Note 15 – Commitments and Contingencies

Rocky Gap Lease

The Company entered into an operating ground lease with the Maryland Department of Natural Resources for approximately 270 acres in the Rocky Gap State Park in which Rocky Gap is situated. The lease expires in 2052, with an option to renew for an additional 20 years.

Under the lease, rent payments are due and payable annually in the amount of $275,000 plus 0.9% of any gross operator share of gaming revenue (as defined in the lease) in excess of $275,000, and $150,000 plus any surcharge revenue in excess of $150,000. Surcharge revenue consists of amounts billed to and collected from guests and are $3.00 per room per night and $1.00 per round of golf. Rent expense associated with the lease was $0.3 million (net of surcharge revenue of $0.1 million) during each of fiscal years 2016, 2015 and 2014.

Gold Town Casino Leases

The Company’s Gold Town Casino is located on four leased parcels of land, comprising approximately nine acres in the aggregate, in Pahrump, Nevada. The leases are with unrelated third parties and have various expiration dates beginning in 2026 (for the parcel on which the Company’s main casino building is located, which we lease from a competitor), and the Company subleases approximately two of the acres to an unrelated third party. Rental income during each of the years ended December 31, 2016 and 2015 was less than $0.1 million related to the sublease of the two acres in Pahrump, Nevada.

Other Operating Leases

The Company leases its branded tavern locations, office headquarters building, equipment and vehicles under noncancelable operating leases that are not subject to contingent rents. The original terms of the current branded tavern location leases range from one to 15 years with various renewal options from one to 15 years. The Company has operating leases with related parties for certain of its tavern locations and its office headquarters building. The lease for the Company’s office headquarters building expires in July 2025. A portion of the office headquarters building is sublet to a related party. Rental income during each of the years ended December 31, 2016 and 2015 was less than $0.1 million for the sublet portion of the office headquarters building. See Note 16, Related Party Transactions, for more detail. Gaming device placement contracts in the form of space lease agreements are also accounted for as operating leases. Under space lease agreements, the Company pays fixed monthly rental fees for the right to install, maintain and operate its gaming devices at business locations, which are recorded in gaming expenses.

Operating lease rental expense, which is calculated on a straight-line basis, net of surcharge revenue, associated with all operating leases during 2016, 2015 and 2014 was as follows:

	Year Ended
	December 31, 2016		December 31, 2015		December 28, 2014
	(In thousands)
Rent expense
Space lease agreements	$	40,848	$	16,032	$	—
Related party leases		2,429		1,108		—
Other operating leases		11,784		4,619		339
	$	55,061	$	21,759	$	339

The current and long-term obligations under capital leases are included in “Current portion of long-term debt” and “Long-term debt, net,” respectively. The majority of the capital leases related to vehicles with minimum lease payment terms of four years or less.

As of December 31, 2016, future minimum lease payments, not subject to contingent rents, were as follows:

	2017		2018		2019		2020		2021		Thereafter		Total
	(In thousands)
Minimum lease payments – operating leases
Space lease agreements	$	31,957	$	25,374	$	24,740	$	5,555	$	2,100	$	1,450	$	91,176
Related party leases		2,434		2,464		2,476		2,488		2,501		12,243		24,606
Other operating leases		10,846		9,727		9,014		8,911		8,278		78,411		125,187
	$	45,237	$	37,565	$	36,230	$	16,954	$	12,879	$	92,104	$	240,969

Minimum lease payments – capital leases
Furniture and equipment	$	596	$	631	$	556	$	241	$	78	$	—	$	2,102
Less: Amounts representing interest														(132	)
Total obligations under capital leases													$	1,970

Participation and Revenue Share Agreements

The Company also enters into gaming device placement contracts in the form of participation and revenue share agreements. Under revenue share agreements, the Company pays the business location a percentage of the gaming revenue generated from the Company’s gaming devices placed at the location, rather than a fixed monthly rental fee. Under participation agreements, the business location holds the applicable gaming license and retains a percentage of the gaming revenue that it generates from the Company’s gaming devices. During the years ended December 31, 2016 and 2015, the total contingent payments recognized by the Company (recorded in gaming expenses) under revenue share and participation agreements were $128.1 million and $41.7 million, respectively, including $2.1 million and $0.7 million, respectively, under revenue share and participation agreements with related parties, as described in Note 16, Related Party Transactions. No amounts were recognized by the Company under such agreements during 2014.

The Company also enters into amusement device and ATM placement contracts in the form of revenue share agreements. Under these revenue share agreements, the Company pays the business location a percentage of the non-gaming revenue generated from the Company’s amusement devices and ATMs placed at the location. During the year ended December 31, 2016, the total contingent payments recognized by the Company (recorded in other operating expenses) for amusement devices and ATMs under such agreements were less than $1.0 million. No amounts were recognized by the Company under such agreements during 2015 and 2014.

Employment Agreements

The Company has entered into at-will employment agreements with each of the Company’s executive officers. Under each employment agreement, in addition to the executive’s annual base salary, the executive is entitled to participate in the Company’s incentive compensation programs applicable to executive officers of the Company. The executives are also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements. Each executive is also provided with other benefits as set forth in his employment agreement. In the event of a termination without “cause” or a “constructive termination” of the Company’s executive officers (as defined in their respective employment agreements), the Company could be liable for estimated severance payments of up to $8.1 million for Mr. Sartini, $2.9 million for Stephen A. Arcana, $3.5 million for Charles H. Protell, $2.1 million for Sean T. Higgins, $1.2 million for Blake L. Sartini II, and $0.4 million for Gary A. Vecchiarelli (assuming each officer’s respective annual salary and health benefit costs as of December 31, 2016 are the amounts in effect at the time of termination and excluding potential expense related to acceleration of stock options).

Miscellaneous Legal Matters

From time to time, the Company is involved in a variety of lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of business, including proceedings concerning labor and employment matters, personal injury claims, breach of contract claims, commercial disputes, business practices, intellectual property, tax and other matters. Although lawsuits, claims, investigations and other legal proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of its currently pending matters will not have a material adverse effect on its business, financial condition, results of operations or liquidity. Regardless of the outcome, legal proceedings can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect the Company’s business, financial condition, results of operations or liquidity in a particular period.

On February 2, 2017, a former employee filed a purported class action lawsuit against the Company in the District Court of Clark County, Nevada, on behalf of similarly situated individuals employed by the Company in the State of Nevada. The lawsuit alleges the Company violated certain Nevada labor laws including payment of an hourly wage below the statutory minimum wage without providing a qualified health insurance plan and an associated failure to pay proper overtime compensation. The complaint seeks, on behalf of the plaintiff and members of the putative class, an unspecified amount of damages (including punitive damages), injunctive and equitable relief, and an award of attorneys’ fees, interest and costs. This case is at an early stage in the proceedings, and the Company is therefore unable to make a reasonable estimate of the probable loss or range of losses, if any, that might arise from this matter. Therefore, the Company has not recorded any amount for the claim as of the date of this filing. While legal proceedings are inherently unpredictable and no assurance can be given as to the ultimate outcome of this matter, based on management’s current understanding of the relevant facts and circumstances, the Company believes that these proceedings should not have a material adverse effect on the Company’s financial position, results of operations or cash flows.