3. ACQUISITIONS

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. CPL is the owner and operator of nine casinos throughout Poland with a total of 482 slot machines and 75 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 related to 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 owns a 66.6% interest in CPL and on April 8, 2013 began consolidating CPL as a majority-owned subsidiary for which the Company has a controlling 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 $34.8 million in net operating revenue and less than $0.1 million in net earnings from the date of acquisition through December 31, 2013 and $51.2 million in net operating revenue and $0.1 million in net losses for the year ended December 31, 2014. 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 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	(3,020)
Gain on business combination including foreign currency translation	2,194
Less: foreign currency translation	(113)
Gain on business combination	$ 2,081

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. The fair value measurement is final.


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	$ 2,381
Accounts receivable	545
Deferred tax assets - current	325
Prepaid expenses	354
Inventory	139
Other current assets	3
Property and equipment	17,905
Licenses	2,533
Trademark	1,924
Deferred tax assets, non-current	1,034
Other long-term assets	477
Current portion of long-term debt	(4,267)
Accounts payable and accrued liabilities	(1,743)
Contingent liability	(5,776)
Accrued payroll	(1,640)
Taxes payable	(2,112)
Long-term debt, less current portion	(1,687)
Deferred income taxes, non-current	(1,257)
Net identifiable assets acquired	9,138

Less: Non-controlling interest	(5,214)
Add: Goodwill	8,070
Net assets acquired	$ 11,994

The Company accounted for the transaction as a step acquisition, and accordingly, CPL's assets of $27.6 million (including $2.4 million in cash) and liabilities of $18.5 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 CPL. Goodwill is not a tax deductible item for the Company.

Non-controlling interest

The Company recognized the Polish Airports’ non-controlling interest in CPL at its fair value as of the acquisition date. 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 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).

The following table provides information regarding the purchase consideration paid for the Company’s acquisition of an additional 33.3% interest in CPL:

Purchase Consideration – cash outflow


Outflow of cash to acquire subsidiary, net of cash acquired
Cash consideration	$ 6,780
Less: balances acquired	(2,381)
Net of cash - investing activities	$ 4,399

Acquisition-related costs

The Company incurred acquisition costs of approximately $0.1 million in connection with the CPL acquisition. These costs include legal, accounting and valuation fees and have been recorded as general and administrative expenses for the year ended December 31, 2013.

Contingent liability

In March 2011, the Polish Internal Revenue Service (“Polish IRS”) started conducting a series of tax audits of CPL to review the calculation and payment of personal income tax by CPL employees.

Based on the March 2011 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 for the periods from December 1, 2007 to December 31, 2008, January 1, 2009 to December 31, 2009 and January 1, 2011 to January 31, 2011.

After proceedings between CPL and the Polish IRS, the Director of the Tax Chamber in Warsaw upheld the decision of the Polish IRS on November 30, 2012 for review of the period from January 1, 2011 to January 31, 2011. CPL paid PLN 0.1 million (less than $0.1 million) to the Polish IRS for taxes and interest owed resulting from the decision. CPL appealed the decision to the Regional Administrative Court in Warsaw in December 2012. In September 2013, the Regional Administrative Court in Warsaw denied CPL’s appeal. CPL appealed the decision to the Supreme Administrative Court and expects a decision in 2015.

After further proceedings and appeals between CPL and the Polish IRS, the Director of the Tax Chamber in Warsaw also upheld the decision of the Polish IRS on December 30, 2013 for review of the period from December 1, 2007 to December 31, 2008 and from January 1, 2009 to December 31, 2009. CPL paid PLN 3.5 million ($1.2 million) to the Polish IRS for taxes and interest owed from January 1, 2008 to December 31, 2008 on December 31, 2013 and PLN 2.8 million ($0.9 million) for taxes and interest owed from January 1, 2009 to December 31, 2009 on December 16, 2014. CPL filed an appeal of this decision in January 2014 to the Voivodship Administrative Court. In September 2014, the Voivodship Administrative Court denied CPL’s appeal. CPL has appealed the decision to the Supreme Administrative Court.

Management has evaluated the likelihood that the litigation will be unfavorable for CPL using a probability weighted cash flow analysis and recorded a liability at estimated fair value in purchase accounting. As a result, the balance of the potential liability for all open periods as of December 31, 2014 is estimated at PLN 12.0 million ($3.4 million based on the exchange rate in effect on December 31, 2014).

Pro Forma Results

The following table provides unaudited pro forma information of the Company as if the acquisition of CPL had occurred as of January 1, 2013. 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 prior to the periods for which the pro forma information is presented, or of future results.



		Unaudited
		For the year
		ended December 31, 2013
Net operating revenue	$	117,955
Net earnings	$	6,037
Basic and diluted earnings per share	$	0.25

Century Downs Racetrack and Casino

In November 2012, the Company’s subsidiary CCE signed credit and management agreements with CDR in connection with the development of a REC project in Balzac, north metropolitan area of Calgary, Alberta, Canada, which the Company will operate as Century Downs Racetrack and Casino.

On November 29, 2013, CCE finalized amended credit and management agreements with CDR in connection with the development of the REC project. Under the amended credit agreement, CCE agreed to loan to CDR a total of CAD 24 million in two separate loans, Loan A and Loan B. Loan A is for CAD 13 million and Loan B is for CAD 11 million. As of December 31, 2014, CCE has loaned CDR CAD 18.6 million ($16.0 million based on the exchange rate in effect on December 31, 2014). Loan A has an interest rate of BMO prime plus 600 basis points (9.0% as of December 31, 2014 and December 31, 2013) and a term of five years, and CAD 11 million of Loan A is convertible at CCE’s option into an additional ownership position in CDR of up to 60%. Loan B has an interest rate equivalent to the rate charged under the BMO Credit Agreement plus an administrative fee and a term of five years. CCE has advanced all funds from Loan A, and any remaining funds that are advanced to CDR will be advanced under Loan B. Both loans are secured by a leasehold mortgage on the REC property and a pledge of CDR’s stock by the majority of the CDR shareholders. Both loans are for the exclusive use of developing and operating the REC project. CCE intends to fund both loans with additional borrowings under our BMO Credit Agreement (Note 6).

Under the amended management and credit agreements with CDR, CCE acquired 15% of CDR, controls the CDR board of directors, manages the development and operation of the REC project and has the right to convert CAD 11 million of Loan A into an additional 60% ownership interest in CDR. As a condition of licensing by the AGLC, the Company anticipates converting the loan to a majority ownership interest on or before the REC is operational.

As of November 29, 2013, the Company began consolidating CDR as a minority owned subsidiary for which it has a controlling financial interest. Unaffiliated shareholders own the remaining 85% of CDR. The Company accounts for and reports the 85% CDR ownership interest as a non-controlling financial interest. CDR contributed a total of less than $0.1 million in net operating revenue and less than $0.1 million in net losses from the date of acquisition through December 31, 2013 and $0.5 million in net operating revenue and $0.1 million in net earnings from January 1, 2014 to December 31, 2014.

The REC project will be the only horse race track in the Calgary area and will consist of a 5.5 furlongs (0.7 mile) racetrack, a gaming floor with 550 proposed slot machines, a bar, a lounge, restaurant facilities, an off-track-betting area and an entertainment area. The AGLC has approved development of the project and a preliminary license. The AGLC will not issue a final license until the REC opens. Horse Racing Alberta, the governing authority for horseracing in Alberta, has approved the REC project and approved a license. Construction commenced on the REC in March 2014 and the Company expects that the REC will open in April 2015. The casino and off-track betting at the REC will be available year-round, and the horse racing season will be from March to November each year. The 2015 horse racing season will be from April to November.

The Company accounted for the transaction as a business combination, and accordingly, CDR’s assets of $22.9 million (including $0.1 million in cash) and liabilities of $20.5 million were included in the Company's consolidated balance sheet at November 29, 2013. The goodwill is attributable to the expected business expansion opportunity for the Company. The acquisition leverages the Company’s management specialties and expertise in the gaming industry to the horse racing industry, and the REC project, once completed, will be one of the Company’s largest scale properties. Goodwill is not a tax deductible item for the Company.

Upon consolidation, the fair value of the Company’s 15% ownership interest was determined to be $0.4 million as of the acquisition date. Since the Company did not give any cash consideration for the 15% ownership interest, it recorded the $0.4 million as a gain in “Gain on business combination” in the 2013 consolidated statement of earnings. The fair value was determined based on the controlling interest obtained and on the Company’s valuation of CDR using the following methods, which the Company believes provide the most appropriate indicators of fair value:

multi-period excess earnings method;

cost method;

capitalized cash flow method;

discounted cash flow method; and

direct market value approach.

Details of the purchase in the table below are based on estimated fair values of assets and liabilities as of November 29, 2013. The measurement period to make any adjustments to the fair value of the assets and liabilities recognized as a result of the acquisition ended a year after the date of acquisition on November 29, 2014. In 2014, the Company adjusted the deferred taxes and valuation allowance recorded as part of the purchase of CDR. The deferred tax asset was increased by $3.0 million and the deferred tax liability was increased by $0.2 million. These amounts were offset in the valuation allowance, which was increased by $2.8 million. The net impact to purchase accounting was zero. The fair value measurement is final.



Acquisition Date	November 29, 2013

Amounts in thousands
Purchase consideration:
Cash paid	$	0
Acquisition date fair value for 15% equity interest for the Company's guarantee of additional REC project financing		397
Total purchase consideration	$	397


Cash	$	98
Restricted cash		472
Accounts receivable		126
Prepaid expenses		12
Casino license		3,001
Property and equipment		19,234
Accounts payable and accrued liabilities		(471)
Taxes payable		(19)
Contingent liability		(189)
Long-term debt, less current portion		(19,792)
Net identifiable assets acquired		2,472

Less: Non-controlling interest		(2,253)
Add: Goodwill		178
Net assets acquired	$	397

Non-controlling interest

The Company recognized non-affiliated shareholders non-controlling interest in CDR at its fair value of $2.3 million as of November 29, 2013.

Acquisition-related costs

The Company incurred acquisition costs of approximately $0.1 million in the year ended December 31, 2014 in connection with the CDR acquisition. These costs include legal, accounting, and valuation fees and have been recorded as general and administrative expenses.

Land

Prior to the Company’s acquisition of its ownership interest in CDR on November 29, 2013, CDR purchased various plots of land on which to build the REC project. CDR sold a portion of this land consisting of 71.99 acres to 1685258 Alberta Ltd (“Rosebridge”) and leased back 51.99 acres of the land. The Company began accounting for the lease using the financing method as of the date of acquisition. Under the financing method, the Company accounts for the land subject to lease as an asset and the lease payments as interest on the financing obligation. As of December 31, 2014, the outstanding balance on the financing obligation was CAD 19.5 million ($16.8 million based on the exchange rate in effect on December 31, 2014) and the implicit interest rate was 10.0%.

Contingent Liability

In February 2013, 1369454 Alberta Ltd filed a lawsuit against CDR for previously owed money not paid by CDR. The case was settled in April 2013, and CDR issued a promissory note to pay 1369454 Alberta Ltd CAD 0.2 million ( $0.2 million based on the exchange rate in effect on December 31, 2014).

Financing

Prior to November 29, 2013, the Company loaned to CDR $1.4 million for deferred financing costs related to legal fees incurred for the CDR loan and various expenditures relating to the development of the REC. As of the date of consolidation, the Company began eliminating the loan as an intercompany transaction.

Restricted Cash

The Company’s subsidiary CCE loaned CDR $0.2 million to pay outstanding Canadian Federal tax owed by CDR in December 2013. The unsecured note was paid on December 4, 2014 and had a nominal 4% interest rate. The note was paid following the release in December 2014 of $0.2 million of restricted cash from escrow that was held with Rosebridge in connection with the land lease.

Pro Forma Results

Pro forma information is not included because the limited activities of CDR during the comparable 2013 periods are immaterial.

Mendoza Central Entretenimientos S.A.

On October 31, 2014, CCE entered into the MCE Agreement with Gambling and Entertainment LLC and its affiliates, pursuant to which CCE purchased 7.5% of the shares of MCE, a company formed in Argentina, for $1 million. Pursuant to the MCE Agreement, CCE will work with MCE to utilize MCE’s exclusive concession agreement with Instituto Provincial de Juegos y Casinos to lease slot machines and provide related services to Mendoza Casino, a casino located in Mendoza, Argentina, and owned by the Province of Mendoza. MCE may also pursue other gaming opportunities. Under the MCE Agreement, CCE has the right to appoint one director to MCE’s board of directors. In addition, CCE has a three-year option to purchase up to 50% of the shares of MCE and to appoint additional directors to MCE’s board of directors based on its ownership percentage of MCE.

The Company accounts for the $1 million investment in MCE using the cost method. Acquisition costs of $0.2 million were incurred for the year ended December 31, 2014 in connection with the MCE investment. These costs include legal and accounting fees and have been recorded as general and administrative expenses.