NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Organization and Nature of Business
Basis for Presentation
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.
Our indirect, wholly-owned subsidiary, Montreign Operating Company, LLC doing business as Resorts World Catskills "Montreign Operating"), owns and operates Resorts World Catskills, a casino resort (the "Casino"), which is located in Sullivan County, New York, approximately 90 miles from New York City. Montreign Operating is the sole holder of a gaming license (a "Gaming Facility License") in the Hudson Valley-Catskill region, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we own and operate Monticello Casino and Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. Monticello Casino and Raceway currently features a video gaming machine ("VGM") and harness horseracing facility. 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 its races to offsite pari-mutuel wagering facilities.
Liquidity and Capital Resources
Historically and prospectively, our primary sources of liquidity and capital resources have been and will continue to be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. Based on our current level of operations and our expected results of operations of the Casino over the next 12 months, we believe that cash generated from operations and cash on hand, together with amounts available under our Term Loan Facility, Revolving Credit Facility and Bangkok Bank Loan, will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the next 12 months. However, we cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings from the Casino will be realized, or that future borrowings will be available under our Term Loan Facility or otherwise to enable us to service our indebtedness or to make anticipated capital expenditures. Our future operating performance and our ability to service our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Note B. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include Empire’s accounts and their wholly-owned subsidiaries. All inter-company balances and transactions are eliminated in consolidation.
Estimates and assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from estimates.
Reclassifications
Certain amounts in the accompanying consolidated financial statements for fiscal 2016 and 2015 have been reclassified to conform to presentation in fiscal 2017, most notably amortization of debt issuance costs has been included within interest expense on the Statement of Operations.
Revenue recognition and Promotional allowances
Gaming revenue is the net difference between gaming wagers and payouts for prizes from VGMs, non-subsidized free play and accruals related to the anticipated payout of progressive jackpots. Progressive jackpots contain base jackpots that increase at a progressive rate based on the credits played and are charged to revenue as the amount of the jackpots increase. The Company recognizes gaming revenues before deductions of such related expenses as NYSGC’s share of VGM revenue and the Monticello Harness Horsemen’s Association (the “MHHA”) and Agriculture and New York State Horse Breeding Development Fund’s contractually required percentages.
Food, beverage, racing and other revenue, includes food and beverage sales, racing revenue earned from pari-mutuel wagering on live harness racing and simulcast signals to and from other tracks and miscellaneous income. The Company recognizes racing revenues before deductions of such related expenses as purses, stakes and awards. Some elements of the racing revenues from Off-Track Betting Corporations (“OTBs”) are recognized as collected, due to uncertainty of receipt of and timing of payments.
Net revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Certification (“ASC”) 605-50, “Revenue Recognition—Customer Payments and Incentives”.
The retail value of complimentary food, beverages and other items provided to the Company’s guests is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such food, beverage and other items as promotional allowances is included in food, beverage, racing and other expense. In addition, promotional allowances include non-subsidized free play offered to the Company’s guests based on their relative gaming worth and prizes included in certain promotional marketing programs.
As described below in "Recently Issued Accounting Pronouncements," the accounting related to our revenues, including complimentary revenue, will be impacted by the adoption of ASC 606 during the first quarter of 2018.
The retail value amounts included in promotional allowances for the years ended December 31, 2017, 2016 and 2015 were as follows:
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|
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|
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|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Food and beverage
|
$
|
1,000
|
|
|
$
|
1,486
|
|
|
$
|
1,553
|
|
Non-subsidized free play
|
2,718
|
|
|
978
|
|
|
1,720
|
|
Players Club awards
|
324
|
|
|
383
|
|
|
195
|
|
Total retail value of promotional allowances
|
$
|
4,042
|
|
|
$
|
2,847
|
|
|
$
|
3,468
|
|
The estimated cost of providing complimentary food, beverages and other items for the years ended December 31, 2017, 2016 and 2015 were as follows:
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|
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|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Food and beverage
|
$
|
1,750
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|
|
$
|
2,080
|
|
|
$
|
2,109
|
|
Non-subsidized free play
|
1,603
|
|
|
577
|
|
|
1,015
|
|
Players Club awards
|
324
|
|
|
383
|
|
|
195
|
|
Total cost of promotional allowances
|
$
|
3,677
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|
|
$
|
3,040
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|
|
$
|
3,319
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|
Cash and cash equivalents
Cash and cash equivalents include cash on account, demand deposits and certificates of deposit with original maturities of three months or less at acquisition. The Company maintains significant cash balances with financial institutions, which are not covered by the Federal Deposit Insurance Corporation. The Company has not incurred any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Restricted cash
The Company has
three
types of restricted cash accounts.
Approximately
$368,000
of cash is held in reserve in accordance with NYSGC regulations as of December 31, 2017 as listed below. The Company granted the NYSGC a security interest in the segregated cash account used to deposit NYSGC’s share of net win in accordance with the NYSGC Rules and Regulations.
Under New York State Racing, Pari-Mutuel Wagering and Breeding Law, MRMI is obliged to withhold a certain percentage of certain types of racing and pari-mutuel wagers towards the establishment of a pool of money, the use of which is restricted to the funding of approved capital improvements. Periodically during the year, MRMI petitions the NYSGC to certify that the noted expenditures are eligible for reimbursement from the capital improvement fund. The balance in this account was approximately
$25,000
and
$39,000
at December 31, 2017 and 2016, respectively. In April 2005, the New York law governing VGM operations was modified to provide an increase in the revenues retained by the VGM operator. A portion of that increase was designated as a reimbursement of marketing expenses incurred by the VGM operator. The amount of revenues directed toward this reimbursement is deposited in a bank account under the control of the NYSGC and the VGM operator. The funds are transferred from this account to the VGM operator upon the approval by NYSGC officials of the reimbursement requests submitted by the VGM operator. The balance in this account was approximately
$343,000
and
$354,000
at December 31, 2017 and 2016, respectively.
In addition to the NYSGC restricted cash balances listed above, the Company established an account to segregate amounts collected and payable to Monticello Harness Horsemen’s Association (the “MHHA”) and pursuant to its contract. The balance in this account was approximately
$324,000
and
$685,000
at December 31, 2017 and 2016, respectively.
Restricted cash and investments for Development Projects
Restricted cash and investments for Development Projects represented the remaining funds from the Term Loan Facility and the Kien Huat Montreign Loan to be utilized for the Development Projects. At December 31, 2017, restricted cash and investments for Development Projects balance of
$136.4 million
is comprised of cash balances of approximately
$11.2 million
, cash equivalents of approximately
$30.7 million
and short-term investments maturing within one year of approximately
$94.5 million
. At December 31, 2017, short-term marketable securities were comprised of commercial paper of approximately
$59.4 million
and U. S. Treasury Notes of approximately
$35.1 million
, all with maturities of less than one year. The short-term marketable securities are recorded at amortized cost, which approximates fair value due to their short-term nature.
Accounts receivable
Accounts receivable, net of allowances, are stated at the amount the Company expects to collect. When required, an allowance for doubtful accounts is recorded based on information on the collectability of specific accounts. Accounts are considered past due or delinquent based on contractual terms, how recently payments have been received and the Company’s judgment of collectability. In the normal course of business, the Company settles wagers for other racetracks and is exposed to credit risk. These wagers are included in accounts receivable. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded an allowance for doubtful accounts of approximately
$171,000
and
$171,000
, as of December 31, 2017 and 2016, respectively.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. The Company provides for depreciation on property and equipment used by applying the straight-line method over the following estimated useful lives:
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Assets
|
Estimated
Useful
Lives
|
Vehicles
|
5-10 years
|
Furniture, fixtures and equipment
|
5-10 years
|
Land improvements
|
5-20 years
|
Building improvements
|
5-40 years
|
Buildings
|
40 years
|
Capitalized Interest
Interest costs incurred in connection with the construction of the Casino and the Development Projects have been capitalized in the cost of the projects. Capitalization will cease when the Casino or the other Development projects are substantially complete or if development activity is suspended for an extended period of time.
The Company capitalized
$29.1 million
of interest charges for the year ended December 31,2017. The Company did not recognize any capitalized interest charges for the fiscal years ended December 31, 2016 and 2015.
Debt issuance costs
Debt issuance costs are amortized on a straight-line basis which approximates the effective interest method over the term of the related debt. The amortization is included within interest expense and is included as a component of the capitalized interest costs.
Development Projects Costs
The Company's application for a Gaming Facility License was submitted in a competitive environment and the Company could not be certain it would be awarded a Gaming Facility License, accordingly all costs incurred for the Development Projects were expensed until the Company was awarded a Gaming License on December 21, 2015. Once awarded the Gaming Facility License, the Company began capitalizing qualifying expenditures on the Development Projects during the fourth quarter of 2015.
Impairment of long-lived assets
The Company periodically reviews the carrying value of its long-lived assets in relation to historical results, as well as management’s best estimate of future trends, events and overall business climate. If such reviews indicate an issue as to whether the carrying value of such assets may not be recoverable, the Company will then estimate the future cash flows generated by such assets (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value.
Loss contingencies
There are times when non-recurring events may occur that require management to consider whether an accrual for a loss contingency is appropriate. Accruals for loss contingencies typically relate to certain legal proceedings, customer and other claims and litigation. As required by generally accepted accounting principles in the United States of America (“GAAP”), the Company determines whether an accrual for a loss contingency is appropriate by assessing whether a loss is deemed probable and can be reasonably estimated. The Company analyzes its legal proceedings and other claims based on available information to assess potential liability. The Company develops its views on estimated losses in consultation with outside counsel handling its defense in these matters, which involves an analysis of potential results assuming a combination of litigation and settlement strategies.
Other long-term liabilities
The difference between our cash payments and straight-line rent on our land leases of
$8.3 million
at December 31, 2017 is included in other long-term liabilities.
Common stock - loss per share
The Company computes basic loss per share by dividing net loss applicable to common shares by the weighted-average common shares outstanding for the period. Diluted loss per share reflects the potential dilution of earnings that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity. Since the effect of common stock equivalents is anti-dilutive with respect to losses, these common stock equivalents have been excluded from the Company’s computation of loss per common share. Therefore, basic and diluted loss per common share for the years ended December 31, 2017, 2016 and 2015 were the same.
The following table shows the approximate number of common stock equivalents outstanding at December 31, 2017, 2016 and 2015 that could potentially dilute basic loss per share in the future, but were not included in the calculation of diluted loss per share for the years ended December 31, 2017, 2016 and 2015, because their inclusion would have been anti-dilutive:
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Outstanding at December 31,
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2017
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2016
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2015
|
Restricted stock
|
139,000
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|
|
216,000
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|
|
137,000
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Warrants
|
133,000
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|
|
133,000
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|
133,000
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Restricted stock units ("RSU's)
|
73,000
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|
|
—
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|
|
—
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Option Matching Rights
|
3,000
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|
|
21,000
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|
|
229,000
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Options
|
13,000
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|
34,000
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|
57,000
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Shares to be issued upon conversion of long-term loan, related party
|
—
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|
|
—
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|
|
1,332,000
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|
Total
|
361,000
|
|
|
404,000
|
|
|
1,888,000
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|
Pursuant to the terms of the Investment Agreement (defined in Note J), Kien Huat has the right to purchase an equal number of additional shares of common stock as are issued upon the exercise of certain options and warrants (the "Option Matching Rights"). On February 17, 2016, the Company provided written notice to Kien Huat regarding the exercise of certain Option Matching Rights to elect whether to exercise such Option Matching Rights. On February 17, 2016, Kien Huat declined to exercise the Option Matching Rights to purchase
204,706
shares of common stock. On January 24, 2018, Kien Huat exercised its option to purchase
1,666
shares of common stock due to a recent option exercise.
Interest Rate Cap Agreement
In February 2017, the Company entered into an interest rate cap agreement with Credit Suisse AG, International to limit its exposure to increases in interest rates on its Term B Loan (as defined below) from May 1, 2017 through February 28, 2018 and then for a portion of the balance of its Term B Loan through July 31, 2019 (the "Interest Rate Cap"). The Company paid
$675,000
for the Interest Rate Cap. The cost of the Interest Rate Cap is amortized over its term as interest expense. The fair value of the Interest Rate Cap was
$251,000
at December 31, 2017 and is presented at fair value as "Other Assets" on the Consolidated Balance Sheet. The difference between the fair value and amortized cost is recorded as an adjustment to accumulated other comprehensive loss.
Accumulated Other Comprehensive Loss
As of December 31, 2017, accumulated other comprehensive loss of
$315,000
consisted solely of the fair value adjustment relating to the Interest Rate Cap.
Fair value
The Company follows the provisions of ASC 820, “Fair Value Measurement,” issued by the FASB for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The Company chose not to elect the fair value option as prescribed by the FASB, for its financial assets and liabilities that had not been previously carried at fair value. The Company’s financial instruments are primarily comprised of current assets, restricted cash and investments, Interest Rate Cap, current liabilities and long-term debt. Current assets, investments and current liabilities approximate fair value due to their short-term nature.
In determining fair value, the Company uses quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
The fair value hierarchy of observable inputs used by the Company is broken down into three levels based on the source of inputs as follows:
- Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
- Level 2 - Valuations based on inputs that are observable inputs and quoted prices in active markets for similar assets and liabilities.
- Level 3 - Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.
The following table presents the carrying amount, fair values and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis:
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|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
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|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Level of Fair Value Hierarchy
|
Assets:
|
|
(in thousands)
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$10,380
|
|
$10,380
|
|
$11,012
|
|
$11,012
|
|
Level 1
|
Restricted cash
|
|
693
|
|
|
693
|
|
|
1,078
|
|
|
1,078
|
|
|
Level 1
|
Interest Rate Cap
|
|
251
|
|
|
251
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
Restricted cash and investments for Development Projects:
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|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
41,920
|
|
|
41,920
|
|
|
—
|
|
|
—
|
|
|
Level 1
|
Marketable securities
|
|
94,511
|
|
|
94,209
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Term B Loan
|
|
450,000
|
|
|
449,749
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
Bangkok Bank Loan
|
|
16,000
|
|
|
16,000
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
Equipment loans
|
|
31,095
|
|
|
31,095
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. The Company used a third party to complete the valuation of its Interest Rate Cap, which is considered a Level 2 asset and is measured at fair value on a recurring basis using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows for the Interest Rate Cap. At December 31, 2017, the the estimated fair value of the Company's investments in marketable securities was
$94.2 million
and the carrying value was approximately
$94.5 million
. At December 31, 2017, the estimated fair value of the Company's outstanding Term B Loan was approximately
$449.7
million and the carrying value was approximately
$450.0 million
. The fair value of the Bangkok Bank Loan and the equipment loans approximate carrying value, due to the Company entering those agreements in close proximity to December 31, 2017.
Advertising
The Company records in selling, general and administrative expense the costs of general advertising, promotion and marketing programs at the time those costs are incurred. Advertising expense was approximately,
$1.4
million,
$1.1 million
, and $
1.1 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
Stock-based compensation
The cost of all share-based awards to employees, including grants of employee stock options and restricted stock, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the market price of Empire’s common stock on the date of grant. The fair value of share-based awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period from the date of grant. As of December 31, 2017, there was approximately
$1.7
million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s equity compensation plan. That cost is expected to be recognized over a period of
2.50
years. This expected cost does not include the impact of any future stock-based compensation awards.
Income taxes
The Company applies the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates for the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Intangible Assets
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company amortizes intangible assets over their estimated useful lives unless the Company determines their lives to be indefinite.
As a condition of the Gaming Facility License, the Company was granted a gaming license, for which it paid
$51 million
on February 25, 2016. The term of the gaming license is
10
years; however, amortization did not commence until the completion of construction and the opening to the general public of the Casino in February 2018. Amortization will be recognized on a straight-line basis beginning in February 2018 and continuing until the license is up for renewal in 2026. During the period that the Company is not amortizing the intangible asset, the Company will assess it for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Recent accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic606), which introduced new revenue recognition guidance, which will supersede nearly all existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
The Company has identified and implemented changes to its accounting policies and practices, business processes and controls to support the new revenue recognition standard. The Company is continuing its assessment of potential changes to the Company's financial disclosures related to revenue recognition will have on its consolidated financial statements and footnote disclosures. the Company anticipates adopting this accounting standard during the first quarter of 2018 with a cumulative-effect adjustment as of the date of adoption. However, the Company has identified a few significant impacts. Under the new guidance, the Company expects it will no longer be permitted to recognize revenues for goods and services provided to customers for free, as an inducement to gamble, as gross revenue with a corresponding offset to promotional allowances to arrive at net revenues. The Company expects the majority of such amounts will offset gaming revenues. In addition, accounting for complimentaries and loyalty points granted under the Company’s customer loyalty program may also change. Under the new guidance, complimentaries and loyalty points earned by customers through past revenue transactions will be identified as separate performance obligations and recorded as a reduction in gaming revenues when earned at the retail value of such benefits owed to the customer (less estimated breakage). When customers redeem such benefits and the performance obligation is fulfilled by the Company, revenue will be recognized in the department that provides the goods or services (e.g., hotel, food and beverage, or entertainment). In addition, given that customer rewards is an aspirational loyalty program with multiple customer tiers, which provide certain benefits to tier members, the Company will need to assess if such benefits are deemed to be separate performance obligations under the new guidance.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which introduced a new standard related to revenue recognition, ASC Topic 606, Revenue from Contracts with Customers (“ASC 606” or the “new revenue standard”). Under ASC 606, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the new revenue standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. Subsequent to May 2014, the FASB issued additional ASU's to provide clarifying guidance and deferred the effective date to years beginning after December 15, 2017, including interim periods within that reporting period. Entities can transition to the new guidance either retrospectively or using the modified retrospective approach including recording a cumulative effect adjustment for the impact of adopting ASC 606 as of the date of adoption (January 1, 2018).
The modified retrospective approach requires the Company to provide disclosures in the notes that accompany the consolidated financial statements describing the financial statement line items impacted by ASC 606. The Company is adopting ASC 606 during the first quarter 2018 using the modified retrospective approach
The Company has concluded that the adoption of the new revenue standard principally affects (1) how it measures the liability associated with our loyalty program and (2) the classification and the measurement, of revenues and expenses among gaming, food and beverage, lodging, and retail, entertainment and other.
Under our loyalty program, guests earn points based on their level of play, which may be redeemed for various benefits, such as free play, dining, or other amenities. Prior to the adoption of ASC 606, the Company determined its liability for unredeemed points based on the estimated costs of services or merchandise to be provided and estimated redemption rates.
Upon adoption of ASC 606, points awarded under our loyalty program are considered a material right given to players based on their gaming play and the promise to provide points to players is required to be accounted for as a separate performance obligation. In addition, certain tier benefits associated with our loyalty program represent material rights in a manner similar to player points, which results in such benefits constituting separate performance obligations. Therefore, ASC 606 requires us to allocate the revenues associated with the players’ activity between gaming revenue and the value of the points and certain tier benefits, if applicable. The measurement of the liability is based on the estimated standalone selling price of the points earned after factoring in the likelihood of redemption. The revenue associated with the points earned will be recognized in the period in which they are redeemed.
In addition to the above, prior to the adoption of ASC 606, complimentary revenues pertaining to food and beverage, and other amenities, were included in gross revenues and also deducted as a promotional allowance in the Consolidated Statements of Operations and Comprehensive Loss. However, subsequent to the adoption of ASC 606, food and beverage, lodging and other services furnished to our guests on a complimentary basis will be measured at the estimated standalone selling prices and included as revenues within food and beverage, lodging, and retail, entertainment and other, as appropriate, with a corresponding decrease in gaming revenues, in the Consolidated Statements of Operations.
The amounts relating to promotional allowances and estimated costs of providing complimentary goods and services for the years ended December 31, 2017, 2016 and 2015, are presented tabularly in “Revenue Recognition and promotional allowances” above. Lastly, we expect that the cumulative effect adjustment to our accumulated deficit upon adoption of ASC 606 will not be significant.
In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The standard must be adopted using a modified retrospective approach and provides for certain practical expedients. Early adoption is permitted. The Company has not yet completed its assessment of the impact of the new standard on the Company's consolidated financial statements. The Company currently anticipates adopting this standard during the first quarter of 2019.
In August 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”), which provides guidance for accounting for restricted cash transactions. Under ASU 2016-18, several aspects of the accounting for restricted cash transactions are simplified, including the presentation and classification of cash receipts and cash payments in the statement of cash flows. ASU 2016-18 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company currently anticipates adopting this standard during the first quarter of 2018 and is currently evaluating the impact that this guidance will have on its financial statements.
In January 2017, FASB issued ASU 2017-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”), which eliminates the second step in the goodwill impairment test that requires an entity to determine the implied fair value of the reporting unit's goodwill. Going forward, an entity would recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. ASU 2017-18 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact, if any, that this guidance will have on its financial statements.
Note C. Prepaid Expenses and Other Assets
The Company has participated in the New York State Empire Zones real estate tax credit program for over
10
years. Under this program, the Company receives a refund for real estate taxes paid during the year, after the end of New York State's fiscal year. Beginning in 2014, the amount of the tax credit received is reduced by
20%
each year until the tax credit ends for the Company at December 31, 2017. For the year ended December 31, 2017, the Company will receive a
20%
refund for real estate taxes paid. The amounts of the unreceived real estate tax credits are included in prepaid expenses and other current assets on the accompanying consolidated balance sheet at December 31, 2017 and 2016, and were approximately
$814,000
and
$1.3 million
, respectively.
Prepaid expenses and other current assets, as presented on the balance sheet are comprised of the following at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2017
|
|
12/31/2016
|
|
|
(in thousands)
|
|
|
|
|
|
Empire zone real estate tax credit
|
|
$
|
814
|
|
|
$
|
1,325
|
|
Prepaid real estate taxes
|
|
443
|
|
|
558
|
|
Prepaid insurance
|
|
327
|
|
|
919
|
|
Inventory
|
|
174
|
|
|
177
|
|
Prepaid gaming expenses
|
|
74
|
|
|
61
|
|
Development escrow & security refundable deposit
|
|
780
|
|
|
623
|
|
Prepaid other
|
|
938
|
|
|
672
|
|
Total prepaid expenses and other current assets
|
|
$
|
3,550
|
|
|
$
|
4,335
|
|
Note D. Property and Equipment
Property and equipment at December 31, 2017 and 2016 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2017
|
|
12/31/2016
|
|
(in thousands)
|
|
|
|
|
Land
|
$
|
770
|
|
|
$
|
770
|
|
Land improvements
|
1,759
|
|
|
1,758
|
|
Buildings
|
4,727
|
|
|
4,727
|
|
Building improvements
|
29,874
|
|
|
28,088
|
|
Vehicles
|
355
|
|
|
307
|
|
Furniture, fixtures and equipment
|
5,196
|
|
|
4,278
|
|
Construction in Progress
|
77
|
|
|
919
|
|
|
42,758
|
|
|
40,847
|
|
Less: Accumulated depreciation
|
(15,895
|
)
|
|
(14,432
|
)
|
|
$
|
26,863
|
|
|
$
|
26,415
|
|
Depreciation expense was approximately
$1.5 million
,
$1.3 million
and
$1.4 million
for years ended
December 31, 2017
,
2016
and 2015, respectively.
The VGMs at MRMI are owned by the NYSGC and, accordingly, the Company's consolidated financial statements include neither the cost nor the depreciation of those devices.
Note E. Development Projects Costs
Capitalized Project Development Costs
Once it was awarded the Gaming Facility License on December 21, 2015, the Company began capitalizing certain Project Development costs during the fourth quarter of 2015. At December 31, 2017 and 2016, total Capitalized Project Development costs incurred were approximately $
566.8 million
and
$202.4 million
, respectively. Total Capitalized Project Development costs at December 31, 2017 consisted of
$560.2 million
of construction costs, site development, contractor insurance, general conditions, architectural fees, construction manager fees, and approximately
$6.6 million
of professional service fees such legal and accounting fees and is reflected on the balance sheet as Capitalized Development Project costs. Total Capitalized Development Project costs at December 31, 2016 consisted of
$198.9 million
of construction costs, site development, contractor insurance, general conditions, architectural fees, construction manager fees, and approximately
$3.5 million
of professional service fees such as legal fees and accounting fees.
In
2017
, total Development Projects costs incurred were approximately
$392.2 million
, of which
$370.7 million
was capitalized and
$21.6 million
was expensed. Development Project costs consisted of
$10.7 million
of land lease costs and rents,
$4.9 million
of salary and related benefits,
$2.0 million
of bank charges,
$892,000
of marketing expenses,
$643,000
of real estate taxes,
$571,000
of insurance expense,
$607,000
in consultants and other professional service fees,
$317,000
in legal fees and approximately
$490,000
of pre-opening expenses, including travel, relocation, recruiting and other start-up costs.
In 2016, total Development Projects costs incurred were approximately
$205.0 million
, of which
$192.0 million
was capitalized and
$13.0 million
was expensed. Development Project expenses consisted of
$10.4 million
of land lease costs,
$400,000
of real estate taxes,
$482,000
of insurance expense,
$324,000
in consultants and other professional service fees,
$164,000
in legal fees and
$1.2 million
of pre-opening expenses, including salary and related benefits, as well as, marketing expenses.
Cash Collateral for Deposit Bond
In February 2016 and June 2017, the Company deposited
$15 million
and
$20 million
in performance bonds to guarantee the completion of the Development Projects. On December 28, 2017, the Company notified the NYSGC that it had expended
85%
of the Company's proposed Minimum Capital Investment (as defined below). On January 4, 2018, the NYSGC notified the Company that it had confirmed that the Minimum Capital Investment criteria has been reached and the funds were returned to the Company for use toward Development Projects expenses.
Restricted Cash and Investments for Development Projects
At December 31, 2017, the
$136.4 million
of restricted cash and investments for Development Projects represented the remaining funds from the Term Loan Facility and the Kien Huat Montreign Loan to be utilized for the Development Projects. This consists of cash and cash equivalents totaling
$41.9 million
and short-term marketable securities totaling
$94.5 million
, which were comprised of commercial paper and U. S. Treasury Notes with maturities of less than one year. At December 31, 2016, the
$26.4 million
of restricted cash and investments for Development Projects on the Consolidated Balance Sheet represented the remaining funds from the January 2016 Rights Offering (defined below) to be utilized for the Development Projects.
Note F. Accrued Expenses and Other Current Liabilities
Accrued Development Projects costs at December 31, 2017 and 2016 were
$71.7 million
and
$41.9 million
, respectively, and were primarily comprised of amounts due to the Construction Manager for costs incurred for the Development Projects, as well as amounts due to the architect and other vendors.
Accrued expenses and other current liabilities, as presented on the balance sheet are comprised of the following at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2017
|
|
12/31/2016
|
|
(in thousands)
|
|
|
|
|
Liability for horseracing purses
|
$
|
886
|
|
|
$
|
1,139
|
|
Accrued payroll
|
1,715
|
|
|
1,897
|
|
Accrued redeemable points
|
271
|
|
|
167
|
|
Liability to NYSGC
|
1,507
|
|
|
360
|
|
Liability for local progressive jackpot
|
1,110
|
|
|
907
|
|
Accrued settlement liability
|
—
|
|
|
758
|
|
Accrued professional fees
|
744
|
|
|
308
|
|
Federal tax withholding payable
|
—
|
|
|
78
|
|
Accrued other
|
1,087
|
|
|
1,733
|
|
Total accrued expenses and other current liabilities
|
$
|
7,320
|
|
|
$
|
7,347
|
|
Note G. Long-Term Debt
Long-term debt consisted of the following at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2017
|
|
12/31/2016
|
|
|
|
|
|
Term B Loan
|
|
$
|
450,000
|
|
|
$
|
—
|
|
Bangkok Bank Loan
|
|
16,000
|
|
|
—
|
|
Equipment loans
|
|
31,095
|
|
|
—
|
|
Total long-term debt
|
|
497,095
|
|
|
—
|
|
Debt issuance costs
|
|
(27,359
|
)
|
|
—
|
|
Total long-term debt, net
|
|
469,736
|
|
|
—
|
|
Less: Current portion of long-term debt
|
|
(14,588
|
)
|
|
$
|
—
|
|
Long term-debt, net of current portion
|
|
$
|
455,148
|
|
|
$
|
—
|
|
Term Loan Agreement
On January 24, 2017, Montreign Operating entered into the Building Term Loan Agreement (the “Original 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. On May 26, 2017 , the parties entered into the first amendment to the Term Loan Agreement and certain ancillary agreements (the “Amended Term Loan Agreement” and, together with the Original Term Loan Agreement, the “Term Loan Agreement”). The Amended Term Loan Agreement increased the aggregate principal amount of the Term B Loan issued under the Original Term Loan Agreement on substantially the same terms and conditions as the Original Term Loan Agreement, which terms are discussed below. In the aggregate, the Term Loan Agreement provides Montreign Operating with loans in principal amount of
$520 million
(the “Term Loan Facility”). All of the borrowings under the Term Loan Agreement will be used to fund the costs of the Development Projects.
Pursuant to the Original Term Loan Agreement, the Term Loan Facility consisted 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 priced at
98.12%
of the principal amount and borrowed in full on January 24, 2017. Proceeds of the Term B Loan were used to pay fees and expenses related to the financing and fund various lender-controlled accounts. 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 prepayment premiums based on a make-whole if the prepayment occurs from January 24, 2017 to (but excluding) the 30th-month anniversary following the Original Loan Closing Date, and a
2%
and
1%
premium if the prepayment occurs from the 30th Month to (but excluding) the 42nd-month anniversary of January 24, 2017 and from the 42nd Month to (but excluding) the 54th-month anniversary of January 24, 2017, respectively.
The Term A Loan may be borrowed during the period from January 24, 2017 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 accrues 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 accrues 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 equal to the undrawn amount of such lender’s commitment multiplied by a rate equal to
2.5%
per annum for the period commencing on January 24, 2017 through March 24, 2018 and
5.0%
per annum thereafter.
As a condition to the Term Loan Agreement, the net proceeds from the Term B Loan and the Kien Huat Montreign Loan, which is discussed below, were deposited into an account controlled by the lenders under the Term Loan Facility. Any drawings on the Term A Loan, which may be made only after all of the proceeds of the Term B Loan have been deployed in the construction of the Development Projects or the operations of the Project Parties, will also be deposited into the same lender-controlled account. The Company further funded this lender-controlled account with approximately
$9.9 million
in December 2017 pursuant to the Term Loan Agreement from the proceeds of the Bangkok Bank Loan, which is discussed below. In order to access the funds (including the net proceeds from the Term Loan Facility and the Kien Huat Montreign Loan) held in these lender-controlled accounts, Montreign Operating must satisfy the applicable disbursement conditions set forth in the Term Loan Agreement and ancillary agreements, such as providing evidence that the withdrawn funds are used for permitted purposes in connection with the Development Projects.
The Term Loan Agreement restricts the Project Parties from incurring additional indebtedness except for, among other things, obligations pursuant to hedging agreements required under the Term Loan Agreement, capital lease obligations and purchase money indebtedness (including FF&E financing) in an amount not exceeding
$40 million
, subordinated indebtedness so long as the proceeds are applied pursuant to the terms of the Term Loan Agreement and other indebtedness not exceeding
$10 million
. Also, the Project Parties may not make any dividend or other distribution, redeem or otherwise acquire any equity securities or subordinated indebtedness. Moreover, the Project Projects are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Party, including Empire, except for payments pursuant to tax sharing agreements, distributions in an amount not exceeding
1%
of the net revenues of the Project Parties in any fiscal year, repurchase of capital stock of the Company in an amount not exceeding
$1 million
and required by the NYSGC, and certain available amounts of cash based on the application of financial covenants.
Pursuant to the Amended Term Loan Agreement, the aggregate principal amount of the Term B Loan increased by
$35 million
from
$415 million
to
$450 million
. This additional amount was borrowed in full on May 24, 2017 and the proceeds were used to pay fees and expenses related to the financing and fund various lender-controlled accounts. The additional
$35 million
principal amount of the Term B Loan was priced at
99.75%
of the principal amount and was issued under substantially the same terms and conditions as the Original Term Loan Agreement except the requirement to contribute additional equity to Montreign Operating was reduced. Pursuant to the Amended Term Loan Agreement, on December 28, 2017, Empire contributed additional equity to Montreign Operating of approximately
$9.9 million
, which takes into account approximately
$600,000
of equity contributions made to the Project Parties, including Montreign Operating, since January 24, 2017. Empire contributed approximately
$9.9 million
to the equity of Montreign Operating from the net proceeds of the Bangkok Bank Loan, which Montreign then deposited into the lender-controlled account that holds the net proceeds from the Term Loan Facility and the Kien Huat Montreign Loan.
As of December 31, 2017,
$450 million
was outstanding under the Term B Loan and there were
no
borrowings outstanding under the Term A Loan. Since the initial opening of the Casino on February 5, 2018, we have been required to make principal payments under the Term B Loan at the end of each calendar quarter, for which the first payment shall be made by June 30, 2018. The Company will repay one percent of the original principal balance each year in quarterly payments of approximately $1.1 million, beginning in June 2018.
Revolving Credit Agreement
On January 24, 2017, Montreign Operating also entered into a Revolving Credit Agreement (as amended, 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 specified Casino amenities to the public. Concurrently with the Term Loan Amendment, on May 24, 2017, Montreign Operating amended the Revolving Credit Agreement to, among other things, permit Montreign Operating to increase the aggregate principal amount of the Term B Loan under the Term Loan Amendment. 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. As of December 31, 2017,
$0
had been drawn down on the Revolving Credit Facility.
On December 7, 2017, Montreign Operating, ERREI, ERREII (together with ERREI, the “Montreign Subsidiary Guarantors”), the Administrative Agent, and the Required Lenders (as such term is defined in the Revolving Credit Agreement) entered into a Second Amendment to the Revolving Credit Agreement (the "Second Revolving Credit Amendment"). The Second Revolving Credit Amendment enables Montreign Operating to borrow up to
$15 million
(but not obtain a letter of credit) under the Revolving Credit Facility with a narrowed scope of amenities at the opening of the Casino, subject to the receipt of NYSGC approval to open the Casino to the public. On February 5, 2018, Montreign Operating received an operation certificate from the NYSGC to commence gaming operations at the Casino. Other than an amendment relating to a narrowed scope of amenities at the opening of the Casino, the Revolving Credit Agreement remains unchanged and in full force and effect. Subsequent to December 31, 2017, the Company began to draw on the Revolving Credit Facility primarily to fund the Casino. The Company drew
$9.0 million
on January 23, 2018 and
$4.0 million
on February 9, 2018, at an interest rate of LIBOR plus
5.0%
.
Pursuant to the Amended Revolving Credit Agreement, Montreign Operating and the Montreign Subsidiary Guarantors each affirmed and ratified their obligations pursuant to the Revolving Credit Facility and all related agreements, including the guarantees of the Montreign Subsidiary Guarantors.
Collateral and Other Provisions of the Term Loan Agreement and Revolving Credit Agreement
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 and the Entertainment 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 and 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. As of December 31, 2017, the Company was in compliance with all respective covenant requirements under the Term Loan Facility and the Revolving Credit Facility. On March 1, 2018, the Company contributed
$2.7 million
to an interest reserve fund under the Term Loan Agreement. This contribution reflects the additional interest to be paid on the Term Loan Facility as a result of the Company's deferral of the completion of 15 VIP suites at the Casino from March 1, 2018 to March 23, 2018.
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.
Bangkok Bank Loan Agreement
On December 28, 2017, the Company entered into a Delayed Draw Term Loan Credit Agreement (the “Bangkok Bank Loan Agreement”), with Bangkok Bank PCL, New York Branch (“Bangkok Bank”), as lender, and MRMI, as guarantor. The Bangkok Bank Loan Agreement provides for loans to be made to the Company in an aggregate principal amount of up to
$20 million
(the “Bangkok Bank Loan”).
The Bangkok Bank Loan may be borrowed in up to five installments, each in multiples of
$500,000
, from time to time until December 28, 2019 or earlier if Bangkok Bank Loan becomes due and payable earlier, whether by acceleration or otherwise. The maturity of the Bangkok Bank Loan may be extended in the sole discretion of Bangkok Bank for additional one-year periods with other terms and conditions as may be agreed by the Company and Bangkok Bank. Any such extension of the Bangkok Bank Loan maturity will be subject to a
1%
extension fee.
Interest will accrue on outstanding borrowings under the Bangkok Bank Loan Agreement at a rate equal to LIBOR plus
6.25%
, or an alternate base rate plus
5.25%
per annum. In addition, the Company will pay commitment fee to Bangkok Bank equal to the undrawn amount of the Bangkok Bank Loan commitment multiplied by a rate equal to
1.50%
per annum. The Bangkok Bank Loan will mature on December 28, 2019. Such commitment fee will be payable on the last business day of each quarter beginning on March 31, 2018. The Bangkok Bank Loan may be prepaid in whole or in part without premium or penalty, subject to the payment of a
2.0%
prepayment fee.
The Bangkok Bank Loan is guaranteed by MRMI and is secured by a security interest in Monticello Casino and Raceway. The Bangkok Bank Loan Agreement contains customary representations and warranties and affirmative covenants, negative covenants and financial covenants, including representations, warranties and covenants that, among other things, restrict the ability of the Company and MRMI to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in certain transactions with affiliates, or make dividends or other distributions. Obligations under the Bangkok Bank Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as applicable), including among others, nonpayment of principal, interest or fees, breach of the affirmative or negative covenants, revocation of a gaming license after the expiration of certain cure periods, and a change of control of the Company. The Company is in compliance with the covenant terms as of December 31, 2017.
The Company borrowed
$16 million
at the closing of the Bangkok Bank Loan. Of this amount, the Company contributed approximately
$9.9 million
to Montreign Operating pursuant to the terms of the Term Loan Agreement, as discussed above. The remaining balance of the Bangkok Bank Loan drawn down is available for the general corporate purposes of the Company.
Financial Covenants of the Principal Credit Agreements
The Term Loan Facility contains certain covenants that, subject to certain significant exceptions limit, among other thongs, the Company's ability to incur additional debt, pay dividends or distributions, make certain investments, create liens on assets, enter into transactions with affiliates, merge or consolidate with another company or transfer and sell assets.
In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio of the Company, which financial covenant is applicable beginning with the fiscal quarter ended December 31, 2018.
Equipment Loans
The Company has entered into several financing agreements related to the purchase of its slot machines, equipment and software for its telephone, hotel and Casino operations. The amount financed was
$31.1 million
and the terms of these agreements run between
six
and
36
months. The stated interest rates for these loans are between
zero
and
eight
per annum. The Company has imputed interest, on several equipment loans with stated interest rates of
0%
, using the Company's cost of funds rate of approximately
10%
. The weighted average of the monthly repayments is approximately
$1.0 million
.
The following table lists the annual principal repayments due for the Company's long term debt as of December 31, 2017:
|
|
|
|
Year ending December 31,
|
Totals
|
|
(in thousands)
|
2018
|
$14,588
|
2019
|
33,625
|
|
2020
|
10,408
|
|
2021
|
5,349
|
|
2022
|
4,500
|
|
2023
|
428,625
|
|
Totals
|
$497,095
|
Note H. Long-Term Loans, Related Party
Kien Huat Montreign Loan Agreement and Kien Huat Note Exchange Agreement
On January 24, 2017, Kien Huat 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 which were used as a capital contribution to Montreign Operating for use towards the expenses of the Development Projects. The Kien Huat Montreign Loan was to mature on February 24, 2024 (the “Kien Huat Loan Maturity Date”).
The Kien Huat Montreign Loan bore interest at a rate of
12%
per annum. Prior to the Kien Huat Loan Maturity Date, interest on the Kien Huat Montreign Loan was accrued and 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 thereafter was 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, was payable in cash on the Kien Huat Loan Maturity Date. Notwithstanding the foregoing, Montreign Holding was 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. The Kien Huat Montreign Loan could be repaid at any time without penalty.
The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement were secured by a pledge of all the membership interests of Montreign Holding by Empire. The Kien Huat Montreign Loan Agreement contained 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 have been 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.
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire, Montreign Holding, and Kien Huat entered into a Note Exchange Agreement (the “Kien Huat Note Exchange Agreement”). The Kien Huat Note Exchange Agreement provides for the issuance of
1,379,873
shares of common stock (the “Exchange Shares”) to Kien Huat in full satisfaction of the Kien Huat Montreign Loan. On December 28, 2017, total indebtedness outstanding under the Kien Huat Montreign Loan was
$36.2
million. Such total indebtedness outstanding under the Kien Huat Montreign Loan was exchanged for the Exchange Shares at an exchange rate of
$26.21
, which exchange rate represents the volume-weighted average price of the Company’s common stock for the 30-day period immediately preceding the date on which the Kien Huat Note Exchange Agreement was executed. In connection with the satisfaction in full of the Kien Huat Montreign Loan pursuant to the Kien Huat Note Exchange Agreement, Empire's pledge of its membership interests in Montreign Holding was released. The Exchange Shares were issued pursuant to an exemption from the registration requirement of the Securities Act provided in Section 4(a)(2) of the Securities Act.
Kien Huat Backstop Loan Agreement
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire and Kien Huat entered into a loan agreement (the “Kien Huat Backstop Loan Agreement”), providing for loans to Empire in an aggregate principal amount of up to
$20 million
(the “Kien Huat Backstop Loan”). Any amounts borrowed under the Kien Huat Backstop Loan will be used exclusively to make payments required under the Bangkok Bank Loan Agreement and will mature on the one-year anniversary of the Maturity Date of the Bangkok Bank Loan, or such earlier date that the Bangkok Bank Loan is terminated (the “Backstop Maturity Date”). As of December 31, 2017, no amounts had been borrowed under the Kien Huat Backstop Loan.
The Kien Huat Backstop Loan bears interest at a rate of
12%
per annum. Prior to the Backstop Maturity Date, interest on any principal amount outstanding under the Kien Huat Backstop Loan will accrue and be added to the outstanding principal of
the Kien Huat Backstop Loan on the first business day of each calendar month beginning on January 1, 2018 and will thereafter be deemed to be part of the principal indebtedness. The Kien Huat Backstop Loan, including all interest and any other amounts due under the Kien Huat Backstop Loan, shall be payable in cash on the Backstop Maturity Date. Kien Huat was paid a commitment fee of
$200,000
on December 28, 2017.
The Kien Huat Backstop Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that restrict the Company’s use of the proceeds of the Kien Huat Backstop Loan to pay amounts due and payable under the Bangkok Bank Loan. Obligations under the Kien Huat Backstop 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; and breach of the affirmative covenants.
Kien Huat Construction Loan Agreement
On October 13, 2016, Montreign Operating and Kien Huat entered into a loan agreement (the "Kien Huat Construction Loan Agreement"). Pursuant to the Kien Huat 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 while the debt financing for the Development Projects was being finalized. In connection with the closing of the Term Loan Facility and the Kien Huat Montreign Loan, on January 24, 2017, the Kien Huat Construction Loan Agreement expired pursuant to its terms without being utilized by Montreign Operating. Montreign Operating paid Kien Huat a commitment fee of
$500,000
upon execution of the Kien Huat Construction Loan. The commitment fee was capitalized and was included in "Other Assets" at December 31, 2016. It was charged to "Interest Expense " on the Consolidated Statement of Operations on January 24, 2017, upon the issuance of the Kien Huat Montreign Loan Agreement.
Conversion of 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 Empire issued a convertible promissory note (the "2010 Kien Huat Note") in the original principal amount of
$35 million
, of which
$17.4 million
was outstanding as of December 31, 2015. 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") in accordance with the terms of the 2010 Kien Huat Loan Agreement.
The Company recognized approximately
$178,000
and
$1.3 million
in interest expense associated with the 2010 Kien Huat Note during the years ended December 31, 2016 and 2015, respectively.
Note I. Stockholders’ Equity
Authorized Capital
On November 1, 2016, Empire filed the Second Amended and Restated Certificate of Incorporation (the "Restated Charter”) with the Secretary of State of the State of Delaware. Pursuant to Restated Charter, Empire’s authorized capital stock consists of
155 million
shares, of which
150 million
shares are common stock and
five million
shares are preferred stock.
Common Stock
Our common stock is transferable only subject to the provisions of Section 303 of the Racing, Pari-Mutuel Wagering and Breeding Law, so long as we hold directly or indirectly, a license issued by the NYSGC, and may be subject to compliance with the requirements of other laws pertaining to licenses held directly or indirectly by us. The owners of common stock issued by us may be required by regulatory authorities to possess certain qualifications and may be required to dispose of their common stock if the owner does not possess such qualifications.
January 2016 Rights Offering
On January 4, 2016, we commenced a rights offering (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 to purchase up to
20,138,888
shares of our common stock. In connection with the January 2016 Rights Offering, on December 31, 2015, the Company and Kien Huat entered into a standby purchase agreement (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 in an aggregate amount not to exceed
$290 million
.
The January 2016 Rights Offering closed on February 17, 2016. The Company issued a total of
20,138,888
shares of common stock for aggregate gross proceeds of approximately
$290 million
. 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. The net proceeds of the January 2016 Rights Offering were approximately
$286.0 million
, which were used (i) to pay the pre-opening expenses relating to the construction of the Casino, (ii) to redeem the outstanding shares of the Series E Preferred Stock in accordance with the terms of the Settlement Agreement on March 7, 2016 and (iii) for the working capital needs of the Company. Pursuant to the January 2016 Standby Purchase Agreement, we paid Kien Huat a commitment fee of
$1.5
million which is equal to
0.5%
of the maximum amount of the January 2016 Rights Offering, and reimbursed Kien Huat for expenses in the amount of
$50,000
.
January 2015 Rights Offering
On January 5, 2015, the Company commenced a rights offering (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 to purchase up to
1,408,451
shares of our common stock. In connection with the January 2015 Rights Offering, on January 2, 2015, the Company and Kien Huat entered into a standby purchase agreement (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 the January 2015 Rights Offering in an aggregate amount not to exceed
$50 million
.
The January 2015 Rights Offering closed on February 6, 2015. The Company issued a total of
1,408,451
shares of common stock for aggregate gross proceeds of approximately
$50 million
. This includes
10,658
shares issued to holders upon exercise of their basic subscription rights 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 terms of the January 2015 Standby Purchase Agreement. The net proceeds of the January 2015 Rights Offering were approximately
$49.5 million
, which were used to pay the expenses of the Casino. Pursuant to the January 2015 Standby Purchase Agreement, we paid Kien Huat a commitment fee of
$250,000
, which is equal to
0.5%
of the maximum amount of the January 2015 Rights Offering and reimbursed Kien Huat for expenses in the amount of
$40,000
.
Restriction on Ability to Pay Dividends
Pursuant to the terms of the Bangkok Bank Loan Agreement, neither Empire nor any of its subsidiaries are permitted to declare or pay any dividends or make other payments to purchase, redeem, retire or otherwise acquire any capital stock of the Company. Such restriction will lapse upon the payment in full of any amounts outstanding under the Bangkok Bank Loan Agreement. Notwithstanding the foregoing, so long as no event of default has occurred, subsidiaries of Empire are permitted to pay dividends to Empire and Empire may pay dividends on the Series B Preferred Stock and for withholding taxes payable in connection with equity compensation programs.
Preferred Stock and Dividends
The Company’s Series B Preferred Stock has voting rights of
0.054
votes per share and each share is convertible into
0.054
shares of common stock. It has a liquidation value of
$29
per share and is entitled to annual cumulative dividends of
$2.90
per share payable quarterly in cash. The Company has the right to pay the dividends on an annual basis by issuing shares of its common stock at the rate of
$3.77
per share. The value of common shares issued as payment is based upon the average closing price for the common shares for the
20
trading days preceding January 30 of the year following that for which the dividends are due. At December 31, 2017 and 2016, there were
44,258
shares of Series B Preferred Shares outstanding.
The Board authorized the cash payment of the Series B Preferred Stock dividends on March 8, 2016. Quarterly payments in the amount of
$32,087
were made on April 1, 2016, July 1, 2016, October 3, 2016 and January 3, 2017 for the 2016 period. Quarterly payments in the amount of
$32,087
were made on April 3, 2017, July 3, 2017, October 2, 2016 and January 2, 2018 for the 2017 period.
On March 2, 2016, our Board authorized the cash payment of dividends due for the year ended December 31, 2015 on our Series B Preferred Stock in the amount of approximately
$167,000
. At December 31, 2015, the Company had undeclared cash dividends on the Series B Preferred Stock of approximately
$167,000
and payment was made on March 2, 2016. The cash dividend was calculated as if it were a dividend issued in shares of our comment stock, which in accordance with the terms of the Series B Preferred stock, means the amount of the cash payment is the annual cash dividend value (as if it had been paid quarterly) multiplied by
1.3
.
Bryanston Settlement Agreement
Effective as of June 30, 2013, the Company and its affiliates consummated the closing of a Settlement Agreement and Release (as amended, the “Bryanston Settlement Agreement”) with Bryanston Group, Inc. and its affiliates (the “Bryanston Parties”). Pursuant to ASC 480, the Series E Preferred Stock held by the Bryanston Parties became contractually redeemable subject to the terms and conditions of the Bryanston Settlement Agreement and was recorded as a liability on the December 31, 2015 balance sheet.
On March 7, 2016, the Company redeemed the outstanding Series E Preferred Stock held by the Bryanston Group for approximately
$30.7 million
pursuant to the terms of the Settlement Agreement. Because the event that caused the entire liability to become due occurred during 2016, the liability was recorded pursuant to the payment terms in place at December 31, 2015 of which
$1.5 million
was recorded as a current liability and the remainder as a long term liability at December 31, 2015.
Interest expense associated with the change in the redemption amount of the liability was
$231,000
and
$1.2 million
for the years ended December 31, 2016 and 2015, respectively.
Note J. Warrants, Restricted Stock, Restricted Stock Units, Options and Option Matching Rights
Warrants
During 2015, the Company issued an aggregate of
83,334
shares of common stock at
$30.00
per share from the exercise of warrants from a warrant holder. The Company received proceeds of
$2.5 million
from the exercise of these warrants.
As of December 31, 2017, there are outstanding warrants to purchase an aggregate of approximately
133,300
shares of Empire’s common stock at
$30.00
per share with an expiration date of May 10, 2020.
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”). Pursuant to the 2014 MHHA Agreement, on March 15, 2018, Empire issued to MHHA
200,000
shares of common stock and a warrant to purchase
60,000
shares of common stock at
$81.50
per share, the proceeds of any sales of which will provide additional monies for the harness horsemen’s purse account. Under the terms of the 2014 MHHA Agreement, the MHHA may dispose of the common stock beginning six months after receipt the common stock, subject to limitations upon the quantity of common shares disposed at any one time, as prescribed by the MHHA Agreement.
Restricted Stock, Restricted Stock Units and Options
Second Amended and Restated 2005 Equity Incentive Plan
In May 2015, the Company's Second Amended and Restated 2005 Equity Incentive Plan (the “2005 Equity Incentive Plan”) expired. Options to purchase approximately
13,300
shares of common stock were outstanding as of December 31, 2017 under the 2005 Equity Incentive Plan. Although the 2005 Equity Incentive Plan expired, the approximately
13,300
options still outstanding under such plan are still exercisable.
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 2015 Equity Incentive Plan provides for an aggregate of
2,600,707
shares of common stock to be available for Awards. At December 31, 2017, a total of
2,425,934
shares were available for future issuance under the 2015 Equity Incentive Plan.
Stock-based compensation expense was approximately
$2.8
million,
$2.7
million and
$596,000
for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there was approximately
$1.7
million of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the 2005 and 2015 Equity Incentive Plans. That cost is expected to be recognized over the remaining vesting period of
2.50
years. This expected cost does not include the impact of any future stock-based compensation awards.
In 2017, 2016 and 2015, the Company received approximately
$16,000
,
$54,000
and
$160,000
, respectively, in proceeds from shares of common stock issued as a result of the exercise of stock options. No options were granted in 2017, 2016 and 2015.
The following table reflects stock option activity in 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
|
|
Range of exercise
prices per share
|
|
Weighted
average exercise
price per share
|
|
Weighted
average remaining
contractual life (years)
|
Options outstanding at December 31, 2014
|
156,200
|
|
|
$7.95 - $131.10
|
|
$
|
33.25
|
|
|
1.47
|
Options exercised in 2015
|
(81,600
|
)
|
|
$13.95-$27.15
|
|
|
|
|
|
Forfeited in 2015
|
(18,000
|
)
|
|
$13.95 -$127.95
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
56,600
|
|
|
$7.95 - $131.10
|
|
|
$
|
48.50
|
|
|
2.61
|
Options exercised in 2016
|
(18,000
|
)
|
|
$7.95-$9.90
|
|
|
|
|
|
Forfeited in 2016
|
(5,000
|
)
|
|
$14.85 -$82.95
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
33,600
|
|
|
$7.95 - $131.10
|
|
|
$
|
68.92
|
|
|
1.11
|
Options exercised in 2017
|
(2,000
|
)
|
|
7.95
|
|
|
|
|
|
Forfeited in 2017
|
(18,300
|
)
|
|
$14.85 -$131.10
|
|
|
|
|
|
Options outstanding at December 31, 2017
|
13,300
|
|
|
$15.00 - $40.05
|
|
|
$
|
26.03
|
|
|
0.74
|
The following table reflects restricted stock and restricted stock unit activity in 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Number of Restricted Stock Units
|
Outstanding at December 31, 2014
|
|
37,000
|
|
|
—
|
|
Grants in 2015
|
|
120,000
|
|
|
—
|
|
Vested in 2015
|
|
(20,000
|
)
|
|
—
|
|
Outstanding at December 31, 2015
|
|
137,000
|
|
|
—
|
|
Grants in 2016
|
|
105,000
|
|
|
—
|
|
Vested in 2016
|
|
(22,000
|
)
|
|
—
|
|
Forfeited in 2016
|
|
(4,000
|
)
|
|
—
|
|
Outstanding at December 31, 2016
|
|
216,000
|
|
|
—
|
|
Grants in 2017
|
|
1,000
|
|
|
74,500
|
|
Vested in 2017
|
|
(55,000
|
)
|
|
—
|
|
Forfeited in 2017
|
|
(22,000
|
)
|
|
(1,600
|
)
|
Outstanding at December 31, 2017
|
|
140,000
|
|
|
72,900
|
|
Option Matching Rights
On August 19, 2009, the Company entered into an investment agreement (the "Investment Agreement") with Kien Huat, pursuant to which Kien Huat purchased shares of common stock of the Company during the year ended December 31, 2009. Under the Investment Agreement, if any options or warrants outstanding at the time of the final closing under the Investment Agreement, or the first
200,000
granted to directors or officers as of the final closing date under the Investment Agreement, are exercised, Kien Huat has the right to purchase an equal number of additional shares of common stock as are issued upon such exercise at the exercise price for the applicable option or warrant. The Company refers to these rights as 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
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
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
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. At December 31, 2017, there were approximately
3,000
Option Matching Rights outstanding with various exercise prices and expiration dates through July 2018. On January 24, 2018, Kien Huat elected to exercise its Option matching Rights for
1,666
shares of the Company's common stock, after a former officer exercised his Stock Option which was due to expire on January 15, 2018. The Option Matching Rights were exercised at a price of
$14.95
per share.
Note K. Concentration
As of December 31, 2017, the Company had
one
debtor that consisted of greater than 10% of accounts receivable. Hawthorne OTB represented
13.0%
of the total net outstanding racing- related accounts receivable.
As of December 31, 2016, the Company had
one
debtor that consisted of greater than 10% of accounts receivable. Hawthorne OTB represented
16.9%
of the total net outstanding racing- related accounts receivable.
Note L. Employee Benefit Plans
Empire 401(k) Plan
Our eligible employees may participate in a Company-sponsored 401(k) benefit plan (the “Plan”). The Company established the Plan to provide employees with the opportunity to accumulate pre-tax assets, and to provide employer contributions for eligible employees for their retirement and other needs. It is intended to be administered in accordance with all applicable federal laws and regulations. The Plan covers substantially all employees not otherwise covered by plans resulting from collective bargaining agreements. The Plan permits employees to defer a portion of their compensation as a pre-tax deferral up to statutory maximums. Effective July 2016, the Company makes a matching contribution for eligible salaried employees as follows:
50%
matching contribution for an employee contribution of up to
4%
of compensation. Eligible employees shall be
100%
vested in the portion of their accounts derived from the Company’s matching contributions. Matching contributions for the years ended December 31, 2017, 2016 and 2015 were approximately
$243,000
,
$142,000
and
$96,000
, respectively. As of December 31, 2017, the Plan had
291
participants.
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. At December 31, 2017, the plan had assets of approximately
$11,000
.
Note M. Income Taxes
The Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions and introducing new tax regimes. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. In response to U.S. tax reform, the Staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB No. 118”) to provide guidance to registrants in applying ASC Topic 740 in connection with U.S. tax reform. SAB No. 118 provides that in the period of enactment, the income tax effects of U.S. tax reform may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period.” The measurement period begins in the reporting period of the U.S. tax reform’s enactment and ends when a registrant has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. SAB No. 118 also describes supplemental disclosure that should accompany the provisional amounts.
We have not completed our determination of the accounting implications of the 2017 Tax Act on our tax accruals. However, we have reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. Due to our operating losses, the 2017 Tax Act did not impact our 2017 operating results or income tax expense. The primary impact of the 2017 Tax Act was the remeasurement of our deferred tax assets, based upon the new U.S. statutory corporate tax rate of 21% and the required change to the related valuation allowance. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.
Empire and all of its subsidiaries file a consolidated income tax return. At December 31, 2017 and 2016, the estimated deferred income tax assets and liability were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2017
|
|
12/31/2016
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
40,502
|
|
|
$
|
57,327
|
|
Stock—based compensation
|
2,097
|
|
|
2,863
|
|
Development costs
|
27,213
|
|
|
26,805
|
|
Other
|
1,396
|
|
|
1,939
|
|
Net deferred tax assets
|
71,208
|
|
|
88,934
|
|
Valuation allowance
|
(71,208
|
)
|
|
(88,934
|
)
|
Deferred tax assets, net
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance decreased approximately $
17.7 million
during the year ended December 31, 2017, primarily due to the impact of the remeasurement of the net deferred tax assets, based upon the the new U.S. statutory corporate tax rate of 21%, offset by current year activity which increased the net deferred tax assets prior to their remeasurement for the new tax rate. The valuation allowance increased approximately
$2.8
million during the year ended December 31, 2016. Of the
$155.6 million
in net operating loss carryforwards approximately
$74.7 million
is readily available as of December 31, 2017.
There are limits on the Company’s ability to use its current net operating loss carryforwards, potentially increasing the future tax liability of the Company if it were to generate taxable income. As of December 31, 2017, the Company had net operating loss carryforwards of approximately
$155.6 million
that expire between 2018 and 2037. The 2004 merger of the Company’s operations with Catskills Development LLC and the investment by Kien Huat in 2009 will limit the amount usable in any year of its net operating losses due to the change in control of the Company within the meaning of the tax laws.
The following is a reconciliation of the federal statutory tax rate to the Company’s effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Tax provision at federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
New York State income taxes, net
|
—
|
%
|
|
—
|
%
|
|
(0.1
|
)%
|
Non-deductible interest
|
—
|
%
|
|
(0.3
|
)%
|
|
(1.2
|
)%
|
Permanent items
|
(3.1
|
)%
|
|
(3.5
|
)%
|
|
(2.5
|
)%
|
Change in valuation allowance
|
(31.9
|
)%
|
|
(31.2
|
)%
|
|
(31.4
|
)%
|
Effective tax rate
|
—
|
%
|
|
—
|
%
|
|
(0.2
|
)%
|
As of December 31, 2017, the Company does not have any uncertain tax positions. As a result, there are no unrecognized tax benefits as of December 31, 2017. If the Company was to incur any interest and penalties in connection with income tax deficiencies, the Company would classify interest within interest expense and classify penalties as selling, general and administrative expenses within the consolidated statement of operations.
The Company files tax returns in the U.S. federal jurisdiction, as well as New York and Delaware. All of its federal and state tax filings as of December 31, 2016 have been timely filed. The Company is subject to U.S. federal or New York State income tax examinations by tax authorities for years after 2013. During the periods open to examination, the Company has net operating loss and tax credit carryforwards that have attributes from closed periods. Since these net operating loss and tax credit carryforwards may be utilized in future periods, they remain subject to examination.
Note N. Related Party Transactions
Moelis Agreements
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. 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 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 with the Casino pursuant to the Moelis letter Agreement.
On January 24, 2017, in connection with the closing of the Term Loan Facility and the Revolving Credit Facility, Moelis was paid approximately
$2.5 million
for financial advisory services 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 was paid upon execution, and the reimbursement of expenses up to
$75,000
. The Moelis-Montreign Engagement Agreement terminated on December 31, 2017.
On May 16, 2017, Moelis and the Company entered into a letter agreement reinstating and amending the Moelis Engagement Letter (the "Updated Moelis Engagement Letter"). Pursuant to the Updated Moelis Engagement Letter, Moelis will act as non-exclusive financial advisor to the Company in connection with certain debt and equity financing and corporate transactions the Company may undertake. The Updated Moelis Engagement Letter describes the fees that will be due to Moelis for each transaction in which the Company engages. If the Company engages in a covered transaction at any time within 12 months of the termination of the Updated Moelis Engagement Letter for any reason other than for cause by the Company, Moelis will be entitled to receive a transaction fee according to the schedule provided therein. The Updated Moelis Engagement Letter terminated on December 31, 2017.
On May 26, 2017, in connection with the closing of the Amended Term Loan Agreement, Moelis was paid approximately
$178,000
for financial advisory services pursuant to the Moelis-Montreign Engagement Letter.
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.
Kien Huat Letter Agreement
On February 17, 2016, Kien Huat and the Company entered into a letter agreement (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 January 2016 Rights Offering and (ii) the
one
-year anniversary of the opening of the Casino, 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 Kien Huat 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 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).
On December 28, 2017, the Company and Kien Huat amended the Kien Huat Letter Agreement to extend by one year Kien Huat’s obligation not to engage in a going-private transaction with Empire without the prior approval of the majority of Empire’s minority shareholders and a majority of the disinterested directors of Empire. As a result of the amendment, such restriction now covers a period ending in February 2020. Other than this one-year extension, all other terms of the Kien Huat Letter Agreement remain unchanged.
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").
In connection with the Kien Huat Note Exchange Agreement, on December 28, 2017, the Company and Kien Huat further amended the Kien Huat Commitment Letter (the "Commitment Amendment"). Pursuant to the Commitment Amendment, Kien Huat’s obligation to participate in, and backstop the Follow-On Rights Offering was terminated. Other than the termination of such follow-on standby purchase commitment, all other terms of the Kien Huat Commitment Letter remain unchanged
RWS License Agreement
On March 31, 2017, Montreign Operating entered into a license agreement (the “RWS License Agreement”) with RW Services Pte Ltd (“RWS”). RWS is an affiliate of Tan Sri Lim Kok Thay, who is a beneficiary of and controls Kien Huat. Pursuant to the RWS License Agreement, RWS granted Montreign Operating the non-exclusive, non-transferable, revocable and limited right to use certain “Genting” and “Resorts World” trademarks (the “RWS Licensed Marks”) in connection with the development, marketing, sales, management and operation (the “Permitted Uses”) of the Development Projects. The right to use the RWS Licensed Marks may be assigned or sublicensed only in certain limited circumstances. However, any use of the RWS Licensed Marks for a purpose other than the Permitted Uses will require the prior written consent of RWS. The name of the Casino is “Resorts World Catskills,” and, notwithstanding the foregoing, the use of such name is exclusive to Montreign Operating and may be used in connection with on-line gaming in addition to the Permitted Uses.
The initial term of the RWS License Agreement will expire on December 31, 2027, and will be extended automatically for additional terms of
12
months each, up to a maximum of
39
additional terms, unless either of the parties provides notice to terminate the RWS License Agreement or upon the mutual written consent of both parties. Montreign Operating’s rights and obligations under the RWS License Agreement are subject to and governed by the rules and regulations applicable to Montreign Operating’s gaming operations at the Casino, and the fiduciary obligations of the boards of directors of Montreign Operating and Empire, as
well as the fiduciary obligations of Kien Huat. Beginning on the date on which the Casino opened to the public, Montreign Operating pays to RWS a fee equivalent to a percentage of Net Revenue (as such term is defined in the RWS License Agreement) generated in each calendar year from (i) all activity at the Casino, (ii) each specific use of the RWS Licensed Marks in the Entertainment Project or Golf Course and (iii) each specific use of the name Resorts World Catskills in connection with on-line gaming. The percentage of Net Revenue payable as the fee is a low single digit percentage that will increase incrementally between the third year and sixth year of the term of the RWS License Agreement and will remain a low single digit percentage during the entire term of the RWS License Agreement.
During the term of the RWS License Agreement, Montreign Operating may participate in the Genting Rewards Alliance loyalty program (the “Alliance”), which will provide central marketing and cross-promotion opportunities for the Development Projects with other members of the Alliance. Montreign Operating’s participation in the Alliance is subject to the provisions of a separate agreement, which is currently being negotiated by the parties.
Mr. Lim, our Director, is also a director of Resorts World Inc. Pte Ltd., the parent company of RWS.
Investment Agreement with Kien Huat
On August 19, 2009, the Company entered into that certain investment agreement (the “Investment Agreement”) with 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 2017, Kien Huat recommended Messrs. Pearlman, Eller and Lim 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 Executive 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.
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.
Note O. Commitments and Contingencies
The Company is 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 and adverse effect on our consolidated financial position, results of operations or cash flows.
Operating Leases
The following table represents the minimum lease payments:
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
Year ending December 31,
|
|
Total Payments
|
|
|
(in thousands)
|
|
|
|
2018
|
|
$
|
12,761
|
|
2019
|
|
9,353
|
|
2020
|
|
8,961
|
|
2021
|
|
8,496
|
|
2022
|
|
8,300
|
|
2023 to 2056
|
|
361,986
|
|
Total
|
|
$
|
409,857
|
|
The details of operating lease commitments are described below.
Casino Lease
On December 28, 2015 , Montreign Operating entered into a lease (the "Casino Lease") with EPT for the lease of the parcel on which the Casino is being 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 anniversaries of the commencement of the Casino Lease. Upon Montreign Operating's timely notice of exercise of its Termination Option, the Casino Lease will be automatically terminated effective as of the applicable Option Date.
T
he following table represents the fixed rent payments under the Casino Lease:
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
(in thousands)
|
2018 (1) (2)
|
$10,500
|
2019 (2)
|
7,500
|
|
2020 (2)
|
7,500
|
|
2021 (2)
|
8,000
|
|
2022 (2)
|
8,000
|
|
2023 to 2056 (2)
|
346,624
|
|
|
|
(1)
|
From March 1, 2017 through August 31, 2018, fixed rent is
$1 million
per month.
|
|
|
(2)
|
From September 1, 2018 through the remainder of the term of the Casino Lease, fixed rent will equal
$7.5 million
per year, subject to an
eight
percent escalation every five years ("Base Amount").
|
In addition to the annual fixed rent, beginning 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 Adelaar Developer, LLC (the "Destination Resort Developer") for the lease of 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)
|
2018 (1)
|
$
|
—
|
|
2019 (1) (2)
|
125
|
|
2020 (2)
|
150
|
|
2021 (2)
|
150
|
|
2022 (2)
|
150
|
|
2023 to 2056 (2) (3)
|
7,675
|
|
|
|
(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 will equal
$150,000
per
|
|
|
(3)
|
From March 2029 through the remainder of the term of the Golf Course Lease, fixed rent will 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 Project Lease
On December 28, 2015, ERREII entered into a sublease (the “Entertainment Project Lease”) with the Destination Resort Developer, for the lease of the Entertainment Project Parcel. The terms of the Entertainment Project Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Entertainment Project Lease, there is no percentage rent due. Fixed rent payments under the Entertainment Project Lease are represented in the table below:
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
(in thousands)
|
2018 (1) (2)
|
$
|
12
|
|
2019 (2)
|
150
|
|
2020 (2)
|
150
|
|
2021 (2)
|
150
|
|
2022 (2)
|
150
|
|
2023 to 2056 (2) (3)
|
7,713
|
|
|
|
(1)
|
From the date the Entertainment Project Lease commenced (the “Entertainment Project Lease Commencement Date”) and until the date on which the Entertainment Village opens for business, which is expected to be December 2018 (the “Entertainment Project Opening Date”), fixed rent payments will equal
$0
.
|
|
|
(2)
|
From the Entertainment Project Opening Date and continuing for the 10 years thereafter, fixed rent will equal
$150,000
per year.
|
|
|
(3)
|
From September 2028 through the remainder of the term of the Entertainment Project Lease, fixed rent will equal
$250,000
per year.
|
The Entertainment Project Lease is a net lease and ERREII is obligated to pay the rent payable under the Entertainment Project Lease and other costs related to ERREII's use and operation of the Entertainment Project Parcel, including the special district tax assessments allocated to the Entertainment Project Parcel, not to exceed the capped dollar amount applicable to the Entertainment Project Parcel. This obligation shall not be assessed against ERREII prior to 60 months following the Entertainment Project Lease Commencement Date.
Purchase Option Agreement
On December 28, 2015, Montreign Operating and EPR entered into a Purchase Option Agreement (the “Purchase Option Agreement”), pursuant to which EPR granted to Montreign Operating the option (the “Purchase Option”) to purchase 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. The Purchase Option commenced on December 28, 2015 and shall expire on the earlier to occur of (i) the natural expiration of the term of the Casino Lease and (ii)
90
days following the earlier termination of the Casino Lease, if otherwise terminated in accordance with its terms (the “Purchase Option Period”).
Under the Purchase Option Agreement, EPR also granted to Montreign Operating the option (the “Resort Project Purchase Option”) to purchase not less than all of the balance of the EPR Property, excluding the Development Project Parcels and the Waterpark (the “Resort Property”) for an additional fee. The Resort Project Purchase Option may be exercised only simultaneously with or after the exercise of the Purchase Option. The Resort Project 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 also granted to Montreign a right of first offer (“ROFO”) with respect to all or any portion of the Resort Property. Under the terms of the ROFO, if EPR makes an offer to or rejects an offer made by Montreign Operating, then EPR shall be precluded for a period of six months from transferring the designated portion of the 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 the Effective Date and shall continue in full force and effect until EPR has sold, leased, licensed or otherwise transferred all of the Resort Property.
Note P. Loss Per Share
As previously discussed in Note I, the Company completed a rights offering during January 2016. As per ASC 260-10-55-13 to ASC 260-10-55-14, a rights issue in which the exercise price at issuance is less than the fair value of the stock contains a bonus element that is somewhat similar to a stock dividend. If a rights issue contains a bonus element and the rights issue is offered to all existing shareholders, basic and diluted earnings per share shall be adjusted retroactively for the bonus element for all periods presented. Since the Company offered the right to all existing shareholders at a
20%
discount, a bonus element was present. The Company determined the bonus element to be an additional
1.458 million
shares which would be added to the denominator that was used in computing basic and diluted earnings per share in 2015. The calculation of the bonus element gave rise to the following adjustments to the weighted average number of common shares and loss per common share for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2015
|
|
|
|
(in thousands, except per share )
|
|
|
|
|
Weighted average number of common shares, as reported
|
|
9,291
|
|
|
Adjustment
|
|
1,458
|
|
|
Weighted average number of common shares, as adjusted
|
|
10,749
|
|
|
|
|
|
|
Loss per common share, as reported
|
|
$
|
(4.00
|
)
|
|
Adjustment
|
|
$
|
0.58
|
|
|
Loss per common shares, as adjusted
|
|
$
|
(3.42
|
)
|
|
|
|
|
|
Note Q. Summarized Quarterly Data (Unaudited)
The following table summarizes the quarterly results of operations for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
Quarter 1
|
|
Quarter 2
|
|
Quarter 3
|
|
Quarter 4
|
2017
|
|
(in thousands, expect per share data)
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
14,769
|
|
|
$
|
17,186
|
|
|
$
|
18,713
|
|
|
$
|
15,183
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(6,356
|
)
|
|
(6,830
|
)
|
|
(6,844
|
)
|
|
(9,887
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(11,451
|
)
|
|
(11,916
|
)
|
|
(10,872
|
)
|
|
(12,105
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share, basic
|
|
$
|
(0.37
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.39
|
)
|
Loss per common share, diluted
|
|
$
|
(0.37
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
16,205
|
|
|
$
|
17,405
|
|
|
$
|
18,530
|
|
|
$
|
15,314
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(4,764
|
)
|
|
(7,047
|
)
|
|
(5,388
|
)
|
|
(6,484
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(5,177
|
)
|
|
(7,045
|
)
|
|
(5,388
|
)
|
|
(6,587
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share, basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.19
|
)
|
Loss per common share, diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
Note R. Subsequent Events
On February 5, 2018, Montreign Operating received an Operation Certificate from the NYSGC to commence gaming operations at the Casino and, on February 8, 2018, the Casino opened to the public.
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”). Pursuant to the 2014 MHHA Agreement, on March 15, 2018, Empire issued to MHHA
200,000
shares of common stock and a warrant to purchase
60,000
shares of common stock at
$81.50
per share, the proceeds of any sales of which will provide additional monies for the harness horsemen’s purse account. Under the terms of the 2014 MHHA Agreement, the MHHA may dispose of the common stock beginning six months after receipt the common stock, subject to limitations upon the quantity of common shares disposed at any one time, as prescribed by the MHHA Agreement. See Note J for a discussion of this event.
The Company drew
$9.0 million
on January 23, 2018 and
$4.0 million
on February 9, 2018, at LIBOR plus
5.0%
interest rates under the Revolving Credit Facility. See Note G for a discussion of the terms of the Revolving Credit Agreement.
On January 4, 2018, the NYSGC notified the Company that it had confirmed that the Minimum Capital Investment criteria has been reached and the $35 million in performance bonds held in trust were returned to the Company for use toward Development Projects expenses. See Note E for a discussion of this event.