PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about management’s current expectations. Examples of such forward-looking statements include discussions of the expected results of various strategies. Although we believe that our expectations are based upon reasonable assumptions, there can be no assurance that our financial goals will be realized. Our forward-looking statements concern matters that involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from the future results, performance or achievements described or implied by such forward-looking statements. Numerous factors may affect our actual results and may cause results to differ materially from those expressed in the forward-looking statements made by us or on our behalf. Any statements that are not statements of historical fact may be forward-looking statements. Among others, we have used the words, “believes,” “anticipates,” “plans,” “estimates,” and “expects” to identify forward-looking statements. Such statements may be considered forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the risk factors set forth in Item 1A of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. We assume no obligation to update the forward-looking statements to reflect actual results or changes in the factors affecting such forward-looking statements.
Overview
Empire Resorts, Inc. (“Empire,” and, together with its subsidiaries, the “Company,” “us,” “our” or “we”) was organized as a Delaware corporation on March 19, 1993, and since that time has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
On December 21, 2015, our indirect wholly-owned subsidiary, Montreign Operating Company, LLC ("Montreign Operating"), was awarded a gaming license (a "Gaming Facility License") by the New York State Gaming Commission ("NYSGC") to operate a resort casino (the "Casino Project") to be located at the site of a four-season destination resort being developed in the Town of Thompson in Sullivan County, approximately 90 miles from New York City (the "Destination Resort"), which is described below. Montreign Operating is the sole holder of a Gaming Facility License in the Hudson Valley-Catskill Area, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State. The Gaming Facility License became effective on March 1, 2016.
The Destination Resort is located on approximately 1,700 acres (the “EPT Property”) owned by EPT Concord II, LLC (“EPT”) and EPR Concord II, L.P. (“EPR LP”), two wholly-owned subsidiaries of EPR Properties, an entity unrelated to the Company. The Casino Project is part of the initial phase of the Destination Resort, which will also include an Indoor Waterpark Lodge (the "Waterpark"), a Rees Jones-redesigned "Monster" Golf Course (the "Golf Course Project") and an Entertainment Village, which will include hotel, retail, restaurants and other amenities (the "Entertainment Village Project" and, together with the Casino Project and the Golf Course Project, the "Development Projects"). In addition to the Casino Project, subsidiaries of Montreign Operating are responsible for developing the Entertainment Village Project and the Golf Course Project. Subsidiaries of EPR Properties are responsible for developing the Waterpark.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we currently own and operate Monticello Casino and Raceway, a 45,000-square foot video gaming machine ("VGM") and harness horseracing facility located in Monticello, New York, approximately 90 miles northwest of New York City. Monticello Casino and Raceway operates 1,110 VGMs, which includes 1,070 video lottery terminals ("VLTs") and 40 electronic table game positions ("ETGs"). VGMs are similar to slot machines, but they are connected to a central system and report financial information to the central system. ETGs include the games of roulette, blackjack and 3-card poker. We also generate racing revenues through pari-mutuel wagering on the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and internationally, and the export simulcasting of our races to offsite pari-mutuel wagering facilities.
In a letter dated December 23, 2016, the NYSGC approved MRMI's racetrack and simulcast license renewal applications for calendar year 2017. Generally, the annual license renewal process requires the NYSGC to review the financial responsibility, experience, character and general fitness of MRMI and its management.
Recent Events
Corporate Restructuring
In January 2017, the Company undertook certain corporate restructuring. In particular, Empire created Montreign Holding Company, LLC ("Montreign Holding"), a wholly-owned subsidiary, to which it contributed all of its membership interests in Montreign Operating, which was formerly a wholly-owned subsidiary of Empire. Concurrently, Empire contributed to Montreign Operating all of its membership interests in each of Empire Resorts Real Estate I, LLC ("ERREI"), which is developing the Golf Course Project, and Empire Resorts Real Estate II, LLC ("ERREII" and together with ERREI, the "Montreign Subsidiaries" and, together with ERREI and Montreign Operating, the "Project Parties"), which is developing the Entertainment Village Project, each of which were formerly wholly-owned subsidiaries of Empire. The diagram below illustrates the Company's organization as to these entities before and after the restructuring:
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Debt Financing for the Development Projects
On January 24, 2017, Montreign Operating closed a senior secured first lien term loan facility, which provides an aggregate principal amount of $485 million of senior secured first lien term loans, consisting of $70 million of Term A loans and $415 million of Term B loans. In addition, on the same date, Montreign Operating entered into a senior secured revolving credit facility in the amount of $15 million. The net proceeds of the senior secured term facility will be used to fund costs relating to the construction of the Development Projects and the proceeds of the senior secured revolving credit facility will be used for working capital, capital expenditures and other general corporate expenses of Montreign Operating following the opening of the Casino Project to the public. The obligations of Montreign Operating under the aforementioned loan facilities are guaranteed by the Montreign Subsidiaries and are secured by security interests in substantially all of the assets of the Project Parties, as well as by a pledge of the membership interests in Montreign Operating by Montreign Holding. In connection with the senior secured term facility, Empire provided a guaranty capped at $30 million on the completion of construction of the Casino Project and the Entertainment Village Project. Please see "
Business - The Destination Resort and the Development Projects - Term
Loan Agreement and Revolving Credit Agreement
" below for more information.
Kien Huat Montreign Loan Agreement
On January 24, 2017, Kien Huat Realty III Limited ("Kien Huat"), Empire's largest stockholder, and Montreign Holding entered into a loan agreement (the "Kien Huat Montreign Loan Agreement"), pursuant to which Montreign Holding obtained from Kien Huat a loan in the principal amount of $32.3 million (the "Kien Huat Montreign Loan"). The net proceeds of the Kien Huat Montreign Loan will be used as a capital contribution to Montreign Operating for use towards the development and operating expenses of the Development Projects. The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement are secured by a pledge of all the membership interests of Montreign Holding by Empire. Please see "
Business - The Destination Resort and the Development Projects - Kien Huat Montreign Loan Agreement
" below for more information.
The Destination Resort and the Development Projects
The Destination Resort is located on the EPT Property in the Town of Thompson in Sullivan County, New York. The Casino Project is part of the initial phase of the Destination Resort, which will also include the Waterpark, the Golf Course Project and the Entertainment Village Project (the Casino Project, the Waterpark, the Golf Course Project and the Entertainment Village Project, collectively the “Initial Projects”). The Company currently expects the construction of the Development Projects will cost approximately $909 million, which includes $744 million of currently expected costs for the Development Projects, $72 million for contingency and interest reserves, $51 million for the Gaming Facility License fee and $42 million of original issue discount and financing and legal fees.
The Casino Project
The Casino Project is designed to meet five-star and five-diamond standards and is expected to include:
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a 95,200-square foot casino floor featuring 2,150 slot machines and 130 table games, which will include Asian-themed games, and a 16 – 18 table poker room;
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designated VIP/high-limit areas located within the main gaming floor, which will offer a minimum of 26 slot machines, eight table games, and a player’s lounge offering food and beverage;
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an 18-story hotel tower containing 332 luxury rooms (including at least eight 1,000 – 1,200-square foot garden suites, seven 2,400-square foot two-story townhouse villas, and 12 penthouse-level suites), indoor pools and two fitness centers;
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a separate private gaming area containing six private VIP gaming salons, a 10-game pit, a private gaming cage, and butler service;
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27,000 square feet of multi-purpose meeting and entertainment space with seating capacity for 2,000 people and a mezzanine level that includes access to outdoor terraces and approximately 7,000 square feet of meeting room space;
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a 7,500-square foot spa located on the VIP level; and
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eight restaurants and seven bars.
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As of February 28, 2017, approximately 85% of the Guaranteed Maximum Price (defined below)(see "
Business - The Destination Resort and the Development Projects - LP Ciminelli
" below for more information) under the construction manager agreement with LP Ciminelli for the Casino Project has been contracted. Additionally, approximately 45% of the construction of the Casino Project is complete.
Gaming Facility License
The Gaming Facility License became effective on March 1, 2016. The Gaming Facility License will have an initial duration of 10 years from March 1, 2016. It will be renewable thereafter for a period of at least an additional ten years, as determined by the NYSGC. The Gaming Facility License is also subject to certain conditions established by the NYSGC, including the following:
• the payment of an aggregate license fee of $51 million, which was paid on March 30, 2016;
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causing the investment of not less than approximately $854 million (the “Minimum Capital Investment”) in the development of the Initial Projects and infrastructure for the Destination Resort in accordance with the submitted plans for the Casino Project and the Destination Resort;
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deposit of a bond representing10% of the Minimum Capital Investment (the "Minimum Capital Investment Deposit"), which was completed on March 1, 2016;
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commencement of gaming operations on or before March 1, 2018;
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compliance with New York State minority-owned and woman-owned business enterprise ("MWBE") requirements with respect to the Casino Project; and
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the creation of a minimum of 1,425 full-time and 96 part-time jobs.
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The Golf Course Project and the Entertainment Village Project
ERREI and ERREII are responsible for the development and construction of the Golf Course Project and the Entertainment Village Project, respectively. The development of the Entertainment Village Project is expected to be built-out in phases. The Company is currently preparing the design plans for the Entertainment Village Project, which will consist of a non-gaming hotel with 100-200 guest rooms as well as dining, entertainment and retail offerings. The targeted rating for this hotel and its related amenities is in the range of 3-Star and 3-Diamond standards to serve mid-market customers. On December 8, 2016, the Company submitted to the Town of Thompson Planning Board (the "Planning Board") an application for the approval for the site plan for the hotel to be located within the Entertainment Village Project. The Planning Board held a special public hearing to consider the application on March 1, 2017.
ERREI has obtained final site approval from the Planning Board for, and has begun site preparation of, the redesign of the Golf Course Project. On December 28, 2016, the Planning Board extended this site plan approval for a period of six months to allow the Company to coordinate the commencement of construction and to obtain final approval of updates to the wetlands permits from the United States Army Corps of Engineers and the New York State Department of Environmental Conservation, if required.
Master Development Agreement and Completion Guaranties
On December 28, 2015 (the “MDA Effective Date”), the Project Parties, on the one hand, and EPT, EPR LP and Adelaar Developer, LLC (the “Destination Resort Developer,” together with EPT and EPR LP collectively, “EPR”), on the other hand, entered into an Amended and Restated Master Development Agreement (as amended, the “MDA”), which amends and restates that certain master development agreement by and between EPT and MRMI originally executed on December 14, 2012. The MDA defines and governs the overall relationship between EPR and the Project Parties with respect to the development, construction, operation, management and disposition of the Initial Projects.
In accordance with the terms of the MDA, the Project Parties shall each be responsible for the development and construction of their portion of the Development Projects. On December 28, 2015, Empire entered into a Completion Guaranty, guaranteeing completion of the development and construction obligations of the Project Parties described in this paragraph.
In accordance with the terms of the MDA, EPR is responsible for the development and construction of the Waterpark and the common infrastructure-related improvements (such as streets, sidewalks, sanitary and storm sewer lines, water, gas, electric, telephone and other utility lines, systems, conduits and other similar facilities) for the Destination Resort. EPR has agreed to be responsible for the development and construction of the Waterpark with a minimum capital investment of $120 million, and the infrastructure for the Destination Resort. EPR financed the costs of the infrastructure by the issuance of tax-exempt bonds by a local development corporation. The debt service for these infrastructure bonds will be funded through special district tax assessments, a portion of which will be allocated to each of the parcels on which the Initial Projects are being built. EPR and the Project Parties have agreed to a capped dollar amount on the special district tax assessment for each of the parcels on which the Development Projects are being built, above which the Project Parties will not be responsible. On December 28, 2015, EPR Properties, a real estate investment trust and the parent company of EPR, entered into a Completion Guaranty, guaranteeing completion of the development and construction obligations of EPR described in this paragraph.
Neither party has the right to terminate the MDA unless Montreign Operating fails to exercise the Purchase Option (as defined below) prior to its expiration in accordance with the terms and conditions of the Purchase Option Agreement (as defined below).
On January 24, 2017, the MDA was amended to (a) reflect that EPR has secured bond financing in connection with its infrastructure development obligations and (b) account for increases in the common infrastructure budget (and corresponding increases in Empire’s common infrastructure cap amount) in connection with the development of additional roads and increase in the budgeted amounts for New York State Electric and Gas costs. The changes to Empire’s common infrastructure cap amount were also reflected in each of the amendments to the Casino Lease, Golf Course Lease and Entertainment Village Lease.
Development Project Parcel Leases and Purchase Option Agreement
On December 28, 2015, the Project Parties entered into the Casino Lease, the Golf Course Lease, the Entertainment Village Lease and the Purchase Option Agreement (each as defined and described in "
Properties - EPT Property
" below). Option payments made by the Company pursuant to that certain option agreement, originally executed on December 21, 2011 and last amended on June 20, 2014 (the "Original Option Agreement"), which total $8.5 million, were applied against rent amounts due to EPT as rent under the Casino Lease, as more fully described below. The Original Option Agreement, which granted the Company the right to lease the Casino Parcel, was superseded by the Casino Lease, Golf Course Lease and the Entertainment Village Lease, which are described below in "
Properties - EPT Property"
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Term Loan Agreement and Revolving Credit Agreement
Term Loan Agreement
On January 24, 2017 (the "Loan Closing Date"), Montreign Operating entered into a Building Term Loan Agreement (the "Term Loan Agreement"), among Montreign Operating, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch ("Credit Suisse"), as administrative agent. The Term Loan Agreement provides for loans to be made to Montreign Operating in an aggregate principal amount of $485 million (the "Term Loan Facility").
The Term Loan Facility consists of $70 million of Term A loans (the "Term A Loan") and $415 million of Term B loans (the "Term B Loan"). The Term B Loan was borrowed in full on the Loan Closing Date and the proceeds were used to pay fees and expenses related to the financing and fund various lender-controlled accounts. The proceeds of the Term Loan Facility (including proceeds of the Term A Loan, which will be deposited into the lender-controlled accounts upon borrowing) will be made available to Montreign Operating, subject to Montreign Operating satisfying the disbursement conditions set forth in the Term Loan Agreement and related loan documents, to pay debt service and costs relating to the development and construction of the Development Projects.
The Term A Loan may be borrowed during the period from the Loan Closing Date to July 24, 2018, subject to meeting the conditions set forth in the Term Loan Agreement at the time of the borrowing. The Term A Loan will mature on January 24, 2022 and the Term B Loan will mature on January 24, 2023. Interest will accrue on outstanding borrowings under the Term A Loan at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum. Interest will accrue on
outstanding borrowings under the Term B Loan at a rate equal to LIBOR (with a LIBOR floor of 1%) plus 8.25% per annum, or an alternate base rate plus 7.25% per annum. In addition, Montreign Operating will pay a commitment fee to each Term A Loan lender (“Term A Lender”) equal to the undrawn amount of such Term A Lender’s Term A Loan commitment multiplied by a rate equal to 2.5% per annum for the period commencing on the Loan Closing Date through March 24, 2018 and 5.0% per annum thereafter.
In the event that the Term B Loan is prepaid or repaid in whole or in part for any reason other than as a result of scheduled amortization and certain other exceptions, Montreign Operating is required to pay pre-payment premiums based on a make-whole if the prepayment occurs from the Loan Closing Date to (but excluding) the 30th-month anniversary following the Loan Closing Date (the “30th Month”), and a 2% and 1% premium if the prepayment occurs from the 30th Month to (but excluding) the 42nd-month anniversary of the Loan Closing Date (the “42nd Month”) and from the 42nd Month to (but excluding) the 54th-month anniversary of the Loan Closing Date, respectively.
Revolving Credit Agreement
On the Loan Closing Date, Montreign Operating also entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) among Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative agent. The Revolving Credit Agreement provides for loans or other extensions of credit to be made to Montreign Operating in an aggregate principal amount of up to $15 million (including a letter of credit sub-facility of $10 million) (the “Revolving Credit Facility”), the proceeds of which may be used for working capital needs, capital expenditures and other general corporate purposes following the opening of the Casino Project to the public. The Revolving Credit Facility will mature on January 24, 2022. Interest will accrue on outstanding borrowings at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum.
Collateral and Other Provisions
The Term Loan Facility and the Revolving Credit Facility are each guaranteed by the Montreign Subsidiaries and are secured by security interests in substantially all the real and personal property of Montreign Operating and the Montreign Subsidiaries and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding. In addition, Empire delivered a completion guaranty in connection with the Term Loan Facility guaranteeing the completion of the construction of the Casino Project and the Entertainment Village Project. Empire’s liability under the completion guaranty (excluding lender’s enforcement costs) is capped at $30 million.
The Term Loan Agreement and the Revolving Credit Agreement contain representations, warranties, affirmative covenants, negative covenants and financial covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict the ability of Montreign Operating and the Montreign Subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, or make dividends or other distributions. Additionally, Montreign Operating is required to deposit $35 million into the lender-controlled account holding the net proceeds of the Term Loan Facility and the Kien Huat Montreign Loan, which amount will be used towards the Entertainment Village Project. Of this payment, $15 million is required to be deposited by June 30, 2017 and the remaining $20 million is required to be deposited by December 31, 2017. The $35 million must be funded in the form of a further equity contribution to Montreign Operating. The Company expects to raise additional equity capital to cover these amounts by the dates on which the deposits must be made. Obligations under the Term Loan Agreement and the Revolving Credit Agreement may be accelerated upon certain customary events of default (subject to grace periods, as appropriate), including, among others: nonpayment of principal, interest or fees; breach of the affirmative or negative covenants; revocation of a gaming license for seven consecutive business days; and a change of control (as such term is defined in the Term Loan Agreement) of Montreign Operating.
To further fund the Development Projects, on January 24, 2017, Montreign Operating entered into the Term Loan Agreement and Montreign Holding entered into the Kien Huat Montreign Loan Agreement. In connection with the consummation of the Term Loan Agreement, on the Loan Closing Date, that certain construction loan agreement (the "Kien Huat Construction Loan Agreement") dated October 13, 2016, by and between Kien Huat and Montreign Operating expired on its terms without being utilized by Montreign Operating. Montreign Operating and Kien Huat had entered into the Kien Huat Construction Loan Agreement to provide Montreign Operating with short-term access to up to $50 million of loans to pay the expenses of the Casino Project while the debt financing for the Development Projects was being finalized.
Kien Huat Montreign Loan Agreement
On the Loan Closing Date, Kien Huat and Montreign Holding entered into the Kien Huat Montreign Loan Agreement, pursuant to which Montreign Holding obtained from Kien Huat a loan in the principal amount of $32.3 million, the net proceeds of which will be used as a capital contribution to Montreign Operating for use towards the expenses of the Development Projects. The Kien Huat Montreign Loan shall mature on February 24, 2024 (the “Kien Huat Loan Maturity Date”), which Kien Huat Loan Maturity Date may be extended by Kien Huat in its sole discretion by up to an additional year.
The Kien Huat Montreign Loan bears interest at a rate of 12% per annum. Prior to the Kien Huat Loan Maturity Date,
interest on the Kien Huat Montreign Loan shall accrue and be added to the outstanding principal of the Kien Huat Montreign
Loan (the “Principal Indebtedness”) on the first business day of each calendar month beginning on February 1, 2017 (each an
“Interest Payment Date”) and shall thereafter be deemed to be part of the Principal Indebtedness. The Principal Indebtedness,
including all interest due through the applicable Interest Payment Date and other amounts due under the Kien Huat Montreign
Loan, shall be payable in cash on the Kien Huat Loan Maturity Date. Notwithstanding the foregoing, Montreign Holding shall
be required to pay in cash to Kien Huat, at the end of any “accrual period” (as defined in Section 1275(a)(5) of the Internal
Revenue Code of 1986, as amended (the “Code”)) ending after the fifth anniversary of the Loan Closing Date the aggregate
amount by which (x) the sum of (i) the amount of accrued interest on the Kien Huat Montreign Loan that has been added to the
Principal Indebtedness plus (ii) any other accrued but unpaid original issue discount (as determined under Section 163(i) of the
Code) on the Kien Huat Montreign Loan from the closing date through the end of such accrual period, in each case that has not
been paid in cash, exceeds (y) the product of (i) the “issue price” (as defined for purposes of the Code) and (ii) the “yield to
maturity” (as defined for purposes of the Code). In addition to the interest payable on the Kien Huat Montreign Loan, Kien
Huat was entitled to a commitment fee of 1%, which fee was added to the Principal Indebtedness of the Kien Huat Montreign Loan on the Loan Closing Date.
Until the Kien Huat Montreign Loan is repaid in full, Montreign Holding shall make no dividend or other distributions to Empire except (i) for purposes of paying bona fide corporate overhead expenses in an amount not to exceed $9 million (which amount is subject to further reduction pursuant to the Kien Huat Montreign Loan Agreement) and (ii) for purposes of the payment of taxes by Empire, to the extent also permitted by the Term Loan Agreement with respect to distributions from
Montreign Operating. The Kien Huat Montreign Loan may be prepaid in full or in part at any time without premium or penalty.
The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement are secured by a pledge of all the membership interests of Montreign Holding by Empire. The Kien Huat Montreign Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict Montreign Holding’s use of the proceeds of the Kien Huat Montreign Loan to expenses relating to the Development Projects. Obligations under the Kien Huat Montreign Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as appropriate), including, among others: nonpayment of principal, interest or fees; breach of the affirmative covenants and a default with respect to the payment of principal or interest under the Term Loan Facility by Montreign Operating or acceleration of the Term Loan Facility for any reason.
County of Sullivan Industrial Development Agency Benefits Relating to the Development Projects
Casino Project IDA Benefits
In March 2013, the Company received approval from the County of Sullivan Industrial Development Agency ("IDA") for the provision of certain forms of financial assistance in connection with the development of the Casino Project. These
prospective benefits included, among others, (i) an exemption from New York State and local sales and use taxes with
respect to certain items used in, or for the acquisition, construction and equipping of the Casino Project (the “Casino Project
Tax Benefit”), which Casino Project Tax Benefit is subject to a cap, (ii) an exemption from all mortgage recording taxes
imposed in New York State, and (iii) a partial (or full) real property tax abatement over 16 years ((i), (ii) and (iii), collectively, the “Casino Project IDA Benefits”). The Casino Project IDA Documents, as further amended as discussed below, became effective upon the grant of the Gaming Facility License to Montreign Operating in December 2015.
In September 2014, the IDA and the Company entered into an Agent Agreement, Lease Agreement, Leaseback Agreement, payment in lieu of tax ("PILOT") Agreement, and related documents (together and as amended, the "Casino Project IDA Documents") providing for the Casino Project IDA Benefits following formal approval of such agreements by the IDA. Among other things, pursuant to the Casino Project IDA Documents, the Company is required to pay to the IDA (i) annual rent and (ii) a fee in connection with the use of these forms of financial assistance.
In support of site preparation activities for the Casino Project, on May 26, 2015, the IDA took action to allow the Company to obtain the Casino Project Tax Benefit with respect to its eligible Casino Project expenses immediately, even though the Casino Project IDA Documents would not be effective until the Gaming Facility License was issued. In connection with this authorization, the Company paid to the IDA an administrative fee of $150,000 and was permitted to defer an escrow payment in the amount of $100,000 until a building permit for the construction of the Casino Project is issued.
On August 14, 2015, the Company applied to the IDA to increase the cap on the Casino Project Tax Benefit and the value subject to the PILOT agreement as a result of changes to the design of the Casino Project, which substantially increased the cost of development. On September 18, 2015, the IDA approved amendments to the Casino Project IDA Documents (i) increasing the Casino Project Tax Benefit cap from approximately $15 million to $35 million and (ii) increasing the total value subject to the PILOT agreement from $53.5 million to $65 million. In connection with these amendments to the Casino Project IDA Documents, the annual rent due to the IDA from the Company on the Casino Project Parcel increased to $166,000 and the fee due to the IDA was increased by $82,500.
In connection with Montreign Operating's entry into the Term Loan Agreement and the Revolving Credit Agreement, on the Loan Closing Date, Montreign Operating, ERREI, the IDA and the Credit Suisse AG, Cayman Islands Branch, as Collateral Agent, entered into a Building Loan Mortgage, Leasehold Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing. In connection with the execution of these agreements, the Company was exempt from the mortgage recording taxes imposed by New York State pursuant to the terms of the Casino Project IDA Documents.
Golf Course Project IDA Benefits
On June 20, 2016, ERREI obtained approval from the IDA for the provision of certain forms of financial assistance in
connection with the Golf Course Project, which prospective benefits include (i) an exemption from New York State and local sales and use taxes with respect to certain items used in, or for, the acquisition, construction and equipping of the Golf Course Project, (ii) an exemption from all mortgage recording taxes imposed in New York State, and (iii) a partial (or full) real property tax abatement over 16 years ((i), (ii) and (iii), collectively, the "Golf Course Project IDA Benefits").
On December 22, 2016, the IDA and ERREI entered into an Agent Agreement, Lease Agreement, Leaseback Agreement, PILOT Agreement and related documents (the "Golf Course Project IDA Documents") providing for the Golf Course Project IDA Benefits. ERREI is required to pay annual rent to the IDA in the amount of $10,000 per year for the first two years of the Lease Agreement term and $25,000 per year thereafter. In addition, ERREI is required to make annual PILOT payments to the IDA based on a total value of $4.8 million, which payment is discounted for the first two years of the property tax abatement period to accommodate for construction of the Golf Course Project.
Casino Project Branding
Montreign Operating is in discussions with an entity affiliated with Tan Sri Lim Kok Thay, a beneficiary of Kien Huat, to use certain trademarks related to the “Resorts World” and "Genting" names in relation to the Casino Project and the other Development Projects (the "RW License Agreement"). In addition, the parties are negotiating an agreement pursuant to which the Casino Project will become a member of the "Genting Rewards" customer loyalty program. On March 7, 2017, the Board of Directors of Empire and the Board of Managers of Montreign Operating approved the form of the RW License Agreement, which will be submitted to the NYSGC for review and approval. Upon the receipt of such approval from the NYSGC, the parties will execute the RW License Agreement.
JCJ Architectur
e
Montreign Operating has entered into a professional services agreement with JCJ Architecture PC, which is a standard architectural agreement, with normal and customary terms, and addresses, among other things, architectural services, dates of completion of the Casino Project and MWBE participation in the Casino Project.
LP Ciminelli
Montreign Operating has entered into a construction manager agreement with LP Ciminelli, Inc., which is a standard construction manager agreement, with normal and customary terms, and addresses, among other things, the Guaranteed Maximum Price of approximately $511 million for the Casino Project (the "Guaranteed Maximum Price"), completion commitments and MWBE participation in the Casino Project.
Monticello Casino and Raceway
Monticello Casino and Raceway began racing operations in 1958 and currently features the following:
• 1,070 VLTs and 40 ETGs (collectively 1,110 VGMs);
• year-round live harness horse racing;
• year-round simulcast pari-mutuel wagering on thoroughbred and harness horse racing from around the world;
• a 3,000-seat grandstand with retractable windows and a 100-seat clubhouse;
• parking spaces for 2,000 cars and 10 buses;
• an a la carte restaurant and a two-outlet food court with seating capacity for up to 100 patrons;
• a 1,386-square foot multi-functional space used for events;
• a 1,525-square foot simulcast room located directly adjacent to the gaming floor;
• a casino bar and an additional clubhouse bar; and
• an entertainment lounge with seating for 75 patrons.
VGM Operations
We operate a 45,000-square foot VGM facility known as Monticello Casino and Raceway. The VGMs are owned by New York State and VGM activities in New York State are overseen by the NYSGC. Revenues derived from our VGM operations consist of VGM revenues and food and beverage revenues.
Gross VGM revenues consist of the total amount wagered at our VGMs, less prizes awarded. The statute provides a
marketing allowance for racetracks operating video lottery programs of 10% on the first $100 million of net revenues generated
and 8% thereafter. Video lottery gaming is permitted for no more than 20 consecutive hours per day and on no day can such operation be conducted past 6:00 a.m.
Raceway Operations
Raceway operations, simulcasting and pari-mutuel wagering activities in New York State are overseen by the NYSGC. We derive our racing revenue principally from the following:
• wagering at Monticello Casino and Raceway on live races run at Monticello Casino and Raceway;
• fees from wagering at out-of-state locations and internationally on races run at Monticello Casino and Raceway
using export simulcasting;
• revenue allocations, as prescribed by law, from betting activity at off-track betting facilities in New York State;
• wagering at Monticello Casino and Raceway on races broadcast from out-of-state racetracks using import
simulcasting; and
• program and certain other ancillary activities.
Simulcasting
Import and, particularly, export simulcasting, are important parts of our business. Simulcasting is the process by which a live horse race held at one facility (the “host track”) is transmitted to another location that allows patrons of such other location to wager on that race. Amounts wagered at each off-track betting location are combined into the appropriate pools at the host
track’s tote facility where the final odds and payouts are determined. With the exception of a few holidays, we offer year-round simulcast wagering from racetracks across the country. In addition, races of national interest, such as the Kentucky Derby, Preakness Stakes and Breeders’ Cup supplement our regular simulcast programming. We also export live broadcasts of our own races to race tracks, casinos and off-track betting facilities in the United States and internationally.
On November 3, 2014, MRMI and the Monticello Harness Horsemen’s Association (the “MHHA”) entered into an
agreement that governs the conduct of MRMI and MHHA relating to horseracing purse payments, the simulcasting of horse
races and certain other payments (the “2014 MHHA Agreement”). The term of the 2014 MHHA Agreement expires seven years
from the date the NYSGC approves the Casino Project to engage in legalized gaming. On that same date, MHHA will also
receive, subject to adjustment for corporate events, 200,000 shares of common stock and a warrant to purchase 60,000 shares of common stock, the proceeds of any sales of which will provide additional monies for the harness horsemen’s purse account.
Pari-mutuel Wagering
Our racing revenue is derived from pari-mutuel wagering at our track and government mandated revenue allocations from certain New York State off-track betting locations. In pari-mutuel wagering, patrons bet against each other rather than against the operator of the facility or with pre-set odds. The amounts wagered form a pool of funds from which winnings are paid based on odds determined by the wagering activity. The racetrack acts as a stakeholder for the wagering patrons and deducts from the amounts wagered a “take-out” or gross commission from which the racetrack pays state and county taxes and racing purses. Our pari-mutuel commission rates are fixed as a percentage of the total handle or amounts wagered.
Regulation
The gaming industry is highly regulated and we must maintain our licenses and pay gaming taxes to continue our operations. The Casino Project and Monticello Casino and Raceway are subject to extensive regulation under the laws, rules, and regulations of New York State. These laws, rules, and regulations generally concern the conduct of operations as well as the responsibility, financial stability, and character of the facilities, owners, managers, and persons with financial interests in the gaming operations. Individuals and entities, including investors and vendors conducting business with us, must file license/registration applications with the NYSGC, and in some instances must submit to background investigations by the New York State Police in order to prove suitability for licensure/registration. Application, fingerprinting and investigative fees must be paid by us or by the individual or entity seeking licensure or registration. Failure to obtain and maintain a license or registration, as applicable, could require us to sever our relationship with such individuals and/or entities, which could have a material adverse effect on our operations or the Development Projects.
Our businesses are also subject to various foreign, federal, state, and local laws and regulations, in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, smoking, environmental matters, employees, currency transactions, taxation, zoning and building codes, construction, land use, and marketing and advertising. We also deal with significant amounts of cash in our operations and are subject to various reporting and federal anti-money laundering ("AML") laws, as further discussed below. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operations or the Development Projects.
Casino Gaming Regulations
The Upstate New York Gaming and Economic Development Act ("Gaming Act"), provides among other things, the statutory framework for the regulation of full-scale casino gaming. The Gaming Act authorized the NYSGC to award up to four Gaming Facility Licenses. The NYSGC awarded Montreign Operating the sole Gaming Facility License in the Hudson Valley-Catskills region. It also awarded one Gaming Facility License in the Albany region and two Gaming Facility Licenses in the eastern Southern Tier/Finger Lakes region. The Gaming Act provides that no casinos shall be authorized in Bronx, Kings, New York, Queens or Richmond counties. New York State may, however, legislatively authorize additional Gaming Facility Licenses.
The Gaming Act provides for a seven-year exclusivity period for holders of Gaming Facility Licenses, commencing March 1, 2016, during which no further Gaming Facilities can be licensed by the NYSGC without legislative action. If the New York State legislature authorizes additional Gaming Facility Licenses within this exclusivity period, holders of the original four Gaming Facility Licenses shall have the right to recover a pro-rata portion of the license fee paid.
On March 1, 2016, the Minimum Capital Investment Deposit was made in the aggregate amount of $85.4 million. The Project Parties' portion of the Minimum Capital Investment Deposit was made in the form of a deposit bond representing approximately $65 million, which is 10% of the Company's share of the Minimum Capital Investment in the Development Projects and EPR's portion was made in the form of a deposit bond representing approximately $20 million, which is 10% of their Minimum Capital Investment in the infrastructure for the Destination Resort and the Waterpark. In addition, on March 30, 2016, we paid the license fee of $51 million, which is reflected on the accompanying consolidated balance sheet as an intangible asset as of December 31, 2016.
The operations of the Casino Project are subject to regulation by the NYSGC, Division of Gaming. The tax rate on slot machines at the Casino Project will be 39% and the tax rate on table games will be 10%. The tax rate on VGM operations at Monticello Casino and Raceway will remain at the existing NYSGC commission rate and is expected to include an additional commission from NYSGC, based on a rate related to the effective tax rate on all gross gaming revenue at the Gaming Facility developed by Montreign Operating. Existing payments to the racing industry for purses and breeding will be maintained. However, the Gaming Act requires the maintenance of the horsemen and breeder payments at the 2013 dollar level to be adjusted annually, pursuant to changes in the consumer price index.
The Gaming Act imposes a $500 annual fee on each slot machine and table game. In addition, the Gaming Act requires that the minimum gambling age for the Casino Project will be 21, and no smoking will be authorized.
Moreover, the Gaming Act deems the Casino Project to be a New York State agency for its capital projects for the purpose of MWBE participation and the NYSGC regulations require all contracts with Montreign Operating that are in excess of $25,000 to be reviewed by the NYSGC for the purpose of MWBE participation. Montreign Operating is expected to use good faith efforts to achieve a 30% MWBE participation rate with respect to the Casino Project.
Regulatory Permits and Approvals Relating to the Development Projects
Casino Project
The Casino Project received all approvals and permits required to begin construction in February 2015 and began construction soon thereafter. In June 2015, Montreign Operating submitted certain changes in the design of the Casino Project, which received approval in July 2015.
Entertainment Village Project and Golf Course Project
On July 22, 2015, the Planning Board granted preliminary site plan approval for the Golf Course Project. On April 13, 2016, the Planning Board approved the lot improvement/consolidation plan for the Golf Course Project, which enables the Company to submit an application for final site plan approval. The Company submitted such application for final site plan approval (the "Golf Course Final Site Plan Approval") for the Golf Course Project on May 25, 2016. On June 8, 2016, the Planning Board approved the Golf Course Final Site Plan Approval. On December 28, 2016, the Planning Board extended its approval of the Golf Course Final Site Plan Approval for a period of six months to allow the Company time to coordinate the start of construction.
On December 8, 2016, the Company submitted to the Planning Board an application for site plan approval for the Entertainment Village Hotel. On February 8, 2017, the Planning Board declared itself the lead agency under the New York State Environmental Quality Review Act and referred the site plan the the Sullivan County Department of Planning and set a public hearing date of March 1, 2017. The Planning Board held a special public hearing to consider the site plan on March 1, 2017. Continued review and final approval of the site plan application for the Entertainment Village hotel is anticipated in the coming weeks.
VGM and Racing Operations
Our VGM, harness horseracing and simulcast activities in New York State are overseen by the NYSGC, Division of Lottery and Division of Horse Racing and Pari-Mutuel Wagering, respectively. The NYSGC has the authority and
responsibility to promulgate rules and regulations that affect the operations of our business. By statute, from April 1, 2008 until March 31, 2017, 41% of gross VGM revenue is distributed to us. Unless the 2017-2018 New York State Budget, which we anticipate will be adopted before March 31, 2017, contains a provision to extend this share percentage of gross VGM revenue to March 31, 2018, effective as of April 1, 2017, only 39% of gross VGM revenue will be distributed to us. We anticipate that
the New York State Budget will be adopted by March 31, 2017. In addition, the law provides for subsidized free play allowance of 15%.
Anti-Money Laundering Laws
The operations of the Casino Project and Monticello Casino and Raceway are subject to federal AML laws. The AML laws relate to the reporting of large cash transactions and suspicious activity and include screening transactions against lists maintained by the Office of Foreign Assets Control in order to prevent the processing of transactions to or from certain countries, individuals, nationals and entities. Our AML policy was developed by applying a risk-based approach and is tailored to our business activities and customer risk profiles. The risk assessment will be updated and revised to reflect changes in our business to ensure sufficiency and effectiveness of our AML policy. Failure to comply with the AML laws could subject us to significant fines and penalties.
Market and Competition from Other Gaming and VGM Operations
The Development Projects are located in the Catskills region in New York State, which has historically been a resort area, although its popularity declined with the growth of other resort destinations. We are located approximately 90 miles northwest of New York City. Specifically, Monticello Casino and Raceway is directly adjacent to New York State Route 17 (the future Interstate 86), has highly visible signage and convenient access from Exit 104 of New York State Route 17. The Development Projects are located at the Destination Resort approximately three miles away from Monticello Casino and Raceway in the Town of Thompson. The Exit 106 interchange off of New York State Route 17 is being redesigned and reconstructed to connect directly to a newly constructed Destination Resort entry road that will deliver guests arriving from New York State Route 17 directly into the Destination Resort.
The casino entertainment business is highly competitive. The industry is comprised of a diverse group of competitors that vary considerably in size and geographic diversity, quality of facilities and amenities available, marketing and growth strategies, and financial condition. Generally, we will compete directly with certain VGM and casino facilities operating in the immediate and surrounding areas. Ultimately, the Casino Project and Monticello Casino and Raceway will also compete, in part, with each other. Upon the completion of the Casino Project and the remaining Initial Projects for the Destination Resort, we will also compete with other non-gaming resorts and vacation areas, various other entertainment businesses, and other forms of gaming. Our non-gaming offerings will also compete with other retail facilities, amusement attractions, food and beverage offerings, and entertainment venues.
Gaming Operations
We expect the Casino Project to receive patronage from guests residing within 75 miles, which represents our primary market. With the completion of the Casino Project and the further opening of the Initial Projects, we expect to also receive patronage from guests residing within a 75- to 120-mile radius, which represents our secondary market. In addition, we are developing a marketing plan to attract Asian clientele both in the bus market from New York City and the mid to high-end gaming market. From game selection to food and beverage offerings, we have allocated appropriate space, game offerings and amenities to support these efforts.
We will face competition for the Casino Project from certain VGM facilities in New York State and from casinos in northeastern Pennsylvania and New Jersey and, to a lesser extent, casinos and gaming facilities located on Native American lands in the Northeast. We will face competition for guests from our primary market from a VGM facility at Yonkers Raceway, located within the New York City metropolitan area. Yonkers Raceway has a harness horse racing facility, approximately 5,300 VGMs, food and beverage outlets and other amenities. In addition, we face competition in and from the northeastern Pennsylvania, New Jersey and Connecticut gaming markets in marketing to and attracting patrons from our secondary market, including the New York City metropolitan area. Pennsylvania casinos operate table games and slot machines, grant casino credit and have access to unlimited non-taxable free play. Pennsylvania legalized the operation of up to 61,000 slot machines at 14 locations throughout the state. As of March 3, 2017, there were 12 casinos in operation within Pennsylvania, with six located at racetracks. One such racetrack facility is Mohegan Sun at Pocono Downs, in Wilkes-Barre, Pennsylvania, located approximately 70 miles southwest of Monticello, which has approximately 2,332 slot machines and 91 table games, including 18 poker tables, and a hotel and spa. In addition, Mount Airy Casino Resort in Mount Pocono, Pennsylvania, approximately 60 miles southwest of Monticello, has approximately 1,868 slot machines and 81 table games, including nine poker tables, a hotel, spa and a golf course and Sands Casino Resort in Bethlehem, Pennsylvania, located approximately 95 miles from Monticello, has approximately 3,000 slot machines and 230 table games, including 30 poker tables, a hotel and spa.
In addition to facing potential competition from the casinos in Atlantic City, legislators in New Jersey have reviewed options to place slot machines in various locations, including the Meadowlands Racetrack located in Bergen County, New Jersey. A referendum was placed on the ballot in November 2016 to enable voters to decide whether or not to amend the New Jersey State Constitution to permit two casinos in northern New Jersey, at least 72 miles from Atlantic City. The referendum was defeated by the voters.
We also face potential competition from the current or future expansion of state-licensed gaming in New England and the northeastern United States and prospective gaming projects under consideration by Native American tribes, including federally-recognized tribes in Massachusetts and New York. With the addition of traditional table gaming in Rhode Island, Maine, Pennsylvania and Delaware in recent years, and new gaming facilities authorized or under development in Massachusetts and Pennsylvania, commercial casino gaming has expanded in the northeastern United States and is poised to expand further. In the Commonwealth of Massachusetts, the single slot-only facility in Plainville has been open since 2015, while the two commercial casinos authorized for the cities of Springfield and Everett reportedly will open in 2018 and 2019, respectively. These jurisdictional expansions, many of which are convenience gaming facilities as opposed to destination gaming facilities, may not result in a corresponding increase in gaming revenues.
Native American gaming projects being pursued by the Mashpee Wampanoag Tribe, which has entered into a tribal-state gaming compact, and the Aquinnah Wampanoag Tribe, both located in the Commonwealth of Massachusetts, and the Shinnecock Indian Nation of New York, also increase the possibility of new tribal gaming in the northeastern United States in the future. In addition, other federally-recognized Native American tribes continue to pursue new gaming projects elsewhere in the northeastern United States. Additionally, tribes seeking federal recognition, as well as presently federally-recognized Native American tribes, continue efforts to establish or expand reservation lands with an interest in commercial casino gaming on such lands.
We are unable to predict the impact additional commercial casino and tribal gaming operations in the northeastern United States will have on our operations. We are also unable to predict whether changes in federal recognition rules or efforts by federally-recognized Native American tribes or tribes seeking federal recognition will lead to the establishment of additional Native American casino gaming operations in the northeastern United States, which could cause further competition with the Casino Project and the other Development Projects.
VGM Facilities
In New York State, we face competition for guests from Orange, Dutchess and Ulster counties for our VGM operation from a VGM facility at Yonkers Raceway. To a lesser extent, Monticello Casino and Raceway faces competition from two of the Pennsylvania casinos, Mohegan Sun at Pocono Downs and Mount Airy Casino Resort. These facilities are discussed above.
Generally, Monticello Casino and Raceway does not compete directly with other harness racing tracks in New York State for live racing patrons. However, Monticello Casino and Raceway does face intense competition for off-track and other
legalized wagering at numerous gaming sites within New York State and the surrounding region. The inability to compete with larger purses for the races at Monticello Casino and Raceway and the limitation on other forms of legalized wagering that Monticello Casino and Raceway may offer has been a significant limitations on our ability to compete for off-track and other legalized wagering revenues.
Other Gaming
Currently electronic gaming machines are operated in 39 states, with 15 of the 39 states with commercial casinos that also offer table games. Legislation permitting other forms of casino gaming is proposed, from time to time, in various states,
including those bordering New York State. Our business could be adversely affected by such competition.
New York legislators have introduced bills related to Internet gaming and Internet poker. We are unable to determine whether and which, if any, legislation will be enacted and what effect it would have on our current operations. On August 3, 2016, New York Governor Cuomo signed legislation to legalize interactive fantasy sports. We do not believe that interactive fantasy sports will materially impact our results of operations.
Pennsylvania legislators have introduced bills related to Internet gaming and the conduct of lottery on the Internet. Such bills have been referred to committees. We are unable to determine whether and which, if any, legislation will be enacted and what impact it would have on our current operations.
New Jersey law permits Atlantic City casinos to conduct Internet gaming by accepting wagers from individuals who are physically present in New Jersey. Additionally, mobile gaming is permitted in any area located within the property boundaries of a casino hotel facility, including any recreation or swimming pool and excluding parking garages and parking areas. Further, New Jersey law permits racetrack customers to place bets on live or simulcast racing while they are on racetrack property, including the restaurants and outdoor areas, such as the paddock. New Jersey gaming regulations also authorized skill-based gaming options such as Candy Crush and Words with Friends-type games that appeal to a new generation of players.
In December 2011, the United States Department of Justice (“Department”) confirmed the reversal of a long-standing precedent that applied a 1961 federal gambling law to Internet gambling. The Wire Act, 18 U.S.C § 1084, et. seq., prevents wagers from taking place over phone lines. Deputy Attorney General James Cole wrote in a letter to William J. Murray, then Deputy Director and General Counsel for New York Lottery, “The Department’s Office of Legal Counsel (‘OLC’) has analyzed the scope of the Wire Act, 18 U.S.C § 1084, and concluded that it is limited only to sports betting.” We are uncertain if the Department’s position would have any effect on our operations.
In November 2011, the voters in New Jersey approved a constitutional amendment permitting the legislature to authorize wagering at casinos in Atlantic City and at current or former racetracks, on the results of professional, certain college, and amateur sport and athletic events. There is legislation that would allow the state Casino Control Commission to issue licenses to casinos and racetracks to accept bets on some professional and collegiate events. However, in August 2016, the U.S. Third Circuit Court of Appeals upheld the prohibition of sports gambling in New Jersey, ruling that under federal law New Jersey may not permit racetracks and casinos to accept such sports wagers. We are uncertain if legalized sports wagering in New Jersey, if permitted in the future, would have an impact on our current or future operations.
Website Access
Our website address is www.empireresorts.com. Our filings with the Securities and Exchange Commission are available at no cost on our website as soon as practicable after the filing of such reports with the Securities and Exchange Commission.
In addition to the other information contained in this report on Form 10-K, the following Risk Factors should be considered carefully in evaluating our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.
Risks Relating to our Overall Business
Although a substantial portion of the funds needed for the development of the Casino Project are in place, the completion of the Development Projects will require additional equity capital and debt financing. If the Company is unable to raise the additional financing needed to complete these projects, the Company’s business will be materially adversely affected.
Although the proceeds of the January 2016 Rights Offering, the Term Loan Agreement and the Kien Huat Montreign Loan Facility provide a substantial portion of the funds needed for the development of the Casino Project, the completion of the Development Projects will require additional capital, including furniture, fixture and equipment financing of up to $40 million and a deposit of $35 million into the lender-controlled account holding the net proceeds of the Term Loan Facility and the Kien Huat Montreign Loan, which amount will be used towards the Entertainment Village Project. Of this payment, $15 million is required to be deposited by June 30, 2017 and the remaining $20 million is required to be deposited by December 31, 2017. The $35 million must be funded in the form of a further equity contribution to Montreign Operating. The Company expects to raise additional equity capital by the dates on which the deposits must be made. The designs of the Golf Course Project and the Entertainment Village Project are not yet finalized and our cost estimates for those projects may change. In addition, cost overruns, delays in the construction schedule or changes in design are among the factors that may increase the projected costs of the Development Projects, which may also require us to raise additional capital. If we are unable to obtain the necessary financing on terms and conditions acceptable to the Company, we may need to curtail or cease the construction of the Development Projects and our business, financial condition and prospects will be materially adversely affected.
As a holding company, we are dependent on the operations of our subsidiary, MRMI, to pay dividends or make distributions in order to generate internal cash flow. Moreover, until the Casino Project is open to the public, none of our subsidiaries involved in the Development Projects will be generating revenue, which will adversely impact our cash flow.
We are a holding company with no revenue generating operations. Montreign Operating and its subsidiaries are responsible to develop the Development Projects, which will generate no revenues or cash flow until those projects are open to the public. The Casino Project, which we expect will be the first Development Project open to the public, is scheduled to open the gaming floor and a portion of the hotel rooms in March 2018. MRMI, which operates the Monticello Casino and Raceway, is our sole subsidiary that generates revenues. Consequently, our ability to meet our working capital requirements for fiscal 2017 depends on the earnings and the distribution of funds from our sole operating subsidiary, MRMI. In fiscal 2016, MRMI had operating income of approximately $3.0 million in the current year. While the cash flow generated from our current operations, along with the proceeds of the Term Loan Facility, the Kien Huat Montreign Loan Agreement and the remaining proceeds of the January 2016 Rights Offering, are sufficient to fund our current obligations and the currently expected costs of the Development Projects and service our debt obligations, it is unlikely that MRMI will generate sufficient revenue to make cash distributions in an amount necessary for us to satisfy our working capital requirements or our obligations under any current or future indebtedness. In addition, MRMI or any other subsidiary may enter into contracts that limit or prohibit its ability to make distributions. The Kien Huat Montreign Loan Agreement limits Montreign Holding’s ability to declare dividends or make distributions to Empire in an amount greater than $9 million, which amount can be used for working capital requirements and for purposes of paying taxes. Such limitations may adversely impact our ability to meet our ongoing obligations. Specifically, these limitations on making of distributions may adversely impact the Company’s ability to pay our employees, accounting professionals or legal professionals, all of whom we rely on to manage our operations, ensure regulatory compliance and sustain our public company status.
If revenues and operating income from our operations at Monticello Casino and Raceway do not increase, it could adversely affect our financial performance.
There can be no assurance that our current operations will draw sufficient patrons to Monticello Casino and Raceway to increase our revenues to the point that we will recognize net income. The operations and placement of our VGMs, including the layout and distribution, are under the jurisdiction of the NYSGC and the program contemplates that a significant share of the responsibility for marketing the program will be borne by the NYSGC. The NYSGC is not required to make decisions that we feel are in our best interest and, as a consequence, the profitability of our VGM operations may not reach the levels that we believe to be feasible or may be slower than expected in reaching those levels. By statute, from April 1, 2008 until March 31, 2017, 41% of gross VGM revenue is distributed to us. Unless the 2017-2018 New York State Budget, which we anticipate will be adopted before March 31, 2017, contains a provision to extend this share percentage of gross VGM revenue to March 31, 2018, effective as of April 1, 2017, only 39% of gross VGM revenue will be distributed to us. No assurance can be given that such revenue will be sufficient to generate a profit or continue to do so. Our operations are subject to many regulatory, competitive, economic and business risks beyond our control, and a change in this regard could have a material adverse impact on our operations and our business prospects.
Gaming is a highly regulated industry and adverse changes or developments in gaming laws or regulations could be
difficult to comply with or significantly increase our costs, which could cause our Development Projects to be unsuccessful.
Gaming is a highly regulated industry. Current laws, such as licensing requirements, tax rates and other regulatory
obligations, including for anti-money laundering, could change or become more stringent resulting in additional regulations
being imposed upon the development and operation of the Casino Project or a further liberalization of competition being introduced in the gaming industry. Any such adverse developments in the regulation of the gaming industry in New York State could be difficult to comply with and significantly increase our costs, which could cause the Development Projects to be unsuccessful.
Changes in the laws, regulations, and ordinances (including local laws) to which the gaming industry is subject, and the application or interpretation of existing laws and regulations, or our inability or the inability of our subsidiaries, key personnel, significant stockholders, or joint venture partners to obtain or maintain required gaming regulatory licenses, permits or approvals could prevent us from pursuing future development projects or otherwise adversely impact our results of operation.
The ownership, management and operation of our current and any future gaming facilities are and will be subject to extensive federal, state, provincial, and/or local laws, regulations and ordinances that are administered by the relevant regulatory agency or agencies in each jurisdiction. These laws, regulations and ordinances vary from jurisdiction to jurisdiction, but generally concern the responsibilities, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations, and often require such parties to obtain certain licenses, permits and approvals. In addition, some of the licenses that we and our subsidiaries, officers, directors and principal stockholders hold expire after a relatively short period and thus require frequent renewals and reevaluations. Obtaining these
licenses in the first place and the renewal process involves a subjective determination by the regulatory agencies. If we or our subsidiaries do not obtain and maintain the required licenses, permits and approvals, we may be required to divest our interest in our current or future gaming facilities or our current gaming facility risks losing its licenses. These laws, regulations and ordinances may also affect the operations of our gaming facilities or our plans in pursuing future projects.
Commercial casino gaming was legalized in New York State in 2013 and regulations implementing the Gaming Act are not fully adopted, which makes it difficult for the Company to assess the impact of these regulations on the Casino Project and other Development Projects.
The regulations implementing the Gaming Act are still in development stage and, accordingly, the Company cannot fully assess the rules that will govern the operation and maintenance of the Casino Project and the other Development Projects. Our inability to consider all relevant regulations in the pre-opening stage of our development may lead to unexpected results and adversely affect our results of operations.
The gaming industry in the northeastern United States is highly competitive, with many of our competitors better known and better financed than us.
We primarily compete directly with other casino and VGM facilities operating in the immediate and surrounding market areas. With the completion of the Casino Project and the further opening of the Initial Projects, we expect to also receive patronage from guests residing within a 75- to 120-mile radius, including the New York City metropolitan area, which represents our secondary market. The gaming industry in the northeastern United States is highly competitive and increasingly dominated by multinational corporations or Native American tribes that enjoy widespread name recognition, established brand loyalty, decades of casino operation experience, an array of amenities, high-quality management talent and a diverse portfolio of gaming assets and with substantially greater financial resources.
Monticello Casino and Raceway faces competition from Yonkers Raceway which is located within the New York City metropolitan area. The Yonkers facility, which is much closer to New York City, has a harness horseracing facility, approximately 5,300 VGMs, food and beverage outlets and other amenities. In contrast, we have more limited financial resources and currently operate our harness horse racing facility and VGMs in Monticello, New York, which is approximately a 90-minute drive from New York City.
Pennsylvania casinos may operate table games and slot machines, have the ability to grant credit to guests of the casino and have the ability to award an unlimited amount of non-taxable free play to their guests, which poses a competitive threat to both the Casino Project and the Monticello Casino and Raceway. Pennsylvania legalized the operation of up to 61,000 slot machines at 14 locations throughout the state. As of March 10, 2017, there were 12 casinos in operation within Pennsylvania, with six located at race tracks. One such racetrack facility is the Mohegan Sun at Pocono Downs, which has approximately 2,330 slot machines and 75 table games, including 18 poker tables, and a hotel and spa. The Mohegan Sun at Pocono Downs in Wilkes-Barre, Pennsylvania, is approximately 70 miles southwest of Monticello and the Town of Thompson. In addition, the Mount Airy Casino Resort has approximately 1,868 slot machines and 81 table games, including nine poker tables, a hotel, spa, and a golf course. The Mount Airy Casino Resort is located in Mount Pocono, Pennsylvania, approximately 60 miles southwest of Monticello. The Pennsylvania Gaming Control Commission selected Stadium Casino, LLC to be awarded the 13th license for a casino to be located in Philadelphia, Pennsylvania. Any expansion of these casinos in Pennsylvania will likely increase the degree of competition within our market and may have an adverse effect on our business and future operating performance.
No assurance can be given that we will be able to compete successfully for gaming customers with established casinos or the competing VGM facility at Yonkers Raceway.
If our competitors operate more successfully than we do, if they attract customers away from us as a result of aggressive pricing and promotion, if they are more successful than us in attracting and retaining employees, if their properties are enhanced or expanded, if they operate in jurisdictions that give them operating advantages due to differences or changes in gaming regulations or taxes, or if additional hotels and casinos are established in and around the locations in which we conduct
business, we may lose market share or the ability to attract or retain employees. In particular, the expansion of casino gaming in
or near any geographic area from which we attract or expect to attract a significant number of our customers could have a
significant adverse effect on our business, financial condition and results of operations.
We depend on our skilled employees and key personnel and the loss of their services would adversely affect our operations and business strategy.
The operation of our business requires qualified executives, managers and skilled employees with hospitality, gaming and horse racing industry experience and qualifications to enable such individuals to obtain and maintain the requisite licenses and approvals from the NYSGC. In addition, with respect to our involvement in the Development Projects, we place substantial reliance on the gaming, project development and hospitality industry experience and knowledge of the northeastern United States gaming market possessed by members of our senior management team. If we are unable to maintain our key personnel and attract new skilled employees with high levels of expertise in the gaming areas in which we engage and propose to engage, or are unable to do so without unreasonably increasing our labor costs, the execution of our business strategy may be hindered and our growth limited. We believe that our success is largely dependent on the continued employment of our executive management and the hiring of strategic personnel at reasonable costs. Competition for skilled employees and qualified executives is intense and we can give no assurance that we would be able to hire a qualified replacement with the required level of experience and expertise for any current members of our senior management, if required to do so. Accordingly, if any of our current key executives were unable or unwilling to continue in his or her present position, or we were unable to attract a sufficient number of qualified employees at reasonable rates, our business, results of operations and financial condition would be materially adversely impacted. Additionally, recruiting and hiring a replacement for any skilled employees or executive management position could divert the attention of other senior management and increase our operating expenses.
Casinos are subject to Anti-Money Laundering Laws.
We deal with significant amounts of cash in the operations and will be subject to various reporting and anti-money laundering regulations. Any violation of AML laws or regulations, on which in recent years, governmental authorities have been increasingly focused, with a particular focus on the gaming industry, by any of our properties could have a material adverse effect on our financial condition and results of operation.
A downgrade in our credit ratings could materially adversely affect our business and financial condition.
In connection with the Term Loan Facility and the Revolving Credit Facility, Montreign Operating was required to obtain credit ratings for its debt offering. Although the maintenance of a certain credit rating is not a condition to the availability of the Term Loan Facility or the Revolving Credit Facility, an adverse change in this credit rating and the credit ratings assigned to our debt securities could adversely affect our business. Such ratings are subject to ongoing evaluation by credit rating agencies, and any rating could be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant such action. For example, such ratings could change based upon, among other things, our results of operations and financial condition.
If any of the credit rating agencies that have rated our securities downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a "watch list" for a possible downgrade or lowering, or otherwise indicates that its outlook for that rating is negative, such action could have a material adverse effect on our costs and availability of funding in the future, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations, among other obligations.
Risks Relating to the Development Projects
The Development Projects are capital intensive and, in order to obtain the necessary financing, we have entered into the Term Loan Agreement and the Kien Huat Montreign Loan Agreement, which contain restrictions that limit our flexibility in operating our business.
The Development Projects require substantial capital. On January 24, 2017, Montreign Operating entered into the Term Loan Agreement and Montreign Holding entered into the Kien Huat Montreign Loan Agreement, both of which agreements contain restrictions that limit our flexibility in operating our business. The Term Loan Agreement and the Kien Huat Montreign Loan Agreement contain a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our subsidiaries’ ability to, among other things:
· incur additional debt or issue certain shares;
· pay dividends on or make distributions in respect of our common stock or make other restricted payments;
· make certain investments or acquisitions;
· incur or permit liens on certain assets; and
· consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.
Moreover, to make use of the proceeds of the Term Loan Agreement, Montreign Operating must satisfy the disbursement conditions set forth thereunder, including confirmations that the proceeds will be applied towards the expenses itemized in the Development Projects construction budget submitted to the lenders. If we cannot satisfy the disbursement conditions, Montreign Operating will be unable to utilize the Term Loan Facility, which may require us to curtail or end construction of the Development Projects altogether. As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs, which may adversely impact our operations.
Defaults under the Term Loan Agreement, the Revolving Credit Agreement or the Kien Huat Montreign Loan Agreement could result in a substantial loss of our assets.
We have pledged a significant portion of our assets as collateral under the Term Loan Agreement, Revolving Credit
Agreement and the Kien Huat Montreign Loan Agreement. A failure to comply with the covenants contained in any of these
agreements could result in an event of default thereunder, which, if not cured or waived, could enable the lenders thereunder to
declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all
commitments to extend further credit. The lenders could also elect to foreclose on our assets securing such debt. Such actions
by the lenders could cause cross defaults under our other indebtedness. In such an event, the Company may not be able to
refinance or repay all of its indebtedness, pay dividends or have sufficient liquidity to meet operating and capital expenditure
requirements. Any such acceleration could cause us to lose a substantial portion of our assets and will substantially adversely
affect our ability to continue our operations.
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our
ability to react to changes in the economy or our industry and prevent us from meeting our obligations.
As of the Loan Closing Date, the amount of our total long-term debt was approximately $447 million (with the ability to draw down on the $70 million Term A Loan subject to the conditions of the Term Loan Agreement, which must be met at the time a request to draw on the Term A Loan is made). Our outstanding debt and related debt service obligations could have important adverse consequences to us, including:
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limiting our ability to borrow further capital needed to complete the Development Projects, if needed;
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heightening our vulnerability to downturns in our business, industry, or the general economy and restricting us from making improvements or acquisitions, or exploring business opportunities;
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requiring a significant portion of our available cash to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our use of available cash to fund our operations, capital expenditures and future business opportunities;
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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have greater capital resources.
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The ability to make payments of principal and interest on indebtedness will depend on the future performance of the Development Projects, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If sufficient cash flow is not generated from operations to service such debt, we may be required, among other things, to:
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seek additional financing in the debt or equity markets;
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delay, curtail or abandon altogether our development plans;
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refinance or restructure all or a portion of our indebtedness; or
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Such measures might be insufficient to service the indebtedness. In addition, any such financing, refinancing or sale of assets may not be available on commercially reasonable terms, or at all. If funds are not available when needed, or available on acceptable terms, we may be required to delay, scale back or eliminate some of our obligations with respect to the Development Projects. In addition, we may not be able to grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could negatively impact our business, operating results and financial condition.
Construction at the Development Projects is subject to hazards that may cause personal injury or loss of life, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.
The construction of large-scale properties such as the Development Projects can be dangerous. Construction workers at our projects are subject to hazards that may cause personal injury or loss of life, thereby subjecting the contractor and us to liabilities, possible losses, delays in completion of the projects and negative publicity. In the event of such accidents, we may stop construction for several days to allow for safety inspections and investigations. We and our contractors will take safety precautions that are consistent with industry practice, but these safety precautions may not be adequate to prevent serious personal injuries or further loss of life, damage to property or delays. If accidents occur during the construction of Development Projects, we may be subject to delays, including delays imposed by regulators, liabilities and possible losses, which may not be covered by insurance, and our business, prospects and reputation may be materially and adversely affected.
The costs associated with the Development Projects may increase due to significant risks inherent in construction projects.
The construction of the Development Projects subjects us to significant risks inherent in the construction of a new facility, including unanticipated design, construction, regulatory and environmental problems. The Development Projects could also experience:
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changes to plans and specifications (some of which may require the approval of the NYSGC);
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delays and significant cost increases;
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shortages of materials;
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shortages of skilled labor or work stoppages for contractors and subcontractors;
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inability of contractors and subcontractors to obtain and maintain required licenses issued by the NYSGC;
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inability to meet MWBE participation goals;
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labor disputes or work stoppages;
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disputes with and defaults by contractors and subcontractors;
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health and safety incidents and site accidents;
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engineering problems, including defective plans and specifications;
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poor performance or nonperformance by any third parties on whom we place reliance;
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changes in laws and regulations, or in the interpretation and enforcement of laws and regulations, applicable to gaming;
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unforeseen construction scheduling, engineering, environmental, permitting, construction or geological problems;
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environmental issues, including the discovery of unknown environmental contamination;
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weather interference, floods, fires or other casualty losses;
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other unanticipated circumstances or cost increases; and
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failure to obtain necessary licenses, permits, entitlements or other governmental approvals with respect to the Entertainment Village Project and Golf Course Project.
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The occurrence of any of these development and construction risks could increase the total costs of the Development Projects or delay or prevent the construction or opening or otherwise affect the design and features of the Development Projects, all of which could materially adversely affect our financial condition and cause us to require additional external financing.
In combination with existing and proposed casinos in New York State and nearby states, the Casino Project will face intense competition that may adversely impact our ability to meet our development goals.
A number of Native American tribes and gaming entrepreneurs are seeking to develop casinos in New York State and Connecticut in areas that are approximately 90 miles from New York City, such as Bridgeport, Connecticut and Southampton, New York. We are unable to predict when or if laws would be amended to permit such tribes and entrepreneurs to develop casinos in New York State and nearby states. Depending on the size, location and scope and gaming tax rate, if casinos are built in northern New Jersey, they may adversely impact our current operations and the prospects for the Casino Project. Based on proximity, a gaming facility in any of the nearby states, which could include a casino, hotel, restaurants and retail shops, may significantly increase the competition we face and have a material adverse effect on our business operations and future performance.
None of the Development Projects have operating history and our projections on the operations of such properties may not serve as an adequate basis to judge our future operating results and prospects.
There is no historical information available about the Casino Project, the Entertainment Village Project or the Golf Course Project upon which you can base your evaluation of their respective business plans and prospects. The Development Projects will generate no revenue until the Casino Project is open to the public (which will be the first of the Development Projects open to the public), which is expected to occur in March 2018. As a result, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as a company seeking to develop and operate a major new development project and gaming businesses in a rapidly growing and intensely competitive market.
We have encountered and will continue to encounter risks and difficulties frequently experienced by companies developing a major new project, and those risks and difficulties may be heightened in a rapidly developing market such as the gaming market in the northeastern United States. Some of the risks relate to our ability to:
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complete our construction projects within their anticipated time schedules and budgets;
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attract and retain customers and qualified employees;
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operate, support, expand and develop our operations and our facilities;
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maintain effective control of our operating costs and expenses;
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develop and maintain internal personnel, systems and procedures to assure compliance with the extensive regulatory requirements applicable to the gaming business;
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respond to changes in our regulatory environment; and
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respond to competitive market conditions.
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If we are unable to complete any of these tasks, we may be unable to complete and operate the Development Projects in the manner we contemplate and generate revenues in the amounts and by the times we anticipate. We may also be unable to meet the conditions to draw on the Term A Loan in order to fund our development and construction activities. If any of these events were to occur, it would have a material adverse effect on our business and prospects, financial condition, results of operations and cash flows.
Even if the Casino Project, the Entertainment Village Project and the Golf Course Project are completed as planned and opened, they may not be financially successful, which would limit our cash flow and would materially adversely affect our operations and our ability to repay our debt.
Even if the Casino Project, the Entertainment Village Project and the Golf Course Project are completed as planned and opened, one or more still may not be a financially successful venture or generate the cash flows that we anticipate. We may not attract the level of patronage that we are seeking. If the Casino Project, the Entertainment Village Project or the Golf Course
Project do not attract sufficient business, this will limit our cash flow and would materially adversely affect our operations and our ability to service payments under our debt agreements.
New York State could grant additional Gaming Facility Licenses in our area or in New York City or the surrounding counties earlier than the expected seven-year blackout period, which could significantly increase the already intense competition in the northeastern United States and cause us to lose or be unable to gain market share.
The Gaming Act provides for the award of up to four Gaming Facility Licenses in three regions of upstate New York, including our area, and prohibits the issuance of Gaming Facility Licenses in the “downstate” region, which includes New York City and its surrounding counties. The award of such a Gaming Facility License is intended to be exclusive for a period of seven years commencing on the date of the award. We can provide no assurance that the New York State government will not change this law and issue additional Gaming Facility Licenses before the expiration of this seven-year exclusivity period. If the New York State government were to allow additional competitors to operate in our area or in other regions of New York through the grant of additional Gaming Facility Licenses, we would face additional competition, which could significantly increase the already intense competition in the northeastern United States and cause us to lose or be unable to gain market share.
Our business depends on a strong brand and if we are not able to build, maintain and enhance our brand, our ability to expand our market will be impaired and our business and operating results will be harmed.
We believe that the brand identity that we intend to develop will significantly contribute to the success of our business. We also believe that maintaining and enhancing a brand is critical to expanding our market share. The Board of Directors of Empire and the Board of Managers of Montreign Operating have approved the form of the RW License Agreement, which has been submitted to the NYSGC for review and approval. Building, maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain our brand, or if we incur excessive expenses in this effort, our business, operating results and financial condition will be materially adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive.
Risks Relating to our Ownership Structure
Stockholders’ ability to influence corporate decisions may be limited because our major stockholder owns a large percentage of our common stock.
Kien Huat is the beneficial holder of 27,533,067 shares of our common stock, representing approximately 88.3% of our voting power as of March 10, 2017. This reflects Kien Huat's participation and backstop of the January 2016 Rights Offering (as defined below) pursuant to the January 2016 Standby Purchase Agreement (as defined below) and the conversion of the convertible promissory note held by Kien Huat pursuant to the terms of a loan agreement dated November 10, 2010, by and between the Company and Kien Huat (the "2010 Kien Huat Loan Agreement"). Under the terms of an investment agreement dated November 12, 2009 (the “Investment Agreement”), between the Company and Kien Huat, if any option or warrant outstanding as of the final closing under the Investment Agreement, or the first 200,000 shares granted to directors or officers who served in such capacity as of the final closing date under the Investment Agreement, are exercised, Kien Huat has the right (following notice of such exercise) to purchase an equal number of additional shares of our common stock as are issued upon such exercise at the exercise price for the applicable option or warrant (such rights the "Option Matching Rights"). As of December 31, 2016, Kien Huat had approximately 21,000 Option Matching Rights.
Under the terms of the Investment Agreement, Kien Huat is also entitled to recommend three directors candidates whom we are required to cause to be elected or appointed to our Board of Directors (“Board”), subject to the satisfaction of all legal and governance requirements regarding service as a director and to the reasonable approval of the Corporate Governance and Nominations Committee of our Board. Kien Huat will continue to be entitled to recommend three directors candidates for so long as it owns at least 24% of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election to our Board will be reduced proportionally to Kien Huat’s percentage of ownership. Under the Investment Agreement, for so long as Kien Huat is entitled to recommend nominees to serve as Board members, among other things, Kien Huat will have the right to nominate one of its director designees to serve as the Chairman of the Board. Emanuel Pearlman has been appointed to serve as Chairman of the Board pursuant to Kien Huat’s recommendation. Until such time as Kien Huat ceases to own capital stock with at least 30% of our voting power outstanding at such time, our Board will be prohibited under the terms of the Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors recommended by Kien Huat and elected by shareholders. Consequently, Kien Huat has the ability to exert significant influence
over our policies and affairs, including the election of our Board and the approval of any action requiring a stockholder vote, such as approving amendments to our certificate of incorporation and mergers or sales of substantially all of our assets, as well as other matters. Although Kien Huat has expressed no interest in doing so, Kien Huat is not restricted from acquiring additional shares of our common stock, including through open market purchases. However, on February 17, 2016, we entered into a letter agreement with Kien Huat (the "Kien Huat Letter Agreement"), wherein Kien Huat agreed, for a period of three years from the date of the Kien Huat Letter Agreement, to seek certain approvals of the Board of Directors and minority shareholders in connection with any "going-private" transaction. Notwithstanding the Kien Huat Letter Agreement, this concentration of voting power could delay or prevent an acquisition of our Company on terms that other stockholders may desire or force the sale of our company on terms undesirable to other stockholders.
Risks Relating to the Market Value of Our Common Stock
The Racing, Pari-Mutuel Wagering and Breeding Law of New York State requires our stockholders to possess certain qualifications. If the NYSGC believes a stockholder does not meet their subjective determination, a stockholder may be forced to sell any stock they hold and such sale may result in a material loss of investment value for the stockholder.
The Racing, Pari-Mutuel Wagering and Breeding Law of New York State requires our stockholders to possess certain qualifications. A failure to possess such qualifications could lead to a material loss of investment by either us or our stockholders, as it would require divestiture of the stockholder’s direct or indirect interest in us. Consequently, should any stockholder ever fail to meet the qualifications necessary to own a direct or indirect interest in us as determined by NYSGC, such stockholder could be forced to liquidate all interests in us. Should such stockholder be forced to liquidate these interests within a relatively short period of time, such stockholder would likely be forced to sell at a discount, causing a material loss of investment value.
The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when our stockholders want to sell their holdings.
The market price of our common stock has in the past been, and may in the future continue to be, volatile. For instance, between January 1, 2016 and March 10, 2017, the closing price of our common stock has ranged between $11.38 and $25.19 per share. A variety of events may cause the market price of our common stock to fluctuate significantly, including, but not necessarily limited to the following:
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quarter-to-quarter variations in operating results;
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adverse or positive news reports or public announcements; and
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market conditions for the gaming industry.
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In addition, the stock market in recent years has experienced significant price and volume fluctuations. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. These market fluctuations may adversely affect the price of our common stock and other interests in the Company at a time when our stockholders want to sell their interest in us.
If we fail to meet the applicable continued listing requirements of NASDAQ Global Market, NASDAQ may delist our common stock, in which case the liquidity and market price of our common stock could decline.
Our common stock is currently listed on the NASDAQ Global Market. In order to maintain that listing, we must satisfy certain continued listing requirements. If we are deficient in maintaining the necessary listing requirements, our common stock may be delisted. If our common stock is delisted, an active trading market for our common stock may not be sustained and the market price of our common stock could decline.
We do not anticipate declaring any dividends in the foreseeable future.
During the past three fiscal years, we did not declare or pay any cash dividends with respect to our common stock and we do not anticipate declaring any cash dividends on our common stock in the foreseeable future. We intend to retain all future earnings for use in the development of our business. There can be no assurance that we will have, at any time, sufficient surplus under Delaware law to be able to pay any dividends.
Future sales of our common stock by our insiders may cause our stock price to decline.
A portion of our outstanding shares are held by directors and executive officers and a significant portion of our outstanding shares are held by Kien Huat, our largest stockholder. Resales of a substantial number of shares of our stock by these stockholders, announcements of the proposed resale of substantial amounts of our stock, or the perception that substantial resales may be made by such stockholders could adversely impact the market price of our stock. Some of our directors and executive officers have entered into Rule 10b5-1 trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Actual or potential sales by these insiders, including those under a pre-arranged Rule 10b5-1 trading plan may adversely impact the market price of our stock.
Future sales of shares of our common stock in the public market could adversely affect the trading price of shares of our common stock and our ability to raise funds in new stock offerings.
Future sales of substantial amounts of shares of our common stock in the public market, including pursuant to the Second Amendment to the Commitment Letter or the effective shelf registration statement, or the perception that such sales are likely to occur could affect the market price of our common stock. Kien Huat’s stock ownership may also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Risks Relating to our Racing Operations
The continuing decline in the popularity of horse racing, decline of the horse population and increasing competition in simulcasting could adversely impact the business of Monticello Casino and Raceway.
Since the mid-1980s, there has been a general decline in the number of people attending and wagering at live horse races at North American racetracks due to a number of factors, including increased competition from other forms of gaming, unwillingness of guests to travel a significant distance to racetracks and the increasing availability of off-track wagering. The declining attendance at live horse racing events has prompted racetracks to rely increasingly on revenues from inter-track, off-track and account wagering markets. The industry-wide focus on inter-track, off-track and account wagering markets has increased competition among racetracks for outlets to simulcast their live races. In 2016, 2015 and 2014, we generated approximately $2.9 million, $3.3 million and $1.8 million, respectively, of revenues from the import and export simulcasting of out-of-state racing, of which approximately $1.4 million, $1.7 million and $900,000, respectively, were due to the horsemen. A continued decrease in attendance at live events and in on-track wagering, continued decline in the horse population and available drivers, as well as increased competition in the inter-track, off-track and account wagering markets, could lead to a decrease in the amount wagered at Monticello Casino and Raceway. Our business plan anticipates the possibility of Monticello Casino and Raceway attracting new guests to our racetrack wagering operations through VGMs in order to offset the general decline in raceway attendance. However, even if our VGM operations attract new guests to our racetrack, we may not be able to generate profit from operations. Public tastes are unpredictable and subject to change. Any further decline in interest in horse racing or any change in public tastes may adversely affect our revenues and, therefore, limit our ability to make a positive contribution to our results of operation.
General Business Risks
Instability and volatility in the financial markets could have a negative impact on our business, financial condition, results of operations and cash flows.
The demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable income. Discretionary consumer spending habits have been adversely affected by the recent economic conditions and the actual or perceived economic conditions could lead to further decrease in spending by our guests. We cannot predict at what level these negative trends will continue, worsen or improve and the ultimate impact it will have on our future results of operations. The continued weakness in our market and the deterioration of the broader global economy would have a material adverse effect on our industry and our business, including our revenues, profitability, operating results and cash flow.
Moreover, we may need to raise additional capital or incur additional indebtedness to finance our plans for growth. We may be unable to incur additional indebtedness in the public or private markets to fund our business strategy on terms we believe to be reasonable, if at all. In addition, the Term Loan Agreement and Revolving Credit Agreement may limit our ability to incur debt at all. Moreover, we may be unable to raise capital on terms acceptable to the Company. An inability to obtain the capital we need to finance our growth plans may adverse affect our operations and business prospects.
We are subject to greater risks than a geographically diverse company.
Our operations are limited to the Catskills region of New York State, which has been affected by decades-long decline in economic conditions. As a result, in addition to our susceptibility to adverse global and domestic economic, political and business conditions, any economic downturn in the region could have a material adverse effect on our operations. An economic downturn would likely cause a decline in the disposable income of consumers in the region, which could result in a decrease in the number of patrons at our facility, the frequency of their visits and the average amount that they would be willing to spend at our facility. We are subject to greater risks than more geographically diversified gaming or resort operations, including:
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a downturn in national, regional or local economic conditions;
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an increase in competition in New York State or the northeastern United States and Canada, particularly for day-trip patrons residing in New York State, including as a result of any new tribal Class III casinos, destination gaming resorts or VGMs at certain racetracks and other locations in New York State, Connecticut and New Jersey and casinos in Pennsylvania;
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impeded access due to road construction or closures of primary access routes; and
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adverse weather and natural and other disasters in the northeastern United States.
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The occurrence of any one of the events described above could cause a material disruption in our business and make us unable to generate sufficient cash flow to make payments on our obligations.
Our business is particularly sensitive to energy prices and a rise in energy prices could harm our operating results.
We are a large consumer of electricity and other energy and, therefore, higher energy prices may have an adverse effect on our results of operations. Accordingly, increases in energy costs may have a negative impact on our operating results. Additionally, higher electricity and gasoline prices which affect our customers may result in reduced visitation to Monticello Casino and Raceway and a reduction in our revenues.
Our business operations have historically been subject to seasonal variations and quarterly fluctuations in operating results, and we can expect to experience such variations and fluctuations in the future.
Our results of operations may be adversely affected by weather-related and seasonal factors. Severe winter weather conditions may deter or prevent patrons from reaching our gaming facilities or undertaking day trips. Although our budget assumes these seasonal fluctuations in our gaming revenues to ensure adequate cash flow during expected periods of lower revenues, we cannot ensure that weather-related and seasonal factors will not have a material adverse effect on our operations.
Our operations are located at a facility in Monticello, New York and the Development Projects are being developed in the Town of Thompson, New York. Although this area is not prone to earthquakes, floods, tornadoes, fires or other natural disasters, the occurrence of any of these events or any other cause of material disruption in our operation could have a material adverse effect on our business, financial condition and operating results. Moreover, although we do maintain insurance customary for our industry, including a policy with $10 million limit of coverage for the perils of flood and earthquake, we cannot ensure that this coverage will be sufficient in the event of one of the disasters mentioned above.
We may be subject to material environmental liability as a result of unknown environmental hazards.
We are subject to various federal, New York State and local environmental laws and regulations that govern our operations and the construction of the Development Projects, including emissions and discharges into the environment, and the storage, handling and disposal of hazardous and non-hazardous substances and wastes. Failure to comply with such laws and regulations could result in regulatory fines, legal fees and costs for remediation. Such fines and costs could be related to our storage, handling and disposal of waste from our racing operations, the existence of asbestos at Monticello Casino and Raceway and the existence of environmental conditions at the site of the Development Projects, which could have a material adverse effect on our business, financial condition or results of operations.
Our information technology and other systems are subject to cyber security risk including misappropriation of customer information or other breaches of information security.
We rely on information technology and other systems to maintain and transmit customers' personal and/or financial information, credit card information, mailing lists and other information. We have taken steps designed to safeguard our customers' personal and financial information and have implemented systems designed to meet all requirements of the Payment Card Industry standards for data protection. However, our information and processes are subject to the ever-changing threat of
compromised security, in the form of a risk of potential breach, system failure, computer virus or unauthorized or fraudulent access or use by unauthorized individuals. The steps we take to deter and mitigate these risks may not be successful, and any resulting compromise or loss of data or systems could adversely impact operations or regulatory compliance and could result in remedial expenses, fines, litigation and loss of reputation, potentially impacting our financial results. Although we have invested in and deployed security systems and developed processes that are designed to protect all sensitive data, prevent data loss and reduce the impact of any security breach, such measures cannot provide absolute security.
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Item 1B.
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Unresolved Staff Comments.
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None.
EPT Property
The Destination Resort is located on approximately 1,700 acres in the Town of Thompson in Sullivan County, New York, which is owned by EPT and EPR LP, two wholly-owned subsidiaries of EPR Properties, an entity unrelated to the Company. The Development Projects are part of the Initial Projects being developed at the Destination Resort, which will also include the Waterpark.
Casino Lease
On December 28, 2015, Montreign Operating entered into the Casino Lease with EPT for the lease of the parcel on which the Casino Project would be built (the "Casino Parcel"). The Casino Lease has a term that expires on the earlier of (i) March 31, 2086 and (ii) Montreign Operating giving EPT written notice of its election to terminate the Casino Lease (the "Termination Option") at least 12 months prior to any one of five Option Dates (as defined below). The Option Dates (each an "Option Date") under the Casino Lease mean each of the 20th, 30th, 40th, 50th and 60th anniversary of the commencement of the Casino Lease. Upon Montreign Operating's timely notice of exercise of its Termination Option, the Casino Lease shall be automatically terminated effective as of the applicable Option Date.
T
he following table represents the fixed rent payments under the Casino Lease:
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Year ending December 31,
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Fixed Rent Payments due by Period
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(in thousands)
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2017 (1) (2)
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$10,000
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2018 (2) (3)
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10,500
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2019 (3)
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7,500
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2020 (3)
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7,500
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2021 (3)
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8,000
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2022 to 2056 (3)
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354,624
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(1)
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Until February 29, 2016, the Company continued to make payments of
$500,000
per month it would have made under the Original Option Agreement. From March 1, 2016 until February 28, 2017, option payments made by the Company under the Original Option Agreement, which totaled
$8.5 million
, were applied against fixed rent due by the Company under the Casino Lease for such period.
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(2)
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From March 1, 2017 through August 31, 2018, fixed rent shall equal
$1 million
per month.
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(3)
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From September 1, 2018 through the remainder of the term of the Casino Lease, fixed rent shall equal
$7.5 million
per year, subject to an
eight
percent escalation every five years (the "Base Amount").
|
In addition to fixed rent, beginning on September 2018 and through the remainder of the term of the Casino Lease (the "Percentage Rent Period"), Montreign Operating is obligated to pay an annual percentage rent equal to
five
percent of the Eligible Gaming Revenue (as such term is defined in the Casino Lease) in excess of the Base Amount for the Percentage Rent Period. Additionally, the lease is a net lease, and Montreign Operating has an obligation to pay the rent payable under the Casino Lease and other costs related to Montreign Operating's use and operation of the Casino Parcel, including the special district tax assessments allocated to the Casino Parcel, not to exceed the capped dollar amount applicable to the Casino Parcel.
Golf Course Lease
On December 28, 2015, ERREI entered into a sublease ("the Golf Course Lease") with the Destination Resort Developer for the lease of the parcel on which the Golf Course would be built (the "Golf Course Parcel"). The terms of the Golf Course Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Golf Course Lease, there is no percentage rent due. Fixed rent payments under the Golf Course Lease are represented in the table below:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2017 (1) (2)
|
$0
|
|
2018 (2)
|
0
|
|
|
2019 (2)
|
125
|
|
|
2020 (2)
|
150
|
|
|
2021 (2)
|
150
|
|
|
2022 to 2056 (2) (3)
|
7,825
|
|
|
|
|
|
(1)
|
From the date the Golf Course Lease commenced (the "Golf course Lease Commencement Date") and until the date on which the Golf Course opens for business, which is expected to be in Spring 2019 (the "Golf Course Opening Date"), fixed rent payments shall equal
$0
.
|
|
|
|
|
(2)
|
From the Golf Course Opening Date and continuing for the 10 years thereafter, fixed rent shall equal
$150,000
per year.
|
|
|
|
|
(3)
|
From March 2029 through the remainder of the term of the Golf Course Lease, fixed rent shall equal
$250,000
per year.
|
The Golf Course Lease is a net lease and ERREI is obligated to pay the rent payable under the Golf Course Lease and other costs related to ERREI's use and operation of the Golf Course Parcel, including the special district tax assessments allocated to the Golf Course Parcel, not to exceed the capped dollar amount applicable to the Golf Course Parcel. This obligation shall not be assessed against ERREI prior to 60 months following the Golf Course Lease Commencement Date.
Entertainment Village Lease
On December 28, 2015, ERREII entered into a sublease (the "Entertainment Village Lease") with the Destination Resort Developer, for the lease of the parcel on which the Entertainment Village Project would be built (the "Entertainment Village Parcel" and, together with the Casino Parcel and the Golf Course Parcel, the "Development Project Parcels"). The terms of the Entertainment Village Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Entertainment Village Lease, there is no percentage rent due. Fixed rent payments under the Entertainment Village Lease are represented in the table below:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2017 (1) (2)
|
$0
|
|
2018 (2)
|
50
|
|
|
2019 (2)
|
150
|
|
|
2020 (2)
|
150
|
|
|
2021 (2)
|
150
|
|
|
2022 to 2056 (2) (3)
|
7,825
|
|
|
|
|
|
(1)
|
From the date the Entertainment Village Lease commenced (the "Entertainment Village Commencement Date") and until the date on which Entertainment Village opens for business, which is expected to be September 2018 (the Entertainment Village Opening Date"), fixed rent payments shall equal
$0
.
|
|
|
|
|
(2)
|
From the Entertainment Village Opening Date and continuing for the 10 years thereafter, fixed rent shall equal
$150,000
per year.
|
|
|
|
|
(3)
|
From September 2028 through the remainder of the term of the Entertainment Village Lease, fixed rent shall equal
$250,000
per year.
|
The Entertainment Village Lease is a net lease and ERREII is obligated to pay the rent payable under the Entertainment Village Lease and other costs related to ERREII's use and operation of the Entertainment Village Parcel, including the special district tax assessments allocated to the Entertainment Village Parcel, not to exceed the capped dollar amount applicable to the Entertainment Village Parcel. This obligation shall not be assessed against ERREII prior to 60 months following the Entertainment Village Lease Commencement Date.
On January 24, 2017, each of the Casino Lease, the Golf Course Lease and the Entertainment Village Lease were amended to correct scrivener’s errors in the legal descriptions of the Casino Parcel, Golf Course Parcel and Entertainment Village Parcel.
Purchase Option Agreement
On December 28, 2015, Montreign Operating, EPT and EPR LP entered into the Purchase Option Agreement, pursuant to which EPT and EPR LP collectively granted to Montreign Operating the option to purchase (the "Purchase Option") all, but not fewer than all, of the Development Project Parcels for a purchase price of $175 million ($200 million after the sixth anniversary of the License Award Effective Date), less a credit of up to $25 million for certain previous payments made by the Project Parties.
Under the Purchase Option Agreement, EPR LP also grants to Montreign Operating the option to purchase not less than all of the balance of the EPT Property (the "Destination Resort Property"), excluding the Development Project Parcels, for an additional fee (the "Destination Resort Purchase Option"). The Destination Resort Purchase Option may be exercised only simultaneously with or after the exercise of the Purchase Option. The Destination Resort Purchase Option commenced on December 28, 2015 and shall expire on the earlier to occur of (a) the expiration of the Purchase Option Period or (b) March 1, 2026.
Under the Purchase Option Agreement, EPR LP also granted to Montreign Operating a right of first offer ("ROFO") with respect to all or any portion of the Destination Resort Property. Under the terms of the ROFO, if EPR LP makes an offer to or rejects an offer made by Montreign, Operating then EPR LP shall be precluded for a period of six months from transferring the designated portion of the Destination Resort Property at a price and on terms which are on the whole substantially equivalent to or worse than those proposed or accepted by Montreign Operating. The ROFO commenced on December 28, 2015 and shall continue in full force and effect until EPR LP has sold, leased, licensed or otherwise transferred all of the Destination Resort Property.
Monticello Land
Monticello Casino and Raceway is located on a 232-acre parcel of land in Monticello, New York, which is held in fee by MRMI. Monticello Casino and Raceway includes a 3,000-seat enclosed grandstand, a clubhouse bar, pari-mutuel wagering facilities (including simulcasting), a paddock, exterior barns and related facilities for the horses, drivers, and trainers. In addition, our VGM operation is conducted in the renovated lower level of the grandstand portion of Monticello Casino and Raceway, which includes a 45,000-square foot gaming floor with a central bar and lounge and a separate high stakes VGM area, a buffet and a two-outlet food court with seating capacity for up to 350 patrons, employee changing areas, storage and maintenance facilities, surveillance and security facilities and systems, cashier’s cage and accounting and marketing areas, as well as parking areas for cars and buses. The corporate offices of the Company are located on the second floor of the building at Monticello Casino and Raceway.
|
|
|
|
|
|
Item 3.
|
Legal Proceedings.
|
We are a party from time to time to various legal actions that arise in the normal course of business. In the opinion of management, the resolution of these other matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
|
|
|
|
|
|
Item 4.
|
Mine Safety Disclosures.
|
Not applicable.
PART III
|
|
|
|
|
|
Item 10.
|
Directors, Executive Officers and Corporate Governance.
|
Directors and Executive Officers
Our directors and executive officers are as follows:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Emanuel R. Pearlman
|
|
56
|
|
Executive Chairman of the Board
|
|
Joseph A. D’Amato
|
|
69
|
|
Chief Executive Officer and Director
|
|
Keith L. Horn
|
|
58
|
|
Director
|
|
Edmund Marinucci
|
|
67
|
|
Director
|
|
Nancy A. Palumbo
|
|
56
|
|
Director
|
|
Gregg Polle
|
|
56
|
|
Director
|
|
Laurette J. Pitts
|
|
48
|
|
Executive Vice President, Chief Operating Officer/Chief Financial Officer
|
|
Charles Degliomini
|
|
58
|
|
Executive Vice President
|
|
Nanette L. Horner
|
|
52
|
|
Executive Vice President, Chief Counsel and Chief Compliance Officer
|
The terms of all of our current directors will expire at the 2017 Annual Meeting of Stockholders, and all directors will be up for election for one-year terms at the 2017 Annual Meeting of Stockholders and at every subsequent annual meeting of stockholders. Any director chosen as a result of a newly created directorship or to fill a vacancy on the Board would hold office for a term expiring at the next annual meeting of stockholders. This does not change the present number of directors or the Board’s authority to change that number and to fill any vacancies or newly created directorships.
The business experience of each or our directors and executive officers is as follows:
Emanuel R. Pearlman
has served as a director since May 2010 and as the Executive Chairman of the Board since June 2016. Mr. Pearlman served as Chairman of the Board from September 2010 through May 2016. Mr. Pearlman currently serves as Chairman and CEO of Liberation Investment Group, LLC, a New York based investment management and financial consulting firm, a position he has held since January 2003. Since January 2012, he has served on the board of directors of Network-1 Technologies, Inc. (NYSE MKT:NTIP), where he serves as chairman of the audit committee and a member of the corporate governance committee. From January 2012 through January 2013, he served on the Board of Dune Energy. From October 2006 to March 2010, Mr. Pearlman served on the board of Multimedia Games, Inc. (NASDAQ-GS:MGAM). Mr. Pearlman holds an MBA from Harvard Business School and a B.A. in Economics from Duke University.
Joseph A. D’Amato
has served as our Chief Executive Officer since January 2010 and as our Chief Financial Officer from September 2009 to December 2010. Mr. D’Amato has served as a director since September 2010. Prior to his employment with the Company, Mr. D’Amato most recently served as Chief Executive Officer of Mount Airy Casino Resort in Pennsylvania from 2007 to 2009 and as Chief Operating Officer of the Seneca Gaming Corporation in Western New York from 2005 to 2007, and as its Chief Financial Officer from 2002 to 2005. During his earlier career in the gaming industry, Mr. D’Amato served in various executive capacities with Resorts International, Trump Entertainment, Bally’s Park Place and Golden Nugget organizations. Mr. D’Amato has participated in raising over $2 billion in the public and bank finance markets, and has extensive experience with Sarbanes Oxley and the filing requirements and regulations of the SEC.
K
eith L. Horn
has served as a director of the Company since April 2016. He served as Chief Operating Officer and a member of the Management Committee of Elliott Management Corporation (“Elliott”), a global, multi-strategy private investment fund with more than $30 billion of assets under management, from 2003 to 2015. Mr. Horn’s role at Elliot encompassed, among other things, direct responsibility for operations, accounting, finance, IT, applications development, human resources, compliance and all aspects of infrastructure and security. From 2011 to 2015, Mr. Horn served as a member of the board of directors of the Managed Funds Association, and was also a member of such board’s Executive Committee and served as Chairman of its Nominating Committee and Chairman of its International Affairs Committee. Prior to joining Elliott, beginning in 1987, Mr. Horn spent 16 years at Merrill Lynch serving in various capacities, including global head of Leveraged Finance, head of Latin America Debt, Chief of Staff to the Chairman and President and a managing director in High Yield Finance and Investment Banking. Mr. Horn began his career in private practice as a corporate and securities attorney. He is a member of the Binghamton University Foundation Board of Directors and a member of the Foundation’s Investment
Committee. In addition, Mr. Horn is a member of the Board of Directors of Peace Players International. Mr. Horn received his J.D. cum laude from Georgetown University Law Center and holds B.A. degrees in Economics and Political Science from Binghamton University, where he graduated Phi Beta Kappa with highest honors.
Edmund Marinucci
has served as a director of the Company since March 2014. Mr. Marinucci has been a partner at PCH Hotels, LLC, a boutique hotel and resort operator based in San Francisco that is an operating division of Pacific Union Company since 1983. From October 1983 to December 2008, Mr. Marinucci served as President of PCH Hotels, LLC. During his tenure as President, PCH Hotels owned and managed properties in the U.S. and the Caribbean. Such properties included Meadowood Resort (Napa, California), Windermere Island Club (Bahamas), Divi Resorts (Aruba), Downtown Athletic Club (New York City), Frangipani Resort (Anguilla) and Marriott Resort (Grand Cayman). During his presidency of PCH Hotels, he oversaw the ground-up development of The Hotel Griffon and the renovation and repositioning of the Drisco Hotel (each in San Francisco). Prior to PCH Hotels, Mr. Marinucci served as Director of Development for HCP Hotels/Aston Resorts in Hawaii. In such position, Mr. Marinucci oversaw all development aspects of the hotel group and grew inventory from 15 to 20 hotel resorts. From 1978 to 1981, Mr. Marinucci served as Director of Resort Operations for Kapalua Resort Maui in Hawaii. While at Kapalua Resort Maui, Mr. Marinucci was responsible for the daily operations of the resort, including the Kapalua Bay Hotel, 150 rental villas, two golf courses, The Bay and The Village. He serves on the board of directors of Miami JV Member LLC, a private hotel and resort company, and has previously served on the board of directors of Jameson Inns/Colony Capital, a private hotel and resort company. Mr. Marinucci is a member of The Cornell Hotel Society. Mr. Marinucci received a BS in Hotel Administration from the Cornell University School of Hotel Administration.
Nancy A. Palumbo
has served as director since June 2009. Ms. Palumbo also acts as an independent consultant in the areas of strategic marketing, corporate communications and business development. Ms. Palumbo has also served as a principal in CRAMN LLC, a global business development company. From March 2009 to December 2010, she served as President of the Green Planet Group, a company that advised on solar and renewable energy solutions. Prior to joining Green Planet Group, from May 2007 to March 2009, Ms. Palumbo was the General Manager for Walker Digital Lottery and from October 2006 to May 2007, she served as the Senior Vice President for Strategic Marketing and Corporate Communications for the New York Daily News. From January 2004 to October 2006, Ms. Palumbo served as the Director of the New York Lottery, where she managed a $6 billion a year business and oversaw the opening of six video gaming facilities. From February 1995 to January 2004, Ms. Palumbo served as the Executive Deputy Commissioner for the Office of Parks Recreation and Historic Preservation for the State of New York, where she was instrumental in developing public-private partnerships to generate additional revenue to expand park services. Ms. Palumbo is a graduate of St. Bonaventure University.
Gregg Polle
was elected to serve as a director in December 2010. Mr. Polle is a Managing Director for Moelis & Company, an investment bank that provides financial advisory services and capital raising solutions to clients in connection with mergers and acquisitions, restructurings and other strategic matters. He has also served as an investment banker with Citigroup Inc. (“Citigroup”) and its predecessors Salomon Brothers and Salomon Smith Barney from 1983 until November 2008. Mr. Polle most recently served as head of the global industrial group at Citigroup and previously was the co-head of Citigroup’s global mergers and acquisitions group. Mr. Polle was a private investor from November 2008 through July 2011. Mr. Polle received a B.S. in Economics from the Wharton School of the University of Pennsylvania.
Laurette J. Pitts
has served as the Chief Financial Officer of the Company since December 2010. In August 2011, Ms. Pitts was promoted to Senior Vice President and Chief Financial Officer and in August 2012, she was promoted to Senior Vice President, Chief Operating Officer and Chief Financial Officer and, effective July 1, 2014, she was promoted to Executive Vice President, Chief Operating Officer and Chief Financial Officer. Ms. Pitts has served in various capacities in the gaming industry since 1992. Prior to her employment with the Company, Ms. Pitts most recently served from December 2008 until December 2010, as Regional Vice President of finance and administration for American Racing and Entertainment, LLC, a private company that owns and operates horseracing, resort, and gaming facilities, including Tioga Downs and Vernon Downs. She previously served as Chief Financial Officer for Mohegan Sun at Pocono Downs, a gaming and entertainment facility owned by the Mohegan Tribe of Indians of Connecticut, from April 2005 until November 2008.
Charles Degliomini
is the Executive Vice President of Governmental Affairs and Corporate Communications of the Company. He has been an employee or consultant of the Company since 2004 and was promoted to his current position in February 2008. Currently, Mr. Degliomini serves as a director of the New York Gaming Association, a not-for-profit trade association created in 2011 to advance the interests of New York State's nine racetrack casinos. He is on the board of Hudson Valley Economic Development Corporation, a public-private partnership that markets the Hudson Valley region as a prime business location to corporate executives, site selection consultants and real estate brokers. Mr. Degliomini is also a member of the board of directors of the Orange and Sullivan County Boys and Girls Club. Previously, he was Senior Vice President of Sales and Marketing of eLottery, Inc., the first firm to advance the technology to facilitate the sales and marketing of governmental lottery tickets on the Internet. Before taking the position at eLottery, Mr. Degliomini was President and founder of Atlantic Communications, a New York-based corporate and government affairs management company. Mr. Degliomini
served in the General Services Administration as chief of staff to the Regional Administrator from 1985 to 1998, and was the New York State communications director for Reagan-Bush in 1984. Mr. Degliomini has a B.A. in Political Science from Queens College.
Nanette L. Horner
was appointed to serve as the Company’s Chief Compliance Officer in August 2010 and has served as the Company’s Corporate Vice President of Legal Affairs since July 2010. In August 2011, Ms. Horner was promoted to Senior Vice President, Chief Counsel and Chief Compliance Officer and, effective July 1, 2014, she was promoted to Executive Vice President, Chief Counsel and Chief Compliance Officer. Ms. Horner has been involved in the gaming industry, as an attorney, since 1996. Prior to her employment with the Company, Ms. Horner worked in the Office of Chief Counsel, assigned to the Bureau of Licensing of the Pennsylvania Gaming Control Board since July 2005. In September 2006, Ms. Horner was named the Board’s first director of the Office of Compulsive and Problem Gambling. She is a member of the Board of Directors for the National Council on Problem Gambling, and is a member of American Mensa and the International Masters of Gaming Law.
Director Independence
The Board evaluates the independence of each nominee for election as a director of our Company in accordance with the NASDAQ listing rules (the “NASDAQ Listing Rules”) of the NASDAQ Stock Market LLC (“NASDAQ”). Pursuant to these rules, a majority of our Board must be “independent directors” within the meaning of the NASDAQ Listing Rules, and all directors who sit on our Corporate Governance and Nominations Committee, Audit Committee and Compensation Committee must also be independent directors.
The NASDAQ definition of “independence” includes a series of objective tests, such as the director or director nominee is not, and was not during the last three years, an employee of the Company and has not received certain payments from, or engaged in various types of business dealings with, the Company. In addition, as further required by the NASDAQ Listing Rules, the Board has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities as a director. In making these determinations, the Board reviewed and discussed information provided by the directors with regard to each director’s business and personal activities as they may relate to Company and its management.
As a result, the Board has affirmatively determined that none of our directors has a material relationship with the Company other than Joseph D’Amato, who serves as our Chief Executive Officer, and Emanuel R. Pearlman, who serves as Executive Chairman of the Board. The Board has also affirmatively determined that all members of our Audit Committee, Corporate Governance and Nominations Committee and Compensation Committee are independent directors.
Audit Committee and Audit Committee Financial Expert
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act and NASDAQ Listing Rules. The Audit Committee is comprised of Ms. Palumbo, Mr. Horn and Mr. Polle. Our Board has determined that Mr. Horn and Mr. Polle qualify as audit committee financial experts as defined by Securities and Exchange Commission rules, based on his education, experience and background. Please see the biographical information above for a description of Mr. Horn's and Mr. Polle's relevant experience.
Code of Conduct and Business Ethics
We adopted a Code of Business Conduct and Ethics, applicable to all employees, and a Code of Ethics for the Principal Executive Officer and Senior Financial Officer(s), each of which is available on our internet website (www.empireresorts.com) and will be provided in print without charge to any stockholder who submits a request in writing to Empire Resorts, Inc. Investor Relations, c/o Monticello Casino and Raceway, 204 State Route 17B, P.O. Box 5013, Monticello, New York 12701. Any amendment to and waivers from the Code of Ethics with respect to the Company’s Chief Executive Officer or Chief Financial Officer will be posted on the Company’s website.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms furnished to us and written representations from our executive officers and directors, we believe that during the year ended December 31, 2016 there were no delinquent filers.
|
|
|
|
|
|
Item 11.
|
Executive Compensation.
|
Summary Compensation Table
The following table sets forth all information concerning the compensation earned, for the fiscal years ended December 31, 2016, 2015 and 2014 for services rendered to us by persons who served as our CEO and CFO during 2016, 2015 and 2014, as well as each of our three other most highly compensated executive officers who were serving as executive officers at the end of 2016, 2015 and 2014, all of whom we refer to herein collectively as our “Named Executive Officers.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
Year
|
|
Salary ($)
|
|
Bonus ($)
|
|
Restricted Stock
Awards ($)
(5)
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
Emanuel R. Pearlman (1)
|
2016
|
|
357,500
|
|
(1
|
)
|
200,000
|
|
|
—
|
|
|
17,500
|
|
(1
|
)
|
|
575,000
|
|
|
Executive Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph A. D’Amato
|
2016
|
|
398,269
|
|
|
200,000
|
|
|
205,000
|
|
|
33,540
|
|
(2
|
)
|
|
836,809
|
|
|
Chief Executive Officer
|
2015
|
|
375,000
|
|
|
225,000
|
|
|
651,250
|
|
|
31,418
|
|
(3
|
)
|
|
1,282,668
|
|
|
|
2014
|
|
375,000
|
|
|
125,000
|
|
|
33,300
|
|
|
26,707
|
|
(4
|
)
|
|
560,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurette J. Pitts
|
2016
|
|
240,000
|
|
|
65,000
|
|
|
—
|
|
|
—
|
|
|
|
305,000
|
|
|
Executive Vice President, Chief Operating Officer and Chief Financial Officer
|
2015
|
|
240,000
|
|
|
100,000
|
|
|
260,500
|
|
|
—
|
|
|
|
600,500
|
|
|
|
2014
|
|
234,808
|
|
|
85,000
|
|
|
33,300
|
|
|
—
|
|
|
|
353,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles Degliomini
|
2016
|
|
257,500
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
|
|
307,500
|
|
|
Executive Vice President
|
2015
|
|
260,000
|
|
|
100,000
|
|
|
260,500
|
|
|
—
|
|
|
|
620,500
|
|
|
|
2014
|
|
250,000
|
|
|
85,000
|
|
|
33,300
|
|
|
—
|
|
|
|
368,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nanette L. Horner
|
2016
|
|
225,000
|
|
|
50,000
|
|
|
—
|
|
|
14,400
|
|
(5
|
)
|
|
289,400
|
|
|
Executive Vice President, Chief Counsel and Chief Compliance Officer
|
2015
|
|
225,000
|
|
|
100,000
|
|
|
260,500
|
|
|
14,400
|
|
(5
|
)
|
|
599,900
|
|
|
|
2014
|
|
219,808
|
|
|
100,000
|
|
|
33,300
|
|
|
14,400
|
|
(5
|
)
|
|
367,508
|
|
|
|
|
|
(1)
|
Mr. Pearlman served as a non-employee director until May 31, 2016, whereupon he became the Executive Chairman of the Board of Directors and a Company employee. Mr. Pearlman will be paid an annual salary of $650,000 in his role as Executive Chairman but does not have an employment agreement with the Company. All Other Compensation includes $17,500 paid to an entity wholly-owned by Mr. Pearlman as reimbursement for medical benefits and administrative expenses provided by such entity in lieu of Company benefits.
|
|
|
|
|
(2)
|
All Other Compensation consists of $23,368 in housing allowance, $5,034 in allocation of personal use of a Company vehicle, and $5,138 for an excess life insurance policy paid by the Company.
|
|
|
|
|
(3)
|
All Other Compensation consists of $22,228 in housing allowance, $4,052 in allocation of personal use of a Company vehicle, and $5,138 for an excess life insurance policy paid by the Company.
|
|
|
|
|
(4)
|
All Other Compensation consists of $18,000 in housing allowance, $3,569 in allocation of personal use of a Company vehicle, and $5,138 for an excess life insurance policy paid by the Company.
|
|
|
|
|
(5)
|
All Other Compensation consists of $14,400 in housing and travel allowance.
|
|
|
|
|
(6)
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These amounts reflect the aggregate grant date fair value of restricted stock granted in the year ended December 31, 2016 under our 2005 Equity Incentive Plan computed in accordance with ASC Topic 718 (formerly SFAS No. 123(R)). Please see Notes B and H to our consolidated financial statements contained in this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for more information. The grant dates for the Restricted Stock are August 2, 2016, May 5, 2015, August 11, 2014 and November 12, 2013, respectively.
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Narrative Disclosure to Summary Compensation Table
The following is a description of our current executive employment agreements:
Joseph A. D'Amato
On November 26, 2012, the Company entered into an employment agreement with Mr. D'Amato, pursuant to which Mr. D'Amato will continue to serve as the Company's Chief Executive Officer. This employment agreement supersedes Mr. D'Amato's prior employment agreement with the Company. Mr. D’Amato’s employment agreement provides for a term ending on December 31, 2015, which was later extended as hereinafter described, unless Mr. D’Amato’s employment is earlier terminated by either party in accordance with the provisions thereof. Mr. D’Amato is to receive a base salary at the rate of $375,000 per year for the term of the agreement and such incentive compensation and bonuses, if any, (i) as the Compensation Committee in its discretion may determine, and (ii) to which Mr. D'Amato may become entitled pursuant to the terms of any incentive compensation or bonus program, plan or agreement from time to time in effect in which he is a participant. Mr. D'Amato will receive a monthly housing allowance in the amount of $1,500. In addition, the Company will lease or purchase an automobile for Mr. D'Amato's sole and exclusive use, and be responsible for the payment of certain expenses related to that vehicle, with an approximate monthly value of $1,500. The Company obtained and shall maintain a key man life insurance policy for Mr. D'Amato providing death benefits in the amount of $1 million to Mr. D'Amato's estate and which policy may, at the option of the Company's Compensation Committee, provide death benefits of $3 million to the Company. In the event that the Company terminates Mr. D’Amato’s employment with Cause (as defined in the agreement) or Mr. D’Amato resigns without Good Reason (as defined in the agreement), the Company’s obligations are limited generally to paying Mr. D’Amato his base salary, unpaid expenses and any benefits to which Mr. D'Amato is entitled through the termination date (collectively "Accrued Obligations"). In the event that Mr. D'Amato's employment is terminated as a result of death or disability, Mr. D'Amato or his estate, as the case may be, is entitled to receive the Accrued Obligations and any unvested options held by Mr. D'Amato shall become vested immediately and remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Mr. D’Amato’s employment without Cause or Mr. D’Amato resigns with Good Reason, the Company is obligated to continue to pay (i) the Accrued Obligations, (ii) a pro rata portion of any bonus awarded pursuant to a bonus plan in which is a participant (based on the days worked during the applicable year) and (iii) Mr. D’Amato’s compensation for the lesser of (A) 18 months or (B) the remainder of the term of the agreement and accelerate the vesting of the options granted in contemplation of the agreement, which options shall remain exercisable through the remainder of their original five-year term. In the event that the Company terminates Mr. D’Amato’s employment without Cause or Mr. D’Amato resigns with Good Reason on or following a Change in Control (as defined in the agreement), the Company is generally obligated to continue to pay Mr. D’Amato’s compensation for the greater of (A) 24 months or (B) the remainder of the term of the agreement and accelerate the vesting of the options held by Mr. D'Amato, which options shall remain exercisable through the remainder of their original five-year term.
On May 29, 2014, the Company entered into Amendment No. 1 to the employment agreement with Mr. D’Amato for the
purpose of amending the definition of “Change in Control” such that a change in the majority of the Board as a result of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction without the approval of the current members of the Board would constitute a Change in Control.
On June 30, 2015, the Company entered into Amendment No. 2 to the employment agreements with Mr. D’Amato for the purpose of extending the termination date of the employment agreement from December 31, 2015 to December 31, 2016. Furthermore, Amendment No. 2 provides that the termination date of the employment agreement shall be automatically extended to December 31, 2018 if the Company is granted a gaming facility license ("Gaming Facility License") by NYSGC with respect to the the Casino Project. On December 21, 2015, the Company was awarded such Gaming Facility License.
Amendment No. 2 further provided that, beginning on the date the Company is granted a Gaming Facility License until the earlier of (i) the termination of the employment agreement or (ii) the completion of the Casino Project, the Company shall provide to Mr. D’Amato furnished housing in Sullivan County, New York, that is mutually agreeable to the Company and Mr. D’Amato in place of a housing allowance.
On August 2, 2016, the Company entered into an Amended and Restated Employment Agreement with Mr. D’Amato, which agreement is effective as of July 1, 2016 (the “Restated D’Amato Employment Agreement”). Pursuant to the Restated D’Amato Employment Agreement, the term of Mr. D’Amato’s service as Chief Executive Officer is extended from December 31, 2018 through June 28, 2019. In addition, Mr. D’Amato’s base salary increased from $375,000 to $425,000 per annum. Further, the geographic radius for the non-competition agreement between Mr. D’Amato and the Company was extended from 60 miles to 100 miles from any location at which any Empire Company (as such term is defined in the Restated D’Amato Employment Agreement) conducts its business. Except for the amendments described herein, the other terms of Mr. D’Amato’s employment remain materially unchanged.
In connection with the execution of the Restated D’Amato Employment Agreement, Mr. D’Amato was granted 12,500 shares of common stock subject to the 2015 Equity Incentive Plan. One-half of the shares vested on August 2, 2016 and the remaining shares will vest on August 2, 2018. In the event of a Change in Control, all shares will vest immediately.
Laurette J. Pitts
On August 17, 2012, the Company entered into an employment agreement with Ms. Pitts pursuant to which Ms. Pitts became the Company’s Chief Operating Officer and continued to serve as the Company’s Senior Vice President and Chief Financial Officer. This employment agreement supersedes Ms. Pitts’s prior employment agreement with the Company. The employment agreement provides for a term ending on December 31, 2014, which was later extended as hereinafter described, unless Ms. Pitts’ employment is terminated earlier by either party in accordance with the provisions thereof. Ms. Pitts is to receive a base salary at the annual rate of $230,000 per year and such incentive compensation and bonuses, if any, (i) as the Compensation Committee in its discretion may determine and (ii) to which Ms. Pitts may become entitled pursuant to the terms of any incentive compensation or bonus program, plan or agreement from time to time in effect in which she is a participant. In the event that the Company terminates Ms. Pitts’s employment with Cause (as defined in the agreement) or Ms. Pitts resigns without Good Reason (as defined in the agreement), the Company’s obligations are limited generally to paying Ms. Pitts her base salary, unpaid expenses and any benefits to which Ms. Pitts is entitled through the termination date (the “Accrued Compensation”). In the event that Ms. Pitts’s employment is terminated as a result of death or disability, Ms. Pitt’s or her estate, as the case may be, is entitled to receive the Accrued Compensation and any unvested options held by Ms. Pitts shall become vested immediately and remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Ms. Pitts’ employment without Cause or Ms. Pitts resigns with Good Reason, in addition to the Accrued Compensation, the Company is obligated to pay (i) a pro-rata portion of any bonus awarded pursuant to a bonus plan in which she is a participant (based on the days worked during the applicable year) and (ii) Ms. Pitts’ compensation for the lesser of (A) 18 months or (B) the remainder of the term of the agreement and accelerate the vesting of the options granted in contemplation of the agreement, which options shall remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Ms. Pitts’ employment without Cause or Ms. Pitts resigns with Good Reason on or following a Change in Control (as defined in the agreement), the Company is generally obligated to continue to pay Ms. Pitts’s compensation for the greater of (i) 24 months or (ii) the remainder of the term of the agreement and accelerate the vesting of the options granted in contemplation of the agreement, which options shall remain exercisable through the remainder of its original five-year term.
On May 29, 2014, the Company entered into Amendment No. 1 to the employment agreement with Ms. Pitts, which
amendment was effective as of July 1, 2014. Pursuant to such amendment, (i) the termination date of Ms. Pitts’ employment agreement was extended from December 31, 2014 to December 31, 2015, (ii) her base salary was increased from $230,000 to $240,000 and (iii) “Executive Vice President” was added to her title. In addition, pursuant to the amendment, the definition of “Change in Control” was amended such that a change in the majority of the Board as a result of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction without the approval of the current members of the Board would constitute a Change in Control.
On June 30, 2015, the Company entered into Amendment No. 2 to the employment agreements with Ms. Pitts extending the termination date of the employment agreement from December 31, 2015 to December 31, 2016. Furthermore, Amendment No. 2 provided that such term would be automatically extended to December 31, 2018, if the Company is granted a Gaming Facility License by the NYSGC with respect to the Casino Project. On December 21, 2015, the Company was awarded such Gaming Facility License.
Charles A. Degliomini
On December 7, 2012, the Company entered into an employment agreement with Mr. Degliomini to continue to serve as the Company's Executive Vice President and/or such other titles as may be granted by the Company. This employment agreement supersedes Mr. Degliomini's prior employment agreement with the Company. Mr. Degliomini's employment agreement provides for a term ending on December 31, 2014, which was later extended as hereinafter described, unless Mr. Degliomini’s employment is terminated by either party in accordance with the provisions thereof. Mr. Degliomini is to receive a base salary at the annual rate of $250,000 and such incentive compensation and bonuses, if any, (i) as the Compensation Committee in its discretion may determine, and (ii) to which Mr. Degliomini may become entitled pursuant to the terms of any incentive compensation or bonus program, plan or agreement from time to time in effect in which he is a participant. In the event that the Company terminates Mr. Degliomini’s employment with Cause (as defined in the agreement) or Mr. Degliomini resigns without Good Reason (as defined in the agreement), the Company’s obligations are limited generally to paying Mr. Degliomini his base salary, unpaid expenses and any benefits to which Mr. Degliomini in entitled through the termination date (collectively “Accrued Obligations”). In the event Mr. Degliomini’s employment is terminated as a result of death or disability, Mr. Degliomini’s or his estate, as the case may be, is entitled to receive the Accrued Obligations and any unvested options held by Mr. Degliomini shall become vested immediately and remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Mr. Degliomini’s employment without Cause or Mr. Degliomini resigns with Good Reason, the Company is obligated to pay (i) the Accrued Obligations, (ii) a pro rata portion of any bonus awarded pursuant to a bonus plan in which he is a participant (based on the days worked during the applicable year) and (iii) Mr. Degliomini’s compensation for the lesser of (A) 18 months or (B) the remainder of the term of the agreement and accelerate the vesting of the options granted in contemplation of the agreement, which options shall remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Mr. Degliomini’s employment without Cause or Mr. Degliomini resigns with Good Reason on or following a Change in Control (as defined in the agreement), the Company is generally obligated to continue to pay Mr. Degliomini’s compensation for the greater of (i) 24 months or (ii) the remainder of the term of the agreement and accelerate the vesting of the options granted in contemplation of the agreement, which options shall remain exercisable through the remainder of its original five-year term.
On August 24, 2014, the Company entered into Amendment No. 1 to the employment agreement with Mr. Degliomini. Pursuant to such amendment, (i) the termination date of Mr. Degliomini’s employment agreement was extended from December 31, 2014 to December 31, 2015 and (ii) his base salary was increased from $250,000 to $257,000. In addition, pursuant to the amendment, the definition of “Change in Control” was amended such that a change in the majority of the Board as a result of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction without the approval of the current members of the Board would constitute a Change in Control.
On June 30, 2015, the Company entered into Amendment No. 2 to the employment agreements with Mr. Degliomini extending the termination date of such agreement from December 31, 2015 to December 31, 2016. Furthermore, Amendment No.2 provided that such term would be automatically extended to December 31, 2018 if the Company is granted a Gaming Facility License by the NYSGC with respect to the Casino Project. On December 21, 2015, the Company was awarded such Gaming Facility License.
Nanette L. Horner
On August 22, 2012, the Company entered into an employment agreement with Ms. Horner, pursuant to which Ms. Horner will continue to serve as the Company’s Senior Vice President, Chief Compliance Officer and Chief Counsel. This employment agreement supersedes Ms. Horner’s prior employment agreement with the Company. Ms. Horner’s employment agreement provides for a term ending on December 31, 2014, which was later extended as hereinafter described, unless Ms. Horner’s employment is earlier terminated by either party in accordance with the provisions thereof. Ms. Horner will receive a base salary of $215,000 and such incentive compensation and bonuses, if any, (i) as the Compensation Committee in its discretion may determine, and (ii) to which Ms. Horner may become entitled pursuant to the terms of any incentive compensation or bonus program, plan or agreement from time to time in effect in which she is a participant. Ms. Horner will also receive a monthly lodging and travel expense allowance of $1,200. In the event that the Company terminates Ms. Horner’s employment with Cause (as defined in the agreement) or Ms. Horner resigns without Good Reason (as defined in the agreement), the Company’s obligations are limited generally to paying Ms. Horner her base salary, unpaid expenses and any benefits to which Ms. Horner is entitled through the termination date (the “Accrued Compensation”). In the event that Ms. Horner’s employment is terminated as a result of death or disability, Ms. Horner’s or her estate, as the case may be, is entitled to receive the Accrued Obligations and any unvested options held by Ms. Horner shall become vested immediately and remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Ms. Horner’s employment without Cause or Ms. Horner resigns with Good Reason, the Company is obligated to pay (i) the Accrued Compensation, (ii) a pro-rata portion of any bonus awarded pursuant to any annual bonus plan in which she is a participant (based on the days worked during the applicable year) and (iii) Ms, Horner's compensation for the lesser of (A) 18 months or (B) the remainder of the term of the
agreement and accelerate the vesting of the options granted in contemplation of the agreement, which options shall remain exercisable through the remainder of its original five-year term. In the event that the Company terminates Ms. Horner’s employment without Cause or Ms. Horner resigns with Good Reason on or following a Change in Control (as defined in the agreement), the Company is generally obligated to continue to pay Ms. Horner’s compensation for the greater of (i) 24 months or (ii) the remainder of the term of the agreement and accelerate the vesting of the options held by Ms. Horner, which options shall remain exercisable through the remainder of its original five-year term.
On May 30, 2014, the Company entered into Amendment No. 1 to the employment agreement with Ms. Horner, which
amendment was effective as of July 1, 2014. Pursuant to such amendment, (i) the termination date of Ms. Horner’s employment agreement was extended from December 31, 2014 to December 31, 2015, (ii) her base salary was increased from $215,000 to $225,000 and (iii) “Executive Vice President” was added to her title. In addition, pursuant to the amendment, the definition of “Change Control” was amended such that a change in the majority of the Board as a result of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction without the approve of the current members of the Board would constitute a Change in Control.
On June 30, 2015, the Company entered into Amendment No. 2 to the employment agreement with Ms. Horner extending the termination date of such agreement from December 31, 2015 to December 31, 2016. Furthermore, Amendment No.2 provided that such term would be automatically extended to December 31, 2018, if the Company is granted a Gaming Facility License by the NYSGC with respect to the casino project. On December 21, 2015, the Company was awarded such Gaming Facility License .
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning the outstanding equity awards of each of the Named Executive Officers as of December 31, 2016:
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Option Awards
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Stock Awards
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Name
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Number of
Securities
Underlying
Unexercised
Options:
Exercisable
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Number of
Securities
Underlying
Unexercised
Options:
Unexercisable
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Option
Exercise Price
($)
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Option Expiration
Date
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Number of Shares of Stock That Have Not Vested
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Market Value of Shares of Stock That Have Not Vested ($)
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Emanuel R. Pearlman
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—
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2,000
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24.75
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11/11/2018
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(1)
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3,000
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68,250
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(3)
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50,000
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1,137,500
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(4)
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75,000
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1,706,250
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(5)
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Joseph A. D’Amato
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—
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—
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—
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25,000
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568,750
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(4)
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6,250
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142,188
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(6)
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Laurette J. Pitts
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—
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—
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—
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10,000
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227,500
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(4)
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—
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Charles Degliomini
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5,000
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—
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111.00
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5/23/2017
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(2)
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10,000
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227,500
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(4)
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Nanette L. Horner
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—
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—
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—
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10,000
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227,500
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(4)
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(1)
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Grant date November 12, 2013; vesting 25% on grant date, 25% on 2/12/2014, 25% on 5/12/2014 and 25% on 8/12/2014; 10-year term.
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(2)
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Grant date May 24, 2007; vesting 33.3% on grant date, 33.3% one year after grant date and 33.4% two years after grant date; 10-year term.
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(3)
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Grant under the 2005 Empire Resorts, Inc. Second Amended and Restated Equity Incentive Plan (the "2005 Equity Incentive Plan"). Grant date November 3, 2015; vesting 100% on 1/6/2017.
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(4)
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Grant date May 5, 2015; vesting 50% on which the NYSGC authorizes the opening of the Casino Project to the public (“Casino Date”), 50% at the six month anniversary of the Casino Date; immediate vesting in the event of a Change in Control (as defined in the award).
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(5)
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Grant date March 3, 2016; vesting 25% on 3/16/2017, 25% on 3/16/2018, 255 on 3/16/2019 and 25% on 3/16/2020.
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(6)
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Grant date August 2, 2016; vesting 50% on grant date and 50% two years after grant date.
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Outstanding Equity Awards Narrative Disclosure
Second Amended and Restated 2005 Equity Incentive Plan
In May 2015, our 2005 Equity Incentive Plan expired. Options to purchase 33,618 shares of common stock were outstanding as of December 31, 2016 under the 2005 Equity Incentive Plan. Although the 2005 Equity Incentive Plan expired, the 33,618 options still outstanding under such plan are still exercisable. In September 2015, our board approved, and in November 2015, our stockholders approved, a new 2015 Equity Incentive Plan, which is discussed below.
2015 Equity Incentive Plan
In September 2015, our Board approved, and in November 2015, our stockholders approved the Company's 2015 Equity Incentive Plan (the "2015 Equity Incentive Plan")
. The purpose of the 2015 Equity Incentive Plan is: (i) to align our interests and recipients of options under the Plan by increasing the proprietary interest of such recipients in our growth and success, and (ii) to advance our interests by providing additional incentives to officers, key employees and well-qualified non-employee directors and consultants who provide services to us, who are responsible for our management and growth, or otherwise contribute to the conduct and direction of our business, operations and affairs.
Administration
The Compensation Committee will administer the 2015 Equity Incentive Plan. The Compensation Committee will have the authority, without limitation (i) to designate participants to receive awards, (ii) determine the types of awards to be granted to participants, (iii) determine the number of shares of common stock to be covered by awards, (iv) determine the terms and conditions of any awards granted under the Plan, (v) determine to what extent and under what circumstances awards may be settled in cash, shares of common stock, other securities, other Awards or other property, or canceled, forfeited or suspended, (vi) determine whether, to what extent, and under what circumstances the delivery of cash, common stock, other securities, other awards or other property and other amounts payable with respect to an award shall be made; (vii) interpret, administer, reconcile any inconsistency in, settle any controversy regarding, correct any defect in and/or complete any omission in this Plan and any instrument or agreement relating to, or award granted under, this Plan; (viii) establish, amend, suspend, or waive any rules and regulations and appoint such agents as the Compensation Committee shall deem appropriate for the proper administration of this Plan; (ix) accelerate the vesting or exercisability of, payment for or lapse of restrictions on, awards; (x) reprice existing awards or to grant awards in connection with or in consideration of the cancellation of an outstanding Award with a higher price; and (xi) make any other determination and take any other action that the Compensation Committee deems necessary or desirable for the administration of this Plan. The Compensation Committee will have full discretion to administer and interpret the Plan and to adopt such rules, regulations and procedures as it deems necessary or advisable and to determine, among other things, the time or times at which the awards may be exercised and whether and under what circumstances an award may be exercised.
Eligibility
Employees, directors, officers, advisers and consultants of the Company or its affiliates are eligible to participate in the 2015 Equity Incentive Plan and are referred to as “Participants.” The Compensation Committee has the sole and complete authority to determine who will be granted an award under the 2015 Equity Incentive Plan, however, it may delegate such authority to one or more officers of the Company under the circumstances set forth in the 2015 Equity Incentive Plan.
Number of Shares Authorized
The 2015 Equity Incentive Plan provided for an aggregate of 952,498 shares of common stock to be available for Awards. Subject to adjustments based on the terms of the 2015 Equity Incentive Plan, on the 90th day after the Company was awarded a Gaming Facility License (the “Trigger Date”), the maximum shares of common stock available for Awards were to automatically increase by the lesser of: (i) 1,633,209 shares of common stock; (ii) such number of shares as would increase the aggregate number of shares of common stock available for Awards to 10% of the issued and outstanding shares of common stock as of the Trigger Date; and (iii) such number of shares of common stock as the Compensation Committee would otherwise determine. On March 8, 2016, pursuant to the terms of the 2015 Equity Incentive Plan, the Board of Directors determined to increase the number of shares available for grant under such plan by 1,663,209 shares for a total amount of shares available for grants of 2,600,707. Such change was effective as of March 20, 2016. At December 31, 2016, a total of 2,501,309 shares were available for future issuance under the 2015 Equity Incentive Plan.
The number of shares available for grant pursuant to Awards under the 2015 Equity Incentive Plan is referred to as the “Available Shares”. If an Award is forfeited, canceled, or if any Option terminates, expires or lapses without being exercised, the common stock subject to such Award will again be made available for future grant. However, shares that are used to pay the exercise price of an Option or that are withheld to satisfy the Participant’s tax withholding obligation will not be available for re-grant under the 2015 Equity Incentive Plan. If there is any change in the Company’s corporate capitalization or structure, the Compensation Committee in its sole discretion may make substitutions or adjustments to the number of shares of common stock reserved for issuance under the 2015 Equity Incentive Plan, the number of shares covered by Awards then outstanding under the Plan, the limitations on Awards under the 2015 Equity Incentive Plan, the exercise price of outstanding Options and such other equitable substitution or adjustments as it may determine appropriate.
The 2015 Equity Incentive Plan will have a term of ten years and no further Awards may be granted under the 2015 Equity Incentive Plan after that date.
Awards Available for Grant
The Compensation Committee may grant awards of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Stock Bonus Awards, Performance Compensation Awards (including cash bonus awards) or any combination of the foregoing, as each type of award is described in the 2015 Equity Incentive Plan. Notwithstanding, the Compensation Committee may not grant to any one person in any one calendar year awards (i) for more than 50% of the Available Shares in the aggregate or (ii) payable in cash in an amount exceeding $10 million in the aggregate.
Options
The Compensation Committee will be authorized to grant Options to purchase common stock that are either “qualified,” meaning they are intended to satisfy the requirements of Code Section 422 for Incentive Stock Options, or “non-qualified,” meaning they are not intended to satisfy the requirements of Section 422 of the Code. Options granted under the 2015 Equity Incentive Plan will be subject to the terms and conditions established by the Compensation Committee. Under the terms of the 2015 Equity Incentive Plan, unless the Compensation Committee determines otherwise in the case of an Option substituted for another Option in connection with a corporate transaction, the exercise price of the Options will not be less than the fair market value (as determined under the Plan) of the shares of common stock on the date of grant. Options granted under the 2015 Equity Incentive Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the Compensation Committee and specified in the applicable award agreement. The maximum term of an Option granted under the 2015 Equity Incentive Plan will be ten years from the date of grant (or five years in the case of an Incentive Stock Option granted to a 10% stockholder). Payment in respect of the exercise of an Option may be made in cash or by check, by surrender of unrestricted shares of common stock (at their fair market value on the date of exercise) that have been held by the participant for any period deemed necessary by the Company’s accountants to avoid an additional compensation charge or have been purchased on the open market, or the Compensation Committee may, in its discretion and to the extent permitted by law, allow such payment to be made through a broker-assisted cashless exercise mechanism, a net exercise method, or by such other method as the Compensation Committee may determine to be appropriate.
Stock Appreciation Rights
The Compensation Committee will be authorized to award Stock Appreciation Rights ("SARs") under the 2015 Equity Incentive Plan. SARs will be subject to such terms and conditions as established by the Compensation Committee. A SAR is a contractual right that allows a participant to receive, either in the form of cash, shares or any combination of cash and shares, the appreciation, if any, in the value of a share over a certain period of time. A SAR granted under the 2015 Equity Incentive Plan may be granted in tandem with an option and SARs may also be awarded to a participant independent of the grant of an
Option. SARs granted in connection with an Option shall be subject to terms similar to the Option which corresponds to such SARs. SARs shall be subject to terms established by the Compensation Committee and reflected in the award agreement.
Restricted Stock
The Compensation Committee will be authorized to award Restricted Stock under the 2015 Equity Incentive Plan. Unless otherwise provided by the Compensation Committee and specified in an award agreement, restrictions on Restricted Stock will lapse after three years of service with the Company. The Compensation Committee will determine the terms of such Restricted Stock awards. Restricted Stock are shares of common stock that generally are non-transferable and subject to other restrictions determined by the Compensation Committee for a specified period. Unless the Compensation Committee determines otherwise or specifies otherwise in an award agreement, if the participant terminates employment or services during the restricted period, then any unvested restricted stock will be forfeited.
Restricted Stock Unit Awards
The Compensation Committee will be authorized to award Restricted Stock Unit awards. Unless otherwise provided by the Compensation Committee and specified in an award agreement, Restricted Stock Units will vest after three years of service with the Company. The Compensation Committee will determine the terms of such Restricted Stock Units. Unless the Compensation Committee determines otherwise or specifies otherwise in an award agreement, if the participant terminates employment or services during the period of time over which all or a portion of the units are to be earned, then any unvested units will be forfeited. At the election of the Compensation Committee, the participant will receive a number of shares of common stock equal to the number of units earned or an amount in cash equal to the fair market value of that number of shares at the expiration of the period over which the units are to be earned or at a later date selected by the Compensation Committee.
Stock Bonus Awards
The Compensation Committee will be authorized to grant awards of unrestricted shares of common stock or other Awards denominated in shares of common stock, either alone or in tandem with other Awards, under such terms and conditions as the Compensation Committee may determine.
Performance Compensation Awards
The Compensation Committee will be authorized to grant any award under the 2015 Equity Incentive Plan in the form of a Performance Compensation Award exempt from the requirements of Section 162(m) of the Code by conditioning the vesting of the Award on the attainment of specific performance criteria of the Company and/or one or more Affiliates, divisions or operational units, or any combination thereof, as determined by the Compensation Committee. The Compensation Committee will select the performance criteria based on one or more of the following factors: (i) revenue; (ii) sales; (iii) profit (net profit, gross profit, operating profit, economic profit, profit margins or other corporate profit measures); (iv) earnings (EBIT, EBITDA, earnings per share, or other corporate profit measures); (v) net income (before or after taxes, operating income or other income measures); (vi) cash (cash flow, cash generation or other cash measures); (vii) stock price or performance; (viii) total stockholder return (stock price appreciation plus reinvested dividends divided by beginning share price); (ix) economic value added; (x) return measures (including, but not limited to, return on assets, capital, equity, investments or sales, and cash flow return on assets, capital, equity, or sales); (xi) market share; (xii) improvements in capital structure; (xiii) expenses (expense management, expense ratio, expense efficiency ratios or other expense measures); (xiv) business expansion or consolidation (acquisitions and divestitures); (xv) internal rate of return or increase in net present value; (xvi) working capital targets relating to inventory and/or accounts receivable; (xvii) inventory management; (xviii) service or product delivery or quality; (xix) customer satisfaction; (xx) employee retention; (xxi) safety standards; (xxii) productivity measures; (xxiii) cost reduction measures; and/or (xxiv) strategic plan development and implementation.
Transferability
Each award may be exercised during the participant’s lifetime only by the participant or, if permissible under applicable law, by the participant’s guardian or legal representative and may not be otherwise transferred or encumbered by a participant other than by will or by the laws of descent and distribution. The Compensation Committee, however, may permit awards (other than Incentive Stock Options) to be transferred to family members, a trust for the benefit of such family members, a partnership or limited liability company whose partners or stockholders are the participant and his or her family members or anyone else approved by it.
Amendment
The 2015 Equity Incentive Plan will have a term of ten years. The Company’s Board of Directors may amend, suspend or terminate the 2015 Equity Incentive Plan at any time; however, shareholder approval to amend the 2015 Equity Incentive Plan may be necessary if the law or SEC so requires. No amendment, suspension or termination will impair the rights of any Participant or recipient of any award without the consent of the Participant or recipient.
Effective as of January 1, 2017, the 2015 Equity Incentive Plan was amended and restated to increase the permissible tax withholding on Awards in the form of common stock from the minimum statutory requirement to the maximum individual statutory rate.
Change in Control
Except to the extent otherwise provided in an award, in the event of a Change in Control, all outstanding Options and equity awards (other than performance compensation awards) issued under the 2015 Equity Incentive Plan will become fully vested and performance compensation awards will vest, as determined by the Compensation Committee, based on the level of attainment of the specified performance goals. In general, the Compensation Committee may, in its discretion, cancel outstanding awards and pay the value of such awards to the participants in connection with a Change in Control. The Compensation Committee can also provide otherwise in an award under the 2015 Equity Incentive Plan. For purposes of the 2015 Equity Incentive Plan, unless an award agreement states otherwise or contains a different definition, "Change in Control" shall be deemed to occur upon:
(i) a tender offer (or series of related offers) shall be made and consummated for the ownership of 50% or more of the outstanding voting securities of the Company, unless as a result of such tender offer more than 50% of the outstanding voting securities of the surviving or resulting corporation or entity shall be owned in the aggregate by (A) the shareholders of the Company (as of the time immediately prior to the commencement of such offer), or (B) any employee benefit plan of the Company or its subsidiaries, and their affiliates;
(ii) the Company shall be merged or consolidated with another corporation, unless as a result of such merger or consolidation more than 50% of the outstanding voting securities of the surviving or resulting corporation or entity shall be owned in the aggregate by (A) the shareholders of the Company (as of the time immediately prior to such transaction); provided, that a merger or consolidation of the Company with another company which is controlled by persons owning more than 50% of the outstanding voting securities of the Company shall constitute a Change in Control unless the Compensation Committee, in its discretion, determine otherwise, or (B) any employee benefit plan of the Company or its subsidiaries, and their affiliates;
(iii) the Company shall sell substantially all of its assets to another entity that is not wholly owned by the Company, unless as a result of such sale more than 50% of such assets shall be owned in the aggregate by (A) the shareholders of the Company (as of the time immediately prior to such transaction), or (B) any employee benefit plan of the Company or its subsidiaries, and their affiliates;
(iv) a Person, as defined in the 2015 Equity Incentive Plan, shall acquire 50% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record), unless as a result of such acquisition more than 50% of the outstanding voting securities of the surviving or resulting corporation or entity shall be owned in the aggregate by (A) the shareholders of the Company (as of the time immediately prior to the first acquisition of such securities by such Person), or (B) any employee benefit plan of the Company or its subsidiaries, and their affiliates; or
(v) the individuals who, as of the date hereof, constitute the members of the Board (the "Current Board Members") cease, by reason of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction affecting the Company, to constitute at least a majority of the members of the Board unless such change is approved by the Current Board Members.
Option Exercises and Stock Vested
The following information sets forth stock options exercised by, and stock vested for, the executive officers during the year ended December 31, 2016:
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OPTION AWARDS
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STOCK AWARDS
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Name
|
Number of
Shares
Acquired on
Exercise (#)
|
Value
Realized on
Exercise ($)
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|
Number of
Shares
Acquired on
Vesting (#)
|
|
Value
Realized on
Vesting ($)
|
|
Joseph A. D’Amato
|
|
—
|
|
—
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4,989
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139,591
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|
|
Laurette J. Pitts
|
|
—
|
|
—
|
|
|
525
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18,557
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Charles Degliomini
|
|
—
|
|
—
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|
|
525
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|
18,534
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|
|
Nanette L. Horner
|
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—
|
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—
|
|
|
525
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|
18,557
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Pension Benefits
None of our employees participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us. Our Compensation Committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in the Company's best interests.
Non qualified Deferred Compensation
None of our employees participates in or has account balances in non-qualified defined contribution plans or other non-qualified deferred compensation plans maintained by us. Our Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or other non-qualified deferred compensation benefits in the future if it determines that doing so is in the Company's best interests.
Deferred Compensation Plan
The Company adopted a deferred compensation plan (the "Deferred Compensation Plan"), which is effective on January 1, 2017. The Deferred Compensation Plan is a non-qualified deferred compensation plan under which eligible participants may elect to defer the receipt of current compensation. Eligible participants include select employees of the Company, including its executive officers. Pursuant to the Deferred Compensation Plan and subject to applicable tax laws, participants may elect to defer up to 50% of their base salary and up to 100% of any cash bonus. In addition to elective deferrals, the Deferred Compensation Plan permits the Company to make discretionary contributions. Participants may elect to receive payment of their vested account balances in a single cash payment or in annual installments for a period of five, 10 or 15 years. Payments will be made or commence upon the earliest of a participant’s separation from service, death or disability. If a participant so elects, payments will be deferred until a fixed and determinable date.
The obligations incurred by the Company under the Deferred Compensation Plan will be unsecured general obligations of the Company to pay the compensation deferred in accordance with the terms of the Deferred Compensation Plan and will rank equally with other unsecured and unsubordinated indebtedness of the Company. Because the Company has subsidiaries, the right of the Company, and hence the right of creditors of the Company (including eligible participants in the Deferred Compensation Plan), to participate in a distribution of the assets of a subsidiary upon its liquidation or reorganization or otherwise, necessarily is subject to the prior claims of creditors of the subsidiary, except to the extent that claims of the Company itself as a creditor may be recognized.
Grants of Plan-Based Awards in 2016
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All Other Stock Awards: Number of Shares of Stocks or Units (#)
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All Other
Option
Awards: Number of Securities Underlying Options (#)
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Exercise
or Base
Price of
Option Awards ($/ share)
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Closing stock price on Award date ($/ share)
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Grant
Date Fair
Value of
Stock and Option Awards
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Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
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Estimated Future Payouts
Under Equity Incentive Plan
Awards
|
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#) (1)
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Maximum
(#)
|
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Joseph A. D’Amato
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8/2/2016
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—
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—
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—
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—
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12,500
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—
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—
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—
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—
|
|
$16.40
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$205,000
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(1)
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The stock awards disclosed in this item consists of 12,500 issued under our 2005 Equity Incentive Plan, of which one-half vested on August 2, 2016 and the remaining 6,250 shares vest on August 2, 2018. The awards are subject to earlier vesting in the event of a change in control of the Company (as defined in the award letters).
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Potential Payments Under Severance/Change in Control Arrangements
The table below sets forth potential payments payable to our current executive officers in the event of a termination of employment under various circumstances. For purposes of calculating the potential payments set forth in the table below, we have assumed that (i) the date of termination was December 31, 2016 and (ii) the stock price was $22.75, which was the closing market price of our common stock on December 31, 2016, the last business day of the 2016 fiscal year.
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Name
|
|
If Company Terminates
Executive Without Cause or
Executive Resigns with
Good Reason
|
|
Termination Following a Change
in Control without Cause or
Executive Resigns with Good
Reason
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|
Emanuel R. Pearlman
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Cash Payment
|
|
$—
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|
$—
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Total
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Joseph A. D’Amato
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Cash Payment
|
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$1,262,500
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$1,973,438
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Total
|
|
$1,262,500
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$1,973,438
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Laurette J. Pitts
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|
Cash Payment
|
|
$545,000
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|
$772,500
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Total
|
|
$545,000
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|
$772,500
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Charles Degliomini
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|
|
|
|
|
Cash Payment
|
|
$565,000
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|
$792,500
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Total
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$565,000
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$792,500
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Nanette L. Horner
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|
|
|
|
|
Cash Payment
|
|
$500,000
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|
$727,500
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Total
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$500,000
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|
$727,500
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For each of our executive officers, in their employment agreements the term “change in control” shall be deemed to have occurred if:
i. a tender offer (or series of related offers) shall be made and consummated for the ownership of 50% or more of the outstanding voting securities of the Company, unless as a result of such tender offer more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to the commencement of such offer), any employee benefit plan of the Company or its Subsidiaries, and their affiliates;
ii. the Company shall be merged or consolidated with another corporation, unless as a result of such merger or consolidation more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its Subsidiaries, and their affiliates;
iii. the Company shall sell substantially all of its assets to another corporation that is not wholly owned by the Company, unless as a result of such sale more than 50% of such assets shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its Subsidiaries and their affiliates;
iv. a Person (as defined below) shall acquire 50% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record), unless as a result of such acquisition more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to the first acquisition of such securities by such Person), any employee benefit plan of the Company or its Subsidiaries, and their affiliates; or
v. the individuals who, as of the date hereof, constitute the members of the Board (the “Current Board Members”) cease, by reason of a financing, merger, combination, acquisition, takeover or other non-ordinary course transaction affecting the Company, to constitute at least a majority of the members of the Board unless such change is approved by the Current Board Members.
Compensation Discussion and Analysis
Objectives of Our Compensation Program
Our compensation programs are intended to encourage executives and other key personnel to create sustainable growth in value for our stockholders. In particular, the objectives of our programs are to:
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•
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attract, retain, and motivate superior talent;
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•
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ensure that compensation is commensurate with our performance and stockholder returns;
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•
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provide performance awards for the achievement of strategic objectives that are critical to our long term growth; and
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•
|
ensure that our executive officers and key personnel have financial incentives to achieve sustainable growth in stockholder value.
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Executive Compensation Decisions--The Role of the Compensation Committee, the Chief Executive Officer and Advisory Vote on Executive Compensation
The Compensation Committee is responsible for evaluating and approving the compensation of our executive officers. The Compensation Committee considers recommendations from our Chief Executive Officer with respect to executive compensation matters, except regarding his own compensation. Although the annual advisory shareholder vote on executive compensation is non-binding, the Committee has considered, and will continue to consider, the outcome of this vote each year when making compensation decisions for our Chief Executive Officer and other named executive officers. At our annual meeting of shareholders held on November 1, 2016, approximately 99.8% of the shareholders who voted on the "say-on-pay" proposal approved the compensation of our named executive officers.
Our Executive Compensation Program and Risk
We do not believe that our compensation programs are structured to reward inappropriate risk-taking, and have concluded that our compensation policies and practices are not reasonably likely to result in a material adverse effect on our businesses, for several reasons, including the following:
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•
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We provide a mix of variable performance-based annual cash compensation (under our senior executive bonus pool plan), fixed cash compensation in the form of base salaries, and long-term equity compensation in the form of equity awards. We believe this combination of variable and fixed cash compensation and a long-term equity interest which vest over time, provides appropriate incentives and rewards management, while at the same time encourages appropriate, but not excessive, levels of risk assumption.
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•
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The design of our compensation programs, including the variety of performance criteria established under our plans, encourages executives to remain focused on both the short-term and long-term success of the Company's operational and development objectives; as a result, any incentive to take short-term risks is mitigated by the necessity for us to achieve success and maintain shareholder value over the long-term. In this regard, a portion of compensation is delivered to executives in the form of an annual bonus, and a portion of the compensation of our senior executives is based on meeting goals relating to the Development Projects.
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•
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A portion of compensation to our senior executives is delivered through the use of equity awards, which generally vest after the Casino Project is complete and open to the public. The Compensation Committee believes that these equity incentive awards focus our executives on the long-term success of the Company, align their interests with those of our shareholders and, because of the multi-year vesting feature, subject management to the long-term consequences of risks undertaken to achieve short-term objectives.
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Determination of Compensation Levels
In setting compensation levels, including bonus eligibility levels for our senior executives, under our performance bonus plan, and the mix of compensation for fiscal 2016, the Compensation Committee considered several factors. These include cash bonuses based on the Company's progress with the construction of the Casino Project and the planning and design of the Entertainment Village Project and Golf Course Project, existing employment agreements with individual executives, the desire to motivate the executives and align the compensation of the executives with the financial performance of the Company by providing incentives, and the Compensation Committee's subjective assessment of the individual's experience, responsibilities, management, leadership abilities and job performance. The Compensation Committee has, from time to time, used focused marketplace compensation analysis and reviewed compensation levels at companies of similar type and size for comparison purposes in connection with the recruitment and retention of our executive officers.
Elements of Our Executive Compensation Structure
Our compensation structure consists of two tiers of remuneration. The first tier consists of base pay, and retirement, health, and welfare benefits. The second tier consists of both short- and long-term incentive compensation.
Base Pay
Base compensation for each of our Named Executive Officers has been established pursuant to their respective employment agreement with the Company. Base pay and benefits are designed to be sufficiently competitive to attract and retain world class executives. In the past, the Compensation Committee has retained the discretion to review executive officers’ base pay, and to make increases based on executive performance and market norms. The Compensation Committee has also recommended increases when executives have been promoted, or their responsibilities have otherwise been expanded.
Equity-based Compensation
Equity-based compensation is designed to provide incentives to our executive officers to build stockholder value over the long-term by aligning their interests with the interest of stockholders. Since 2005, we have granted equity-based awards in the form of restricted stock and options, as the Compensation Committee determined this was an effective vehicle for the motivation and retention of our executive officers.
On March 16, 2016, Mr. Pearlman was granted 75,000 shares of restricted stock under the 2015 Equity Incentive Plan, 25% of such shares, or 18,750 shares, will vest annually over a four-year period ending March 16, 2020. The shares are subject to immediate vesting in the event that (i) Mr. Pearlman is removed from the Board of Directors other than for cause, (ii) he is not renominated by Kien Huat Realty III Limited to stand for election to the Board,or (iii) a Change in Control (as defined in the award) has occurred.
On August 2, 2016, Mr. D'Amato was granted 12,500 shares of restricted stock under the 2015 Equity Incentive Plan, of which 6,250 shares vested immediately on August 2, 2016 and the remaining 6,250 shares will vest on August 2, 2018. The award is subject to earlier vesting in the event of a Change in Control (as defined in the award).
The Compensation Committee believes that the Company generally benefits from the retention and risk mitigation elements provided by a multi-year vesting period and has determined that delayed vesting based on the opening of the Casino Project to the public aligns an executive's compensation interests with the longer-term business strategies and tactics of the Company over the vesting period. The Committee also believes that the vesting over a multiple-year period relating to the opening of the Casino Project
to the public reduces the motivation to engage in short-term strategies that may increase the Company's share price in the near term but may not create the best foundation for maximizing long-term stockholder value. The long-term vesting requirement is therefore also considered a disincentive to excessive risk taking by management as any adverse consequences of such risks would be reflected in the value of the equity awards by the time those awards vest. Accordingly, all restricted share awards granted to executives in 2016 reflect a multi-year vesting period tied to the opening of the Casino Project to the public.
In September 2015, the Board approved and, in November 2015, stockholders approved, the 2015 Equity Incentive Plan, pursuant to which any future equity incentive awards will be made to the Named Executive Officers. The 2015 Equity Incentive Plan provided for an aggregate of 952,498 shares of common stock to be available for Awards. Subject to adjustments based on the terms of the 2015 Equity Incentive Plan, on the Trigger Date, the maximum shares of common stock available for Awards were to automatically increase by the lesser of: (i) 1,633,209 shares of common stock; (ii) such number of shares as would increase the aggregate number of shares of common stock available for Awards to 10% of the issued and outstanding shares of common stock as of the Trigger Date; and (iii) such number of shares of common stock as the Compensation Committee would otherwise determine. On March 8, 2016, pursuant to the terms of the 2015 Equity Incentive Plan, the Board of Directors determined to increase the number of shares available for grant under such plan by 1,663,209 shares for a total amount of shares available for grants of 2,600,707. Such change was effective as of March 20, 2016. At December 31, 2016, a total of 2,501,309 shares were available for future issuance under the 2015 Equity Incentive Plan.
The Compensation Committee may grant awards of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Stock Bonus Awards, Performance Compensation Awards (including cash bonus awards) or any combination of the foregoing.
The Compensation Committee believes that equity-based compensation provides an incentive that focuses the executive' attention on managing our Company from the perspective of an owner with an equity stake in the business. In determining the amount of equity-based compensation to be awarded to our named executive officers, the Compensation Committee takes into consideration, among other things, the level of the officer's responsibility, performance of the officer, other compensation elements and the amount of previous equity grants awarded to the individual. In addition, with respect to recruiting an executive officer to join our Company, the amount of equity consideration may be negotiated to reflect the amount necessary to hire the desired person. The size of such awards would be based on the Compensation Committee view on the prospective officer's potential to have an impact on our profitability, growth and financial position.
Cash Bonus Pool for Senior Executives
The Board determined to set aside $625,000 for possible award to Mr. Pearlman, Mr. D’Amato, Ms. Pitts, Ms. Horner, Mr. Degliomini and Mr. Keith Kabeary with respect to the fiscal year ended December 31, 2016. Bonuses to the eligible officers named will be determined at the discretion of the Compensation Committee.
After the conclusion of fiscal 2016 and the preparation of the Company's audited financial statements, the Compensation Committee held meetings to consider the extent to pay bonuses to the senior executives. The 2016 bonuses for the senior executives were discretionary and based primarily upon a subjective analysis by the Compensation Committee of the individual performance of each senior executive. Awards were made pursuant to the Bonus Plan in the first quarter of the current fiscal year and are reflected in the Summary Compensation Table above.
Director Compensation
Directors who are also our officers are not separately compensated for their service as directors. Our non-employee directors received the following aggregate amounts of compensation for 2016:
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|
|
|
|
|
|
|
Name
|
Fees earned or paid in
cash ($)
|
|
Restricted stock awards
($) (1)
|
|
Other compensation ($)
|
|
Total ($)
|
|
Emanuel R. Pearlman
|
303,000 (2)
|
|
$909,000
|
|
$0
|
|
$1,212,000
|
|
Nancy Palumbo
|
120,000 (3)
|
|
58,800
|
|
|
|
|
178,800
|
|
|
Gregg Polle
|
143,341 (4)
|
|
58,800
|
|
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|
|
202,141
|
|
|
James Simon
|
40,000 (5)
|
|
49,140
|
|
|
80,000 (5)
|
|
169,140
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|
Edmund Marinucci
|
127,508 (6)
|
|
58,800
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|
|
186,308
|
|
|
Keith Horn
|
68,333 (7)
|
|
95,093
|
|
|
|
|
163,426
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|
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|
|
(1)
|
3,000 shares, with a grant date of November 2, 2016, were issued to each outside Director under the Company's 2015 Equity Incentive Plan and 75,000 shares, with a grant date of March 16, 2016, were issued to Emanuel Pearlman under the Company's 2015 Equity Incentive Plan. Restricted stock amount is equal to the grant date fair value of the grants.
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(2)
|
Mr. Pearlman served as a non-employee director until May 31, 2016, whereupon he became the Executive Chairman of the Board of Directors and a Company employee. Consists of (i) $25,000 annual cash compensation for non-employee directors; (ii) $5,000 for service on the Audit Committee; (iii) $5,000 for service on the Compensation Committee; (iv) $5,000 for service on the Corporate Governance and Nominations Committee; (v) $5,000 for service on the Regulatory Compliance Committee; (vi) $24,000 for service on the Strategic Development Committee and an additional $24,000 for acting as Chairman of the Strategic Development Committee; (vii) $130,000 additional compensation for the Chairman of the Strategic Development Committee for the significant amount of time spent in supporting and facilitating the Company’s pursuit of the Casino Project; and (viii) $80,000 for acting as Chairman of the Board.
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(3)
|
Consists of: (i) $50,000 annual cash compensation for non-employee directors; (ii) $10,000 for service on the Audit Committee; (iii) $10,000 for service on the Compensation Committee; (iv) $10,000 for service on the Regulatory Compliance Committee; (v) $10,000 for service on the Corporate Governance and Nominations Committee; (vi) $15,000 for acting as Chairman of the Compensation Committee; and (vii) $15,000 for acting as Chairman of the Regulatory Compliance Committee.
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(4)
|
Consists of: (i) $50,000 annual cash compensation for non-employee directors; (ii) $16,667 for acting as Chairman of the Audit Committee from January 1, 2016 to May 31, 2016; (iii) $48,000 for service on the Strategic development Committee; (iv) $10,000 for service on the Audit Committee; (v) $5,833 for service on the Compensation Committee from June 1, 2016 to December 31, 2016; (vi) $5,833 for service on the Corporate Governance Committee from June 1, 2016 to December 31, 2016; (vii) $4,508 for service on the Regulatory Compliance Committee from July 19, 2016 to December 31, 2016; and (vii) $2,500 for service as Lead Director from November 1, 2016 to December 31, 2016.
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(5)
|
Mr. Simon resigned his position as Director on July 19, 2016. Consists of: (i) $25,000 annual cash compensation for non-employee directors; (ii) $5,000 for service on the Audit Committee; (iii) $5,000 for service on the Compensation Committee; (iv) $5,000 for service on the Regulatory Compliance Committee; and (v) $80,000 for continued availability to consult with the Company following Mr. Simon's resignation.
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(6)
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Consists of: (i) $50,000 annual cash compensation for non-employee directors; (ii) $10,000 for service on the Corporate Governance and Nominations Committee; (iii) $4,508 for service on the Compensation Committee from June 1, 2016 to December 31, 2016; (iv) $15,000 for acting as Chairman of the Corporate Governance and Nominations Committee; and (v) $48,000 for service on the Strategic Development Committee.
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(7)
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Mr. Horn became a director on April 19, 2016. Consists of: (i) $33,333 annual cash compensation for non-employee directors; (ii) $5,833 for service on the Audit Committee; (iii) $5,833 for service on the Regulatory Compliance Committee; and (iv) $23,334 for acting as Chairman of the Audit Committee.
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Cash Compensation
Each non-employee member of the Board receives annual cash compensation for non-employee directors of $50,000. The chairperson of (i) the Audit Committee receives annual compensation of $40,000, (ii) the Compensation Committee receives annual compensation of $15,000, (iii) the Corporate Governance and Nominations Committee receives annual compensation of $15,000; (iv) the Regulatory Compliance Committee receives annual compensation of $15,000 and (v) the Special Committee receives annual compensation of $48,000. Annual compensation for each member of the Audit Committee, Compensation Committee, Corporate Governance and Nominations Committee and Regulatory Compliance Committee is $10,000 per committee, including for the chairperson of such committee. Annual compensation for each member of the Special Committee is $48,000 per member. Annual compensation for the Chairman of the Board was $160,000. Compensation for the Lead Director is $10,000 annually. Compensation for the Chairman of the Special Committee for the significant amount of time spent in supporting and facilitating the Company’s pursuit of the Casino Project was $260,000 annually.
Stock Compensation
In November 2016, the non-employee directors of the Company received an annual grant of 3,000 shares of restricted stock, with such shares vesting on January 5, 2018. Further, in March 2016, Mr. Pearlman was granted 75,000 shares of restricted stock, 25% of such shares, or 18,750 shares will vest annually over a four-year period ending March 16, 2020. The shares are subject to immediate vesting in the event that (i) Mr. Pearlman is removed from the Board of Directors other than for cause, (ii) he is not renominated by Kien Huat to stand for election to the Board, or (iii) a Change in Control (as defined in the award) has occurred.
In November 2015, the non-employee directors of the Company received an annual grant of 3,000 shares of restricted stock, with such shares vesting on January 6, 2017. Further, in May 2015, Mr. Pearlman was granted 50,000 shares of restricted stock, 50% on the date on which the NYSGC authorizes the opening of the Casino Project to the public (“Casino Date”) and 50% as to the six-month anniversary of the Casino Date; immediately vesting in the event (i) Mr. Pearlman is removed from the Board other than for cause, (ii) he is not renominated by Kien Huat Realty III Limited to stand for election to the Board or (iii) a Change in Control (as defined in the award) has occurred.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the Compensation Committee of our board of directors, or other committee serving an equivalent function. None of the members of our Compensation Committee has ever been our employee or one of our officers.
Compensation Committee Report
We have reviewed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with the Company's management. Based on such review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Compensation Committee
Nancy Palumbo
Gregg Polle
Edmund Marinucci
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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The following table sets forth information concerning beneficial ownership of our capital stock outstanding at March10, 2017 by (i) each stockholder known to be the beneficial owner of more than five percent of any class of our voting securities then outstanding, (ii) each of our directors, (iii) each of our “named executive officers” as defined in Item 402(a)(3) of Regulation S-K promulgated under the Exchange Act, and (iv) our current directors and executive officers, as a group.
The information regarding beneficial ownership of our common stock has been presented in accordance with the rules of the Commission. Under these rules, a person may be deemed to beneficially own any shares of capital stock as to which such person, directly or indirectly, has or shares voting power or investment power, and to beneficially own any shares of our capital stock as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (a) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (b) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire from us within 60 days. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity.
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Name and Address of
Beneficial Owner (1)
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Common Stock Beneficially Owned
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Series B Preferred Stock
Beneficially Owned
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Directors
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Shares
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Percentage
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Shares
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Percentage
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Edmund Marinucci
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8,244
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(2)
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*
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—
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—
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Joseph A. D’Amato
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44,190
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(3)
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*
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—
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—
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Nancy Palumbo
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19,372
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(4)
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*
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—
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—
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Emanuel R. Pearlman
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157,351
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(5)
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*
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—
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—
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Gregg Polle
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19,176
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(6)
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*
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—
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—
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Keith L. Horn
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5,250
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(7)
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*
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—
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—
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Current Officers
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Laurette J. Pitts
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11,000
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(10)
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*
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—
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—
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Charles Degliomini
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15,525
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(8)
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*
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—
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—
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Nanette L. Horner
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13,691
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(9)
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*
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—
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—
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Directors and Officers as a Group (9 people)
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293,799
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(11)
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*
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—
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—
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Stockholders
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Kien Huat Realty III Limited
c/o Kien Huat Realty Sdn Bhd.
22nd Floor Wisma Genting
Jalan Sultan Ismail
50250 Kuala Lumpur
Malaysia
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27,533,067
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(12)
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88.3
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%
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—
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—
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Patricia Cohen
6138 S. Hampshire Ct.
Windermere, FL 34786
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—
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44,258
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100
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%
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(1)
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Unless otherwise indicated, the address of each stockholder, director, and executive officer listed above is Empire Resorts, Inc., c/o Monticello Casino and Raceway, Route 17B, P.O. Box 5013, Monticello, New York 12701.
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(2)
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Consists of 3,622 shares of our common stock owned directly by Edmund Marinucci and options that are currently exercisable into 1,622 shares of our common stock and 3,000 shares of restricted stock issued pursuant to the Company's 2015 Equity Incentive Plan which currently have voting rights but do not vest until January 5, 2018.
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(3)
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Consists of 12,940 shares of our common stock owned directly by Joseph A. D’Amato, and 31,250 shares of restricted stock pursuant to the Company's 2005 Equity Incentive Plan which currently have voting rights but are not vested. Of the unvested restricted stock, 6,250 shares vest on August 2, 2018, 12,500 shares vest on the date on which the
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NYSGC authorizes the opening of the Casino Project to the public (“Casino Date”) and 12,500 vest at the six month anniversary of the Casino Date; immediate vesting in the event of a Change in Control (as defined in the award).
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(4)
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Consists of 14,372 shares of our common stock owned directly by Nancy Palumbo and options that are currently exercisable into 2,000 shares of our common stock and 3,000 shares of restricted stock issued pursuant to the Company’s 2015 Equity Incentive Plan which currently have voting rights but do not vest until January 5, 2018.
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(5)
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Consists of 30,351 shares of our common stock owned directly by Emanuel R. Pearlman, options that are currently exercisable into 2,000 shares of our common stock, 75,000 shares of restricted stock issued pursuant to the Company's 2015 Equity Incentive Plan which vest as to 18,750 shares on each of March 16, 2017, March 16, 2018, March 16, 2019 and March 16, 2020; and 50,000 shares of restricted stock issued pursuant to the Company's 2005 Equity Incentive Plan which currently have voting rights but vest as follows: 25,000 shares vest on the Casino Date and 25,000 vest at the six-month anniversary of the Casino Date; however, there is immediate vesting in the event (i) Mr. Pearlman is removed from the Board other than for cause, (ii) if he is not renominated by Kien Huat to stand for election to the Board, or (iii) upon a Change in Control (as defined in the award)
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(6)
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Consists of 14,176 shares of our common stock owned directly by Gregg Polle, options that are currently exercisable into 2,000 shares of our common stock and 3,000 shares of restricted stock issued pursuant to the Company’s 2015 Equity Incentive Plan which currently have voting rights but do not vest until January 5, 2018.
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(7)
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Consists of 2,250 shares of our common stock owned directly by Keith Horn and 3,000 shares of restricted stock issued pursuant to the Company’s 2015 Equity Incentive Plan which currently have voting rights but do not vest until January 5, 2018.
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(8)
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Includes 525 shares of our common stock owned directly by Charles Degliomini, options that are currently exercisable into 5,000 shares of our common stock and 10,000 shares of restricted stock pursuant to the Company's 2005 Equity Incentive Plan which currently have voting rights but are not vested. Of the unvested restricted stock, 5,000 shares vest on the Casino Date and 5,000 vest at the six-month anniversary of the Casino Date; immediate vesting in the event of a Change in Control (as defined in the award).
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(9)
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Consists of 3,691 shares of our common stock owned directly by Nanette Horner and 10,000 shares of restricted stock pursuant to the Company's 2005 Equity Incentive Plan which currently have voting rights but are not vested. Of the unvested restricted stock, 5,000 shares vest on the Casino Date and 5,000 vest at the six-month anniversary of the Casino Date; immediate vesting in the event of a Change in Control (as defined in the award).
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(10)
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Consists of 1,000 shares of our common stock owned directly by Laurette Pitts and 10,000 shares of restricted stock pursuant to the Company's 2005 Equity Incentive Plan which currently have voting rights but are not vested. Of the unvested restricted stock, 5,000 shares vest on the Casino Date and 5,000 vest at the six-month anniversary of the Casino Date; immediate vesting in the event of a Change in Control (as defined in the award).
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(11)
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Includes options held by directors and officers of the Company that are currently exercisable into an aggregate of 12,622 shares of our common stock, and 93,250 shares of restricted stock issued pursuant to the Company’s 2015 Equity Incentive Plan which currently have voting rights but vest on the following dates: 12,000 shares vest on January 5, 2018, 18,750 shares vest on each of March 16, 2016, 2017, 2018 and 2019, 12,000 shares vest on January 5, 2018 and 6,250 shares vest on August 2, 2018. In addition, 105,000 shares of restricted stock pursuant to the Company's 2005 Equity Incentive Plan which currently have voting rights but are not vested, of which 52,500 shares vest on the Casino Date and 52,500 vest at the six-month anniversary of the Casino Date; immediate vesting in the event of a Change in Control (as defined in the award).
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(12)
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Based solely on the Schedule 13D/A filed jointly by Kien Huat and Tan Sri Lim Kok Thay on February 18, 2016. Tan Sri Lim is a director of Kien Huat and Kien Huat is indirectly controlled by Tan Sri Lim. Tan Sri Lim and Kien Huat share voting and dispositive power over the equity securities. .
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence.
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Investment Agreement with Kien Huat
On August 19, 2009, we entered into that certain investment agreement (the “Investment Agreement”) with Kien Huat Realty III Limited (“Kien Huat”), pursuant to which we issued 6,901,208 shares of common stock, representing just under 50% of our voting power at the time. Under the terms of the Investment Agreement, Kien Huat is entitled to recommend three directors whom we are required to cause to be elected or appointed to our Board, subject to the satisfaction of all legal and governance requirements regarding service as a member of our Board and to the reasonable approval of the Governance Committee of the Board of Directors. In 2016, Kien Huat recommended Emanuel Pearlman, Gregg Polle and Edmund Marinucci for appointment to the Board of Directors pursuant to the Investment Agreement. Kien Huat will continue to be entitled to recommend three nominees for directors for so long as it owns at least 24% of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election or appointment to the Board of Directors will be reduced proportionally to Kien Huat’s percentage of ownership. Under the Investment Agreement, for so long as Kien Huat is entitled to designate nominees for directors to the Board, among other things, Kien Huat will have the right to nominate one of its nominees elected to serve as a director to serve as the Chairman of the Board, and Mr. Pearlman has been appointed to serve as Chairman of the Board pursuant to Kien Huat’s recommendation. Until such time as Kien Huat ceases to own capital stock with at least 30% of our voting power outstanding at such time, the Board of Directors will be prohibited under the terms of the Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors nominated by Kien Huat.
Pursuant to the Investment Agreement, if any option or warrant outstanding as of the final closing under the Investment Agreement, or the first 200,000 granted to directors or officers who served in such capacity as of the final closing date under the Investment Agreement, are exercised, Kien Huat has the right (following notice of such exercise) to purchase an equal number of additional shares of our common stock as are issued upon such exercise at the exercise price for the applicable option or warrant (such rights the "Option Matching Rights"). Pursuant to the terms of the Investment Agreement, the Company is required to provide notice (an “Option Exercise Notice”) of any exercise within five (5) business days, after which notice is received, Kien Huat is required to notify the Company of whether it decides to exercise such Option Matching Rights within ten (10) business days. The Company did not provide such notice to Kien Huat pursuant to the Investment Agreement. On December 31, 2015, the Company and Kien Huat entered into a letter agreement (the “OMR Letter Agreement”) pursuant to which the parties agreed that, as a result of the Company’s failure to provide the Option Exercise Notice, Kien Huat’s right to elect to purchase an equal number of shares had not yet vested and would inure to Kien Huat’s benefit only upon the Company’s delivery of such Option Exercise Notice. To fulfill the Company’s obligations pursuant to the Investment Agreement, pursuant to the OMR Letter Agreement, the Company provided the Option Exercise Notice as of December 31, 2015 for approximately 204,706 shares of common stock as required by the Investment Agreement. Kien Huat had ten (10) business days following the date on which the Company’s Chief Compliance Officer provides written notice that Kien Huat is no longer unable to exercise the Option Matching Rights pursuant to the Company’s Insider Trading Policy (the “Effective Date Notice”) to elect whether to exercise such Option Matching Rights. On February 17, 2016, the Company provided the Effective Date Notice to Kien Huat regarding Kien Huat's election to exercise its Option Matching Rights. On February 17, 2016, Kien Huat declined to exercise the Option Matching Rights to purchase
204,706
shares of common stock.
2010 Kien Huat Loan Agreement and Conversion of 2010 Kien Huat Note
On November 17, 2010, Empire entered into a loan agreement (the "2010 Kien Huat Loan Agreement") with Kien Huat, pursuant to which the Company issued a convertible promissory note (the "2010 Kien Huat Note") in the original principal amount of $35.0 million, of which $17.4 million was outstanding as of December 31, 2015. On August 8, 2012, the Company and Kien Huat entered into Amendment No. 1 (the “First Amendment”) to the 2010 Kien Huat Loan Agreement. Pursuant to the First Amendment, the maturity date of the 2010 Kien Huat Note was extended from May 17, 2013 to December 31, 2014. In consideration of the extension of the maturity date of the 2010 Kien Huat Note, effective as of the date of the First Amendment, the rate of interest was increased to 7.5% per annum from 5% per annum. In addition, the Company agreed to pay Kien Huat upon execution a one-time fee of $174,261, or 1% of the outstanding principal amount of the 2010 Kien Huat Note as of the date of the First Amendment.
On December 18, 2013, the Company and Kien Huat entered into Amendment No. 2 (the “Second Amendment”) to the 2010 Kien Huat Loan Agreement. Pursuant to the Second Amendment, the maturity date of the 2010 Kien Huat Note was extended from December 31, 2014 to March 15, 2015. In consideration of the extension of the maturity date of the 2010 Kien
Huat Note, the Company agreed to pay Kien Huat a one-time fee of $25,000. In addition, the Company agreed to pay $20,000 of out-of-pocket legal fees and expenses incurred by Kien Huat.
On March 3, 2015, the Company and Kien Huat entered into Amendment No. 3 (the "Third Amendment") to the 2010 Kien Huat Loan Agreement. Pursuant to the Third Amendment, the maturity date of the 2010 Kien Huat Note was extended from March 15, 2015 to March 15, 2016. Additionally, if the Company was denied a Gaming Facility License for the Casino Project, it was to be deemed an Event of Default under the 2010 Kien Huat Loan Agreement. In consideration of the extension of the maturity date of the 2010 Kien Huat Note, the Company agreed to pay Kien Huat a one-time fee of $25,000 and an additional $20,000 of out-of-pocket legal fees and expenses incurred by Kien Huat.
Pursuant to the Kien Huat Commitment Letter (which is defined and discussed below), Kien Huat agreed to convert into common stock the 2010 Kien Huat Note in accordance with its terms upon the earlier to occur of (i) the closing of the January 2016 Rights Offering and (ii) the maturity of the 2010 Kien Huat Note, which was March 15, 2016. On February 17, 2016, upon consummation of the January 2016 Rights Offering, the 2010 Kien Huat Note was converted into 1,332,058 shares of common stock (the "Note Conversion").
We paid interest to Kien Huat pursuant to the 2010 Kien Huat Loan Agreement totaling approximately $4.1 million from November 2010 through March 31, 2014. Due to an inadvertent oversight, the Company did not withhold taxes due on interest payments from November 2010 through March 31, 2014, to Kien Huat, which is a foreign entity affiliate of ours, as required by the Internal Revenue Code of 1986, as amended. Kien Huat has reimbursed the Company for the taxes that were due on such interest payments, which are equal to 30% of the interest paid to Kien Huat, or approximately $1.2 million (the “Taxes Payable”). The total of the Taxes Payable and anticipated interest charges thereon is approximately $1.3 million.
The Taxes Payable amount has been remitted to the Internal Revenue Service (the "IRS") and was accepted by the IRS in the second quarter of fiscal year 2014. The interest on the Taxes Payable for fiscal year ending December 31, 2010 was paid and accepted by the IRS in the third quarter of fiscal year 2014 and no penalties were assessed.
The interest on the Taxes Payable for 2011-2013, which is estimated in the amount of $114,000, will be remitted to the IRS upon the IRS's request therefor. Based on the Company’s actions to correct such oversight, the Company believes that it is not probable that penalties would be due for the period of 2011-2013; however, if penalties were to be due to the IRS, the amount could be up to approximately $400,000. The Company has not adjusted its historical financial statements for any period prior to March 31, 2014, as the Company believes that the impact to previously issued financial statements is not material.
In March 2015, we received notification from the IRS that the interest and penalties on the Taxes Payable for 2011-2013 were approximately $154,000. We have filed an appeal of the penalties for 2011- 2013. At the conclusion of the appeal any amounts due will be remitted to the IRS upon the IRS's request. As of March 6, 2017, the Company resolved this matter with the IRS and no further action for the years noted above is necessary. The final result was not materially different from our current estimate.
2014 Rights Offering
On April 2, 2014, the Company commenced a rights offering of common stock to holders of its common stock and Series B Preferred Stock as of March 31, 2014 (the "April 2014 Rights Offering"). Upon completion of the April 2014 Rights Offering, the Company issued 427,776 shares of common stock and raised approximately $13.4 million. This includes 90,633 shares issued to holders upon exercise of their basic subscription rights, 302,526 shares issued to Kien Huat upon exercise of its basic subscription rights and 34,617 shares issued to holders upon exercise of their over-subscription rights in the April 2014 Rights Offering.
2015 Rights Offering
On January 5, 2015, the Company commenced the January 2015 Rights Offering of non-transferable subscription rights to holders of record of our common stock and Series B Preferred Stock as of January 2, 2015. In connection with the January 2015 Rights Offering, on January 2, 2015, the Company and Kien Huat entered into the January 2015 Standby Purchase Agreement. Pursuant to the January 2015 Standby Purchase Agreement, Kien Huat agreed to exercise in full its basic subscription rights granted in the January 2015 Rights Offering within 10 days of its grant. In addition, Kien Huat agreed it would exercise all rights not otherwise exercised by the other holders in an aggregate amount not to exceed $50 million. The January 2015 Rights Offering closed on February 6, 2015 and the Company received net proceeds of approximately $49.5 million. The Company issued a total of 1,408,451 shares of common stock at $35.50 per share. This includes 10,658 shares issued to holders upon exercise of their basic subscription and over-subscription rights and 864,360 shares issued to Kien Huat
upon exercise of its basic subscription rights. Kien Huat also acquired the remaining 533,433 shares not sold in the January 2015 Rights Offering pursuant to the January 2015 Standby Purchase Agreement. Pursuant to the January 2015 Standby Purchase Agreement, we paid Kien Huat a commitment fee of $250,000 and reimbursed Kien Huat for its expenses. in the amount of $40,000.
2016 Rights Offering
On January 4, 2016, the Company commenced the January 2016 Rights Offering of transferable subscription rights to holders of record of our common stock and Series B Preferred Stock as of January 4, 2016. The subscription rights were listed for trading on The Nasdaq Stock Market under the symbol "NYNYR" for the duration of the January 2016 Rights Offering. In connection with the January 2016 Rights Offering, on December 31, 2015, we and Kien Huat, our largest stockholder, entered into the January 2016 Standby Purchase Agreement. Pursuant to the January 2016 Standby Purchase Agreement, Kien Huat agreed to (i) exercise its basic subscription rights to acquire approximately $30 million of our common stock within 10 days of the commencement of the January 2016 Rights Offering with a closing proximate thereto and (ii) to exercise the remainder of its basic subscription rights prior to the expiration date of the January 2016 Rights Offering. In addition, Kien Huat agreed it would exercise all rights not otherwise exercised by the other holders in the January 2016 Rights Offering, which we refer to as the standby purchase, upon the same terms as other holders in an aggregate amount not to exceed $290 million. The January 2016 Rights Offering closed on February 17, 2016 and the Company received net proceeds of approximately $285.9 million. The Company issued a total of 20,138,888 shares of common stock at $14.40 per share. This includes 176,086 shares issued to holders upon exercise of their basic subscription and over-subscription rights and 13,136,817 shares issued to Kien Huat upon exercise of its basic subscription rights. Kien Huat also acquired the remaining 6,825,985 shares not sold in the January 2016 Rights Offering pursuant to the January 2016 Standby Purchase Agreement. Pursuant to the January 2016 Standby Purchase Agreement, we paid Kien Huat a commitment fee of $1,450,000 and reimbursed Kien Huat for its expenses. in the amount of $50,000.
Commitment Letter from Kien Huat
To support the Company's financing needs for the Development Projects, Kien Huat entered into a series of commitment letters with the Company, which was last amended on September 22, 2015 (as amended, the "Kien Huat Commitment Letter"). Pursuant to the Kien Huat Commitment Letter, Kien Huat committed to an equity investment in the Company in the aggregate amount of $375 million in support of the Development Projects, the redemption of the Series E Preferred Stock and for working capital purposes. Kien Huat has invested an aggregate of $340 million of such commitment pursuant to the January 2015 Standby Purchase Agreement and the January 2016 Standby Purchase Agreement. Kien Huat also agreed to participate in, and backstop, a follow-on rights offering on the same terms and conditions and at the same subscription price as the January 2016 Rights Offering, in an amount not to exceed $35 million (the "Follow-On Rights Offering").
Registration Rights
Pursuant to the terms of the Investment Agreement, on August 19, 2009, the Company entered into a Registration Rights Agreement with the Kien Huat (the “Registration Rights Agreement”). The Registration Rights Agreement provides, among other things, that Kien Huat may require that the Company file one or more “resale” registration statements, registering under the Securities Act of 1933, as amended, the offer and sale of all of the common stock issued or to be issued to Kien Huat pursuant to the Investment Agreement as well as any shares acquired by way of a share dividend or share split or in connection with a combination of such shares, recapitalization, merger, consolidation or other reorganization with respect to such shares. In addition, pursuant to the Kien Huat Commitment Letter, the Company agreed to register for resale all of the shares of common stock issued to Kien Huat in the 2015 Rights Offering and the 2016 Rights Offering, as well as the Follow-on Rights Offering, if any, as well as any other unregistered shares of common stock held by Kien Huat. On February 23, 2016, the Company filed a registration statement on Form S-3 (No. 333-309662) registering for resale all of the shares of common stock held by Kien Huat, which registration statement is currently pending with the Securities and Exchange Commission.
Kien Huat Letter Agreement
As a result of Kien Huat’s increased proportionate ownership following the consummation of the January 2016 Rights Offering and the Note Conversion, at the request of the Company, on February 17, 2016, Kien Huat and the Company entered into the Kien Huat Letter Agreement pursuant to which, during the period commencing on February 17, 2016 and ending on the earlier of (i) the three year anniversary of the closing of the Rights Offering and (ii) the one-year anniversary of the opening of the Casino Project, Kien Huat has agreed not to take certain actions with respect to the Company. In particular, during such time period, Kien Huat has agreed not to, and to cause the Kien Huat Parties not to, take certain actions in furtherance of a “going-private” transaction (as such term is defined in the Letter Agreement) involving the Company unless such transaction is
subject to the approval of (x) holders of a majority of the votes represented by the common stock, Series B Preferred Stock and any other capital stock of the Company entitled to vote together with the common stock in the election of the Board (other than any such capital stock owned by any Kien Huat Parties) and (x) either (A) a majority of disinterested members of the Board Board or (y) a committee of the Board composed of disinterested members of the Board. In addition, during such period, the Company and Kien Huat have agreed to cooperate to ensure that, to the greatest extent possible, the Board includes no fewer than three independent directors (the definition of independence as determined under the standards of The NASDAQ Stock Market or any other securities exchange on which the common stock of the Company is then listed).
Kien Huat Construction Loan Agreement
On October 13, 2016, Montreign Operating and Kien Huat entered into a loan agreement (the KH Construction Loan Agreement. Pursuant to the KH Construction Loan Agreement, Kien Huat agreed to make available to Montreign Operating up to an aggregate of
$50 million
of loans to pay the expenses of the Casino Project while the debt financing for the Development Projects was finalized. The term of the KH Construction Loan Agreement would expire on the earlier of (i) the consummation of financing in an amount no less than the remaining contract amount under the Casino Project construction contract and (ii) October 13, 2017. In connection with the closing of the Term Loan Facility and the Kien Huat Montreign Loan, on January 24, 2017, the KH Construction Loan Agreement expired on its terms without being utilized by Montreign Operating. Montreign paid Kien Huat a commitment fee of
$500,000
upon execution of the KH Construction Loan. The commitment fee was capitalized and is included in Other Assets. It is being amortized over the life of the agreement.
Kien Huat Montreign Loan Agreement
On the Loan Closing Date, Kien Huat and Montreign Holding entered into the Kien Huat Montreign Loan Agreement, pursuant to which Montreign Holding obtained from Kien Huat a loan in the principal amount of $32.3 million, of which $32.0 million were used as a capital contribution to Montreign Operating for use towards the development and operating expenses of the Development Projects. The KH Montreign Loan shall mature on February 24, 2024, which Kien Huat Loan Maturity Date may be extended by Kien Huat in its sole discretion by up to an additional year.
The Kien Huat Montreign Loan bears interest at a rate of 12% per annum. Prior to the Kien Huat Loan Maturity Date,
interest on the Kien Huat Montreign Loan shall accrue and be added to the Principal Indebtedness on each Interest Payment Date and shall thereafter be deemed to be part of the Principal Indebtedness. The Principal Indebtedness, including all interest due through the applicable Interest Payment Date and other amounts due under the KH Montreign Loan, shall be payable in cash on the Kien Huat Loan Maturity Date. Notwithstanding the foregoing, Montreign Holding shall be required to pay in cash to Kien Huat, at the end of any “accrual period” (as defined in Section 1275(a)(5) of the Code) ending after the fifth anniversary of the Loan Closing Date the aggregate amount by which (x) the sum of (i) the amount of accrued interest on the Kien Huat Montreign Loan that has been added to the Principal Indebtedness plus (ii) any other accrued but unpaid original issue discount (as determined under Section 163(i) of the Code) on the Kien Huat Montreign Loan from the closing date through the end of such accrual period, in each case that has not been paid in cash, exceeds (y) the product of (i) the “issue price” (as defined for purposes of the Code) and (ii) the “yield to maturity” (as defined for purposes of the Code). In addition to the interest payable on the Kien Huat Montreign Loan, Kien Huat was entitled to a commitment fee of one percent (1%), which fee was added to the Principal Indebtedness of the Kien Huat Montreign Loan. The Kien Huat Montreign Loan may be prepaid in full or in part at any time without premium or penalty.
The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement are secured by a pledge of all the membership interests of Montreign Holding by Empire. The Kien Huat Montreign Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict Montreign Holding’s use of the proceeds of the Kien Huat Montreign Loan to expenses relating to the Projects. Obligations under the Kien Huat Montreign Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as appropriate), including, among others, nonpayment of principal, interest or fees, breach of the affirmative covenants, and a default with respect to the payment of principal or interest under the Term Loan by Montreign Operating or acceleration of the Term Loan for any reason.
Moelis & Company
On December 9, 2013, the Company executed a letter agreement (the "Moelis Letter Agreement") pursuant to which it engaged Moelis & Company LLC ("Moelis") to act as its financial advisor in connection with the Casino Project. Pursuant to the Moelis Letter Agreement, we agreed to pay Moelis a retainer fee in the aggregate amount of $250,000, of which $150,000 was payable upon execution and $100,000 of which was paid within 90 days after execution. In the event a financing is consummated, the Moelis Letter Agreement contemplates additional transaction-based fees would be earned by Moelis.
During 2014, we paid Moelis approximately $44,000 for professional services and travel.
During 2015, we paid Moelis approximately $428,000 for professional services, travel and expenses.
At the close of the January 2016 Rights Offering Moelis was paid approximately $2.1 million for financial advisory services in connection to with the Casino Project, pursuant to the Moelis Letter Agreement.
On January 24, 2017, Moelis was paid approximately $2.5 million for financial advisory services in connection with the Casino Project pursuant to the Moelis Letter Agreement.
In March 2017, Montreign Operating entered into an engagement agreement with Moelis (the "Moelis-Montreign Engagement Agreement") pursuant to which Moelis will act as exclusive financial advisor to Montreign Operating. Pursuant to the Moelis-Montreign Engagement Agreement, Moelis is entitled to an advisory fee of $100,000, which is payable upon execution, and the reimbursement of expenses up to $75,000. The Moelis-Montreign Engagement Agreement will automatically terminate on December 31, 2017 unless either party terminates earlier.
Gregg Polle, a director of the Company, is a Managing Director of Moelis. Mr. Polle refrained from participating in the discussion of the Moelis Letter Agreement and the Moelis-Montreign Engagement Agreement and the determination of whether to enter into such agreements.
Audit Committee Review
Our audit committee charter provides that the Audit Committee will review and approve all transactions between the Company and its officers, directors, director nominees, principal stockholders and their immediate family members. We expect that any such transactions will be on terms no less favorable to it than it could obtain from unaffiliated third parties.
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Item 14.
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Principal Accounting Fees and Services.
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Our principal accountant for the audit and review of our annual and quarterly financial statements was Ernst & Young LLP. The following table shows the fees paid or accrued by us to Ernst & Young, LLP during these periods:
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Type of Service
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2016
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2015
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2014
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Audit Fees (1)
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$
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911,000
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$
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921,000
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$
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734,000
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Audit-Related Fees (2)
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25,000
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23,000
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23,000
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Tax Fees (3)
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88,000
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71,000
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84,000
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Total
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$
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1,024,000
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$
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1,015,000
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$
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841,000
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(1)
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Comprised of the audit of our annual financial statements, internal controls over financial reporting, reviews of our quarterly financial statements, various SEC filings and statutory audits.
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(2)
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Comprised of services rendered in connection with our audit of the Company’s employee benefit plan.
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(3)
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Comprised of services for tax compliance and tax return preparation.
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In accordance with the Sarbanes-Oxley Act of 2002, the Audit Committee established policies and procedures under which all audit and non-audit services performed by our principal accountants must be approved in advance by the Audit Committee. As provided in the Sarbanes-Oxley Act of 2002, all audit and non-audit services to be provided after May 6, 2003 must be pre-approved by the Audit Committee in accordance with these policies and procedures.