Drive Shack Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

EQUITY AND EARNINGS PER SHARE

EQUITY AND EARNINGS PER SHARE

12 Months Ended

Dec. 31, 2017

Stockholders' Equity Note [Abstract]

Earnings per Share

The Company is required to present both basic and diluted earnings per share (“EPS”). The following table shows the amounts used in computing basic and diluted EPS:



	For Year Ended December 31,
	2017			2016		2015
Numerator for basic and diluted earnings per share:
(Loss) income from continuing operations after preferred dividends and noncontrolling interest	$	(47,781	)	$	71,499	$	15,621
Income from discontinued operations, net of tax	—			—		646
(Loss) Income Applicable to Common Stockholders	$	(47,781	)	$	71,499	$	16,267

Denominator:
Denominator for basic earnings per share - weighted average shares	66,903,457			66,709,925		66,479,321
Effect of dilutive securities
Options	—			2,078,515		2,168,594
Denominator for diluted earnings per share - adjusted weighted average shares	66,903,457			68,788,440		68,647,915

Basic earnings per share:
(Loss) income from continuing operations per share of common stock, after preferred dividends and noncontrolling interest	$	(0.71	)	$	1.07	$	0.23
Income from discontinued operations per share of common stock	$	—		$	—	$	0.01
(Loss) Income Applicable to Common Stock, per share	$	(0.71	)	$	1.07	$	0.24

Diluted earnings per share:
Income from continuing operations per share of common stock, after preferred dividends and noncontrolling interest	$	(0.71	)	$	1.04	$	0.23
Income from discontinued operations per share of common stock	$	—		$	—	$	0.01
Income Applicable to Common Stock, per share	$	(0.71	)	$	1.04	$	0.24

Basic EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period. Due to rounding, income per share from continuing operations and income per share from discontinued operations may not sum to the income per share of common stock. The Company’s common stock equivalents are its options. During 2017, based on the treasury stock method, the Company had 1,749,596 potentially dilutive common stock equivalents which were excluded due to the Company's loss position. During 2016 and 2015, based on the treasury stock method, the Company had: 2,078,515; and 2,168,594; dilutive common stock equivalents, respectively, resulting from its outstanding options. During 2017, 2016 and 2015, the Company had: 201,430; 309,024; and 259,277 antidilutive options, respectively. Net income (loss) applicable to common stockholders is equal to net income (loss) less preferred dividends.

Common Stock Issuances

In June 2015 and December 2015, the Company issued a total of 51,777 and 18,798 shares, respectively, of its common stock to its independent directors as a component of their 2015 annual compensation.

In May 2016 and July 2016, the Company issued a total of 57,740 and 21,798 shares, respectively, of its common stock to its independent directors as a component of their annual compensation.

In January 2017, May 2017, October 2017 and December 2017, the Company issued a total of 18,074; 90,366; 30,822 and 13,538 shares, respectively, of its common stock to its independent directors as a component of their annual compensation.

Option Plan

In June 2002, (with the approval of our board of directors) we adopted the Newcastle Nonqualified Stock Option and Incentive Award Plan (the "Newcastle Option Plan"), for officers, directors, consultants and advisors, including the Manager and its employees.

In May 2012, our board of directors adopted the 2012 Newcastle Nonqualified Stock Option and Incentive Plan (the "2012 Plan") which was approved by our shareholders. The 2012 Plan was adopted as the successor to the Newcastle Option Plan for officers, directors, consultants and advisors, including the Manager and its employees, and facilitated the continued use of long-term equity-based awards and incentives for the benefit of the service providers to us and our Manager.

On April 8, 2014, our board of directors adopted the 2014 Plan, which was approved by our shareholders and was amended and restated by our board of directors as of September 17, 2014 to reflect the 1-for-3 reverse stock split, which was effective after the close of trading on August 18, 2014, and as of November 3, 2014 to reflect the 1-for-2 reverse stock split, which was effective after the close of trading on October 22, 2014. The 2014 Plan was adopted as the successor to the 2012 Plan for officers, directors, consultants and advisors, including the Manager and its employees, and facilitated the continued use of long-term equity-based awards and incentives for the benefit of the service providers to us and our Manager.

On April 16, 2015, our board of directors adopted the 2015 Newcastle Investment Corp. Nonqualified Option and Incentive Award Plan (the “2015 Plan”), which was approved by our shareholders. The 2015 Plan is the successor to the 2014 Plan for officers, directors, consultants and advisors, including the Manager and its employees, and is intended to facilitate the continued use of long-term equity-based awards and incentives for the benefit of the service providers to us and our Manager. The maximum number of shares available for issuance under the 2015 Plan is 300,000 shares, as increased on the date of any equity issuance by us during the one-year term of the 2015 Plan by ten percent of the equity securities issued by us in such equity issuance.

On April 7, 2016, our board of directors adopted the 2016 Newcastle Investment Corp. Nonqualified Option and Incentive Award Plan (the “2016 Plan”), which was approved by our shareholders. The 2016 Plan is the successor to the 2015 Plan for officers, directors, consultants and advisors, including the Manager and its employees, and is intended to facilitate the continued use of long-term equity-based awards and incentives for the benefit of the service providers to us and our Manager. The maximum number of shares available for issuance under the 2016 Plan is 300,000 shares, as increased on the date of any equity issuance by us during the one-year term of the 2016 Plan by ten percent of the equity securities issued by us in such equity issuance.

On April 11, 2017, our board of directors adopted the 2017 Drive Shack Inc. Nonqualified Option and Incentive Award Plan (the “2017 Plan”), which was approved by our shareholders. The 2017 Plan is the successor to the 2016 Plan for officers, directors, consultants and advisors, including the Manager and its employees (through January 1, 2018), and is intended to facilitate the continued use of long-term equity-based awards and incentives for the benefit of our service providers. The maximum number of shares available for issuance under the 2017 Plan is 300,000 shares, as increased on the date of any equity issuance by us during the one-year term of the 2017 Plan by ten percent of the equity securities issued by us in such equity issuance. Effective as of January 1, 2018, no awards will be granted or otherwise awarded to the Manager under the 2017 Plan.

All outstanding options granted under the 2016 Plan, 2015 Plan, 2014 Plan, 2012 Plan and the Newcastle Option Plan will continue to be subject to the terms and conditions set forth in the agreements evidencing such options and the terms of the 2016 Plan, 2015 Plan, 2014 Plan, 2012 Plan and the Newcastle Option Plan. Upon exercise, all options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the strike price per share, unless advance approval is made to settle the option in shares of common stock.

On May 7, 2015, and pursuant to the anti-dilution provisions of the 2014 Plan, the 2012 Plan and Newcastle Option Plan, as applicable, the Company’s board of directors approved an equitable adjustment of all outstanding options in order to account for the impact of the 2014 return of capital distributions. The equitable adjustment entails a strike price adjustment and the issuance of additional options which were determined so as to compensate for the loss in value that would have otherwise occurred as a result of the 2014 return of capital distributions. As a result of this adjustment, options relating to a total of 178,740 shares were issued on May 7, 2015 at a strike price of $1.00 per share.

Upon joining the board of directors, the non-employee directors were, in accordance with the Newcastle Option Plan or the 2015 Plan, as applicable, automatically granted options relating to an aggregate of 333 shares of common stock. The fair value of such options was not material at the date of grant.

For the purpose of compensating the Manager for its role in raising capital for the Company, the Manager has been granted options relating to shares of the Company’s common stock, with strike prices subject to adjustment as necessary to preserve the value of such options in connection with the occurrence of certain events (including capital dividends and capital distributions made by the Company). These options represented an amount equal to 10% of the shares of common stock of the Company sold in its public offerings and the value of such options was recorded as an increase in equity with an offsetting reduction of capital proceeds received. The options granted to the Manager, which may be assigned by Fortress Investment Group LLC (“Fortress”) to its employees, were fully vested on the date of grant and one thirtieth of the options become exercisable on the first day of each of the following thirty calendar months, or earlier upon the occurrence of certain events, such as a change in control of the Company or the termination of the Management Agreement. These options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the strike price per share, unless a majority of the independent members of the Company’s board of directors determine to settle the option in shares of common stock. The options expire ten years from the date of issuance. Effective as of January 1, 2018, no awards will be granted or otherwise awarded to the Manager.

In connection with the spin-off of New Residential on May 15, 2013, 3.6 million options that were held by the Manager, or by the directors, officers or employees of the Manager, were converted into an adjusted Company option and a new New Residential option. The strike price of each adjusted Company option and New Residential option was set to collectively maintain the intrinsic value of the Company option immediately prior to the spin-off of New Residential and to maintain the ratio of the strike price of the adjusted Company option and the New Residential option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five-day average closing price subsequent to the spin-off date.

In connection with the spin-off of New Media on February 13, 2014, the strike price of each Company option was reduced by $5.34 to reflect the adjusted value of the Company’s shares as a result of the spin-off. The adjusted value was calculated based on the five-day average closing price of the New Media's shares subsequent to the spin-off date.

In connection with the spin-off of New Senior on November 6, 2014, 5.5 million options that were held by the Manager, or by the directors, officers or employees of the Manager, were converted into an adjusted Company option and a new New Senior option. The strike price of each adjusted Company option and New Senior option was set to collectively maintain the intrinsic value of the Company option immediately prior to the spin-off of New Senior and to maintain the ratio of the strike price of the adjusted Company option and the New Senior option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five-day average closing price subsequent to the spin-off date.

The following is a summary of the changes in the Company's outstanding options for the year ended December 31, 2017.



	Number of Options		Weighted Average Strike Price		Weighted Average Life Remaining (in years)
Balance at December 31, 2016	5,126,906		$	2.79
Expired	(116,330	)	13.13
Balance at December 31, 2017	5,010,576		$	2.55	5.59 years

Exercisable at December 31, 2017	3,858,081		$	2.58	5.61 years

The Company's outstanding options were summarized as follows:



	Year Ended December 31, 2017		Year Ended December 31, 2016
	Issued in 2011 and thereafter	Total	Issued Prior to 2011	Issued in 2011 and thereafter	Total
Held by the Manager	3,857,748	3,857,748	110,029	5,010,243	5,120,272
Issued to the Manager and subsequently transferred to certain Manager’s employees ^(A)	1,152,495	1,152,495	6,301	—	6,301
Issued to the independent directors	333	333	—	333	333
Total	5,010,576	5,010,576	116,330	5,010,576	5,126,906


(A)	The Company and the Manager agreed that options held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options will relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018.

The following table summarizes the Company’s outstanding options at December 31, 2017. Note that the last sales price on the New York Stock Exchange for the Company’s common stock in the year ended December 31, 2017 was $5.53 per share.



Recipient	Date of Grant/Exercise	Number of Options (A)		Options Exercisable at December 31, 2017	Weighted Average Strike Price (A)		Fair Value At Grant Date (millions) (B)			Intrinsic Value at December 31, 2017 (millions)
Directors	Various	3,666		333	$	—	Not Material			—
Manager ^(C)	2002 - 2007	587,277		—	$	0.00	$	6.4		—
Manager ^(C)	Mar-11	311,853		144,511	$	1.00	$	7.0	(J)	$	1.0
Manager ^(C)	Sep-11	524,212		271,425	$	1.00	$	5.6	(K)	$	1.7
Manager ^(C)	Apr-12	348,352		209,782	$	1.00	$	5.6	(L)	$	1.3
Manager ^(C)	May-12	396,316		237,608	$	1.00	$	7.6	(M)	$	1.5
Manager ^(C)	Jul-12	437,991		266,076	$	1.00	$	8.3	(N)	$	1.6
Manager ^(C)	Jan-13	958,331		680,862	$	2.32	$	18.0	(O)	$	3.2
Manager ^(C)	Feb-13	383,331		272,345	$	2.95	$	8.4	(P)	$	1.1
Manager ^(C)	Jun-13	670,829		476,604	$	3.23	$	3.8	(Q)	1.9
Manager ^(C)	Nov-13	965,847		686,202	$	3.57	$	6.0	(R)	2.7
Manager ^(C)	Aug-14	765,416		612,333	$	4.01	$	1.7	(S)	2.3
Exercised ^(D)	Prior to 2008	(173,853	)	N/A	$	14.09	N/A			N/A
Exercised ^(E)	Oct-12	(15,972	)	N/A	$	1.48	N/A			N/A
Exercised ^(F)	Sep-13	(51,306	)	N/A	$	1.67	N/A			N/A
Exercised ^(G)	2014	(216,186	)	N/A	$	1.46	N/A			N/A
Exercised ^(H)	2015	(202,446	)	N/A	1.00		N/A			N/A
Exercised ^(I)	2016	(266,657	)	N/A	3.01		N/A			N/A
Expired unexercised	2002-2007	(416,425	)	N/A	N/A		N/A			N/A
Outstanding		5,010,576		3,858,081

(A)

The strike prices are subject to adjustment in connection with return of capital dividends and spin-offs. A portion of the Company’s 2008 dividends was deemed return of capital dividends. The effect on the strike prices was not significant. In the first quarter of 2014, strike prices were adjusted by $0.32 reflecting the portion of the Company's 2013 dividends which was deemed return of capital. The strike prices were adjusted for the New Residential, New Media and New Senior spin-offs as described above. On May 7, 2015, and pursuant to the anti-dilution provisions of the 2014 Plan, 2012 Plan and Newcastle Option Plan, as applicable, the Company’s board of directors approved an equitable adjustment of all outstanding options in order to account for the impact of the 2014 return of capital distributions. The equitable adjustment entails a strike price adjustment and the issuance of additional options which were determined so as to compensate for the loss in value that would have otherwise occurred as a result of the 2014 return of capital distributions. As a result of this adjustment, options relating to a total of 178,740 shares were issued on May 7, 2015 at a strike price of $1.00 per share as detailed below.



Grant Date		Number of Options Issued
Mar-11		24,354
Sep-11		92,963
Apr-12		32,105
May-12		12,987
Jul-12		16,331
Total options issued		178,740

(B)

The fair value of the options was estimated using an option valuation model. Since the Newcastle Option Plan, 2012 Plan, 2014 Plan, 2015 Plan, 2016 Plan and 2017 Plan have characteristics significantly different from those of traded options, and since the assumptions used in such model, particularly the volatility assumption, are subject to significant judgment and variability, the actual value of the options could vary materially from management’s estimate. The volatility assumption for these options was estimated based primarily on the historical volatility of the Company’s common stock and management’s expectations regarding future volatility. The expected life assumption for options issued prior to 2011 was estimated based on the simplified term method. This simplified method was used because the Company did not have sufficient historical data to conclude on the appropriate expected life of its options and because historical data to date was consistent with the simplified term method. The expected life assumption for options issued in 2011 and thereafter was estimated based primarily on the historical expected life of applicable previously issued options.


(C)	The Manager assigned certain of its options to Fortress’s employees as follows:



Date of Grant	Strike Prices	Total Unexercised Inception to Date
Mar-11	$1.00	62,370
Sep-11	$1.00	104,843
Apr-12	$1.00	69,670
May-12	$1.00	79,263
Jul-12	$1.00	87,598
Jan-13	$2.32	191,666
Feb-13	$2.95	76,666
Jun-13	$3.23	134,166
Nov-13	$3.57	193,170
Aug-14	$4.01	153,083
	Total	1,152,495

The Company and the Manager agreed that options held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options will relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018.


(D)	111,770 of the total options exercised were by the Manager. 61,417 of the total options exercised were by employees of Fortress subsequent to their assignment. 666 of the total options exercised were by directors.


(E)	Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of $0.2 million.


(F)	Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of $0.9 million.


(G)	215,853 options were exercised by employees of Fortress subsequent to their assignment with an intrinsic value of $4.1 million. 333 options were exercised by directors with a minimal intrinsic value.


(H)	Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of $0.8 million.


(I)	Exercised by employees of Fortress subsequent to their assignment. The options exercised had an intrinsic value of $0.4 million. As a result of his resignation, the Company's former CEO forfeited 16,748 options and were transferred back to the Manager.


(J)	The assumptions used in valuing the options were: a 1.7% risk-free rate, 107.8% volatility and a 3.3 year expected term.


(K)	The assumptions used in valuing the options were: a 1.13% risk-free rate, 13.2% dividend yield, 151.1% volatility and a 4.6 year expected term.


(L)	The assumptions used in valuing the options were: a 1.3% risk-free rate, 12.9% dividend yield, 149.4% volatility and a 4.7 year expected term.


(M)	The assumptions used in valuing the options were: a 1.05% risk-free rate, 11.9% dividend yield, 148.4% volatility and a 4.8 year expected term.


(N)	The assumptions used in valuing the options were: a 0.75% risk-free rate, 11.9% dividend yield, 147.5% volatility and a 4.8 year expected term.


(O)	The assumptions used in valuing the options were: a 2.0% risk-free rate, 8.8% dividend yield, 56.2% volatility and a 10-year term.


(P)	The assumptions used in valuing the options were: a 2.1% risk-free rate, 7.8% dividend yield, 55.5% volatility and a 10-year term.


(Q)	The assumptions used in valuing the options were: a 2.5% risk-free rate, 8.8% dividend yield, 36.9% volatility and a 10-year term.


(R)	The assumptions used in valuing the options were: a 2.8% risk-free rate, 6.7% dividend yield, 32.0% volatility and a 10-year term.


(S)	The assumptions used in valuing the options were: a 2.7% risk-free rate, 8.6% dividend yield, 23.4% volatility and a 10-year term.

Tax Benefits Preservation Plan

On December 7, 2016, our board of directors adopted a Tax Benefits Preservation Plan (the “Plan”) with American Stock Transfer and Trust Company, LLC as rights agent, and the disinterested members of the board of directors declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record at the close of business on December 20, 2016. Each right was governed by the terms of the Plan and entitled the registered holder to purchase from us a unit consisting of one one-thousandth of a share of Series E Junior Participating Preferred Stock, par value $0.01 per share at a purchase price of $27.00 per unit, subject to adjustment. The Plan was intended to help protect our ability to use our tax net operating losses and certain other tax assets by deterring an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder (the “Code”).

In connection with the adoption of the Plan, our board of directors approved the Articles Supplementary of Series E Junior Participating Preferred Stock, which was filed with the State Department of Assessments and Taxation of Maryland on December 8, 2016. The Plan terminated on December 6, 2017.

On December 6, 2017, our board of directors adopted a Tax Benefits Preservation Plan (the “Tax Plan”) with American Stock Transfer and Trust Company, LLC as rights agent, and the disinterested members of the board of directors declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record at the close of business on December 20, 2017. Each right is governed by the terms of the Plan and entitles the registered holder to purchase from us a unit consisting of one one-thousandth of a share of Series E Junior Participating Preferred Stock, par value $0.01 per share at a purchase price of $36.00 per unit, subject to adjustment. The Plan is intended to help protect our ability to use our tax net operating losses and certain other tax assets by deterring an “ownership change” as defined under the Code.

Preferred Stock

In March 2003, the Company issued 2.5 million shares ($62.5 million face amount) of its 9.75% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred”). In October 2005, the Company issued 1.6 million shares ($40.0 million face amount) of its 8.05% Series C Cumulative Redeemable Preferred Stock (the “Series C Preferred”). In March 2007, the Company issued 2.0 million shares ($50.0 million face amount) of its 8.375% Series D Cumulative Redeemable Preferred Stock (the “Series D Preferred”). The Series B Preferred, Series C Preferred and Series D Preferred are non-voting, have a $25 per share liquidation preference, no maturity date and no mandatory redemption. The Company has the option to redeem the Series B Preferred, the Series C Preferred and the Series D Preferred, at their liquidation preference. If the Series C Preferred or Series D Preferred cease to be listed on the NYSE or the AMEX, or quoted on the NASDAQ, and the Company is not subject to the reporting requirements of the Exchange Act, the Company has the option to redeem the Series C Preferred or Series D Preferred, as applicable, at their liquidation preference and, during such time any shares of Series C Preferred or Series D Preferred are outstanding, the dividend will increase to 9.05% or 9.375% per annum, respectively.

In connection with the issuance of the Series B Preferred, Series C Preferred and Series D Preferred, the Company incurred approximately $2.4 million, $1.5 million, and $1.8 million of costs, respectively, which were netted against the proceeds of such offerings. If any series of preferred stock were redeemed, the related costs would be recorded as an adjustment to income available for common stockholders at that time.

In March 2010, the Company settled its offer to exchange (the “Exchange Offer”) shares of its common stock and cash for shares of its preferred stock. After settlement of the Exchange Offer, 1,347,321 shares of Series B Preferred Stock, 496,000 shares of Series C Preferred Stock and 620,000 shares of Series D Preferred Stock remain outstanding for trading on the New York Stock Exchange.

As of January 31, 2018, Drive Shack Inc. had paid all current and accrued dividends on its preferred stock.

Noncontrolling Interest

The Company’s noncontrolling interest in 2016 and 2017 is related to our Traditional Golf business, a portion of which the Company does not own. In October 2016, the Company exited certain golf properties in which the Company had a noncontrolling interest. The noncontrolling interest associated with the remaining golf property has a carrying value of zero.