase price accounting of the acquired assets and assumed liabilities as recorded at fair value on the MTR Merger Date (in thousands):

Current and other assets	$	75,031
Property and equipment		289,211
Goodwill		66,826
Intangible assets (1)		473,000
Other noncurrent assets		20,381
Total assets		924,449
Current liabilities		46,446
Long-term debt (2)		624,877
Deferred income taxes (3)		143,104
Other noncurrent liabilities		7,011
Total liabilities assumed		821,438
Net assets acquired	$	103,011

(1)	Intangible assets consist of gaming licenses which are non-amortizable and, trade names and loyalty programs which are amortized over three and one-half and one year, respectively.

(2)	Long-term debt was primarily comprised of MTR second lien notes of $570.7 million.

(3)	Deferred tax liabilities were derived based on fair value adjustments for property and equipment, identified intangibles, deferred financing costs, certain long term liabilities and long-term debt.

Goodwill, the excess of the purchase price of acquiring MTR Gaming over the fair market value of the net assets acquired, in the amount of $66.8 million was recorded as of the MTR Merger Date. The Company considers the goodwill to represent benefits expected to be realized as a result of the MTR Merger.

Unaudited Pro Forma Information – Reno Acquisition and MTR Merger

The following unaudited pro forma information presents the results of operations of the Company for the years ended December 31, 2015 and 2014, as if the MTR Merger and Reno Acquisition had both occurred on January 1, 2014 (in thousands except per share data).

	For the years ended December 31,
	2015		2014
Net revenues	$	901,455	$	908,415
Net income		97,783		40,552
Net income per common share:
Basic	$	2.10	$	0.87
Diluted	$	2.08	$	0.87
Weighted shares outstanding:
Basic		46,550,042		46,426,714
Diluted		47,008,980		46,509,008

These pro forma results do not necessarily represent the results of operations that would have been achieved if the acquisition had taken place on January 1, 2014, nor are they indicative of the results of operations for future periods. The pro forma amounts include the historical operating results of the Company, MTR Gaming, the Silver Legacy and Circus Reno prior to the MTR Merger and Reno Acquisition, with adjustments directly attributable to the MTR Merger and Reno Acquisition.