Item 1. Description of Business
THE COMPANY
Overview of the Company
The Company was initially formed on July 22, 2005, at the direction of OCM Principal Opportunities Fund III, L.P. and OCM Principal Opportunities Fund IIIA, L.P. (the “Oaktree Funds”), each of which is a Delaware limited partnership and an affiliate of Oaktree Capital Management, L.P., a Delaware limited partnership (formerly Oaktree Capital Management, LLC) (“Oaktree”). The Company was formed for the primary purpose of participating in various activities relating to the gaming industry.
In 2006, the Company, through a wholly-owned subsidiary, OCM AcquisitionCo, LLC, a Nevada limited liability company (“AcquisitionCo”), acquired a 42% equity interest in Cannery Casino Resorts, LLC, a Nevada limited liability company (“CCR”), and a 33-1/3% equity interest in NP Land, LLC, a Nevada limited liability company (“NP Land”). The Company owns more than 99.99% of the capital interest in OCM Blocker, LLC, a Delaware limited liability company (“Blocker”), and Blocker owns all of the issued and outstanding units of AcquisitionCo. The Company and Blocker are also parties to an Option to Purchase dated January 5, 2006 as corrected on March 17, 2006 (the “Blocker Option Agreement”), whereby the Company has the option to purchase all of the issued and outstanding units of AcquisitionCo from Blocker. GLCP Nevada LLC, a Delaware limited liability company and a third-party entity unaffiliated with the Company (“GLCP”), owns less than 0.01% of the capital interest in Blocker.
The Company’s current business consists primarily of its ownership of these equity interests. CCR, through wholly-owned subsidiaries:
· owns and operates the Cannery Hotel and Casino (“The Cannery”) located in North Las Vegas, Nevada;
· owns and operates a temporary casino at The Meadows, located in North Strabane Township, Washington County, Pennsylvania, and is currently constructing a larger, permanent casino facility;
· operates the Rampart Casino (the “Rampart Casino”) located in the Summerlin area of northwest Las Vegas; and
· operates the Eastside Cannery Casino and Hotel (the “Eastside Cannery”).
· Operated the Nevada Palace Hotel and Casino (the “Nevada Palace”) until February 29, 2008 when it was as closed as planned in connection with the construction of the Eastside Cannery.
Ownership of the Company
All of the Company’s issued and outstanding voting equity, the Class A Membership Units, are held by OCM VoteCo, LLC, a Delaware limited liability company (“VoteCo”), and all of the Company’s issued and outstanding non-voting equity, the Class B Membership Units, are held by OCM InvestCo, LLC, a Nevada limited liability company (“InvestCo”). VoteCo is owned equally by eight individuals, seven of whom are principals of Oaktree and one of whom is a managing director of Oaktree (collectively, the “VoteCo Equityholders”). InvestCo is owned principally by the Oaktree Funds, which hold all of InvestCo’s issued and outstanding voting securities. At present, the Company has no plans to issue any additional Class A Membership Units or Class B Membership Units.
The VoteCo Equityholders, through VoteCo, control all matters of the Company that are subject to the vote of members, including the appointment and removal of the Company’s managers (the “Managers”). The Company has issued Class B Membership Units to InvestCo, which units do not entitle the holders thereof to any voting rights (except as otherwise required by applicable law). The Class B Membership Units allow InvestCo and its investors, including the Oaktree Funds, to invest in the Company without having any voting power or power to control the operations or affairs of the Company (except as required by law). If InvestCo and its investors, including the Oaktree Funds, had any power to control the operations or affairs of the Company, they and their respective constituent equityholders would generally be required to be licensed or found suitable pursuant to the gaming laws and liquor codes of the jurisdictions in which CCR’s properties are located.
VoteCo, InvestCo, the Company and each of the Company’s wholly-owned subsidiaries are managed by Stephen Kaplan, a Principal of Oaktree, and Ronald Beck, a Managing Director of Oaktree. Oaktree is a Los Angeles-based investment management firm with over $49 billion in assets committed to management in specialized investment strategies. These strategies include distressed debt, high
yield bonds, convertible securities, emerging market equities, power infrastructure investments, principal investments for corporate control, real estate investments, mezzanine financing and Japanese equity securities. Oaktree has approximately 530 employees, with offices in Los Angeles, New York, Stamford (Connecticut), London, Frankfurt, Paris, Beijing, Hong Kong, Seoul, Shanghai, Singapore, Tokyo and, through affiliates of Oaktree-managed funds, Amsterdam and Luxembourg. Oaktree is led by Howard Marks, Chairman, and Bruce Karsh, President, and is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. The Oaktree Funds are the fourth closed-end “principal” funds that the professionals who invest and manage the Oaktree Funds have organized since 1994 for the purpose of making control-oriented equity investments.
Business Developments
Recent Events
On March 12, 2009, the Company entered into the agreements outlined below in connection with the termination of that certain Purchase Agreement by and between Crown Limited, an Australian company (“Parent”), Crown CCR Group Investments One, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Parent (“Crown One”), Crown CCR Group Investments Two, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Parent (“Crown Two,” and collectively with Parent and Crown One, the “Crown Parties”), the Company, Millennium Gaming, Inc., a Nevada corporation (“Millennium,” and together with the Company, the “Current Equityholders”), and CCR (collectively, CCR with Millennium and the Company, the “Seller Parties”), dated as of December 11, 2007 (as thereafter amended, the “Original Purchase Agreement”), pursuant to which Crown One and Crown Two were to purchase, directly or indirectly, all of the issued and outstanding equity interests of CCR (the “CCR Units”) from the Current Equityholders and rights in an option agreement.
Termination and Settlement Agreement
On March 12, 2009, the Seller Parties and the Crown Parties entered into a Termination and Settlement Agreement (the “Termination and Settlement Agreement”), whereby the parties agreed to (a) terminate the Original Purchase Agreement, and (b) settle and release claims among the parties to the Original Purchase Agreement relating to the Original Purchase Agreement, and in connection therewith, Crown One and Crown Two (collectively, the “Purchasers”), paid the Current Equityholders a cash payment of $50 million, of which the Company received $21 million. In addition, certain of the parties to the Original Purchase Agreement and other related parties entered into separate agreements releasing claims relating to the Original Purchase Agreement.
Preferred Purchase Agreement
Simultaneously with the execution and delivery of the Termination and Settlement Agreement and in accordance with the terms thereof, the Crown Parties, the Current Equityholders and CCR entered into a Preferred Purchase Agreement (the “Preferred Purchase Agreement”). Under the terms of the Preferred Purchase Agreement, the Purchasers agreed to purchase from CCR, and CCR agreed to sell to the Purchasers, 71,614 Series B Preferred Units of CCR (the “Series B Purchase”) for an aggregate purchase price of $320 million in cash (the “Preferred Purchase Price”), upon obtaining all necessary regulatory approvals and subject to the terms and conditions set forth therein.
Simultaneously with the execution and delivery of the Preferred Purchase Agreement and in accordance with the terms thereof, the Current Equityholders, CCR, the Purchasers and JPMorgan Chase Bank, N.A., as escrow agent, entered into an Escrow Agreement, pursuant to which the Purchasers deposited the Preferred Purchase Price into an escrow account, and the Crown Parties and the Seller Parties agreed that the Preferred Purchase Price will be released from the escrow account, subject to, and in accordance with, the terms and conditions of the Escrow Agreement and the Preferred Purchase Agreement, as follows, (a) the entire Preferred Purchase Price will be released to CCR upon the closing of the Series B Purchase, which is subject to obtaining all necessary regulatory approvals, or (b) if the Series B Purchase does not close prior to May 11, 2009 (or such other date as extended in accordance with the terms of the Preferred Purchase Agreement), then (i) $80 million of the Preferred Purchase Price will be returned to the Purchasers, and CCR will issue to the Purchasers, and the Purchasers will purchase, subject to obtaining all necessary regulatory approvals, 9,435 Series A2 Preferred Units of CCR representing 4.1% of the issued and outstanding equity of CCR (the “Series A2 Purchase”) and (ii) $240 million of the Preferred Purchase Price will be released to CCR ($40 million of which would be applied to the Series A2 Purchase, if applicable).
Option Agreement
Simultaneously with the execution and delivery of the Termination and Settlement Agreement and in accordance with the terms thereof, the Crown Parties, the Current Equityholders and CCR entered into an Option Agreement (the “Option Agreement”), which grants the Crown Parties, subject to the terms and conditions set forth in the Option Agreement, the option to complete the purchase of all of the direct and indirect interests of the Current Equityholders in CCR on terms substantially similar to the terms of the Original
Purchase Agreement as more fully described below in Item 1 - Business Developments - 2007 Highlights. If the Crown Parties exercise their option under the Option Agreement, then upon the consummation of the transactions contemplated by the Option Agreement and by the Preferred Purchase Agreement, the Crown Parties will collectively own, directly or indirectly, 100% of the issued and outstanding units of CCR for an aggregate purchase price of approximately $1.7 billion (such purchase price includes the Preferred Purchase Price), subject to adjustment upon the terms and conditions of the Option Agreement.
2008 Highlights
On February 29, 2008, the Nevada Palace, located on the Boulder Strip in east Las Vegas, ceased operations as planned in connection with the construction of the Eastside Cannery. The Eastside Cannery opened on August 28, 2008, on the former site of the Nevada Palace. Its amenities include a 16-story hotel, with more than 300 guest rooms and suites, a resort spa, Jacuzzi and a half-acre pool, approximately 65,000 square feet of gaming space, with over 2,100 slot machines, 26 table games, a 450-seat bingo hall, a live Keno lounge, a poker room and a race and sports book. In addition, the Eastside Cannery has six restaurants, two night clubs and a 20,000 square foot ballroom and meeting place.
Highlights
On December 11, 2007, the Company entered into the Original Purchase Agreement pursuant to which Crown One and Crown Two were to purchase, directly or indirectly, the CCR Units from the Current Equityholders.
Under the terms of the Original Purchase Agreement, (a) Crown One had agreed to purchase from Millennium, all of Millennium’s CCR Units, (b) Crown Two had agreed to purchase from the Company, all of the Company’s interest in Blocker, and (c) Crown One had agreed to purchase from the Company, all of the Company’s right, title and interest in the Blocker Option Agreement, and the aggregate purchase price that would have been payable by the Crown Parties to the Current Equityholders was approximately $1.75 billion in cash, less outstanding debt and other adjustments. The Original Purchase Agreement also provided that the Crown Parties would have been indemnified for damages resulting from breaches of Sellers’ representations, warranties and covenants, certain tax liabilities and other matters. The sum of $25 million of the purchase price was to have been placed in escrow for three years after the closing date as the exclusive source, subject to certain exceptions, for satisfaction of such damages as to which claims are made.
Prior Highlights
In September 2006, the Company, through a subsidiary, acquired a 33-1/3% equity interest in CCR and a 33-1/3% equity interest in NP Land, both Nevada limited liability companies. The Company’s acquisition of the 33-1/3% equity interest in CCR and a 33-1/3% equity interest in NP Land was completed pursuant to the terms and conditions of a Contribution and Unit Purchase Agreement, dated as of May 10, 2005, as amended and restated in its entirety by the First Amendment and Restatement of Contribution and Unit Purchase Agreement, dated as of September 23, 2005 (the “CUP Agreement”). The parties to the CUP Agreement were Messrs Paulos and Wortman, Millennium, CCR, AcquisitionCo, and other entities named therein. In November 2006, the Company, through a subsidiary, contributed an additional $50 million to CCR, increasing its equity interest in CCR from 33-1/3% to 42%.
Key features of the transactions completed during 2005 and 2006 pursuant to the CUP Agreement include the following:
· In September 2005, the first series of transactions contemplated by the CUP Agreement were consummated. The Company’s affiliates loaned an aggregate of $10,607,245 (the “InvestCo NP Loans”) and $4,282,454 (the “LandCo Loan”) to entities controlled by Mr. Wortman to enable Mr. Wortman, and entities controlled by him, to acquire from an unrelated third party all of the interests not otherwise owned by him in the entities which own the land and assets relating to the Nevada Palace.
· In January 2006, the second series of transactions contemplated by the CUP Agreement were consummated. The Company’s affiliates loaned to MGIM, LLC, a Nevada limited liability company controlled by Messrs. Paulos and Wortman, $64 million (the “AcquisitionCo Loan “) and $5,125,000 (the “InvestCo/MGIM Loan”) to enable MGIM, LLC to acquire from an unrelated third party a 33-1/3% interest in CCR for a total purchase price of $70 million.
· In September 2006, the last of the series of transactions contemplated by the CUP Agreement was completed, and the Company acquired a 33-1/3% interest in each of CCR and NP Land in exchange for cancellation of loans of $64 million and $4,282,454, plus accrued interest of $5,470,685 and $502,631, respectively.
· The InvestCo NP Loans, the LandCo Loan, the AcquisitionCo Loan and the InvestCo/MGIM Loan each accrued interest at 12%, but in the case of the LandCo Loan and the AcquisitionCo Loan, interest was waived and considered additional investment upon the final closing of the equity purchase pursuant to the CUP Agreement. The loans were financed by capital
contributions from InvestCo.
In July 2006, CCR, through a wholly-owned subsidiary, PA Meadows, LLC, a Delaware limited liability company (“PA Meadows”), acquired all of the capital stock in entities owning and operating The Meadows harness racetrack and issued to the seller a note for $175 million to secure a cash purchase price obligation, and a note for $25 million to secure a holdback obligation. The acquisition was pursuant to two agreements: (i) a Stock Purchase Agreement between PA Meadows and Magna Entertainment Corp., a Delaware corporation (“MEC”), dated November 8, 2005, as amended by a first amendment dated July 26, 2006, and (ii) a Post-Closing and Note Issuance Agreement dated July 26, 2006 by and between PA Meadows, MEC and the parties named therein. On November 14, 2006, PA Meadows paid $175 million in cash and delivered a $25 million holdback agreement to MEC, in full satisfaction of the notes issued to MEC on July 26, 2006. The acquisition was financed by a $50 million equity contribution from the Company to CCR and proceeds from two syndicated credit facilities. In exchange for the $50 million equity contribution to CCR, CCR issued additional equity interests to AcquisitionCo, causing the Company’s percentage ownership in CCR to increase from 33-1/3% to 42%.
Messrs. Paulos and Wortman, through Millennium, own the remaining 58% of the equity interests in CCR and continue to play a substantial role in the management of the business. Mr. Wortman also owns the remaining 66-2/3% of the equity interests in NP Land.
Employees
The Company has no employees, other than its two managers, Messrs. Kaplan and Beck, who receive no compensation from the Company for their services.
Environmental Issues
The Company has no physical assets.
CANNERY CASINO RESORTS, LLC
CCR was organized on May 22, 2001. In December 2002, CCR commenced casino operations at the Rampart Casino. In January 2003, CCR completed construction of The Cannery and commenced its operations. In July 2006, CCR acquired The Meadows, where it currently owns and operates a temporary gaming facility and where it is constructing a permanent casino expected to open in April 2009. In September 2006, CCR acquired the gaming assets of and commenced temporary operations at the Nevada Palace, which ceased operation on February 29, 2008 as planned in connection with the construction of the Eastside Cannery, which replaced the Nevada Palace and opened on August 28, 2008. The Cannery, the Rampart Casino and the Eastside Cannery are currently managed by Millennium Management Group II, LLC, a Nevada limited liability company (“MMG II”), and MMG II provides certain management services related to The Meadows. MMG II is 95% owned by Messrs. Paulos and Wortman.
On May 18, 2007, CCR entered into two new syndicated credit facilities totaling $860 million: a $745 million first lien facility and a $115 million second lien term loan facility. The proceeds were used primarily to retire existing debt, including the then-existing $250 million credit facility. The remainder of the proceeds from the borrowing will be used to partially fund the construction of the permanent casino facility at The Meadows and the completion of the Eastside Cannery. For more information about the syndicated credit facilities, see the Company’s periodic filing on Form 8-K filed with the SEC on May 24, 2007.
The Cannery
The Cannery, located in North Las Vegas, Nevada, commenced operations in January 2003, and, in 2006, completed a $40 million expansion project. Currently, The Cannery features approximately 72,000 square feet of casino space, including 1,961 slot/video poker machines, 37 table games (including 12 poker tables), a poker room, and a race and sports book. The attached three-story hotel is designed to be compatible with The Cannery’s World War II industrial theme and includes 201 hotel rooms. In addition, The Cannery’s facilities include a sports-themed restaurant and bar, a buffet restaurant, a Mexican-themed restaurant, an Italian restaurant, a steakhouse and a franchised donut shop; a 14 screen movie theatre; an indoor/outdoor multi-purpose entertainment venue used to host events such as boxing matches and community festivals; an entertainment lounge; a pool and jacuzzi; and parking for approximately 3,600 vehicles (including a 1,900-space parking garage), with valet options and additional off-site parking for large events, along with shuttle bus service to and from the casino.
The Rampart Casino
In December 2002, CCR, through a subsidiary, commenced operations at the Rampart Casino under a 10-year sublease agreement with Hotspur Casinos Nevada, Inc., a Nevada corporation (“Hotspur”).
The Rampart Casino is situated within the JW Marriott Las Vegas Resort, Spa & Golf at the Resort at Summerlin, located in the Summerlin area of northwest Las Vegas. The Rampart Casino’s facilities consist of approximately 50,000 square feet of casino space, over 1,200 slot machines, 26 table games, a race and sports book, three restaurants, multiple bars, and an entertainment lounge. The JW Marriott Las Vegas Resort is located on over 50 acres of land and consists of a hotel with over 500 guest rooms and suites, a spa, and several restaurants.
The Eastside Cannery/Nevada Palace
On September 22, 2006, CCR, through a subsidiary, acquired the gaming assets of the Nevada Palace and entered into a 35-year lease of the Nevada Palace land with NP Land. In May 2007, CCR commenced construction of the Eastside Cannery to replace the Nevada Palace, which was operated through February 29, 2008 when it closed as planned in connection with the construction of the Eastside Cannery. The Eastside Cannery opened on August 28, 2008.
The Eastside Cannery, located on the Boulder Strip in east Las Vegas and eight miles from McCarran International Airport, is similar in nature to The Cannery, with more than 300 guest rooms and suites, a resort spa, Jacuzzi and a half-acre pool complete with cabanas on the property. The Eastside Cannery’s casino offers guests approximately 65,000 square feet of gaming space, with over 2,100 slot machines, 26 table games, a 450-seat bingo hall, a live Keno lounge, a poker room and a race and sports book. In addition, the Eastside Cannery has six restaurants, two night clubs and a 20,000 square foot ballroom and meeting place.
The primary assets of NP Land are approximately 22 acres of land, the primary site of the Eastside Cannery, which land is leased to a wholly-owned subsidiary of CCR.
The Meadows
In 2006, CCR, through its indirect subsidiary, PA Meadows, acquired from MEC all of the capital stock of entities owning and operating The Meadows harness racetrack. Concurrently with the acquisition, PA Meadows and its wholly-owned subsidiaries entered into a Racing Services Agreement, whereby a wholly-owned subsidiary of MEC (the “MEC Operator”) would continue to operate The Meadows for a minimum term of five years unless terminated earlier under certain circumstances. Under the Racing Services Agreement, the MEC Operator receives all revenues from and is liable for all of the costs associated with the racing operations, after paying PA Meadows a fixed fee of $50,000 per year, and generally indemnifies CCR and its affiliates against losses arising from all obligations and liabilities of the racing operations, subject to certain exceptions. In addition, MEC agreed to guarantee the financial obligations of the MEC Operator. As a result, during the term of the Racing Services Agreement, CCR’s principal economic interest in the racing operations will consist of the $50,000 in annual fixed fees paid by the MEC Operator.
The Pennsylvania Gaming Control Board (the “Pennsylvania Board”) approved Washington Trotting Association (“WTA”), a wholly-owned subsidiary of PA Meadows, to receive a Category 1 Slot Machine License to operate a casino at The Meadows in December 2006. In June 2007, PA Meadows opened an 82,000 square-foot temporary casino at The Meadows, which houses over 1,800 slot machines, a 360-seat all-you-can-eat restaurant, a snack bar, and sports bar with 23 bar-top video poker games. The Meadows is also the first casino in Pennsylvania to offer patrons Keno, roulette and Monopoly-themed slot machines. PA Meadows began construction of a 350,000 square-foot permanent casino in late 2007 and expects the permanent casino to open in spring 2009. The permanent casino will house approximately 3,750 slot machines and will integrate the long-standing tradition of harness racing at The Meadows with state-of-art gaming facilities.
Gaming Markets
Las Vegas Locals Gaming Market
Las Vegas and North Las Vegas, which are part of Clark County, Nevada, are located within a growing metropolitan area. With an estimated population of 2 million, Clark County is Nevada’s largest county and the 15th largest county in the United States. In 2007, Clark County’s population increased by approximately 4%, and remained relatively unchanged in 2008. The Cannery, the Rampart Casino and the Nevada Palace are all located in Clark County. CCR’s management believes that the Clark County’s population growth over the past decade has been driven, in part, by Clark County’s favorable business climate, tax structure and great weather.
CCR competes primarily in the Las Vegas locals gaming market, which is defined as the Clark County gaming market excluding the Las Vegas Strip, Downtown Las Vegas and Laughlin. The Las Vegas Convention and Visitors Authority estimates that two-thirds of the local Las Vegas adult population participates in casino gaming on a regular basis. In 2008, total win from nonrestricted gaming operations in the Las Vegas locals gaming market declined by 9.36% from its high of $2.51 billion in 2007. Prior to last year, gaming revenues for the Las Vegas locals gaming market have experienced steady increases in conjunction with the growth of the Clark County population. According to the Nevada Gaming Control Board, total win from nonrestricted gaming operations in the Las Vegas locals gaming market grew from approximately $2.12 billion in 2004 to approximately $2.69 billion in 2006, and $2.77 billion
in 2007, representing an average annual compound growth rate of 12.7% between 2004 and 2006, and 3.1% between 2006 and 2007.
The specific submarkets for The Cannery, the Rampart Casino and the Eastside Cannery (once open) are North Las Vegas, Summerlin, and the Boulder Strip, respectively.
North Las Vegas
The Cannery is located in North Las Vegas, off of I-15 and a few miles from I-95, and targets local residents and visitors to the nearby Nellis Air Force Base and Las Vegas Motor Speedway. According to the Nevada Gaming Control Board, total win from nonrestricted gaming operations in North Las Vegas decreased from approximately $303 million in 2007 to approximately $282 million in 2008, an approximately 6.72% decrease from 2007. From 2006 to 2007, total win from nonrestricted gaming operations decreased approximately 3.63%, from $314 million in 2006 to $303 million in 2007.
Summerlin
The Rampart Casino is located in the Summerlin area of northwest Las Vegas, a 22,500-acre, master-planned community with approximately 60,000 households, adjacent to the Summerlin Parkway and within close proximity to six golf courses. CCR management believes that the Rampart Casino’s primary market consists of frequent local gaming patrons who seek a friendly atmosphere and convenience, as well as higher-than-average payout rates for slot machines and video poker games. In addition, due to its central location within the JW Marriott Resort, the Rampart Casino benefits from resort and conference visitor traffic. Because the Summerlin area is categorized with the balance of Clark County in the Nevada Gaming Control Board’s revenue reports, specific annual gaming revenues for the Summerlin area cannot be determined.
The Boulder Strip
The Eastside Cannery is located, along the Boulder Highway, known as the “Boulder Strip.” The Boulder Strip is known as a popular “off the Las Vegas Strip” gaming destination for visitors to Las Vegas who are looking for a less costly gaming experience than that offered on the Las Vegas Strip. Many of the casinos along the Boulder Strip offer entertainment amenities beyond gambling, including movie theaters, bowling alleys and dining establishments. According to the Nevada Gaming Control Board, the Boulder Strip, which includes casinos within the city limits of Henderson, Nevada, has seen win from nonrestricted gaming operations grow from approximately $792 million in 2004 to approximately $928 million in 2007. This growth represents an average annual compound growth rate of 5.47% between 2004 and 2007. In 2008, nonrestricted gaming operations were approximately $839 million, representing a decrease of 9.52% from the prior year. Despite the recent decrease, CCR management believes that the Boulder Strip has become, and is likely to remain, popular with Las Vegas locals.
Pennsylvania Gaming Market
The Meadows is located in North Strabane Township, Washington County, Pennsylvania. North Strabane Township is part of the greater Pittsburgh metropolitan area and is located approximately twenty-five miles from the city of Pittsburgh. The Meadows competes in a large market that includes western Pennsylvania, eastern Ohio and northern West Virginia, although its primary market is the greater Pittsburgh metropolitan area. Of the states in The Meadows casino’s greater market, only West Virginia has established slot machine gaming and recently added table games. Slot machine gaming is relatively new to Pennsylvania. Pennsylvania has approved for licensure 11 slot machine gaming facilities throughout the state, 6 racetrack-based casino facilities and 5 stand alone slot machine gaming facilities. Of the 11 facilities approved for licensure, 6 racetrack facilities are open and 1 stand alone slot machine gaming facility, Mt. Airy Casino Resort, is open. The closest licensed in-state racetrack-based casino is Presque Isle Downs & Casino, in Erie, Pennsylvania, which is approximately 146 miles from The Meadows. Ohio does not permit slot machine gaming.
Competition
The casino hotel industry is a highly fragmented and competitive industry. The gaming industry includes land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American reservations and other forms of legalized gaming. CCR management believes that the primary competition to CCR’s casinos currently comes from other casinos that cater to the Las Vegas locals gaming market. In addition, to a lesser extent, CCR’s casinos face competition from casinos located on the Las Vegas Strip and in downtown Las Vegas. Competition with the Company’s casino at The Meadows currently comes from racetrack-based casinos in West Virginia and will also likely come from The Rivers Casino, located in Pittsburgh, Pennsylvania, and anticipated to open in August 2009. The competition among companies in the gaming industry is intense and many of CCR’s competitors have significantly greater resources than CCR.
Under the terms of CCR’s amended and restated operating agreement, Millennium and its affiliates, on the one hand, and AcquisitionCo and its affiliates (including the Company), on the other, must offer gaming opportunities first to CCR prior to pursuing any such opportunity outside CCR. Generally, no manager of CCR may serve as a manager, officer, director or employee of any casino operating or holding company, except that a manager may serve in such capacities with respect to CCR or its subsidiaries or entities that hold equity in the Company (other than Oaktree or investors in the Oaktree Funds). Nevertheless, a manager may serve as a manager, officer, director or employee of a casino operating or holding company formed to pursue a gaming opportunity offered to but not accepted by CCR and a casino operating or holding company formed to pursue certain opportunities in Mexico.
Las Vegas Locals Gaming Market
The growth in gaming revenue in the Las Vegas locals gaming market has led to a highly competitive market to attract business of Las Vegas locals. In addition to established casinos, CCR faces competition from smaller casinos, supermarkets, bars and convenience stores that offer gaming.
The closest casino competitors to The Cannery are Aliante Station and Santa Fe Station, which are approximately five and six miles, respectively, from the site of the casino, although outside of The Cannery’s primary market area. Other competitors (each more than six miles from The Cannery) include Texas Station Gambling Hall and Fiesta Rancho. Each of these four competitors is owned by Station Casinos, Inc. Together, they account for over 6,500 slots, over 100 tables and over 500 hotel rooms and suites. The closest competitor to the Rampart Casino is Suncoast Casino, which is within close proximity to the Rampart Casino. In addition, a nearby Red Rock Station casino is a significant competitor of the Rampart Casino. The next closest competitors, Texas Station, Fiesta Station, and Arizona Charlie’s - Decatur, are each more than five miles away, outside of the Rampart Casino’s primary market area. The Boulder Strip is home to many competitors. Prominent casinos along the Boulder Strip include Sam’s Town Hall & Gambling Hall, operated by Boyd Gaming Corporation; and Sunset Station, Boulder Station, Green Valley Ranch and Fiesta Henderson, each owned by Station Casinos, Inc. These competitors generally have from 1,500 to over 3,100 slots, 25 to 70 tables (including poker) and 200 to over 600 hotel rooms and suites. The Eastside Cannery and a few other smaller casinos along the Boulder Strip may lack the necessary facilities and other amenities to effectively compete in this prominent sub-market.
Las Vegas Strip and Downtown Las Vegas Gaming Market
The Las Vegas Strip is the location of dozens of casinos, including the largest and newest mega-casinos that Las Vegas has to offer. In addition, the downtown Las Vegas area includes approximately a dozen casinos on or near Fremont Street in old Las Vegas. Casinos located on the Las Vegas Strip or in downtown Las Vegas are typically tourist destinations and generally do not target the locals gaming market.
The Neighborhood Casino Act
In 1997, the Nevada Legislature passed Senate Bill No. 208 (the “Neighborhood Casino Act”), enacting laws which possibly create significant barriers to new competition in CCR’s local gaming markets by limiting future casino development in certain areas of Clark County, Nevada. Those laws were amended in 2001. With certain specified exemptions, the Neighborhood Casino Act restricts non-restricted gaming to certain designated gaming enterprise districts, and imposes potentially burdensome requirements on applicants proposing to have new locations designated as gaming enterprise districts by the applicable county, city or town body with jurisdiction.
Pennsylvania Gaming Market
The primary established competition for the casino at The Meadows are two racetrack-based casinos located in West Virginia: the Wheeling Island Racetrack and Gaming Center in Wheeling, West Virginia, and the Mountaineer Racetrack and Gaming Resort in Chester, West Virginia. The Wheeling Island Racetrack and Gaming Center is approximately 34 miles from The Meadows and is an established racetrack and slot machine gaming center with approximately 2,400 slots. The Mountaineer Casino is approximately 50 miles from The Meadows and is an established racetrack and slot machine gaming center with approximately 3,200 slots. Both facilities recently added table games. Pennsylvania has approved for licensure 11 slot machine gaming facilities throughout the state, 6 racetrack-based casino facilities and 5 stand alone slot machine gaming facilities. The 6 racetrack facilities are open and 1 stand alone slot machine gaming facility, Mt. Airy Casino Resort, is open. The closest licensed in-state racetrack-based casino is Presque Isle Downs & Casino, located in Erie, Pennsylvania, which is approximately 146 miles from The Meadows. In addition to the 6 racetrack casinos currently in operation, the Valley View Downs in Lawrence County is expected to begin operations in 2009 pending licensing approval by the Pennsylvania Board. Valley View Downs is approximately 75 miles from The Meadows. The Pennsylvania Board has also approved for licensure a stand alone slot machine facility in Pittsburgh, Pennsylvania, The Rivers Casino. The Rivers Casino will be approximately 25 miles from The Meadows and is expected to open in August
2009.
Business and Marketing Strategy
CCR aims to target the locals gaming market and capitalize on strong demographic trends. In addition, CCR seeks to position its gaming assets to cater to the propensity of the local residents to participate in casino-style gaming in proximity to where they live. CCR management believes that CCR’s Las Vegas casinos also benefit from Nevada regulatory restrictions that have the effect of limiting competition in the gaming industry, including the Neighborhood Casino Act. For more information on the Neighborhood Casino Act, see “Item 1. Cannery Casino Resorts-Competition-The Neighborhood Casino Act” above.
Strong Management Team.
The day-to-day operations of CCR are managed by Messrs. Paulos and Wortman, each of whom have had significant gaming industry experience. Mr. Paulos previously served as President of Primadonna Resorts, Inc., which through subsidiaries owned and operated various casino-hotel properties, including Buffalo Bill’s, Whiskey Pete’s, the Primm Valley Inn and Resort, and New York-New York Casino Resort, where he also served on the board of directors. Mr. Paulos has served as Chief Operating Officer of Crown Casino Limited, where he was responsible for the construction and opening of its casino in Melbourne, Australia, and as Senior Vice President of Circus Circus Enterprises, Inc., where he had primary responsibility for the development of the Excalibur and Luxor casinos. Mr. Wortman previously served as Chairman and Chief Executive Officer of Palace Casinos, Inc. In addition to Nevada Palace, he previously owned and operated the Fallon Nugget and Bonanza Inn in Fallon, Nevada and Renata’s/Sunset Lanes in Henderson, Nevada. Mr. Wortman held various senior positions at Caesars Palace Las Vegas, including Treasurer, Chief Financial Officer, Vice President of Administration and Vice President of Hotel Operations, and served as President and Chief Operating Officer of Caesars Tahoe.
Targeted Customer Base.
CCR’s operating strategy aims to attract and retain customers primarily from the locals market through innovative, frequent and high-profile promotional programs, focused marketing efforts and convenient locations. CCR’s primary customers are located within a five-mile radius of its casinos, and CCR focuses its marketing efforts on those patrons.
High-Value Customer Experience.
In order to provide a high-value gaming experience, CCR focuses on slot and video poker machine play. CCR management believes that by offering a wide variety of high quality slot and video poker games, its casinos attract locals and repeat visitors. CCR management is committed to providing a high-value entertainment experience through restaurant, hotel and other entertainment amenities to attract local gaming patrons.
Creative Marketing and Promotional Programs.
CCR management believes that promotions and promotional events are one of the primary factors to success in the locals gaming market. CCR employs a marketing strategy that utilizes innovative, frequent and high-profile promotional programs in order to attract and retain customers and establish a high level of name recognition for CCR’s casinos. In addition to aggressive marketing through television, radio and newspaper advertising, CCR creates and sponsors promotional events and has established and promotes an exclusive players club.
Operating Efficiencies.
By operating its Nevada casinos with a similar marketing focus and target customer, CCR realizes certain operating efficiencies. For example, The Cannery and the Rampart Casino participate in the same players club, which provides casino patrons with the opportunity to win points at either location and enables management to run larger joint promotions. CCR also benefits from joint purchasing programs for food and other supplies and available quantity discounts. In addition, CCR realizes equipment cost savings from, among other things, identical player tracking systems in its casinos. These player tracking systems provide CCR with access to a larger database of customers for purposes of cross-marketing and promotions. Finally, the accounting, personnel and other administrative functions of CCR’s casinos are centralized to reduce costs.
Employees
As of December 31, 2008, CCR and its subsidiaries had approximately 3,139 active employees and approximately 2,787 full-time equivalent employees. Of these employees, 86 are unionized. CCR recognizes that its employees are critical to its success and has
sought to foster a productive work culture. Employees are offered competitive salaries and benefit packages.
Environmental Matters
The operations and properties of The Cannery, the Rampart Casino and the Eastside Cannery (and the former operations of the Nevada Palace) are and will continue to be subject to a wide variety of complex and stringent environmental laws. CCR management and NP Land management believe that their respective operations and properties are in compliance in all material respects with all applicable environmental laws. Based upon their experience to date, CCR management and NP Land management believe that the future cost of compliance with and liability under existing environmental laws will not have a material adverse effect on their respective financial condition or results of operations.
The operations and properties of The Meadows also are and will continue to be subject to a wide variety of complex and stringent environmental laws. CCR management believes that these operations and properties are in compliance in all material respects with all environmental laws. As a result, CCR management believes that the future cost of compliance with and liability under existing environmental laws applicable to The Meadows will not have a material adverse effect on PA Meadows’s financial condition or results of operations.
REGULATORY MATTERS
The Company is subject to gaming regulation in Nevada and gaming and harness racing regulation in Pennsylvania. The ownership and operation of casino gaming facilities in Nevada are subject to the gaming laws and regulations of the State of Nevada, including the Nevada Gaming Control Act (such laws and regulations, the “Nevada Act”), and the licensing and regulatory control of the Nevada Gaming Control Board (the “Nevada Board”), the Nevada Gaming Commission (the “Nevada Commission”), the Clark County Liquor and Gaming Licensing Board, the City of Las Vegas and the City of North Las Vegas (collectively, the “Nevada Gaming Authorities”). The ownership and operation of slot machine facilities in Pennsylvania are subject to the Pennsylvania Race Horse Development and Gaming Act (such laws and regulations, the “Pennsylvania Act”) and the licensing and regulatory control of the Pennsylvania Board. The ownership and operation of harness racing tracks in Pennsylvania are subject to the harness racing laws and regulations of the Commonwealth of Pennsylvania, including the Race Horse Industry Reform Act (such laws and regulations, the “RHIRA”), and the licensing and regulatory control of the Pennsylvania State Harness Racing Commission (“Pennsylvania Commission”).
Nevada Gaming Laws and Regulations
The Nevada Act and the regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned with, among other things, the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity and the strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments. Changes in such laws, regulations and procedures could have an adverse effect on CCR’s gaming operations and the Company’s indirect investment in CCR.
Licensing Requirements and Approvals
In 2006, certain required approvals were obtained from the Nevada Gaming Authorities in connection with the Company’s acquisition of its equity interests in CCR and NP Land. Such approvals included (i) the Company was registered as a “publicly traded corporation” as that term is defined by the Nevada Act (a “Registered Company”); (ii) the Company, VoteCo, and AcquisitionCo were registered as holding or intermediary companies and found suitable; and (iii) the VoteCo Equityholders received various approvals including licensure as members and managers, as applicable, of VoteCo and findings of suitability as controlling members and managers, as applicable, of the Company.
While the direct and indirect holders of Class B Membership Units of the Company were not required to be found suitable in connection with the Company’s acquisition of equity interests in CCR and NP Land, they remain subject to the discretionary authority of the Nevada Gaming Authorities and can be required to file an application and have their suitability determined, or to dispose of their investment in the Company.
The Nevada Gaming Authorities may require additional licensing or suitability applications. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or an applicant for a finding of suitability must pay or must cause to be paid all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada Gaming Authorities have the jurisdiction to disapprove a change in a corporate position.
Consequences of Being Found Unsuitable or Violating Gaming Laws
If the Nevada Gaming Authorities were to find an officer, manager or key employee of CCR, the Company, VoteCo or AcquisitionCo unsuitable to continue having a relationship with these entities, the companies involved would have to sever all relationships with such person. The Nevada Gaming Authorities may deny an application for any cause which they deem reasonable. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
If it were determined that the Nevada Act was violated by CCR, the Company, VoteCo or AcquisitionCo, the gaming licenses held by CCR’s subsidiaries and affiliates could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, any such violator and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act, or of the regulations of the Nevada Commission, at the discretion of the Nevada Commission. Furthermore, the Nevada Commission could appoint a supervisor to operate The Cannery, the Rampart Casino, the Nevada Palace or, when constructed, the Eastside Cannery and, under specified circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of the premises) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) impact casino revenues and cause the Company to suffer financial loss.
Ongoing Obligations of Gaming Licensees and Beneficial Securities Holders
On September 21, 2006, the Nevada Commission issued an order of registration of the Company, which was immediately effective and which has since been amended twice (the “Final Order”). The Final Order prohibits (1) VoteCo, InvestCo or their respective affiliates from selling, assigning, transferring, pledging or otherwise disposing of the Company’s Class A Membership Units or Class B Membership Units or any other security convertible into or exchangeable for Class A Membership Units or Class B Membership Units, without the prior approval of the Nevada Commission, and (2) the Company from declaring cash dividends or distributions on any class of membership unit of the Company beneficially owned in whole or in part by InvestCo, VoteCo, or their respective affiliates, without the prior approval of the Nevada Commission.
The Company, VoteCo and AcquisitionCo are subject to detailed ongoing financial and operating reporting requirements to the Nevada Gaming Authorities. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company, VoteCo and AcquisitionCo must be reported to, or approved by, the Nevada Commission.
Regardless of the number of shares held, any beneficial holder of a Registered Company’s voting or non-voting securities may be required to file an application, be investigated and have that person’s suitability as a beneficial holder of voting securities determined if the Nevada Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the beneficial holder of such securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information, including a list of its beneficial owners. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation.
The Nevada Act requires any person who individually or in association with others acquires, directly or indirectly, beneficial ownership of more than 5% of a Registered Company’s voting securities to report the acquisition to the Nevada Commission, and such person may be required to be found suitable. The Nevada Act requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 10% of a Registered Company’s voting securities to apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered Company’s voting securities may apply to the Nevada Commission for a waiver of a finding of suitability if the institutional investor holds the voting securities for investment purposes only. Also under certain circumstances, an institutional investor that has obtained a waiver may hold up to 19% of a Registered Company’s voting securities for a limited period of time and maintain the waiver. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of a Registered Company, a change in the corporate charter, bylaws, management, policies or operations of a Registered Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding a Registered Company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
· voting on all matters voted on by stockholders or interest holders;
· making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in management, policies or operations; and
· other activities that the Nevada Commission may determine to be consistent with such investment intent.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner of equity securities if the record owner, after request, fails to identify the beneficial owner. Any member found unsuitable and who holds, directly or indirectly, any beneficial ownership of the equity securities of a Registered Company beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. A Registered Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a member or hold a voting security or other equity security issued by the Registered Company or to have any other relationship with the Registered Company, the Registered Company:
· pays that person any dividend or interest with respect to voting securities of the Registered Company;
· allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;
· pays remuneration in any form to that person for services rendered or otherwise; or
· fails to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt or non-voting security of a Registered Company to file applications, be investigated and be found suitable to own the debt or non-voting security of a Registered Company. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Company can be sanctioned, including by revocation of its approvals, if without the prior approval of the Nevada Commission, the Registered Company:
· pays to the unsuitable person any dividend, interest, or any distribution whatsoever;
· recognizes any voting right by such unsuitable person in connection with such securities;
· pays the unsuitable person remuneration in any form; or
· makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.
A Registered Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes.
The Nevada Act provides that changes in control of a Registered Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby the person obtains control, may not occur without the prior approval of the Nevada Commission. Entities and persons seeking to acquire control of a Registered Company must satisfy the Nevada Commission with respect to a variety of stringent standards prior to assuming control of such Registered Company. The Nevada Commission may also require controlling stockholders, members, partners, officers, directors and other persons having an ownership interest in or a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.
Any person who is licensed, required to be licensed, registered, required to be registered, or under common control with such persons, and who proposes to become involved or is involved in a gaming venture outside of Nevada (“Foreign Gaming”), is required to deposit certain funds with the Nevada Board in order to pay the expenses of investigation of the Nevada Board of their participation in such Foreign Gaming. Thereafter the licensees are required to comply with certain reporting requirements imposed by the Nevada Act. A licensee is also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the Foreign Gaming operation, fails to conduct the Foreign Gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs, contracts with, or associates with, a person in the Foreign
Gaming operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.
Pennsylvania Gaming Laws and Regulations
The ownership and operation of slot machine facilities in Pennsylvania are subject to extensive state regulation by the Pennsylvania Board under the Pennsylvania Act and the regulations of the Pennsylvania Board. The Pennsylvania Board has broad discretion regarding the issuance, renewal, revocation and suspension of slot machine licenses. The Pennsylvania Act, and the regulations promulgated thereunder, concern primarily the good character, honesty, integrity and financial stability of slot machine licensees, their intermediary and holding companies, their employees, their security holders and others financially interested in slot operations.
On December 20, 2006, the Pennsylvania Board approved WTA to receive a Category 1 Slot Machine License. The Category 1 Slot Machine License was approved upon completion of a background investigation and initial satisfaction of certain conditions set by the Pennsylvania Board. The holder of a Category 1 Slot Machine License may operate up to 3,000 slot machines and, with the approval of the Pennsylvania Board, up to an additional 2,000 slot machines after six months of operation. Prior to the commencement of slot machine operations, WTA obtained additional approvals from the Pennsylvania Board, such as approval of internal controls and equipment, licensing of employees and the successful completion of gaming test days.
As pre-conditions to receiving its license, WTA had to demonstrate, by clear and convincing evidence to the satisfaction of the Pennsylvania Board, that WTA and its affiliates are persons of good character, honesty, integrity and that their prior activities, reputation, habits and associations do not pose a threat to the public interest or the effective regulation and control of slot machine operations or create or enhance the danger of unsuitable, unfair or illegal practices, methods and activities in the conduct of slot machine operations or in the carrying on of the business and financial arrangements incidental thereto. WTA also had to demonstrate by clear and convincing evidence the adequacy of its financial resources, the financial stability, integrity and responsibility of it and its affiliates, and the integrity of all financial backers, investors, mortgagees, bondholders and holders of indentures, notes or other evidences of indebtedness, either in effect or proposed, except that banking or licensed lending institutions and certain institutional investors may be waived from the qualification requirements. WTA had to show by clear and convincing evidence that it has sufficient business ability and experience to create and maintain a successful, efficient operation.
As a licensee, WTA is obligated to develop and implement a diversity plan to assure that all persons are accorded equality of opportunity in employment and contracting, which it has done. WTA is also required to maintain certain records, which it has done, which shall be made available to the Pennsylvania Board upon request. In addition, WTA is required to hold a license issued by the Pennsylvania Commission to conduct harness racing meetings. WTA holds a license from the Pennsylvania Commission to conduct harness racing meetings.
As a licensee, WTA is obligated to fully cooperate with the Pennsylvania Board in the conduct of any inquiry or investigation and provide any supplementary information as may be requested. Currently, there are no known inquiries or investigations, except license renewal investigations that are in the normal course, being conducted about WTA or its affiliates.
No executive-level Pennsylvania state employee, public official or party officer, or any of their immediate family members, may knowingly or intentionally have a financial interest in a licensed gaming entity, be employed by any gaming entity or affiliate thereof or solicit or accept any service or discount not offered to the general public from a gaming entity or affiliate. No applicant, affiliate, intermediary, subsidiary or holding company may possess a greater than one-third ownership or financial interest in another slot machine licensee or person eligible to apply for a Category 1 Slot Machine License. A licensed entity or officer, director, principal employee or key employee of a licensee may not make any contribution to a candidate for nomination or election to any public office in Pennsylvania.
The Pennsylvania Board may deny an application or suspend or revoke a license of a person or applicant who has failed to prove to the satisfaction of the Pennsylvania Board that the person or applicant is qualified in accordance with the Pennsylvania Act, who has violated the Pennsylvania Act, who is disqualified under the criteria set forth in the Pennsylvania Act, who provided false or misleading information to the Pennsylvania Board, who has materially departed from a representation made in the application for a license or who has failed to comply with applicable Federal or state laws or regulations. If the Pennsylvania Board does not approve a slot machine license application based on a finding that an individual who is a principal or has an interest in the entity applying for licensure does not meet the character requirements or any other eligibility requirement or is in violation of the change in ownership and control provisions of the Pennsylvania Act, the Pennsylvania Board may permit the individual or entity the opportunity to divest completely his or her interest in the entity and related entities. The Pennsylvania Board must approve the terms and conditions of divestiture, but the Pennsylvania Act requires that the compensation for the divested interest not exceed the cost of the interest.
On February 27, 2007, WTA paid a one-time license fee in the amount of $50 million. As a Category 1 Slot Machine licensee, WTA is subject to a daily tax of 34%, a local county share assessment of 2%, a local municipality share assessment of 2% but no less than
$10 million, an additional daily assessment of 5% of its daily gross terminal revenue, and a 1.5% tax on gross terminal revenue. A licensee shall also pay a daily assessment to the Pennsylvania Race Horse Development Fund in a maximum amount of 12% of daily gross terminal revenue as determined by the Department of Revenue. WTA is also responsible for the costs of investigation and regulation.
A license or permit issued by the Pennsylvania Board is a privilege and, except as set forth below, may not be sold, transferred or assigned to any person, nor shall a licensee or permittee pledge or otherwise grant a security interest in a license. A licensee must notify the Pennsylvania Board prior to or immediately upon becoming aware of any proposed or contemplated change of ownership by a group or person which involves (i) more than 5% of the licensee’s ownership interests, (ii) more than 5% of the ownership interests of an entity that owns, directly or indirectly, at least 20% of the voting or other ownership interests of the licensee, (iii) a sale, other than in the ordinary course of business, of a licensee’s assets, or (iv) any other transaction or occurrence deemed to be relevant by the Pennsylvania Board. A purchaser of the assets of a licensee other than in the ordinary course of business or of more than 20% of the licensee’s ownership interests must independently qualify for a license and pay a new license issuance fee of $50 million. However, the fee is subject to reduction in the discretion of the Pennsylvania Board. WTA notified the Pennsylvania Board of the proposed transfer to Crown in December 2007.
Slot machine licenses must be renewed annually. If a completed renewal application is received in a timely manner, the license shall remain in effect unless and until the Pennsylvania Board denies or renews the license.
Pennsylvania Harness Racing Laws and Regulations
The ownership and operation of pari-mutuel harness racing facilities in Pennsylvania is subject to extensive state regulation by the Pennsylvania Commission under the RHIRA and the regulations of the Pennsylvania Commission. Pursuant to the RHIRA, the Pennsylvania Commission is empowered to issue no more than five licenses for the conduct of pari-mutuel harness racing (each, a “Harness Racing License”). Two subsidiaries of PA Meadows, WTA and Mountain Laurel Racing, Inc., each holds one of the five Harness Racing Licenses. In June 2007, the Pennsylvania Commission granted the sole remaining Harness Racing License to Valley View Downs, LP.
Once a Harness Racing License has been issued, the RHIRA provides that such license shall remain in effect so long as the licensee complies with all conditions, rules, regulations and provisions of the RHIRA. Harness Racing Licenses are not transferable. The RHIRA requires that each holder of a Harness Racing License shall, within ten days after any transfer of stock comprising an interest of 5% or more of such licensee, notify the Pennsylvania Commission of such transfer. Such licensee must also file with the Pennsylvania Commission affidavits from the proposed transferees setting forth certain required information regarding the proposed transfer and the proposed transferee. WTA and MLR have sent appropriate notice to the Pennsylvania Commission regarding the proposed transactions with the Crown Parties.
Since PA Meadows purchased the stock of the entities that own and operate The Meadows, the MEC Operator has continued to conduct harness racing at the site of The Meadows and operate the racing operations. As such, and in connection with such activities, the MEC Operator has made appropriate application to the Pennsylvania Commission and maintains an appropriate license.
If the Pennsylvania Commission determines that it is inconsistent with the public interest, convenience or necessity, or with the best interest of racing generally, for any person to continue as the holder of an equity interest in a licensee or any parent or affiliate of a licensee, the Pennsylvania Commission may order such person to dispose of such interest in a licensee within a period of time specified by the Pennsylvania Commission.
The Pennsylvania Commission may refuse to grant a Harness Racing License or may suspend or revoke a Harness Racing License without a prior hearing if it determines by a preponderance of the evidence that (i) a licensee, its officers, employees or agents have not complied with the conditions, rules, regulations and provisions of the RHIRA and (ii) it would be in the public interest, convenience or necessity to revoke or suspend the subject license. Such refusal, suspension or revocation may be premised upon, among other things, a determination by the Pennsylvania Commission that (a) any officer, director, member or stockholder of the licensee or any parent or affiliate of the licensee (1) has been convicted of a crime involving moral turpitude, (2) has engaged in bookmaking or other forms of illegal gambling, (3) has been found guilty of any fraud or misrepresentation in connection with racing or breeding, (4) has been found guilty of any violation or attempt to violate any law, rule or regulation of any racing jurisdiction for which suspension from racing might be imposed in such jurisdiction or (5) has violated any rule, regulation or order of the Pennsylvania Commission, or (b) the experience, character or fitness of any officer, director, member or stockholder of the licensee or any parent or affiliate of the licensee is such that the participation of the person in horse racing or related activities would be inconsistent with the public interest, convenience or necessity or with the best interest of racing. Upon receiving notice of any such determination by the Pennsylvania Commission, a licensee may, within ten days after such notice, demand a hearing before the Pennsylvania Commission. However, the action of the Pennsylvania Commission in refusing to grant or in suspending or revoking a
Harness Racing License shall remain in full force pending such hearing and final determination.
In addition to its power to suspend or revoke Harness Racing Licenses, the Pennsylvania Commission is authorized and empowered to impose fines upon persons and entities that participate in any way in any horse race meet at which pari-mutuel wagering is conducted and violate the RHIRA or the rules and regulations promulgated by the Pennsylvania Commission, in an amount not to exceed $5,000 for each violation.
Each entity participating in the management of a licensee and each licensee must provide the Pennsylvania Commission on an annual basis with a complete list of all holders of an ownership interest in such entity or licensee, indicating the interest of each such owner.
Reports to Security Holders
The Company is required to file annual, quarterly and other current reports and information with the Commission. You may read and copy any materials filed by the Company with the Commission at its Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Company’s filings are also available to the public from commercial document retrieval services and at the World Wide Web site maintained by the Commission at http://www.sec.gov.
Item 2.
Item 2. Description of Property.
Neither the registrant nor any of its consolidated subsidiaries owns real property.
Item 3.
Item 3. Legal Proceedings.
As of March 31, 2009, neither the Company nor any of its consolidated subsidiaries is a party to any pending legal proceeding, and to their knowledge, no action, suit or proceeding against it or any of its consolidated subsidiaries has been threatened by any person.
As of March 31, 2009, no director, officer, affiliate or security holder of the Company, and no owner of record or beneficially of more than five percent of the Company’s Class A Membership Units, is adverse to the Company or has a material interest adverse to the Company, in any material proceeding to which such person is a party.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2008.
PART II
Item 5.
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.
On September 23, 2005, the Company issued all of its Class A Membership Units to VoteCo without registration pursuant to Section 4(2) of the Securities Act in exchange for an aggregate capital contribution of $100. On that same date, the Company issued all of its Class B Membership Units to InvestCo without registration pursuant to Section 4(2) of the Securities Act in exchange for subsequent contributions by InvestCo of (1) all the membership units in LandCo, whose primary asset is its one-third equity interest in NP Land, and (2) $64 million. Except as described immediately above, the Company has not issued any other securities.
No established public trading market exists for the Company’s membership units. There are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in any of the Company’s membership units. In addition, the Final Order prohibits VoteCo, InvestCo and their respective affiliates from selling, assigning, transferring, pledging or otherwise disposing of the Company’s Class A Membership Units or Class B Membership Units or any other security convertible into or exchangeable for Class A Membership Units or Class B Membership Units, without the prior approval of the Nevada Commission.
There are no outstanding options or warrants to purchase, or securities convertible into, the Company’s membership units. The Company’s currently outstanding Class A Membership Units are “restricted,” which means that they were originally sold in offerings that were not subject to a registration statement filed with the Commission. Accordingly, the Company’s membership units are subject to sale in the public market pursuant to Rule 144 under the Securities Act, including the limitations set forth therein. Effective February 15, 2008, Rule 144 generally permits a person or persons whose membership units are aggregated and who has beneficially owned restricted membership units for at least six months to sell in the public market within any three-month period a number of membership units that does not exceed the greater of:
· 1% of the then outstanding membership units of the class of membership units to be sold; or
· if applicable, the average weekly trading volume of the class of membership units to be sold on all national securities exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of sale is filed with the Commission.
Sales pursuant to Rule 144 under the Securities Act are subject to restrictions relating to the manner of sale, notice and availability of current public information about the Company. The Company has not agreed with any security holder to register any of its membership units for sale by any security holder. The Company does not currently propose to publicly offer any membership interests of its common equity.
As of March 31, 2009, VoteCo was the only holder of record of the Company’s Class A Membership Units and InvestCo was the only holder of record of the Company’s Class B Membership Units.
The Company does not pay, and does not expect to pay in the foreseeable future, any dividends or other distributions with respect to its membership units.
The Company does not have any equity compensation plans and does not expect to authorize securities for issuance pursuant to any equity compensation plans in the foreseeable future.
Item 6.
Item 6. Selected Financial Information.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis.
Overview
The following management’s discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the audited financial statements and the notes thereto included in Part II, Item 8
Item 8. Financial Statements.
The financial statements and supplementary data of the Company called for by this item are submitted under a separate section of this annual report. Reference is made to the Index of Financial Statements contained on page hereof.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9(A)T. Internal Control over Financial Reporting.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
· Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management of the Company; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
The Company’s management, including the Company’s principal executive officer and principal financial officer, does not expect that its disclosure controls and procedures, or its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2008, based on the control criteria established in a report entitled Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). That framework defines a material weakness as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based upon that evaluation, our management concluded that the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm
pursuant to temporary rules of the Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
We have made no significant change in our internal control over financial reporting during the most recent fiscal quarter covered by this annual report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
Not Applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons.
As of March 31, 2009, the managers of the Company and of CCR are as follows:
STEPHEN KAPLAN has served as a Manager of the Company since its inception and as manager of CCR and a member of its management committee since September 2006, and is expected to continue in these roles. Mr. Kaplan is a Principal at Oaktree and is the worldwide head of Oaktree’s Principal Group. In 1995, Mr. Kaplan founded Oaktree along with six other principals. Mr. Kaplan graduated with a B.S. degree in Political Science summa cum laude from the State University of New York at Stony Brook and a J.D. from the New York University School of Law.
RONALD BECK has served as a Manager of the Company since its inception and as manager of CCR and a member of its management committee since September 2006, and is expected to continue in these roles. Mr. Beck is a Managing Director of Oaktree and joined Oaktree in 2000. Mr. Beck is a co-portfolio manager of Oaktree’s Principal Group. Mr. Beck graduated with a B.A. degree in Economics from Stanford University, a J.D. from Stanford Law School and an M.B.A. from Stanford’s Graduate School of Business.
WILLIAM J. PAULOS has served as manager of CCR and a member of its management committee since May 2001. Mr. Paulos established Millennium Management Group, LLC in September 1996 with Mr. Wortman and has served as its Chief Executive Officer since its inception. Millennium Management Group, LLC is currently a consultant to the Greektown Casino in Detroit. From January 1995 to September 1996, Mr. Paulos was President of Primadonna Resorts, Inc. which, through subsidiaries, owned and operated various casino hotel properties including Buffalo Bill’s, Whiskey Pete’s, the Primm Valley Inn and Resort and New York-New York Casino Resort. From March 1994 to January 1995, Mr. Paulos was the Chief Operating Officer of Crown Casino Limited.
WILLIAM C. WORTMAN has served as manager of CCR and a member of its management committee since May 2001. Mr. Wortman established Millennium Management Group, LLC in September 1996 with Mr. Paulos and has served as its President since its inception. In 1985, Mr. Wortman became an owner in the Nevada Palace, which he continues to own. Mr. Wortman has also served as President of Nevada First Bankcorp since 1999, and has served as Vice-Chairman of the Board of Nevada 1st Bank since 1997. From 1993 to 1994, Mr. Wortman served as Chairman and Chief Executive Officer of Palace Casinos, Inc.
The Company’s named executive officers are Mr. Kaplan and Mr. Beck, who receive no compensation for their services as Managers. The Company has no directors.
The Company was founded by the VoteCo Equityholders for the primary purpose of participating in various activities relating to the gaming industry. Seven of the VoteCo Equityholders are principals of Oaktree and one is a managing director of Oaktree. None would be considered independent under the NASDAQ Stock Market listing standards. The VoteCo Equityholders did not receive any direct consideration or other compensation in connection with their activities in founding the Company.
Corporate Governance
The Company
Pursuant to the Company’s limited liability company agreement, the Company is managed by two Managers, each of whom is appointed, and may be removed, by VoteCo as the holder of Class A Membership Units. The two current Managers of the Company are Messrs. Kaplan and Beck. The Company’s Managers cannot take and cannot cause the Company to take the following actions without the approval of VoteCo as the holder of Class A Membership Units:
· any material change in the business purpose of the Company or the nature of the business;
· any action that would render it impossible to carry on the ordinary business of the Company;
· any removal or appointment of any Manager of the Company;
· any voluntary withdrawal of any member from the Company;
· any assignment for the benefit of creditors, any voluntary bankruptcy of the Company, or any transaction to dissolve, wind up or liquidate the Company; or
· any transaction between the Company and any member or Manager of the Company, or any affiliate or direct family member of any member or Manager of the Company, that is not made on an arm’s-length basis.
Generally, in all other respects, VoteCo has no power or authority to participate in the management of the Company or to bind or act on behalf of the Company in any way or to render it liable for any purpose. Except as otherwise expressly required by applicable law, InvestCo as the sole holder of the Company’s Class B Membership Units has neither any right to vote on any matters to be voted on by the members of the Company, nor any power or authority to participate in the management of the Company or bind or act on behalf of the Company in any way or render it liable for any purpose.
Because the Company has conducted no operations other than in connection with the ownership of equity interests in CCR and NP Land, the Company does not have, and is not required to have, a separately designated audit, nominating or compensation committee or committee performing similar functions, and the Company does not have an audit committee financial expert. Preparation of the Company’s financial statements is performed by an outside consultant, on a contractual basis, and supervised by the Company’s Managers.
CCR
In connection with the Company’s acquisition of its equity interest in CCR, AcquisitionCo and Millennium executed an amended and restated form of operating agreement. Under the terms of the amended and restated operating agreement, CCR has a management committee composed of four managers, two designated by AcquisitionCo and two designated by Millennium. AcquisitionCo designated Messrs. Kaplan and Beck as its initial managers, and Millennium designated Messrs. Paulos and Wortman as its initial managers. Other than powers expressly delegated to MMG II in its management of CCR’s casino properties, all powers to control and manage the business and affairs of CCR are vested in the Management Committee. Managers are required to be licensed or found suitable by the relevant Nevada gaming authorities in order to engage in the management of CCR. For further information about licensing and suitability requirements, see “Item 1. Regulatory Matters-Nevada Gaming Laws and Regulations”.
Compliance with Section 16(a) of the Exchange Act
The Company voluntarily registered its Class A Membership Units pursuant to Section 12(g) of the Securities Exchange Act of 1934 by filing a registration statement on Form 10-SB on June 9, 2006. The registration became effective automatically 60 days later on August 8, 2006. Stephen Kaplan, Ronald Beck, John Frank, Bruce Karsh, David Kirchheimer, Howard Marks, Richard Masson and Sheldon Stone each filed an Initial Statement of Beneficial Ownership of Securities on Form 3 on August 16, 2006, which filing was not timely.
Code of Ethics.
We have adopted a code of ethics as described in Item 406 of Regulation S-B. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be sent to OCM HoldCo, LLC, c/o Oaktree Capital Management, L.P., 333 South Grand Avenue, 28th Floor, Los Angeles, California 90071.
Item 11.
Item 11. Executive Compensation.
Messrs. Kaplan and Beck, the Company’s named executive officers, are not entitled to compensation from the Company for any services rendered to or on behalf of the Company, or otherwise, in their capacities as Managers of the Company, and since the inception of the Company have received no such compensation. The Company’s Managers are entitled to reimbursement from the first available funds of the Company for direct out-of-pocket costs and expenses incurred on behalf of the Company that directly relate to the business and affairs of the Company.
The VoteCo Equity holders did not receive any direct consideration or other compensation in connection with their activities in founding the Company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Company has no equity compensation plans.
The following table sets forth, as of March 31, 2009, information regarding the beneficial ownership of the Company’s voting securities by all persons known to be the beneficial owners of more than 5% of any voting class of Company securities.
(1) The address for each beneficial owner is:
c/o Oaktree Capital Management, L.P.
333 South Grand Ave, 28th Floor
Los Angeles, CA
(2) Beneficial ownership is determined in accordance with the Exchange Act, as amended, and the rules and regulations promulgated thereunder.
(3) VoteCo directly owns 100% of the Company’s Class A Membership Units.
(4) Messrs. Kaplan and Beck are the managers of VoteCo and the Company.
(5) Stephen Kaplan, Ronald Beck, John Frank, Bruce Karsh, David Kirchheimer, Howard Marks, Richard Masson and Sheldon Stone are each a voting member of VoteCo holding 12.5 VoteCo units. These individuals may be deemed to form a “group” holding all 100 VoteCo units and, as a result, each such individual may be deemed to be a beneficial owner of the .100 Class A Membership Units of the Company directly held by VoteCo.
None of the Class A Membership Units beneficially owned by the persons listed in the table above have been pledged as security.
The following table sets forth, as of March 31, 2009, information regarding the beneficial ownership by all Managers of the Company, named individually and as a group, of any class of equity securities of the Company, the Company’s parent or the Company’s subsidiaries.
(1) The address for each beneficial owner is:
c/o Oaktree Capital Management, L.P.
333 South Grand Ave, 28th Floor
Los Angeles, CA
(2) Beneficial ownership is determined in accordance with the Exchange Act, as amended, and the rules and regulations promulgated thereunder.
(3) Messrs. Kaplan and Beck are the managers of VoteCo, the Company, Blocker, AcquisitionCo, LandCo and OCM AcquisitionCo II, LLC. Blocker is a direct subsidiary of the Company and owns nothing other than its interest in AcquisitionCo.
(4) Mr. Kaplan is the listed owner of the securities.
(5) VoteCo is the listed owner of all .100 Company Class A Membership Units. Messrs. Kaplan and Beck each may be deemed to be a member of a “group” holding all 100 VoteCo Units and, as a result, each of Mr. Kaplan and Mr. Beck may be deemed to be a beneficial owner of all .100 Company Class A Membership Units directly held by VoteCo.
(6) The Company is the listed owner of all 126,896.317 Blocker Class A Units. Each of Messrs. Kaplan and Beck may be deemed to be a member of a “group” holding all 100 VoteCo Units and, as a result, each of Messrs. Kaplan and Beck may be deemed to be a beneficial owner of all 126,896.317 Blocker Class A Units directly held by the Company.
(7) Blocker is the listed owner of all 1,000 AcquisitionCo Class A Membership Units. Messrs. Kaplan and Beck each may be deemed to be a member of a “group” holding all 100 VoteCo Units and, as a result, each of Messrs. Kaplan and Beck may be deemed to be a beneficial owner of all 1,000 AcquisitionCo Class A Membership Units directly held by Blocker.
(8) AcquisitionCo is the listed owner of all 1,000 LandCo Units. Each of Messrs. Kaplan and Beck may be deemed to be a member of a “group” holding all 100 VoteCo units and, as a result, each of Messrs. Kaplan and Beck may be deemed to be a beneficial owner of all 1,000 LandCo Units directly held by AcquisitionCo.
(9) The Company is the listed owner of all of the equity interests of AcquisitionCo II. Each of Messrs. Kaplan and Beck may be deemed to be a member of a “group” holding all 100 VoteCo units and, as a result, each of Messrs. Kaplan and Beck may be deemed to be a beneficial owner of all of the equity interests of OCM AcquisitionCo II, LLC directly held by the Company.
(10) Mr. Beck is the listed owner of the securities.
(11) Messrs. Kaplan and Beck are each a listed owner of 50% of these securities.
None of the securities listed in the table above as beneficially owned by the Company’s Managers has been pledged as security.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Limited Liability and Indemnification under the Company’s Limited Liability Company Agreement and CCR’s Operating Agreement
The Company’s limited liability company agreement provides that no member or Manager of the Company has any liability for the obligations of the Company, except to the extent required by law. To the maximum extent authorized by law, the Company indemnifies any person from any loss, damage, claim or liability incurred by him, her or it as a result of any act or failure to act (other than as a result of fraud, gross negligence or willful misconduct) performed or not performed by such person as a member, Manager, employee, agent or representative of the Company, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred.
In addition, a Manager of the Company who performs his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the Company and with such care as an ordinarily prudent person in a like position would use under similar
circumstances, does not have any liability by reason of being or having been a Manager of the Company. Furthermore, a Manager of the Company is not liable, as Manager of the Company, under any judgment, decree or order of court, or in any other manner, for any debt, obligation or liability of the Company.
CCR’s operating agreement provides that under certain circumstances CCR will indemnify any person who is an affiliate of AcquisitionCo who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, by reason of the fact that he, she or it was serving at the request of CCR as a manager, officer, employee or agent of CCR. CCR’s operating agreement also provides that CCR will reimburse AcquisitionCo and its affiliates in connection with the development of gaming opportunities for CCR, at a cap of $250,000 per fiscal year of CCR, and will reimburse the expenses of managers of CCR serving on CCR’s management committee, including those managers who are affiliates of AcquisitionCo, for certain out-of-pocket expenses reasonably attributable to CCR.
Other Transactions
In February 2007, the Oaktree Funds, beneficial owners of the Company’s non-voting equity interests, agreed to support, through member contributions to CCR, letters of credit issued in favor of the Pennsylvania Department of Transportation for an aggregate stated amount of approximately $18.3 million. Such support was transferred to PA Meadows during the second quarter of 2007. The Oaktree Funds received $382,000 from CCR as consideration for supporting the letters of credit.
As of December 31, 2008, the Company was conditionally committed to make up to an additional $25 million of equity investment in CCR to support the operational needs of CCR’s subsidiary, PA Meadows, but only in certain limited circumstances and only to the extent not previously funded.
CCR has a receivable of approximately $16.2 million from NH Downs Holdings, LLC, a subsidiary of InvestCo (“NH Downs”), in connection with the development of certain gaming opportunities in New Hampshire.
In March 2009, Millennium and the Company, through AcquisitionCo, made equity contributions to CCR for the purpose of maintaining CCR’s compliance with its debt covenants. The equity contribution by AcquisitionCo was funded by an equity contribution from Blocker, which in turn was funded by a loan from the Company.
Company’s Parent
The Company’s only parent is VoteCo, which holds 100% of the voting securities of the Company.
Transactions between CCR and its Promoters
Transactions relating to the Company’s Acquisition of its Equity Interests in CCR and NP Land
The Company entered into certain transactions with Messrs. Paulos and Wortman in order to consummate the transactions contemplated by the CUP Agreement. On September 30, 2005, the Company’s affiliates loaned the InvestCo NP Loans and the LandCo Loan to entities controlled by Mr. Wortman to enable Mr. Wortman, and entities controlled by him, to acquire from an unrelated third party all of the interests not otherwise owned by him in the entities which own the land and assets relating to the Nevada Palace. On January 5, 2006, the Company’s affiliates loaned to MGIM, LLC, a Nevada limited liability company controlled by Messrs. Paulos and Wortman, the AcquisitionCo Loan and the InvestCo/MGIM Loan to enable MGIM, LLC to acquire from an unrelated third party a 331/3% interest in CCR for a total purchase price of $70 million. All of these loans, while outstanding, accrued interest at 12%, but in the case of the LandCo Loan and the AcquisitionCo Loan, interest was waived and considered additional investment upon the consummation of the Company’s acquisition of its initial 331/3% equity interest in CCR and NP Land. The InvestCo NP Loans were secured by all of the membership interests in NP Land and a related entity controlled by Mr. Wortman, and were also secured by the land and assets of the Nevada Palace. The LandCo Loan was secured by pledges of the membership interests in an entity controlled by Mr. Wortman. The AcquisitionCo Loan and the InvestCo/MGIM Loan were secured by pledges of all of the membership interests in CCR held by MGIM, LLC and Millennium, which pledges were subordinated to the pledge of such interests securing CCR’s then-existing credit agreement. When the transactions contemplated by the CUP Agreement were consummated, all of the related security interests were released.
In September 2006, the Company, through its subsidiaries, acquired MGIM, LLC’s 331/3% equity interest in CCR in exchange for the cancellation of the $64 million AcquisitionCo Loan to MGIM, LLC, and a 331/3% equity interest in NP Land in exchange for the cancellation of the $4,282,454 LandCo Loan. The $10,607,245 InvestCo NP Loans and the $5,125,000 InvestCo/MGIM Loan were repaid. In addition, a wholly-owned subsidiary of CCR, Nevada Palace, LLC, entered into a lease with NP Land of the 22 acres on which the Eastside Cannery sits. Nevada Palace, LLC also acquired from entities affiliated with Mr. Wortman gaming equipment and
other operating assets for approximately $8 million and assumed approximately $1,340,000 of slot machine lease liabilities and $156,000 (accrued as part of the purchase price) of certain other liabilities directly associated with the continuation of operations of the Nevada Palace at the time its gaming assets were sold to CCR. The NP Land lease is for a 35-year term at a fixed rental rate of $192,467 per month (as of December 31, 2008), subject to periodic inflationary adjustments, and required a $3 million security deposit.
In addition to the loans and the NP Land lease, certain payments were made to Messrs. Paulos and Wortman in connection with the transactions contemplated by the CUP Agreement. The Company and Millennium are generally responsible for their respective expenses in connection with the CUP Agreement. Each agreed to take in-substance equalizing distributions from CCR of $3 million and $6 million, respectively, which were applied by the Company to the Company’s obligations, including consulting fees ($1,996,155) and amounts due to beneficial owners ($1,003,845), and by Millennium to pre-existing indebtedness. In addition, in 2006 entities controlled by Mr. Wortman were reimbursed for approximately $2.3 million, respectively, of costs and expenses incurred by them primarily in connection with the development of the Eastside Cannery. In 2006, these costs and expenses included $1.9 million of expenses incurred in connection with moving certain power lines relating to the development of the Eastside Cannery, $265,000 in legal and professional fees relating to the CUP Agreement, $155,000 in title fees and approximately $80,000 in architectural and similar fees in connection with construction of the Eastside Cannery.
Other than the $6 million distribution to Millennium and the $2.3 million reimbursement to entities controlled by Mr. Wortman, there have been no payments by CCR or its affiliates to Messrs. Paulos or Wortman or their affiliates for fees, expenses or other amounts paid or payable in connection with the transactions relating to the CUP Agreement, except amounts paid for business expenses reimbursed in the ordinary course.
For additional information concerning the transactions relating to the CUP Agreement, see “Item 1. Description of Business - The Company - Acquisition of Equity Interests in CCR and NP Land; Acquisition of The Meadows.”
Other Transactions
Relatives of Messrs. Paulos and Wortman provide CCR with Automated Teller Machines (“ATM”) processing services. CCR received combined commissions of $2,795,042 and $2,042,528 in 2008 and 2007, respectively, pursuant to separate agreements with CCR’s casinos. Under these agreements, the providers receive the exclusive right to provide cash advance and ATM processing services at predetermined customer rates in return for providing, maintaining and keeping supplied ATMs at each location. Each agreement has an initial term that expires in 2011, followed by five one-year renewals that are automatic unless either party gives 90 days’ notice.
CCR has purchased promotional merchandise utilized for casino marketing and as customer incentives from an affiliate of Millennium and a company where a relative of Mr. Paulos has a financial interest. CCR incurred aggregate costs of $2,113,164 and $2,635,801 in 2008 and 2007, respectively, in connection with such purchases.
CCR has contracted with MMG II, an affiliate of Millennium, to operate and manage the Rampart Casino, The Cannery and the Eastside Cannery, and MMG II provides certain management services related to The Meadows. CCR incurred fees to MMG II of $6,458,564 and $5,042,549 in 2008 and 2007, respectively, in connection with these arrangements.
During the Company’s last fiscal quarter of 2007, Mr. Wortman incurred certain obligations in connection with the development of certain gaming opportunities in New Hampshire. In connection with pursuing such opportunities, NH Downs has a receivable of approximately $9.1 million from Mr. Wortman.
On July 15, 2006, CCR executed with Millennium a 10-year lease of an executive office building and adjacent parking spaces. The lease is for a fixed rental rate of $32,000 per month, subject to periodic inflationary adjustments, and grants Millennium two 5-year renewals.
The management of CCR believes that the transactions relating to the ATM processing services, the provision of promotional merchandise, the executive office lease and the operation and management of the Rampart Casino and The Cannery, are on terms that are substantially similar to terms that would be available to unaffiliated third parties and are expected to continue in the future.
An affiliate of one of the Company’s members provides the Company with certain administrative support services for an annual fee of $50,000, based on hourly rates of assigned personnel.
Item 14.
Item 14. Principal Accountant Fees and Services.
Audit Fees:
For 2008 and 2007, we incurred audit and financial statement review fees totaling approximately $130,000 and $136,000, respectively, to Piercy Bowler Taylor & Kern, our independent registered public accounting firm.
Audit-Related Fees:
For 2008 and 2007, we incurred no fees to Piercy Bowler Taylor & Kern, Certified Public Accountants, for assurance and related services reasonably related to the performance of audit and financial statement review.
Tax Fees:
For 2008 and 2007, we incurred no tax preparation fees to Piercy Bowler Taylor & Kern, Certified Public Accountants.
All Other Fees:
For 2008 and 2007, we incurred no other fees to Piercy Bowler Taylor & Kern, Certified Public Accountants, for products and services other than the services reported above.
Audit Committee Policies and Procedures:
We do not currently have an audit committee. The foregoing services were pre-approved by our Managers.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Exhibits.
In reviewing the agreements included as exhibits to this Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements.
The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
· should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
· have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
· may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
· were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
EXHIBIT
NUMBER
INDEX OF EXHIBITS
2.1
First Amendment and Restatement of Contribution and Unit Purchase Agreement, dated as of December 23, 2005 (1)
3.1
Amended and Restated Certificate of Formation, dated as of December 1, 2005 (1)
3.2
Limited Liability Company Agreement, dated as of September 23, 2005 (1)
10.1
Rampart Casino Sublease Agreement, dated April 1, 2002 (2)
10.2
Rampart Management Agreement, dated April 1, 2002 (3)
10.3
Cannery Management Agreement, dated May 2002 (3)
10.4
LandCo Loan Agreement, dated as of September 30, 2005 (1)
10.5
InvestCo/Esquire Loan Agreement, dated as of September 30, 2005 (2)
10.6
InvestCo/Nevada Palace Loan Agreement, dated as of September 30, 2005 (2)
10.7
Stock Purchase Agreement, dated as of November 8, 2005, between Magna Entertainment Corp. and PA Meadows, LLC (1)
10.8
AcquisitionCo Loan Agreement, dated as of January 5, 2006 (1)
10.9
InvestCo/MGIM Loan Agreement, dated January 5, 2006 (2)
10.10
Limited Continuing Guarantee, dated January 5, 2006 (2)
10.11
Credit Agreement, dated as of January 5, 2006 (2)
10.12
Lease Agreement, dated July 15, 2006, between Millennium Gaming, Inc. and Cannery Casino Resorts, LLC (4)
10.13
Rampart Financial Services Agreement, dated June 18, 2006 (3)
10.14
Cannery Financial Services Agreement, dated June 18, 2006 (3)
10.15
First Amendment to Stock Purchase Agreement, dated July 26, 2006 (2)
10.16
Racing Services Agreement, dated July 26, 2006 (2)
10.17
Post-Closing and Note Issuance Agreement, dated July 26, 2006 (2)
10.18
Equity Commitment Letter Agreement, dated July 26, 2006 (2)
10.19
Form of Amended and Restated Operating Agreement for Cannery Casino Resorts, LLC (1)
10.20
Form of Ground Lease between Nevada Palace, LLC and NP Land, LLC (2)
10.21
Form of Omnibus Management Agreement between Cannery Casino Resorts, LLC, and Millennium Management Group II, LLC (2)
10.22
Amendment to Continuing Guaranty, dated as of September 22, 2006 (4)
10.23
First Lien Credit Agreement, dated as of November 14, 2006 (5)
10.24
Second Lien Credit Agreement, dated as of November 14, 2006 (5)
10.25
First Amendment to Post-Closing and Note Issuance Agreement, dated as of November 14, 2006 (5)
10.26
Pledge Agreement, dated June 5, 2006 (6)
10.27
Amendment to Pledge Agreement, dated April 2, 2007 (6)
10.28
First Lien Credit Agreement, dated as of May 18, 2007 (7)
10.29
Second Lien Credit Agreement, dated as of May 18, 2007 (7)
10.30
Purchase Agreement, by and among Crown Limited, Crown CCR Group Investment One, LLC, Crown CCR Group Investment Two, LLC, Millennium Gaming, Inc., OCM HoldCo, LLC and Cannery Casino Resorts, LLC dated as of December 11, 2007(8)
10.31
Termination and Settlement Agreement, by and among Crown Limited, Crown CCR Group Investment One, LLC, Crown CCR Group Investment Two, LLC, Millennium Gaming, Inc., OCM HoldCo, LLC and Cannery Casino Resorts, LLC dated as of March 12, 2009.
10.32
Preferred Purchase Agreement, by and among Crown Limited, Crown CCR Group Investment One, LLC, Crown CCR Group Investment Two, LLC, Millennium Gaming, Inc., OCM HoldCo, LLC and Cannery Casino Resorts, LLC dated as of March 12, 2009.
10.33
Option Agreement, by and among Crown Limited, Crown CCR Group Investment One, LLC, Crown CCR Group Investment Two, LLC, Millennium Gaming, Inc., OCM HoldCo, LLC and Cannery Casino Resorts, LLC dated as of March 12, 2009.
21.1
Subsidiaries of OCM HoldCo, LLC (1)
31.1
Section 302 Certification of Principal Executive Officer
31.2
Section 302 Certification of Principal Financial Officer
32.1
Certification pursuant to 18 U.S.C. Section 1350
32.2
Certification pursuant to 18 U.S.C. Section 1350
(1) Filed previously with the Company’s Form 10-SB on June 9, 2006.
(2) Filed previously with the Company’s Amendment No. 1 to Form 10-SB on July 26, 2006.
E-1
(3) Filed previously with the Company’s Post-Effective Amendment No. 1 to Form 10-SB on September 8, 2006.
(4) Filed previously with the Company’s Current Report on Form 8-K on September 27, 2006
(5) Filed previously with the Company’s Current Report on Form 8-K on November 20, 2006
(6) Filed previously with the Company’s Current Report on Form 8-K on April 8, 2007
(7) Filed previously with the Company’s Current Report on Form 8-K on May 24, 2007
(8) Filed previously with the Company’s Annual Report on Form 10-KSB on March 31, 2008
E-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Stephen A. Kaplan
Stephen A. Kaplan
Manager
March 31, 2009
/s/ Ronald N. Beck
Manager
March 31, 2009
Ronald N. Beck
S-1
OCM HoldCo, LLC and Subsidiaries
Consolidated Financial Statements
December 31,
December 31,
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Managers of
OCM HoldCo, LLC
We have audited the accompanying consolidated balance sheet of OCM HoldCo, LLC and its subsidiaries (collectively the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, members’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2008 and 2007, and its consolidated results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
PIERCY BOWLER TAYLOR & KERN
/s/ Piercy Bowler Taylor & Kern
Certified Public Accountants
Las Vegas, Nevada
March 31, 2009
OCM HoldCo, LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2008 and 2007
See notes to consolidated financial statements.
OCM HoldCo, LLC and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2008 and 2007
See notes to consolidated financial statements.
OCM HoldCo, LLC and Subsidiaries
Consolidated Statements of Members’ Equity
For the Years Ended December 31, 2008 and 2007
See notes to consolidated financial statements.
OCM HoldCo, LLC and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2008 and 2007
See notes to consolidated financial statements
OCM HoldCo, LLC and Subsidiaries
Notes to Financial Statements
December 31,
NOTE 1 - Organization:
Business Activities
The Company and its consolidated subsidiaries were formed on July 22, 2005, at the direction of OCM Principal Opportunities Fund III, L.P. and OCM Principal Opportunities Fund IIIA, L.P. (the “Oaktree Funds”) Oaktree Funds, each of which is a Delaware limited partnership and an affiliate of Oaktree, for the purpose of participating in various activities relating to the gaming industry.
The Company, through a wholly-owned subsidiary, OCM AcquisitionCo, LLC (“AcquisitionCo”), owns 42% equity interest in Cannery Casino Resorts, LLC (“CCR”) and a 331¤3% equity interest in NP Land, LLC (“NP Land”). The Company’s current business consists primarily of its ownership of these equity interests. CCR, through wholly-owned subsidiaries, owns and operates The Cannery Hotel and Casino (“The Cannery”), located in North Las Vegas, Nevada, the Eastside Cannery Casino and Hotel (the “Eastside Cannery”), located in southeast Las Vegas, which opened on August 28, 2008, and operates the Rampart Casino, located in the Summerlin area of northwest Las Vegas. The primary assets of NP Land are approximately 22 acres of land, the current site of the Eastside Cannery, which land is leased to a wholly-owned subsidiary of CCR. In addition, CCR, through a wholly-owned subsidiary, PA Meadows, owns The Meadows Racetrack and Casino (“The Meadows”), an operating harness racetrack located in North Strabane Township, Washington County, Pennsylvania, where it is currently operating a temporary casino and is constructing a larger permanent casino that is scheduled to open mid-April 2009.
All of the Company’s issued and outstanding Class A Units are held by VoteCo, and all of the Company’s issued and outstanding non-voting Class B Units are held by InvestCo. VoteCo and InvestCo are affiliates of Oaktree. VoteCo is responsible for the operations of the Company, including the appointment and removal of managers. VoteCo has a de minimus economic interest in the Company, and its total equity contributions are limited to $100.
On December 11, 2007, the Company and CCR’s 58%-member entered into a definitive agreement with CCR, Crown Limited, an Australian Company (“Parent’), Crown CCR Investments One, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Parent (“Crown One”), and Crown CCR Investments Two, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Parent (“Crown Two” and together with Crown One and Parent, the “Crown Parties”), to sell, directly or indirectly, all of the issued and outstanding equity interests of CCR to Crown One and Crown Two, which transaction was initially expected to be consummated during the first quarter of 2009. However, on March 12, 2009, the parties terminated the purchase agreement when it was determined that the preconditions to completion would not be satisfied in time to allow the purchase to proceed. Under the termination agreement, a full release has been given to all parties and Crown One and Crown Two paid CCR’s members $50 million ($21 million to the Company).
The Company and the Crown Parties have entered into new agreements requiring Crown One and Crown Two to pay $320 million to CCR to, in part, subscribe for a 24.5% convertible preferred equity interest, with an option to acquire the balance of the equity interests of CCR for approximately $1.4 billion at any time over the next 2 years, each subject to regulatory approval. If the regulatory approval for issuance of the convertible preferred equity interest is not received within 60 days (90 days at the option of CCR), Crown One and Crown Two will pay an additional $200 million and purchase an approximate 4.1% preferred interest in CCR for $40 million. The two preferred interests discussed herein are no coupon and non-participating.
Costs incurred by CCR relating to the initial definitive agreement ($2,122,546 at December 31, 2008) were deferred until the arrangement was terminated in 2009 and then treated as a distribution to CCR’s members.
Concentrations and economic uncertainties
The Company and its consolidated subsidiaries expect to be economically dependent upon relatively few investments in the gaming industry. The United States is experiencing a recession accompanied by, among other things, reduced casino gaming and other recreational activity nationwide, instability in the commercial and investment banking systems and reduced credit availability, and is also engaged in war, all of which are likely to have far-reaching effects on economic activity in the country for an indeterminate period. The effects and probable duration of these conditions and related uncertainties on the Company’s unconsolidated investees’ future operations and cash flows cannot be estimated at this time but may be significant.
NOTE 2 - Significant Accounting Policies:
Use of estimates
Timely preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.
Basis of accounting and presentation
The accompanying consolidated financial statements as of December 31, 2008 and 2007 include the accounts of the Company and its wholly-owned subsidiaries OCM Blocker, LLC (“Blocker”), AcquisitionCo, OCM AcquisitionCo II, LLC, and OCM LandCo, LLC. All significant inter-company accounts and transactions have been eliminated.
Investments in CCR and NP Land (Note 3) are accounted for using the equity method of accounting. The Company has not elected to adopt the option available under Financial Accounting Standards Board (“FASB”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, to measure any of its eligible financial instruments or other items. Accordingly, the Company continues to measure all of its assets and liabilities on the historical cost basis of accounting except as required by generally accepted accounting principles.
Statement of cash flows and cash concentration
At the request and for the convenience of the Company, certain of the disbursements of the Company and its consolidated subsidiaries for operating expenses are made by InvestCo and/or its beneficial owners directly to vendors and investees, and distributions from the Company’s investees are received directly by InvestCo. Accordingly, these activities are treated as constructive cash inflows and outflows in the statements of cash flow.
The Company and its unconsolidated investees carry and expect to carry cash and equivalents and investment securities on deposit with financial institutions substantially in excess of federally-insured limits, and risk of losses related to such concentrations that might result from any failures of depository institutions may be increasing in the current economic environment. The extent of loss, if any, to be sustained as a result of a future financial institution failure, however, is not subject to estimation at this time.
Gaming Licenses
Professional fees and other costs associated with the applications for licensure of the Company and its consolidated subsidiaries and certain of its beneficial owners, including payments to regulatory agencies, have been capitalized pursuant to guidelines contained in para. 2.06 of the American Institute of Certified Public Accountants’ Audit and Accounting Guide, Audits of Casinos. These fees and costs have been treated as indefinite life intangible assets pursuant to Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, based on expectations at the time the costs were incurred and capitalized that such licenses would be granted, as they subsequently were, that they would enable the Company and/or its consolidated subsidiaries to hold direct and indirect ownership interests in gaming enterprises, and, therefore, that it was and is probable that they will benefit future periods through continued profitable operations of its investee entities and resultant expected increases in the value of its investments therein and cash distributions therefrom. License renewal fees are not significant and are expensed as incurred.
Such assets are evaluated at least annually (and more frequently when circumstances warrant) to determine if events or changes in circumstances indicate that the probability that such assets will continue to benefit future periods might have been impaired. Examples of such events or changes in circumstances that might indicate impairment of these assets might include an active or likely regulatory threat to the availability or viability of a license, specifically, as a result of (i) non-compliance with regulations, (ii) an adverse change
in the legal, regulatory or business climate relative to gaming nationally or in the jurisdiction, or (iii) a significant long term decline in historical or forecasted earnings or cash flows of the investee or the fair value of its property or business possibly as a result of competitive or other economic or political factors. As of December 31, 2008, based on our evaluation, there has been no impairment to these assets.
Income taxes
The Company accounts for uncertain in income taxes recognized in financial statements under the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. The Company’s adoption of FIN 48 on January 1, 2007, had no effect on retained earnings or results of operation. The Company records estimated penalties and interest, if any, related to income tax matters, including uncertain tax positions, if any, as a component of income tax expense.
Members’ capital
Allocations of net income and distributions to the Members are determined in accordance with the Company’s operating agreement.
NOTE 3 - Significant Equity Investee:
On September 22, 2006, the Company, through a subsidiary, acquired a 33-1/3% equity interest in CCR and a 33-1/3% equity interest in NP Land, both Nevada limited liability companies, in exchange for cancellation of loans of $64 million and $4,282,454, and accrued interest of $5,470,685 and $502,631, respectively. The Company’s acquisition of the 33-1/3% equity interest in CCR and a 33-1/3% equity interest in NP Land was completed pursuant to the terms and conditions of the CUP Agreement. On November 14, 2006, the Company, through a subsidiary, contributed an additional $50 million to CCR, increasing its equity interest in CCR from 331/3% to 42%. For the year ended December 31, 2007, the Company’s equity in the earnings of CCR and NP Land totaled $578,420 and $508,663, respectively. For the year ended December 31, 2008, the Company’s equity in earnings of CCR and NP Land totaled $3,012,049 and $528158, respectively. No distributions were received from either CCR or NP Land in the year ended December 31, 2008.
The following tables present condensed financial information of CCR as of December 31, 2008 and 2007, and for the years ended December 31, 2008 and 2007:
The unaudited total assets of NP Land at December 31, 2008 and 2007, was approximately $4,600,000 and $5,400,000, respectively. The unaudited net income for the years ended December 31, 2008 and 2007, was approximately $1,600,000 and $1,500,000, respectively.
NOTE 4 - Income Taxes:
Prior to the election by Blocker to be taxable as a corporation, effective January 1, 2006, neither the parent nor its subsidiaries were tax paying entities for federal or state income tax purposes. Blocker owns 100% of the other subsidiaries included in this consolidation. Accordingly, equity in the flow-through earnings of CCR and NP Land is taxed to Blocker. Blocker also incurs
interest expense ($1,961,784 for 2008 and $2,612,702 for 2007) on inter-company indebtedness ($23,218,683 at December 31, 2008 and 2007) that is deductible for tax purposes (a permanent difference) but which is eliminated, along with the related debt, in this consolidation. The Company incurs certain other costs, primarily associated with being a public company, including professional and other fees, which, for tax purposes, flow through to its members.
The following table presents a reconciliation of the income tax benefit with that determined by applying the statutory U.S. federal income tax rate to income before income taxes for the years ended December 31, 2008 and 2007:
At December 31, 2008, Blocker had approximately $33,075,000 and $769,000 in federal net operating loss and general business tax credit carryforwards, which expire beginning in 2021.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used to determine taxable income for income tax reporting purposes. The following table presents the significant components of the non-current deferred tax assets (liabilities) of the Company and its consolidated subsidiaries related to its investments in CCR and NP Land (there are no current deferred tax assets and liabilities):
The other CCR attributes shown above consist primarily of depreciation and amortization.
NOTE 5 - Related party transactions:
In May 2008, a wholly-owned subsidiary of the Company entered into a loan repayment guarantee agreement which is expected to terminate no later than May 15, 2009. The likelihood of the guarantee ever being called is remote. Although the maximum exposure under the guarantee is $20 million, the fair value of the guarantee is not material as of December 31, 2008.
As of December 31, 2008, the Company was conditionally committed to make up to an additional $25 million of equity investment in CCR to support the operational needs of CCR’s subsidiary, PA Meadows, but only in certain limited circumstances and only to the extent not previously funded.
An affiliate of one of the Company’s members provides the Company with certain administrative support services for an annual fee of $50,000 based on hourly rates of assigned personnel ($75,000 in 2007).
In February 2007, the Oaktree Funds, beneficial owners of the Company’s non-voting equity interests, agreed to support, through member contributions to CCR, letters of credit issued in favor of the Pennsylvania Department of Transportation for an aggregate stated amount of approximately $18.3 million. Such support was transferred to PA Meadows during the second quarter of 2007. The Oaktree Funds received $382,000 from CCR as consideration for supporting the letters of credit.
In March 2009, Millennium and the Company, through AcquisitionCo, made equity contributions to CCR for the purpose of maintaining CCR’s compliance with its debt covenants. The equity contribution by AcquisitionCo was funded by an equity contribution from Blocker, which in turn was funded by a loan from the Company.