NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note A. Organization and Nature of Business
Basis for Presentation
The condensed consolidated financial statements and notes as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 are unaudited and include the accounts of Empire Resorts, Inc. (“Empire”) and subsidiaries (together with its subsidiaries, the “Company”). All share and per share information in this quarterly report on Form 10-Q gives retroactive effect to a one-for-five reverse stock split effective as of December 23, 2015.
The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and the footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the Company’s opinion, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the interim period may not be indicative of results to be expected for the full year.
Nature of Business
Monticello Casino & Raceway
Through Empire’s wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), the Company currently owns and operates Monticello Casino and Raceway, a
45,000
square foot VGM and harness horseracing facility located in Monticello, New York,
90
miles northwest of New York City. Monticello Casino and Raceway operates
1,110
VGMs, which includes
1,070
video lottery terminals ("VLTs") and
40
electronic table game positions ("ETGs"). VGMs are similar to slot machines, but they are connected to a central system and report financial information to the central system. The Company also generates 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.
In a letter dated April 13, 2016, the New York State Gaming Commission (the "NYSGC") approved MRMI's racetrack and simulcast license renewal applications for calendar year 2016. Generally, the annual license renewal process requires the NYSGC to review the financial responsibility, experience, character and general fitness of MRMI and its management.
Adelaar and Montreign Resort Casino
On December 21, 2015, our wholly-owned subsidiary, Montreign Operating Company, LLC ("Montreign"), was awarded a license (a “Gaming Facility License”) by the NYSGC to operate a resort casino (“Montreign Resort Casino” or the "Casino Project") to be located at the site of a four-season destination resort planned for the Town of Thompson in Sullivan County
90
miles from New York City (“Adelaar” or the “Adelaar Project”), which is described below. The Gaming Facility License became effective on March 1, 2016 (the "License Award Effective Date").
The Adelaar Project is to be located on approximately
1,700
acres (the “EPT Property”) owned by EPT Concord II, LLC (“EPT”) and EPR Concord II, L.P. (“EPR LP”)
two
wholly-owned subsidiaries of EPR Properties (“EPR”). Montreign Resort Casino is part of the initial phase of the Adelaar Project, which will also include an Indoor Waterpark Lodge (the “Waterpark”), Rees Jones redesigned “Monster” Golf Course (the “Golf Course”) and an Entertainment Village, which will include retail, restaurant, shopping and entertainment (the “Entertainment Village” and, together with the Casino Project and the Golf Course, the “Development Projects” and the Development Projects together with the Waterpark, the “Initial Projects”).
Montreign Resort Casino
Montreign Resort Casino is designed to meet 5-star and 5-diamond standards and is expected to include:
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•
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A
90,000
square foot casino floor featuring
2,150
slot machines and
102
table games;
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•
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Designated VIP/high-limit areas;
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•
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An
18
story hotel tower containing
332
luxury rooms (including
eight
garden suites,
seven
two
story townhouse villas, and
12
penthouse-level suites), indoor pools and fitness center;
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•
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A VIP floor containing
6
private gaming salons;
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•
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27,000
square feet of multi-purpose meeting and entertainment space with seating capacity for
1,300
people and a mezzanine level that includes a poker room and approximately
7,000
square feet of meeting room space;
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•
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A
7,500
square foot spa; and
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•
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Seven
restaurants and
four
bars.
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Gaming Facility License
The Gaming Facility License will have an initial duration of
ten
years from March 1, 2016. It shall be renewable thereafter for a period of at least an additional
ten
years, as determined by the NYSGC. The Gaming Facility License is also subject to certain conditions established by the NYSGC including the payment of a license fee of
$51 million
; deposit of a bond representing
10%
of the Minimum Capital Investment (as defined below)(the "Minimum Capital Investment Deposit"); causing the investment of no less than approximately
$854 million
(the “Minimum Capital Investment”) in the development of the initial phase of Adelaar in accordance with the submitted plans for Montreign Resort Casino and Adelaar; commencement of gaming operations on or before March 1, 2018; compliance with state minority and woman business enterprise requirements; and the creation of a minimum of
1,425
full time jobs and
96
part time jobs. The Minimum Capital Investment Deposit was made on March 1, 2016 and the license fee was paid on March 30, 2016.
Golf Course and Entertainment Village
Our subsidiaries are responsible for the development and construction of the Golf Course and the Entertainment Village. The development of the Entertainment Village is expected to be built-out in phases with the initial phase being approximately
50,000
square feet. If full build-out occurs, the Entertainment Village will be approximately
150,000
-
200,000
square feet, depending on market demand. We have agreed to invest a minimum of
$15 million
in the development and construction of the Golf Course and
$25 million
in the development and construction of the Entertainment Village. The Company is currently preparing the design plans for the Entertainment Village. The Company has begun site preparation for the redesign of the Golf Course.
Master Development Agreement and Completion Guaranties
On December 28, 2015 (the “MDA Effective Date”), Montreign, Empire Resorts Real Estate I, LLC (“GC Tenant”) and Empire Resorts Real Estate II LLC (“EV Tenant," and together with Montreign and GC Tenant, the “Project Parties”), each a wholly-owned subsidiary of the Company, on the one hand, and EPT, EPR LP and Adelaar Developer, LLC (“Adelaar Developer,” together with EPT and EPR LP collectively, “EPR”), on the other hand, entered into an Amended and Restated Master Development Agreement (as amended, the “MDA”), which amends and restates that certain master development agreement by and between EPT and MRMI originally executed on December 14, 2012. The MDA defines and governs the overall relationship between EPR and the Project Parties with respect to the development, construction, operation, management and disposition of the Initial Projects.
In accordance with the terms of the MDA, the Project Parties shall each be responsible for the development and construction of their portion of the Initial Projects. The Project Parties have agreed to invest a minimum of
$611 million
in the development and construction of the Casino Project,
$15 million
in the development and construction of the Golf Course and
$25 million
in the development and construction of the Entertainment Village. On December 28, 2015, Empire entered into a Completion Guaranty, guaranteeing completion of the development and construction obligations of the Project Parties described in this paragraph.
In accordance with the terms of the MDA, EPR is responsible for the development and construction of the Waterpark and the common infrastructure-related improvements (such as streets, sidewalks, sanitary and storm sewer lines, water, gas, electric, telephone and other utility lines, systems, conduits and other similar facilities). EPR has agreed to be responsible for the development and construction of the Waterpark with a minimum capital investment of
$120 million
, and the infrastructure. On December 28, 2015, EPR Properties, a real estate investment trust and the parent company of EPR, entered into a Completion Guaranty, guaranteeing completion of the development and construction obligations of EPR described in this paragraph.
Neither party has the right to terminate the MDA unless Montreign fails to exercise the Purchase Option (as defined below) prior to its expiration in accordance with the terms and conditions of the Purchase Option Agreement (as defined below).
Empire Project Parcel Leases and Purchase Option Agreement
On September 3, 2015, MRMI and EPT entered into a non-binding term sheet (the “Term Sheet”) which contemplated, among other things, the lease by the Project Parties of parcels containing the Golf Course (the "Golf Course Parcel") and Entertainment Village (the "Entertainment Village Parcel" and, together with the Casino Parcel (defined below) and the Golf Course Parcel, the "Empire Project Parcels") in addition to the Casino Project Parcel. The Term Sheet also contemplates a separate purchase option agreement granting MRMI and/or its affiliates the right to purchase all three, but not less than all three, of the Empire Project Parcels. As a result, on December 28, 2015, the Project Parties entered into the Casino Lease, the Golf Course Lease, the Entertainment Village Lease and the Purchase Option Agreement (each as defined and described below). In addition, option payments made by the Company pursuant to a prior option agreement, which aggregate to a total of
$8.5 million
, shall be applied against rent amounts due to EPT as rent under the Casino Lease as more fully described below.
Casino Lease
On December 28, 2015, Montreign entered into a lease (the “Casino Lease”) with EPT for the lease of the Casino Parcel. The Casino Lease has a term that expires on the earlier of: (i) March 31, 2086, and (ii) upon Montreign giving EPT written notice of its election to terminate the Casino Lease (the “Termination Option”) at least twelve (
12
) months prior to any one of five Option Dates (as defined below). The option dates (each an "Option Date") under the Casino Lease mean each of the twentieth (20th), thirtieth (30th), fortieth (40th), fiftieth (50th) and sixtieth (60th) anniversaries of the commencement of the Casino Lease. Upon Montreign's timely notice of exercise of its Termination Option, the Casino Lease shall be automatically terminated effective as of the applicable Option Date.
T
he following table represents the annual fixed rent payments under the Casino Lease:
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Year ending December 31,
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Annual Fixed Rent Payments due by Period
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(in thousands)
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2016 (1)
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$
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1,000
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2017 (1) (2)
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10,000
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2018 (2) (3)
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10,500
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2019 (3)
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7,500
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2020 (3)
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7,500
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2021 to 2056 (3)
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362,624
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(1)
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Until February 29, 2016, the Company continued to make payments of
$500,000
per month it would have made under that certain Option Agreement, originally executed on December 21, 2011 and last amended on June 20, 2014 (the “Original Option Agreement”). The Original Option Agreement, which granted to the Company the right to lease the parcel on which Montreign Resort Casino (the “Casino Parcel”) would be built, was superseded by the leases for the Casino Parcel, the Entertainment Village Parcel (as defined below) and the Golf Course Parcel. From March 1, 2016 until February 28, 2017, option payments made by the Company under the Original Option Agreement, which totaled
$8.5 million
, shall be applied against annual fixed rent due by the Company under the Casino Lease.
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(2)
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From March 1, 2017 through August 31, 2018, annual fixed rent shall equal
$1 million
per month.
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(3)
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From September 1, 2018 through the remainder of the term of the Casino Lease, annual fixed rent shall equal
$7.5 million
per year, subject to an eight percent (
8%
) escalation every five years.
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In addition to the annual fixed rent, beginning September 2018 and through the remainder of the term of the Casino Lease (the “Percentage Rent Period”) Montreign is obligated to pay an annual percentage rent equal to five percent (
5%
) of the Eligible Gaming Revenue (as such term is defined in the Casino Lease) for the Percentage Rent Period. Additionally, the lease is a net lease, and Montreign has an obligation to pay the rent payable under the Casino Lease and other costs related to Montreign's use and operation of the Casino Parcel, including the special district tax assessments allocated to the Casino Parcel, not to exceed the capped dollar amount applicable to the Casino Parcel.
Golf Course Lease
On December 28, 2015, GC Tenant entered into a sublease (the “Golf Course Lease”) with Adelaar Developer for the lease of the Golf Course Parcel. The terms of the Golf Course Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Golf Course Lease, there is no percentage rent due. Annual fixed rent payments under the Golf Course Lease are represented in the table below:
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Year ending December 31,
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Annual Fixed Rent Payments due by Period
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(in thousands)
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2016 (1)
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$
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—
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2017 (2)
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0
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2018 (2)
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0
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2019 (2)
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125
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2020 (2)
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150
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2021 to 2056 (2) (3)
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7,975
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(1)
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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 2018 (the “Golf Course Opening Date”), annual fixed rent payments shall equal to
$0
.
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(2)
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From the Golf Course Opening Date and continuing for the first ten (10) years thereafter, annual fix rent shall equal
$150,000
.
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(3)
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From December 2028 through the remainder of the term of the Golf Course Lease, annual fixed rent shall equal
$250,000
.
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The Golf Course Lease is a net lease and GT Tenant is obligated to pay the rent payable under the Golf Course Lease and other costs related to Montreign's use and operation of the Golf Course Parcel, including the special district tax assessments allocated to the Golf Course Parcel, not to exceed the capped dollar amount applicable to the Golf Course Parcel. This obligation shall not be assessed against GT Tenant prior to 60 months following the Golf Course Lease Commencement Date.
Entertainment Village Lease
On December 28, 2015, EV Tenant entered into a sublease (the “Entertainment Village Lease”) with Adelaar Developer, for the lease of the Entertainment Village Parcel. The terms of the Entertainment Village Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Entertainment Village Lease, there is no percentage rent due. Annual fixed rent payments under the Entertainment Village Lease are represented in the table below:
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Year ending December 31,
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Annual Fixed Rent Payments due by Period
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(in thousands)
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2016 (1)
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$
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—
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2017 (2)
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0
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2018 (2)
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0
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2019 (2)
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125
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2020 (2)
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150
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2021 to 2056 (2) (3)
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7,975
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(1)
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From the date the Entertainment Village Lease commenced (the “Entertainment Village Lease Commencement Date”) and until the date on which the Entertainment Village opens for business, which is expected to be September 2018 (the “Entertainment Village Opening Date”), annual fixed rent payments shall equal to
$0
.
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(2)
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From the Entertainment Village Opening Date and continuing for the first ten (10) years thereafter, annual fix rent shall equal
$150,000
.
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(3)
|
From December 2028 through the remainder of the term of the Entertainment Village Lease, annual fixed rent shall equal
$250,000
.
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The Entertainment Village Lease is a net lease and EV Tenant is obligated to pay the rent payable under the Entertainment Village Lease and other costs related to Montreign's use and operation of the Entertainment Village Parcel, including the special district tax assessments allocated to the Entertainment Village Parcel, not to exceed the capped dollar amount applicable to the Entertainment Village Parcel. This obligation shall not be assessed against EV Tenant prior to 60 months following the Entertainment Village Lease Commencement Date.
Regulation
VGM and Racing Operations
Our VGM and harness horseracing and simulcast operations are overseen by the NYSGC. The legislation that created the NYSGC provides that the Board of the NYSGC shall consist of
seven
members. The NYSGC has the authority and responsibility to promulgate rules and regulations that affect the operations of our business. Our VGM, harness horseracing and simulcast activities in the State of New York are overseen by the NYSGC, Division of Lottery and Division of Horse Racing, respectively.
In addition to receiving
41%
of our VGM revenue from our operations at Monticello Casino and Raceway through March 31, 2017, the law provides for a subsidized free play allowance of
15%
.
Casino Gaming
The Upstate New York Gaming and Economic Development Act ("Gaming Act"), among other things, provides the statutory framework for the regulation of full-scale casino gaming. The Gaming Act authorizes the NYSGC to award up to four (
4
) Gaming Facility Licenses. The Gaming Act provides that no Gaming Facilities shall be authorized in Bronx, Kings, New York, Queens or Richmond counties. The state may, however, legislatively authorize additional gaming facility licenses.
In accordance with the Gaming Act, the Siting Board was charged with selecting applicants qualified to receive a Gaming Facility License and determining the location of such Gaming Facilities. There will be a seven (
7
) year exclusivity period for holders of Gaming Facility Licenses, commencing March 1, 2016, during which no further Gaming Facilities will be licensed by the NYSGC. If the Legislature authorizes additional Gaming Facility Licenses within this period, licensees shall have the right to recover a pro-rata portion of the license fee paid.
In connection with the Company's application for a Gaming Facility License in response to the Siting Board's Request for Application (the "RFA"), we paid to the NYSGC an application fee of
$1 million
("Application Fee") to help defray the costs associated with the processing and investigation of our application. However, if the costs of processing, investigation and related costs exceed the Application Fee, we shall be required to pay the additional amount to the NYSGC within thirty (
30
) days after notification of insufficient fees. If the investigation costs are below the amount of the Application Fee paid, any unexpended portion shall be returned to us.
On March 1, 2016, the Minimum Capital Investment Deposit in the aggregate of
$85.4 million
, was made. The Project Parties' portion of the Minimum Capital Investment Deposit was made in the form of a deposit bond representing approximately
$65 million
, which is
10%
of the Company's Minimum Capital Investment in the Development Projects, and EPR's portion was made in the form of a deposit bond representing approximately
$20 million
, which is
10%
of its Minimum Capital Investment in the Infrastructure and the Waterpark. In addition, on March 30, 2016, we paid the license fee of
$51 million
and is reflected on the accompanying consolidated balance sheet as an intangible asset as of March 31, 2016.
The tax rate on slot machines at Montreign Resort Casino will be
39%
and the tax rate on table games will be
10%
. The tax rate on VGM operations at Monticello Casino and Raceway will remain at the existing NYSGC commission rate and is expected to include an additional commission from NYSGC based on a rate related to the effective tax rate on all gross gaming revenue at the Gaming Facility developed by Montreign. Existing payments to the racing industry for purses and breeding will be maintained. The minimum gambling age for Montreign Resort Casino will be twenty-one, and no smoking will be authorized.
The Gaming Act imposes a
$500
annual fee on each slot machine and table game. In addition, the Gaming Act requires the maintenance of the horsemen and breeder payments at the 2013 dollar level to be adjusted annually pursuant to changes in the consumer price index.
County of Sullivan Industrial Development Agency
Montreign received from the County of Sullivan Industrial Development Agency approval for benefits including an exemption from New York State ("State") and local sales and use taxes with respect to certain items used in, or for the acquisition, construction and equipping of the Casino Project, an exemption from all mortgage recording taxes imposed in the State and a partial (or full) real property tax abatement over sixteen (
16
) years. Montreign has begun to receive the benefit of exemption from the local sales and use taxes and the real property tax abatement.
Liquidity
The accompanying condensed consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company anticipates that its current cash and cash equivalents balances and cash generated from operations will be sufficient to meet working capital requirements, excluding expenditures on the Development Projects, for at least the next twelve months. To finance a portion of the Development Projects expenses, the Company consummated the January 2016 Rights Offering, from which the Company received net proceeds of
$286.0 million
. The Company will need to raise additional funds to complete the Development Projects. Whether these resources are adequate to meet the Company’s liquidity needs beyond that period will depend on the Company’s growth and operating results and the progress of the Development Projects. To raise the additional capital necessary for the Development Projects, we may seek to enter into strategic agreements, joint ventures or similar agreements or we may sell additional debt or equity in public or private transactions, including pursuant to the Credit Suisse Commitment (as defined below). The sale of additional equity could result in additional dilution to the Company’s existing stockholders and financing arrangements may not be available to us, or may not be available in amounts or on acceptable terms.
As of March 31, 2016, we had total currents assets of approximately
$21.0 million
and total current liabilities of approximately
$36.1 million
, which liabilities includes approximately
$25.9 million
in accrued Development Project costs. As of March 31, 2016, our total assets included approximately
$170.7 million
of remaining net proceeds from the January 2015 Rights Offering and January 2016 Rights Offering (each as defined and discussed below), which will be used to pay the accrued Development Projects costs of approximately
$25.9 million
included in our current liabilities. The net proceeds from the January 2015 Rights Offering and the January 2016 Rights Offering, which will be used for Development Projects expenses, are presented on the balance sheet as a non-current asset as required by GAAP because they will be used for the construction of a long-term asset.
We have had continuing net losses and negative cash flow from operating activities, including a loss from operations of
$4.8 million
for the three months ended March 31, 2016. The net losses for the three months ended March 31, 2016 were primarily related to the pre-opening development expenses in the amount of
$3.1 million
and consisted of
$2.6 million
in land lease expense,
$201,000
in legal, consultants and other professional services,
$106,000
in insurance expense,
$97,000
in property tax expenses and
$85,000
in other expenses.
$41.2 million
of the costs incurred for the Development Projects were eligible to be capitalized for the three months ended March 31, 2016.
For the three months ended March 31, 2015, the Development Project costs incurred were approximately
$2.4 million
and consisted of
$566,000
in legal, construction manager costs, consultants and other professional services,
$1.1 million
of non-refundable payments pertaining to the Option Agreement with EPR and
$732,000
in architectural and engineering fees.
As a condition of the Gaming Facility License, the Company is required to invest, or cause to be invested the Minimum Capital Investment in the development of the Initial Projects. The Company's portion of the Minimum Capital Investment is approximately
$651.4 million
for the Development Projects. On March 1, 2016, the Minimum Capital Investment Deposit, in the aggregate amount of
$85.4 million
, was made. The Project Parties' portion of the Minimum Capital Investment Deposit was made in the form of a deposit bond representing approximately
$65 million
, which is
10%
of the Company's Minimum Capital Investment in the Development Projects. In addition, on March 30, 2016, the Company paid the license fee of
$51 million
which is reflected on the March 31, 2016 consolidated balance balance as an intangible asset.
Montreign entered into a security agreement with the entity that posted the bond, pursuant to which Montreign is required to deposit cash as collateral security in the amount of
$65 million
. The NYSGC will release the Minimum Capital Investment Deposit upon confirmation that
85%
of the Company's proposed Minimum Capital Investment has been expended. The cash collateral will be deposited onto an account in installments of which approximately
$15 million
has been paid during the first quarter of 2016 and is reflected on the accompanying consolidated balance sheet as other assets as of March 31, 2016.
Montreign shall be required to deposit additional collateral security installments as follows: July 1, 2017, in the amount of
$20 million
and January 15, 2018, in the amount of approximately
$30 million
.
To support the expenses related to the Development Projects, the Company entered into amendments to the debt and equity financing commitments initially obtained in June 2014 in support of Montreign’s application for a Gaming Facility License. For the debt portion of the Company’s financing, in June 2014, Credit Suisse committed to provide the CS Credit Commitment of up to a maximum amount of
$478 million
. On September 22, 2015, Credit Suisse and the Company entered into a further amendment to the CS Credit Commitment increasing the financing commitment Credit Suisse provided up to a maximum of
$545 million
, which amount may be reduced by no more than
$70 million
depending on the amount of furniture, fixtures and equipment financing the Company otherwise obtains. The CS Credit Commitment provides that it may change the terms of the credit facility to ensure successful syndication. The CS Credit Facility is subject to various conditions precedent, including evidence of an equity investment in Company of not less than
$301 million
, all of which equity has been raised by the Company. The CS Commitment expires on June 1, 2016. The Company obtained the CS Credit Commitment to demonstrate its ability to finance the costs and expenses of the Casino Project. However, the Company has reserved the flexibility to reassess financing alternatives and either proceed with the debt financing described herein or pursue alternative means of debt financing on terms and conditions more beneficial to the Company, subject to payment of a fee to Credit Suisse.
For the equity investment portion of the Company’s financing for the Development Projects and to redeem the outstanding Series E preferred stock of the Company (the "Series E Preferred Stock") in accordance with an existing settlement agreement, in June 2014, the Company and Kien Huat entered into a letter agreement, pursuant to which Kien Huat committed to support the Company's equity financing needs with respect to the Casino Project and Adelaar (the "Original Commitment Letter"). Pursuant to the Original Commitment Letter, Kien Huat initially agreed to participate in, and backstop, a rights offering in an amount up to
$150 million
plus the amount needed to redeem the Series E Preferred Stock if the Company commenced a rights offering on the terms described in the Original Commitment Letter in support of the Casino Project. For such commitment, the Company agreed to pay Kien Huat a fee of
1.0%
of the maximum amount raised, of which
0.5%
was paid upon execution of the Original Commitment Letter and the remaining
0.5%
being due if a rights offering was launched. In addition, the Company agreed to pay for or reimburse Kien Huat for all of its out-of-pocket expenses in connection with the negotiation, execution and delivery of the Original Commitment Letter and the consummation of the transactions contemplated thereby.
The Company and Kien Huat entered into a second amendment to the Original Commitment Letter (the “Second Amendment” and together with the Original Commitment Letter, the “Commitment Letter”) on September 22, 2015. Pursuant to the Second Amendment, Kien Huat increased its overall equity investment commitment to the Company from
$150 million
plus the amount necessary to redeem the Series E Preferred Stock to an aggregate total of
$375 million
, which amounts include the
$50 million
invested in the January 2015 Rights Offering. In particular, Kien Huat agreed to participate in, and backstop, two additional rights offerings, the first of which is the January 2016 Rights Offering (which is defined and discussed below), which Kien Huat agreed to backstop in an amount not to exceed
$290 million
. 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"). Except for the increase in the overall commitment amount, the terms and conditions of the Commitment Letter remain unchanged.
On January 4, 2016, the Company commenced a rights offering for aggregate gross proceeds of
$290 million
. 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 exercise its basic subscription rights and to exercise all rights not otherwise exercised by the other holders in an aggregate amount not to exceed
$290 million
. Under the January 2016 Standby Purchase Agreement, the Company paid Kien Huat a portion of the commitment fee described in the Commitment Letter in the amount of approximately
$1.5 million
and reimbursed Kien Huat for its expenses in an amount not exceeding
$50,000
. The January 2016 Rights Offering closed on February 17, 2016. The Company issued a total of
20,138,888
shares of common stock at
$14.40
per share. This includes
176,086
shares issued to holders upon exercise of their basic subscription and over-subscription rights and
13,136,817
shares issued to Kien Huat upon exercise of its basic subscription rights. Kien Huat also acquired the remaining
6,825,985
shares not sold in the January 2016 Rights Offering pursuant to the January 2016 Standby Purchase Agreement.
On January 5, 2015, the Company commenced a rights offering (the “January 2015 Rights Offering”) for aggregate gross proceeds of
$50 million
to raise a portion of the equity financing necessary to develop the Casino Project. In partial satisfaction of Kien Huat's obligations pursuant to the Commitment Letter, 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 ten (
10
) days of its grant. In addition, Kien Huat agreed
it would exercise all rights not otherwise exercised by the other holders in an aggregate amount not to exceed
$50 million
. Under the January 2015 Standby Purchase Agreement, the Company paid Kien Huat a portion of the commitment fee described in the Commitment Letter in the amount of
$250,000
and reimbursed Kien Huat for its expenses in an amount not exceeding
$40,000
. The January 2015 Rights Offering closed on February 6, 2015. The Company issued a total of
1,408,451
shares of common stock at
$35.50
per share. This includes
10,658
shares issued to holders upon exercise of their basic subscription and over-subscription rights and
864,360
shares issued to Kien Huat upon exercise of its basic subscription rights. Kien Huat also acquired the remaining
533,433
shares not sold in the January 2015 Rights Offering pursuant to the January 2015 Standby Purchase Agreement. The Company received net proceeds of approximately
$49.5 million
, which were used for the expenses relating to the pursuit of the Gaming Facility License and are being used for development purposes relating to the Casino Project.
We may also seek to enter into other strategic agreements, joint ventures or similar agreements or we may sell additional debt or equity in public or private transactions in support of the Development Projects and our ongoing operations. On January 3, 2014, we filed the S-3, which was declared effective on February 12, 2014, covering the offer and sale of up to
$250 million
of our securities. As of May 2, 2016, we had up to approximately
$83.7 million
available for future issuances under the S-3. However, because the Company's public float is less than
$75 million
as of the date of this filing, we will be limited in the amount of securities we may sell under the S-3 to an amount no greater than one third our public float. This amount of availability is sufficient to complete the Follow-On Rights Offering. The sale of additional equity will result in additional dilution to the Company’s existing stockholders and financing arrangements may not be available to the Company, or may not be available in amounts or on terms acceptable to the Company.
On March 3, 2015, the Company and Kien Huat entered into Amendment No. 3 (the "Third Amendment") to the Loan Agreement, dated November 17, 2010 and amended on August 8, 2012 and December 18, 2013 (the "Loan Agreement"). Pursuant to the Third Amendment, among other things, the maturity date of the Kien Huat Note was extended from March 15, 2015 to March 15, 2016. Additionally, pursuant to the Third Amendment, the Loan Agreement was amended to add the denial to issue a Gaming Facility License to the Company as an Event of Default. Pursuant to the terms of the Commitment Letter and the Loan Agreement, upon consummation of the January 2016 Rights Offering, the Kien Huat Note was converted into
1,332,058
shares of our common stock, which conversion, along with the payment in cash of interest due, satisfied the Kien Huat Note in full (the "Conversion").
Note B. Summary of Significant Accounting Policies
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, beverage 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.
The retail value amounts included in promotional allowances for the three months ended March 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Food and beverage
|
$
|
360
|
|
|
$
|
341
|
|
Non-subsidized free play
|
589
|
|
|
(128
|
)
|
Players club awards
|
119
|
|
|
25
|
|
Total retail value of promotional allowances
|
$
|
1,068
|
|
|
$
|
238
|
|
The estimated cost of providing complimentary food, beverage and other items for the three months ended March 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Food and beverage
|
$
|
530
|
|
|
$
|
535
|
|
Non-subsidized free play
|
347
|
|
|
(75
|
)
|
Players club awards
|
119
|
|
|
25
|
|
Total cost of promotional allowances
|
$
|
996
|
|
|
$
|
485
|
|
Principles of consolidation
The condensed consolidated financial statements include Empire’s accounts and their wholly-owned subsidiaries. All significant inter-company balances and transactions are eliminated in consolidation.
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
as of March 31, 2016 and December 31, 2015.
Project Development Costs
Because 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, all costs incurred for the Development Projects were expensed until the Company was awarded a Gaming Facility License on December 21, 2015. As a result of being awarded the Gaming Facility License, the Company began capitalizing the expenditures on the Development Projects during the fourth quarter of 2015.
Loss per common share
The Company computes basic loss per share by dividing net loss applicable to common shareholders 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 March 31, 2016 and 2015 are the same.
The following table shows the approximate number of common stock equivalents outstanding at March 31, 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 three months ended March 31, 2016 and 2015, because their inclusion would have been anti-dilutive.
|
|
|
|
|
|
|
|
Outstanding at March 31,
|
|
2016
|
|
2015
|
Options
|
52,000
|
|
|
148,400
|
|
Warrants
|
133,000
|
|
|
216,600
|
|
Option Matching Rights
|
22,000
|
|
|
237,000
|
|
Restricted stock
|
199,000
|
|
|
21,400
|
|
Shares to be issued upon conversion of long-term loan, related party
|
—
|
|
|
1,315,000
|
|
Total
|
406,000
|
|
|
1,938,400
|
|
Pursuant to the terms of an investment agreement between the Company and Kien Huat, 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.
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 FASB, for its financial assets and liabilities that had not been previously carried at fair value. The Company’s financial instruments are comprised of current assets, current liabilities and a long-term loan. Current assets and current liabilities approximate fair value due to their short-term nature.
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 March 31, 2016, there was approximately
$3.6
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
4.00
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 in the amount of $51 million during the three months ended March 31, 2016. The term of the gaming license is 10 years, however amortization will not commence until the completion of construction and the opening to the general public of the Montreign Resort Casino. Amortization will be recognized on a straight line basis beginning at that time and continuing until it 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.
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.
Recent accounting pronouncements
In May 2014, the FASB issued 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, 2016, including interim periods within that reporting period, and early adoption is prohibited. On July 9, 2015, the FASB reaffirmed the guidance in its April 29, 2015 proposed Accounting Standards Update ("ASU") that defers the effective date of the new revenue recognition standard by one year and allows early adoption as of the original effective date. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is assessing the impact that the new revenue recognition guidance will have on the consolidated financial statements.
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. Early adoption is permitted. The Company is currently evaluating its leases against the requirements of this pronouncement.
In March 2016, FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which provides guidance for accounting for share based compensation for employees. Under ASU 2016-09, several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is assessing the impact that the new stock compensation guidance will have on the consolidated financial statements.
Note C. Property and Equipment, Capitalized Project Development Costs and Cash for Development Projects
Property and Equipment
Property and equipment at March 31, 2016 and December 31, 2015 consists of:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
3/31/2016
|
|
12/31/2015
|
Land
|
$
|
770
|
|
|
$
|
770
|
|
Land improvements
|
1,732
|
|
|
1,732
|
|
Buildings
|
4,727
|
|
|
4,727
|
|
Building improvements
|
27,301
|
|
|
27,284
|
|
Vehicles
|
302
|
|
|
280
|
|
Furniture, fixtures and equipment
|
3,903
|
|
|
3,894
|
|
Construction in Progress
|
175
|
|
|
197
|
|
|
38,910
|
|
|
38,884
|
|
Less—Accumulated depreciation
|
(13,431
|
)
|
|
(13,095
|
)
|
|
$
|
25,479
|
|
|
$
|
25,789
|
|
Depreciation expense was approximately
$336,000
and
$333,000
for the three months ended March 31, 2016 and 2015, respectively.
The VGMs in the Company’s facility are owned by the NYSGC and, accordingly, the Company's consolidated financial statements include neither the cost nor the depreciation of those devices.
Capitalized Development Projects Costs
As a result of being awarded the Gaming Facility License on December 21, 2015, the Company began capitalizing the expenditures on the Casino Project during the fourth quarter of 2015. All expenditures that could be capitalized related specifically to the Casino Project in fiscal 2015. Beginning in the first quarter of 2016, the Company also incurred expenditures relating to the Entertainment Village and the Golf Course that could be capitalized. Accordingly, the balance sheet item "capitalized project development costs" was renamed "Capitalized Development Projects costs" to collectively reflect the capitalized expenditures for the Casino Project, Entertainment Village and Golf Course.
At March 31, 2016, total capitalized Development Projects costs were approximately
$51.6 million
and consisted of construction costs, site development, contractor insurance, general conditions, construction manager fees, and professional fees such as architectural, legal and accounting fees and is reflected on the balance sheet as capitalized Development Projects costs.
At December 31, 2015, total capitalized Development Projects costs incurred were approximately
$10.4 million
and consisted of
$10.3 million
in architectural, engineering fees, construction manager costs and subcontractor costs and approximately
$127,000
in legal, consultants and other costs and is reflected on the balance sheet as capitalized Development Projects costs.
Cash for Development Projects
Pursuant to the MDA, executed on December 28, 2015, the Company assumed responsibility for the development of the Entertainment Village and the Golf Course in addition to the Casino Project. Accordingly, the balance sheet item "Cash for development of the Casino Project" was renamed "Cash for Development Projects" to collectively reflect the cash available for the Development Projects.
At March 31, 2016, the
$170.7
million Cash for the Development Projects on the consolidated balance sheet represents the remaining portion from the January 2016 Rights Offering to be utilized for the Casino Project, Golf Course, and Entertainment Village.
At December 31, 2015, the
$15.4 million
cash for development of the Casino Project on the consolidated balance sheet represents the remaining funds from the January 2015 Rights Offering to be utilized for the Casino Project.
Note D. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities, as presented on the balance sheet, are comprised of the following at March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
3/31/2016
|
|
12/31/2015
|
Liability for horseracing purses
|
$
|
994
|
|
|
$
|
529
|
|
Accrued payroll
|
1,157
|
|
|
1,719
|
|
Series E payable
|
—
|
|
|
1,500
|
|
Accrued redeemable points
|
116
|
|
|
67
|
|
Liability to NYSGC
|
1,224
|
|
|
1,012
|
|
Liability for local progressive jackpot
|
801
|
|
|
927
|
|
Accrued Development Projects costs
|
25,925
|
|
|
10,811
|
|
Accrued professional fees
|
1,934
|
|
|
844
|
|
Federal tax withholding payable
|
154
|
|
|
154
|
|
Accrued other
|
1,680
|
|
|
1,664
|
|
Total accrued expenses and other current liabilities
|
$
|
33,985
|
|
|
$
|
19,227
|
|
Note E. Long-Term Loan, Related Party
Conversion of Kien Huat Note
On November 17, 2010, Empire entered into a loan agreement (the "Loan Agreement") with Kien Huat, in the principal amount of
$35 million
of which
$17.6 million
was outstanding as of December 31, 2015. On June 26, 2014, Kien Huat and the Company entered into a commitment letter (the "Commitment Letter") pursuant to which Kien Huat agreed, among other things, to convert in accordance with its terms that certain convertible promissory note in the principal amount of
$17.4 million
(the “Kien Huat Note”) into shares of the Company’s common stock. Pursuant to the terms of the Commitment Letter and the Loan Agreement, on February 17, 2016, the Kien Huat Note was converted into
1,332,058
shares of common stock.
Letter Agreement
As a result of Kien Huat’s increased proportionate ownership following the consummation of the January 2016 Rights Offering and the conversion of the Kien Huat Note, at the request of the Company, on February 17, 2016, Kien Huat and the Company entered a letter agreement (the “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 Project, Kien Huat has agreed not to take certain actions with respect to the Company. In particular, during such time period, Kien Huat has agreed not to, and to cause its affiliates other than the Company or its subsidiaries (collectively with Kien Huat, “Kien Huat Parties”) not to, take certain actions in furtherance of a “going-private” transaction (as such term is defined in the Letter Agreement) involving the Company unless such transaction is subject to the approval of (x) holders of a majority of the votes represented by the common stock, Series B preferred stock and any other capital stock of the Company entitled to vote together with the common stock in the election of the board of directors (the “Board”) of the Company (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 (3) 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)
.
Note F. Bryanston Settlement Agreement
Effective as of June 30, 2013 (the “Closing Date”), the Company, Kien Huat, Colin Au Fook Yew (“Au”) and Joseph D'Amato (“D'Amato” and, together with the Company, Kien Huat and Au, the “Company Parties”) consummated the closing of a Settlement Agreement and Release (as amended, the “Settlement Agreement”) with Stanley Stephen Tollman (“Tollman”) and Bryanston Group, Inc. (“Bryanston Group” and, together with Tollman, the “Bryanston Parties”). Pursuant to the Settlement Agreement, the Company Parties and the Bryanston Parties agreed to the settlement of certain claims relating to shares of Series E Preferred Stock of the Company (the “Preferred Stock”) held by the Bryanston Parties and that certain Recapitalization Agreement, dated December 10, 2002, by and between, among others, the Bryanston Parties and a predecessor to the Company (the “Recapitalization Agreement”), pursuant to which the Bryanston Parties acquired the Preferred Stock. On the Closing Date, the Recapitalization Agreement terminated and ceased to have any further force and effect as between the Bryanston Parties and the Company.
As a result of the Settlement Agreement on June 30, 2013, and pursuant to ASC 480, the Series E Preferred Stock became contractually redeemable subject to the terms and conditions of the Settlement Agreement and has been classified as a liability on the accompanying December 31, 2015 balance sheet. The amount of the liability recorded on the balance sheet is the amount at which it would be settled if the redemption occurred as of the balance sheet date. The difference between the redemption amount and the amount recorded in the balance sheet as of the date of the Settlement Agreement has been reflected as a deemed dividend on that date. Changes in the redemption value of the liability subsequent to the date of the Settlement Agreement are recorded as interest expense. 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 has been recorded pursuant to the payment terms in place at December 31, 2015 which was
$1.5 million
as a current liability and the remainder as a long term liability on the accompanying December 31, 2015 balance sheet.
Interest expense associated with the change in the redemption amount of the liability was
$231,000
and
$310,000
for the three months ended March 31, 2016 and 2015, respectively.
Note G. Stockholders’ Equity
Authorized Capital
On February 16, 2011, Empire filed an amended and restated certificate of incorporation (the “Amended Charter”) with the Secretary of State of the State of Delaware. The Amended Charter amended Empire’s prior Amended and Restated Certificate of Incorporation, by: (1) increasing Empire’s authorized capital stock from
100 million
shares, consisting of
95 million
shares of common stock and
5 million
shares of preferred stock, to a total of
155 million
shares, consisting of
150 million
shares of common stock and
5 million
shares of preferred stock (the “Authorized Capital Amendment”); and (2) eliminating the classified board provisions and providing for the annual election of all directors (the “Declassification Amendment”). The Authorized Capital Amendment and the Declassification Amendment were each approved by the requisite vote of Empire’s stockholders at a special meeting of stockholders held on February 16, 2011.
Common Stock
January 2016 Rights Offering
On January 4, 2016, we commenced a 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. The subscription rights were listed for trading on The Nasdaq Stock Market under the symbol "NYNYR" for the duration of the January 2016 Rights Offering. In connection with the January 2016 Rights Offering, on December 31, 2015, we and Kien Huat entered into the January 2016 Standby Purchase Agreement. Pursuant to the January 2016 Standby Purchase Agreement, Kien Huat agreed to (i) exercise its basic subscription rights to acquire approximately
$30 million
of our common stock within ten (
10
) days of the commencement of the January 2016 Rights Offering with a closing proximate thereto and (ii) to exercise the remainder of its basic subscription rights prior to the expiration date of the January 2016 Rights Offering. In addition, Kien Huat agreed it would exercise all rights not otherwise exercised by the other holders in the January 2016 Rights Offering, which we refer to as the standby purchase, upon the same terms as other holders in an aggregate amount not to exceed
$290 million
. Pursuant to the January 2016 Standby Purchase Agreement, we paid Kien Huat a commitment fee in the amount of
$1,450,000
, which is equal to
0.5%
of the maximum amount of the January 2016 Rights Offering, and reimbursed Kien Huat for its expenses in an amount not exceeding
$50,000
. The net proceeds of the January 2016 Rights Offering will be used for (i) the expenses relating to the development of the Casino Project, (ii) to redeem the outstanding shares of the Series E preferred stock of the Company in accordance with the terms of an existing settlement agreement and (iii) the expenses related to the development of the Golf Course and the Entertainment Village and to support the working capital needs of the Company.
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
following the deduction of expenses. After giving effect to the January 2016 Rights Offering (including the standby purchase pursuant to the January 2016 Standby Purchase Agreement) and the Note Conversion, Kien Huat owns approximately
88.7%
of the outstanding shares of the Company’s common stock.
Preferred Stock and Dividends
The Company’s Series B Preferred Stock has voting rights of
0.16
votes per share and each share is convertible into
0.054
shares of its 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, 2015 and 2014, there were
44,258
shares of Series B Preferred Shares outstanding.
The Board authorized the cash payment of quarterly dividends for calendar year 2016. A payment in the amount of $32,087 was made on April 1, 2016.
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 the same day. The cash dividend was calculated as if it were a dividend issued in shares of our common 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 (if it had been paid quarterly) multiplied by
1.3
.
On February 9, 2015, our Board authorized the issuance of
5,102
shares of our common stock in payment of dividends due for the year ended December 31, 2014 on our Series B Preferred Stock. The recorded value of these shares was
approximately
$159,000
. At December 31, 2014, the Company had undeclared dividends on the Series B Preferred Stock of approximately
$159,000
.
Note H. Concentration
As of March 31, 2016, the Company has
one
debtor, that consists of Philadelphia Park which represented
15.5%
of the total net outstanding racing related accounts receivable.
As of March 31, 2015, the Company had
one
debtor, that consists of Hawthorn OTB which represented
11.1%
of the total net outstanding racing related accounts receivable.
Note I. Commitments and Contingencies
Legal Proceedings
Monticello Raceway Management, Inc. v. Concord Associates L.P.
On January 25, 2011, Empire’s subsidiary, MRMI, filed a complaint in the Sullivan County Court against Concord, an affiliate of Louis R. Cappelli who was a significant stockholder. The lawsuit seeks amounts that MRMI believes is owed to it under an agreement between Concord, MRMI and the MHHA (the “2008 MHHA Agreement”). Pursuant to the 2008 MHHA Agreement, until the earlier to occur of the commencement of operations at the gaming facilities to be developed by Concord at the site of the former Concord hotel and former Concord resort or July 31, 2011, MRMI was to continue to pay to the MHHA
8.75%
of the net win from VGM activities at Monticello Casino and Raceway, and Concord was to pay the difference, if any, between
$5 million
per year and
8.75%
of the net win from VGM activities (“VGM Shortfall”) during such period. As of December 31, 2010, MRMI believes Concord owed it approximately
$300,000
for the VGM Shortfall. Concord has contested its responsibility to make such VGM Shortfall payments to MRMI. In its Decision and Order, dated January 15, 2014, the Sullivan County Supreme Court awarded damages to MRMI in the approximate amount of
$308,000
plus interest and costs. On February 4, 2014, Concord filed a Notice of Appeal with the Appellate Division of the New York Supreme Court, Third Department ("Third Department"). The oral argument on the appeal was heard by the Third Department on April 28, 2015 and the Third Department determined that the damages to MRMI should be reduced to
$122,562
. On July 8, 2015, we filed a Notice of Motion for Re-Argument and Leave to Appeal (the "Motion") regarding the decision of the Third Department. The Motion was denied by the Third Department on September 2, 2015. On October 9, 2015, we filed a Motion for Leave to Appeal with the Court of Appeals. In an opinion dated November 24, 2015, the Court of Appeals denied our Motion for Leave to Appeal. The Appellate Division had remanded the case to the trial court for a recomputation of the amount of the judgment. In an Order and Amended Judgment dated December 22, 2015, MRMI was awarded a judgment in the amount of
$183,097
. MRMI received payment of its judgment on April 15, 2016 in the amount of approximately
$188,000
.
Concord Associates, L.P. v. Entertainment Properties Trust
On September 18, 2013, the United States District Court for the Southern District of New York (“SDNY”) granted Motions to Dismiss filed by the Company and all other defendants. This lawsuit was filed in March 2012, by Concord and various affiliates in the SDNY and asserted in an amended complaint various federal antitrust claims against the Company, EPR, EPT, Genting NY LLC and Kien Huat. The lawsuit arises out of the Company's exclusivity agreement and option agreement with EPT to develop the site of the EPT Property located in Sullivan County, New York. Concord brought federal antitrust claims alleging conspiracy in restraint of trade, conspiracy to monopolize and monopolization. Concord also brought state law claims for tortious interference with contract and business relations. Concord sought damages in an amount to be determined at trial but not less than subject to automatic trebling under federal antitrust laws), unspecified punitive damages and permanent injunctive relief. In its decision, the SDNY dismissed Concord’s federal antitrust claims with prejudice and dismissed Concord's state law claims without prejudice. On March 18, 2016, the United States Court of Appeals for the Second Circuit affirmed SDNY's dismissal of Concord's complaint.
Other Proceedings
The Company is a party from time to time to various other 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 its consolidated financial position, results of operations or cash flows.
Operating leases
The following table represents the minimum lease payments under the Company's operating leases:
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
(in thousands)
|
Year ending December 31,
|
|
Total Lease Payments
|
|
|
|
2016
|
|
$
|
1,000
|
|
2017
|
|
10,000
|
|
2018
|
|
10,500
|
|
2019
|
|
7,750
|
|
2020
|
|
7,800
|
|
2021 to 2056
|
|
378,574
|
|
Total
|
|
$
|
415,624
|
|
|
|
|
Note J. Related Party Transactions
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 Adelaar Project and the Casino Project. 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 and 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 Project pursuant to the Moelis Letter Agreement.
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 determination of whether to enter into such agreement.
Note K. Loss Per Share
As previously discussed in Note A, 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 during the three months ending March 31, 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 three months ended March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Three months ending March 31,
|
|
|
2015
|
|
|
(in thousands, except per share)
|
|
|
|
Weighted average number of common shares, as reported
|
|
8,974
|
|
Adjustment
|
|
1,458
|
|
Weighted average number of common shares, as adjusted
|
|
10,432
|
|
|
|
|
Loss per common share, as reported
|
|
$
|
(0.46
|
)
|
Adjustment
|
|
$
|
(0.07
|
)
|
Loss per common share, as adjusted
|
|
$
|
(0.39
|
)
|
|
|
|