ACQUISITIONS AND NEW VENTURES

California Internet Gaming

During May 2015, our Internet real-money gaming operation, I-Gaming, entered into an agreement with a licensed card room operator to provide Internet-based interactive gaming services within California, should enabling legislation be enacted in California which would permit such activities. The term of the agreement commences after enabling legislation and upon the acceptance of the first customer wager and will then continue for a ten-year period. Under the agreement, I-Gaming and the licensed operator will jointly provide a platform for operations, obtain and maintain required licenses and regulatory approvals, and operate Internet-based interactive gaming services that will be marketed to California residents and may include poker and other real-money gaming activities. At this time, it is difficult to assess whether this legislation will be enacted into law, and the effect it would have on our business.

Big Fish Games

On December 16, 2014, we completed the acquisition of Big Fish Games, a global producer and distributor of social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac and mobile devices. Big Fish Games is headquartered in Seattle, Washington, and has locations in Oakland, California and Luxembourg with approximately 604 employees. We acquired Big Fish Games to leverage its casino and casual game experience, assembled workforce and to position ourselves in the mobile and online game industry. We financed the acquisition with borrowings under our Amended and Restated Credit Agreement (the "Senior Secured Credit Facility") and the addition of a $200 million Term Loan Facility ("Term Loan") to the existing Senior Secured Credit Facility.

The purchase price consideration was $838.3 million, composed of $401.7 million in cash, a deferred payment to the founder of Big Fish Games of $85.3 million, payable over three years and recorded at fair value of $78.0 million as of the acquisition date, an estimated payable to the Big Fish Games equity holders related to an income tax refund of $18.1 million and $15.8 million payable in 157,115 shares of our common stock. In addition, we are required to pay additional variable cash consideration based upon the achievement of certain performance milestones of Big Fish Games through December 31, 2015, limited to a maximum of $350 million based on achievement of certain non-GAAP earnings targets before interest and tax. In 2015, Big Fish Games achieved its earnout milestones, and we are committed to paying $281.6 million in 2016 and $68.4 million in 2017.

The estimated fair value of the earnout liability at the acquisition date was $324.7 million. We estimated the fair value of the deferred payment and the earnout liability using a discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount rate based on our cost of debt. The cost of debt as of the closing date was based on the observed market yields of our Senior Unsecured Notes issued in December of 2013 and was adjusted for the difference in seniority and term of the deferred payment and the earnout liability. Refer to Note 16—Fair Value of Assets and Liabilities for further discussion of the fair value measurement of the deferred payment and the earnout liability.

Goodwill of $540.3 million arising from the acquisition consisted largely of projected future revenue and profit growth, including benefits from Big Fish Games’ expertise in the mobile and online games industry, particularly social casinos. All of the goodwill was assigned to Big Fish Games, which remains a stand-alone business for purposes of segment reporting. None of the goodwill recognized will be deducted for tax purposes.

The acquisition of Big Fish Games is included in Acquisition of businesses, net of cash acquired in the investing section of the Consolidated Statements of Cash Flows in the amount of $366.0 million, net of cash acquired of $34.7 million. Included in non-cash investing activities is common stock issued in connection with the acquisition of $15.8 million, earnout liability of $324.7 million, and deferred payments of $97.1 million.

Acquisition-related costs in the amount of $6.4 million were charged directly to operations and were included in selling, general and administrative expense in the Consolidated Statements of Comprehensive Income. Acquisition-related costs included legal, advisory, valuation, accounting and other fees incurred to effect the business combination.

During 2015, we obtained additional information to assist us in determining the values of the liabilities assumed at the acquisition date and changes which occurred during the measurement period. A measurement period adjustment was recorded related to estimated payroll taxes associated with the earnout liability. We retroactively adjusted the December 31, 2014 Condensed Consolidated Balance Sheet and increased deferred tax assets by $0.8 million, increased goodwill by $1.4 million and increased accrued expense by $2.2 million. We completed our valuation during the fourth quarter of 2015. During 2015, we made payments of $18.7 million to Big Fish Games former equity holders for the receipt of federal and state income tax refunds and working capital adjustments related to the acquisition and we made a scheduled deferred founder payment of $28.4 million.

The following table summarizes the final fair value of the assets acquired and liabilities assumed, net of cash acquired of $34.7 million, at the date of acquisition.



(in thousands)	Total
Accounts receivable	$	19,361
Income taxes receivable	18,107
Prepaid expense	9,727
Deferred income taxes	1,682
Other assets	1,780
Property and equipment	14,632
Goodwill	540,306
Other intangible assets	362,863
Total assets acquired	968,458
Accounts payable	9,064
Accrued expense	19,217
Income taxes payable	210
Deferred revenue	37,250
Deferred income taxes	96,238
Other liabilities	2,821
Total liabilities acquired	164,800
Purchase price, net of cash acquired	$	803,658

The final fair value of other intangible assets consists of the following:



(in thousands)	Fair Value Recognized		Weighted-Average Useful Life
Tradename	$	200,000	N/A
Customer relationships	32,663		3.0 years
Developed Technology	87,000		4.0 years
In-Process Research & Development	12,700		5.0 years
Strategic Developer Relationships	30,500		6.0 years
Total intangible assets	$	362,863

We engaged a third-party valuation firm to assist in our analysis of the fair value of tangible and intangible assets acquired. All estimates, key assumptions and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation firm, the fair value analysis and related valuation represents the conclusions of management and not the conclusions of any third party.

Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the related assets as follows: 1 to 5 years for computer hardware and software and 2 to 10 years for office furniture, fixtures and equipment. The estimated useful lives for leasehold improvements is 3 to 10 years based on the shorter of the estimated useful life of the improvement or the lease term.

The tradename was valued using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset. A royalty rate of 5.0% was used based on a review of third-party licensing agreements given Big Fish Games’ brand recognition and competitive position in the market. The tradename was assigned an indefinite life based on our intention to keep the Big Fish Games name for an indefinite period of time.

In valuing the customer relationships, the replacement cost method of the cost approach was used. The value was determined based on the number of paying customers and average cost per customer. Developed technology was valued using the relief-from-royalty method of the income approach based upon revenue derived from games within the premium paid, casino and casual free-to-play categories. Big Fish Games pays royalties of 10.0% and 25.0% to its developers and these rates were used in the valuation.

As of the valuation date, Big Fish Games had a portfolio of free-to-play games expected to launch in 2015 and one game expected to launch in 2016. We estimated that the majority of the revenue associated with games launched in 2015 would be 5 years and the game launched in 2016 would be 6 years. The fair value was calculated using the relief-from-royalty method of the income approach and a royalty rate of 10.0% was used in the valuation.

Strategic developers are third-party alliance partners that develop content exclusively for Big Fish Games. In the valuation of strategic developer relationships, the comparative method of the income approach was used to calculate the fair value. In estimating the fair value, the analysis considered the differences in the present value of the cash flows associated with the strategic developers and without the strategic developers.

As of the valuation date, the fair value of Big Fish Games’ deferred revenue was $37.3 million, which reflects the costs including network and delivery, royalties, third party platform fees, game operations and corporate expense, plus a market participant margin.

During the period from December 16, 2014 through December 31, 2014, Big Fish Games contributed revenue of $13.9 million and loss from continuing operations before provision for income taxes of $2.9 million.

Pro Forma Information (unaudited)

The following table illustrates the effect on net revenue and earnings from continuing operations as if we had acquired Big Fish Games as of the beginning of 2013. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the acquisitions of Big Fish Games been consummated at the beginning of 2014 and 2013. In 2013, earnings from continuing operations included $23.1 million of nonrecurring acquisition costs for us and Big Fish Games.



(in thousands)	Year ended December 31,
	2014		2013
Net revenue	$	1,126,592	$	1,085,518
Earnings from continuing operations	$	64,145	$	11,182

Saratoga Harness Racing Inc. ("SHRI") Joint Venture

In 2014, we entered into a 50% joint venture with SHRI which unsuccessfully bid on the development of a destination casino and resort in the Capital Region of New York. Our remaining investment of $0.8 million, included in other assets on our Consolidated Balance Sheets, reflects our share of land owned by the venture.

In 2014, we incurred $1.0 million in equity losses in our Other Investments segment associated with the license application process and funded $3.3 million to the joint venture. As a result of the bid decision, we recorded an impairment loss of $1.6 million to reduce our investment in the joint venture to its fair value.