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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 0-52042

 

OCM HOLDCO, LLC

(Exact name of Registrant as specified in its charter)

 

DELAWARE

 

20-3673772

(State or other jurisdiction of incorporation

or organization)

 

(I.R.S. Employer Identification No.)

 

333 SOUTH GRAND AVENUE

28th FLOOR

LOS ANGELES, CALIFORNIA, 90071

(Address of principal executive offices)

 

(213) 830-6300

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes o No x

 

 

 



Table of Contents

 

OCM HOLDCO, LLC

Index

Form 10-Q

 

 

 

 

PAGE

 

Forward Looking Statements

 

3

 

 

 

 

Part I

Financial Information

 

4

 

 

 

 

Item 1.

Consolidated Financial Statements

 

4

 

Balance Sheets

 

4

 

Statements of Comprehensive Loss

 

5

 

Statements of Changes in Members’ Equity

 

6

 

Statements of Cash Flows

 

7

 

Notes to Unaudited Consolidated Financial Statements

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

14

Item 4.

Controls and Procedures

 

14

 

 

 

 

Part II

Other Information

 

15

Item 1.

Legal Proceedings

 

15

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

15

Item 3.

Defaults Upon Senior Securities

 

15

Item 4.

Mine Safety Disclosures

 

15

Item 5.

Other Information

 

15

Item 6.

Exhibits

 

15

 

Signatures

 

16

 

2



Table of Contents

 

Forward Looking Statements.

 

In addition to historical information, this Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the notes to the financial statements of OCM HoldCo, LLC set forth in the section entitled “Financial Statements.” When used in this report, the words “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” “seeks,” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the information described in this Form 10-Q. You should also carefully review the risk factors described in the previously filed Form 10-K for the year ended December 31, 2013, and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “Commission”).

 

3



Table of Contents

 

PART I—FINANCIAL STATEMENTS

 

Item 1. Financial Statements.

 

OCM HoldCo, LLC and Subsidiaries

Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

8,128,944

 

$

9,363,650

 

Deferred tax assets, current

 

 

229,972

 

 

 

8,128,944

 

9,593,622

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Investment in Cannery Casino Resorts, LLC

 

81,598,065

 

82,762,314

 

Gaming and related licenses

 

805,698

 

805,698

 

Deferred tax assets, net of valuation allowance of $11,247,177 and $2,793,392 as of September 30, 2014 and December 31, 2013, respectively

 

74,226

 

7,563,796

 

 

 

$

90,606,933

 

$

100,725,430

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued expenses, including $204,894 and $167,394 to related parties as of September 30, 2014 and December 31, 2013, respectively

 

$

216,687

 

$

179,745

 

Deferred tax liabilities, current, net of valuation allowance of $322,888 and $0 as of September 30, 2014 and December 31, 2013, respectively

 

74,226

 

 

 

 

290,913

 

179,745

 

 

 

 

 

 

 

Members’ equity

 

90,316,020

 

100,545,685

 

 

 

$

90,606,933

 

$

100,725,430

 

 

See notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

OCM HoldCo, LLC and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

For the Three and Nine Months Ended September 30, 2014 and 2013

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Income (loss)

 

 

 

 

 

 

 

 

 

Interest income

 

$

2,096

 

$

2,594

 

$

6,626

 

$

7,760

 

Equity in loss of unconsolidated investees

 

(1,922,238

)

(1,398,709

)

(1,075,826

)

(2,804,532

)

 

 

(1,920,142

)

(1,396,115

)

(1,069,200

)

(2,796,772

)

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Professional fees

 

52,090

 

50,422

 

186,294

 

200,772

 

Administrative fees and other expenses

 

13,363

 

13,410

 

40,780

 

40,516

 

Interest expense, related parties

 

 

11,643

 

 

34,107

 

 

 

65,453

 

75,475

 

227,074

 

275,395

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax provision

 

(1,985,595

)

(1,471,590

)

(1,296,274

)

(3,072,167

)

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

(350

)

(487,104

)

(7,824,716

)

(1,368,912

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

(1,985,945

)

(1,958,694

)

(9,120,990

)

(4,441,079

)

Equity in other comprehensive (loss) income of unconsolidated investee, net of tax, unrealized (loss) gain on interest rate swap and investments

 

(650

)

(50,477

)

(57,475

)

106,420

 

Comprehensive loss

 

$

(1,986,595

)

$

(2,009,171

)

$

(9,178,465

)

$

(4,334,659

)

 

See notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

OCM HoldCo, LLC and Subsidiaries

Consolidated Statements of Changes in Members’ Equity (Unaudited)

For the Nine Months Ended September 30, 2014 and 2013

 

 

 

Total members’
equity

 

Accumulated other
comprehensive
income (loss)

 

Invested capital and
accumulated earnings

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Balances, beginning of period

 

$

100,545,685

 

$

(125,216

)

$

100,670,901

 

Net loss

 

(9,120,990

)

 

(9,120,990

)

Distribution to members

 

(1,051,200

)

 

(1,051,200

)

Equity in other comprehensive loss of unconsolidated investee, net of tax, unrealized loss on interest rate swap, and investments

 

(57,475

)

(57,475

)

 

 

 

 

 

 

 

 

 

Balances, end of period

 

$

90,316,020

 

$

(182,691

)

$

90,498,711

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

Balances, beginning of period

 

$

107,929,154

 

$

(205,774

)

$

108,134,928

 

Net loss

 

(4,441,079

)

 

(4,441,079

)

Equity in other comprehensive income of unconsolidated investee, net of tax, unrealized gain on interest rate swap

 

106,420

 

106,420

 

 

 

 

 

 

 

 

 

 

Balances, end of period

 

$

103,594,495

 

$

(99,354

)

$

103,693,849

 

 

See notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

OCM HoldCo, LLC and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2014 and 2013

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net loss

 

$

(9,120,990

)

$

(4,441,079

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Equity in loss of unconsolidated investees

 

1,075,826

 

2,804,532

 

Deferred income taxes

 

7,824,716

 

1,372,843

 

Increase in accounts payable and accrued expenses

 

36,942

 

41,871

 

Decrease in taxes payable

 

 

(3,931

)

Net cash used in operating activities

 

(183,506

)

(225,764

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Net cash provided by investing activities

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Distribution to members

 

(1,051,200

)

 

Net cash used in financing activities

 

(1,051,200

)

 

 

 

 

 

 

 

Net decrease in cash

 

(1,234,706

)

(225,764

)

Cash, beginning of period

 

9,363,650

 

10,638,837

 

 

 

 

 

 

 

Cash, end of period

 

$

8,128,944

 

$

10,413,073

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Noncash financing and investing activity

 

 

 

 

 

Equity in other comprehensive (loss) income of unconsolidated investee

 

$

(57,475

)

$

106,420

 

 

See notes to unaudited consolidated financial statements.

 

7



Table of Contents

 

OCM HoldCo, LLC and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

 

NOTE 1— Basis of Presentation and Organization

 

The consolidated financial statements of OCM HoldCo, LLC (“OCM”), a Delaware limited liability company, as of September 30, 2014 and December 31, 2013, and for the three and nine month periods ended September 30, 2014 and 2013, include the accounts of OCM and its wholly-owned subsidiaries (collectively, the “Company”). The interim financial statements presented herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”) applicable to interim financial information.  Certain information and disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all adjustments necessary for a fair presentation of the results for the interim periods have been made (consisting of normal recurring adjustments).  Results of operations for the current interim periods are not necessarily indicative of results to be expected for the full fiscal year.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

All of OCM’s issued and outstanding Class A Units are held by OCM VoteCo, LLC, a Delaware limited liability company (“VoteCo”), and all of OCM’s issued and outstanding non-voting Class B Units are held by OCM InvestCo, LLC, a Nevada limited liability company (“InvestCo”).  The rights of the Class A Units and Class B Units are substantially identical with the exception that the Class B Units are not entitled to any management or voting rights with respect to the Company, except as provided by applicable law.  Neither class has dividend or liquidation preferences, atypical participation rights, or preferred, convertible, or redeemable features.  In general, any sale, assignment or transfer of such units is subject to the prior approval of the gaming regulators of Nevada and Pennsylvania.  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, less than 0.00015%, and its total equity contributions are limited to $100.

 

OCM, through its subsidiary, OCM AcquisitionCo, LLC, a Delaware limited liability company (“AcquisitionCo”), owns 92,690 Series A1 Preferred Units (together with the Series A2 Preferred Units, the “Series A Units”) of Cannery Casino Resorts, LLC (“CCR”), which represent a 31.71% interest in the aggregate Series A Units of CCR.  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’s current business consists primarily of its ownership of these equity interests in CCR. CCR, through wholly-owned subsidiaries, owns and operates The Cannery Hotel and Casino (“The Cannery”), located in North Las Vegas, Nevada and the Eastside Cannery Casino and Hotel (the “Eastside Cannery”), located in southeast Las Vegas.  In addition, CCR, through a wholly owned subsidiary, PA Meadows, LLC, a Delaware limited liability company (“PA Meadows”), owns The Meadows Racetrack and Casino (“The Meadows”), an operating harness racetrack and casino located in North Strabane Township, Washington County, Pennsylvania.

 

On May 13, 2014, CCR and its wholly-owned subsidiary, PA MezzCo, LLC, a Delaware limited liability company (“MezzCo” and collectively with CCR, the “Sellers”), entered into a Membership Interest Purchase Agreement (“Agreement”) with Gaming and Leisure Properties, Inc. and a subsidiary (collectively, the “Buyers”) to sell PA Meadows for approximately $465 million.  The transaction requires approval from the Pennsylvania Gaming Control Board and the Pennsylvania Racing Commission and is expected to close in 2015.  In connection with entering into the Agreement, the Sellers simultaneously entered into a consulting agreement with the Buyers (“Consulting Agreement”) whereby the Sellers will provide general advisory services to the Buyers relating to the transaction contemplated under the Agreement.  The Consulting Agreement ends upon the earliest of (i) the closing of the sale of PA Meadows, (ii) 33 months from execution of the Consulting Agreement, or (iii) the failure of the Buyers and Sellers to deliver certain required representations to extend the Consulting Agreement upon the 13-month and 25-month anniversary of executing the Consulting Agreement.  Upon executing the Consulting Agreement, the Sellers received a non-refundable consulting fee of $10 million, and may earn a $5 million extension fee at each of the 13-month and 25-month anniversaries of executing the Consulting Agreement contingent upon the delivery of certain representations and the extension of the Consulting Agreement.

 

On July 14, 2014, AcquisitionCo distributed $0.5 million as a return of capital to Blocker.  Blocker in turn paid OCM a total of $0.5 million as payment of accrued interest on intercompany loans to OCM.  OCM then distributed $1.1 million to InvestCo as a return of capital.

 

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Commission on March 28, 2014, from which the balance sheet information as of December 31, 2013 was derived.

 

8



Table of Contents

 

NOTE 2—Selected condensed consolidated operating information for unconsolidated investees

 

Selected unaudited condensed consolidated operating information for Cannery Casino Resorts, LLC, and Subsidiaries is as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

102,887,734

 

$

110,119,786

 

$

321,313,549

 

$

343,212,791

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

$

2,733,504

 

$

6,535,095

 

$

23,042,736

 

$

26,028,710

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,061,931

)

$

(4,410,941

)

$

(3,392,704

)

$

(8,844,315

)

 

NOTE 3—Income taxes

 

OCM is a limited liability company and, accordingly, is treated as a partnership for federal income tax purposes with the tax effect of its activities recognized in the income tax returns of its members.

 

OCM owns over 99.99% of the equity interest in Blocker, which has elected to be taxed as a corporation and which, in turn, owns 100% of AcquisitionCo.  AcquisitionCo owns the investment in CCR, a Nevada limited liability company that is treated as a partnership for federal income tax purposes.  Accordingly, equity in the earnings of CCR are generally taxable to Blocker along with other tax attributes (permanent differences) and business tax credits. The principal exception to this generalization is earnings from the corporate, taxpaying subsidiaries of CCR that own and operate The Meadows, a racetrack and casino in Pennsylvania.

 

Blocker incurs interest expense on intercompany indebtedness that is deducted for income tax purposes but is eliminated (a permanent difference), along with the related debt, in this consolidation.  OCM also incurs certain other costs, primarily associated with being a reporting company, including professional and other fees, which, for tax reporting purposes, flow through to its members.  The Company has recorded a valuation allowance to reduce the related deferred tax assets to the amount that is more likely than not to be realized.  Because of these circumstances, the Company’s estimated effective tax rate, for the periods presented, differs significantly from the federal statutory rate of 35%.

 

Management has made an analysis of its state and federal tax returns that remain subject to examination by major authorities (consisting of tax years 2011 and thereafter) and concluded that the Company has no recordable liability as a result of uncertain tax positions taken.

 

NOTE 4—Related party loans

 

On July 15, 2010, the Company borrowed $750,000 from certain affiliates of the Company in order to cover existing and future expenses of the Company. Interest accrued at the prime rate plus 2% on the outstanding principal amount, and unpaid interest compounded monthly.  The notes evidencing this loan were due and payable on demand.  On October 30, 2013, the Company fully repaid these borrowings.

 

NOTE 5—Contingencies

 

The United States recently experienced a recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational, construction and real estate market activities and general discretionary consumer spending. Although capital market activity and liquidity have improved of late, the recovery from this recession period is fragile and there can be no assurance that our business, which has been severely affected by the downturn, will fully recover to pre-recession levels.

 

The Company often carries cash on deposit with financial institutions substantially in excess of federally-insured limits, and the risk of losses related to such concentrations has been increasing as a result of recent economic developments and uncertainties discussed in the foregoing paragraph.  The extent of any loss that might be incurred as a result of uninsured deposits in the event of a future failure of a bank or other financial institutions, if any, is not subject to estimation at this time.

 

NOTE 6—Financial Instruments

 

Except for cash, the fair value of which equals its carrying value, the only significant financial instrument the Company has is its investment in an unconsolidated investee accounted for using the equity method for which fair value disclosure is not required.

 

NOTE 7—Subsequent Events

 

On October 27, 2014 Gaming and Leisure Properties, Inc. (“GLPI”) filed a lawsuit in the United States District Court for the Southern District of New York against CCR.  GLPI alleges willful breach and other misconduct on the part of CCR with respect to the Agreement and Consulting Agreement entered into between CCR and GLPI relating to GLPI’s purchase of PA Meadows.  GLPI seeks declatory relief regarding the breach of contract claims, unspecified damages and a declaration that a material adverse effect has occurred that would excuse GLPI from completing the transaction.  CCR believes the lawsuit is without merit and intends to defend the suit vigorously to ensure that GLPI complies with its contractual obligations.

 

9



Table of Contents

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following management discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited interim financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Overview

 

The Company’s activities consist solely of holding substantial, noncontrolling equity interests in gaming enterprises and related assets.

 

Background

 

Overview

 

The Company and its consolidated subsidiaries were formed on July 22, 2005, at the direction of affiliates of Oaktree Capital Management, L.P., a Delaware limited partnership (“Oaktree”), for the purpose of participating in various activities relating to the gaming industry.

 

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 of less than 0.00015%, and its total equity contributions are limited to $100.

 

In 2006, the Company acquired a 42% equity interest in CCR through AcquisitionCo.  Through its subsidiaries AcquisitionCo and Blocker, the Company currently owns a 31.71% interest in the Series A Units of CCR.  The Company’s current business consists primarily of its ownership of this equity interest.  CCR, through wholly owned subsidiaries, owns and operates The Cannery, located in North Las Vegas, Nevada and the Eastside Cannery, located in Las Vegas, Nevada.  Through its wholly owned subsidiary, PA Meadows, CCR also owns and operates a racetrack and a casino at The Meadows, located in North Strabane Township, Washington County, Pennsylvania.

 

On October 30, 2013, AcquisitionCo distributed $1.9 million as a return of capital to Blocker.  Blocker in turn paid OCM a total of $1.9 million as payment of accrued interest on intercompany loans to OCM.  OCM then repaid $0.9 million in principal and interest for a related party loan (see Note 4) and distributed $0.1 million to InvestCo as a return of capital.

 

In December 2013, the Company’s subsidiaries, OCM Land Co, LLC and OCM AcquisitionCo II, LLC were dissolved.

 

On July 14, 2014, AcquisitionCo distributed $0.5 million as a return of capital to Blocker.  Blocker in turn paid OCM a total of $0.5 million as payment of accrued interest on intercompany loans to OCM.  OCM then distributed $1.1 million to InvestCo as a return of capital.

 

Recent Developments

 

On May 13, 2014, CCR and its wholly-owned subsidiary, PA MezzCo, LLC, a Delaware limited liability company (“MezzCo” and collectively with CCR, the “Sellers”), entered into a Membership Interest Purchase Agreement (“Agreement”) with Gaming and Leisure Properties, Inc. and a subsidiary (collectively, the “Buyers”) to sell PA Meadows for approximately $465 million.  The transaction requires approval from the Pennsylvania Gaming Control Board and the Pennsylvania Racing Commission and is expected to close in 2015.  In connection with entering into the Agreement, the Sellers simultaneously entered into a consulting agreement with the Buyers (“Consulting Agreement”) whereby the Sellers will provide general advisory services to the Buyers relating to the transaction contemplated under the Agreement.  The Consulting Agreement ends upon the earliest of (i) the closing of the sale of PA Meadows, (ii) 33 months from execution of the Consulting Agreement, or (iii) the failure of the Buyers and Sellers to deliver certain required representations to extend the Consulting Agreement upon the 13-month and 25-month anniversary of executing the Consulting Agreement.  Upon executing the Consulting Agreement, the Sellers received a non-refundable consulting fee of $10 million, and may earn a $5 million extension fee at each of the 13-month and 25-month anniversaries of executing the Consulting Agreement contingent upon the delivery of certain representations and the extension of the Consulting Agreement.

 

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Table of Contents

 

As disclosed in Note 7 (Subsequent Events) to the unaudited consolidated financial statements of OCM, CCR is involved in litigation with GLPI relating to the PA Meadows transaction.

 

Operations Analysis

 

Results of Operations

 

Material variables and factors affecting the Company’s loss before income tax provision for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, are as follows:

 

·                  CCR’s net loss increased approximately $1.7 million for the three months ended September 30, 2014, compared to the same period for the prior year, due to the operational highlights for CCR discussed below.  This increase resulted in a $0.5 million increase in equity in loss of unconsolidated investees.

 

Material variables and factors affecting the Company’s loss before income taxes for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, are as follows:

 

·                  CCR’s net loss decreased approximately $5.5 million for the nine months ended September 30, 2014, compared to the same period for the prior year, due to the operational highlights for CCR discussed below.  This decrease resulted in a $1.7 million decrease in equity in loss of unconsolidated investees.

 

Material tax attributes of the Company’s unconsolidated investees, primarily CCR, flow to OCM through Blocker, an entity in which OCM owns 99.99% of the equity interest, and are either nonrecurring or vary significantly.  Further, significant income of CCR is taxable to corporate subsidiaries of CCR.

 

During 2014 and 2013, the Company’s operations are related to its investments in CCR.  The United States recently experienced a recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational, construction and real estate market activities and general discretionary consumer spending. Although capital market activity and liquidity have improved of late, the recovery from this recession period is fragile and there can be no assurance that our business, which has been severely affected by the downturn, will fully recover to pre-recession levels.

 

Operational highlights for CCR for the three months and nine months ended September 30, 2014 and 2013 are as follows:

 

Three months ended September 30, 2014 and 2013:

 

Consolidated revenues (net) decreased $7.2 million for the three months ended September 30, 2014, as compared to the same corresponding period in the prior year. The declines in consolidated revenues (net) were primarily due to the following:

 

·                  Casino revenues

 

Casino revenues decreased $4.8 million as compared to the same corresponding period in the prior year.  Casino revenue at The Meadows decreased $3.9 million primarily due to lower table games and slot revenues.  Table games revenues and slot revenues declined $1.4 million and $1.9 million, respectively, primarily due to volatile high limit table games play and a decline in patron visits at The Meadows by middle and lower tiered customers. Casino revenues at the Eastside Cannery Hotel and Casino (“Eastside”) declined $1.0 million primarily due to lower slot revenues as compared to the same corresponding period.  The declines in slot revenues at the Eastside were primarily due to lower visits and spend per visit. Casino revenues at the Cannery for the three months ended September 30, 2014 were relatively flat as compared to the same corresponding period in the prior year.

 

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·                  Other revenues

 

Other revenues decreased $2.8 million as compared to the same corresponding period in the prior year. The decreases in other revenues were primarily due to one non-recurring prior-year transaction stemming from a property tax settlement at The Meadows on September 3, 2013. The settlement resulted in a cash payment of approximately $0.9 million and $2.2 million in property tax credits to be applied the over next 5 fiscal years. The cash payment and property tax credit was recorded as other income for the three months ended September 30, 2013.

 

Income from operations decreased $3.8 million for the three months ended September 30, 2014, as compared to the same corresponding period in the prior year.  The decline in income from operations were primarily from lower consolidated revenues (net) as previously discussed, which were offset by the following:

 

·                  Casino expenses

 

Casino expenses declined $1.2 million primarily due to lower casino tax expense at The Meadows related to the decline in casino revenues (as discussed previously).

 

·                  Management fees

 

Management fees decreased slightly $0.2 million primarily due to lower PSA fees received from The Meadows as compared to the same corresponding period in the prior year.

 

·                  Other selling, general and administrative (“SG&A”)

 

SG&A expense declined $0.5 million primarily due to: (i) lower payroll costs at the corporate level; (ii) lower casino marketing promotional expense and, to a lesser extent, cost saving measures at the Eastside.

 

·                  Depreciation and Amortization

 

Depreciation and amortization expense declined $1.5 million, primarily at the Eastside and The Meadows.

 

Net loss decreased $1.7 million for the three months ended September 30, 2014 as compared to the same corresponding period in the prior year. The decline in net loss were primarily due to lower income from operations (as previously discussed), which was offset by lower income tax expense of $1.8 million as compared to the same corresponding period in the prior year.

 

Nine months ended September 30, 2014 and 2013:

 

Consolidated revenues (net) decreased $21.9 million for the nine months ended September 30, 2014, as compared to the same corresponding period in the prior year. The declines in consolidated revenues (net) were primarily due to the following:

 

·                  Casino revenues

 

Casino revenues decreased $22.7 million as compared to the same corresponding period in the prior year.  Casino revenue at The Meadows decreased $17.3 million primarily due to lower table games and slot revenues.  Table games and slot revenues declined $5.9 million and $11.1 million, respectively, primarily due to: (i) adverse weather conditions during the first part of the year; (ii) lower casino volume and hold percentage for table games at The Meadows; (iii) the opening of the Nemacolin Woodlands Resort in late June 2013 and; (iv) a decline in patron visits to The Meadows by middle and lower tiered customers.

 

Casino revenues at Cannery and Eastside declined $1.1 million and $4.4 million, respectively, primarily due to lower slot revenues. The decreases in slot revenues were driven by lower visits and spend at CCR’s Nevada operations.

 

·                  Pari-Mutuel wagering

 

Pari-mutuel wagering revenues decreased $1.0 million as compared to the same corresponding period in the prior year. The declines in pari-mutuel wagering revenues were primarily due to the closure of one off track betting parlor in the prior year.

 

·                  Other revenues

 

Other revenues increased $1.5 million as compared to the same corresponding period in the prior year. On May 13, 2014, CCR and its wholly-owned subsidiary, MezzCo, entered into a Membership Interest Purchase Agreement with Gaming and Leisure Properties, Inc. and a subsidiary to sell PA Meadows for approximately $465 million. In connection with entering into the Agreement, the CCR simultaneously entered into a Consulting Agreement with the Buyers whereby the CCR will provide general advisory services to the Buyers relating to the transaction contemplated under the Agreement. Upon executing the Consulting Agreement, CCR received a non-refundable consulting fee of $10 million which was reported as other income for the nine months ended September 30, 2014.  As disclosed in Note 7 (Subsequent Events) to the unaudited consolidated financial statements of OCM, CCR is involved in litigation with GLPI relating to the PA Meadows transaction.

 

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At the Cannery, other revenues increased $0.6 million as compared to the same corresponding period in the prior year, primarily due to increased theater lease fees received from a unrelated third party due to improvements to the theater that were completed in January 2014.

 

The gains in other revenues were offset by two non-recurring prior-year transactions stemming from: (i) a litigation settlement of $6.0 million related to the termination of a consulting fee agreement between CCR and the Jackson Rancheria of Mewuk Indians of California (“Tribe”) on May 31, 2013; (ii) a property tax settlement at The Meadows with certain governmental agencies on September 3, 2013. The settlement resulted in a cash payment of approximately $0.9 million and $2.2 million in property tax credits to be applied over the next 5 fiscal years. Both the litigation settlement and property tax settlement were reported as other income for the nine months ended September 30, 2013.

 

Income from operations decreased $3.0 million for the nine months ended September 30, 2014, as compared to the same corresponding period in the prior year. The decrease in income from operations was primarily due to the decrease in consolidated revenues (net), as previously discussed, which were offset by the following:

 

·                  Casino expenses

 

Casino expenses declined $6.8 million primarily due to lower casino tax expense at The Meadows of $6.5 million related to the declines in casino revenues (as discussed previously).

 

·                  Pari-mutuel wagering expense

 

Pari-mutuel wagering expense declined $0.9 million primarily due to the closure of one off track betting parlor in the prior year (as previously discussed).

 

·                  Management fees

 

Management fees decreased $2.6 million primarily due to the termination of the consulting agreement with Tribe (as previously discussed).

 

·                  Market research and project promotion

 

Market research and project promotion decreased $1.1 million primarily due to lower corporate development cost.

 

·                  Other selling, general and administrative (“SG&A”)

 

SG&A expense declined $1.6 million primarily due to: (i) lower payroll costs at the corporate level; (ii) lower casino marketing promotional expense, comp cost, and to a lesser extent cost saving measures at the Eastside.

 

·                  Depreciation and Amortization

 

Depreciation and amortization expense declined $5.9 million, primarily at the Eastside and The Meadows.

 

Net loss decreased $5.5 million for the nine months ended September 30, 2014 as compared to the same corresponding period in the prior year. The decrease in net loss was primarily driven by: (i) decreased interest expense of $1.2 million related to lower outstanding debt as compared to the same corresponding period in the prior year; (ii) gain from the sale of land of $1.2 million at The Meadows in March 2014 to an unrelated third party for development of a retail center; and (iii) lower income tax expense of $6.0 million as compared to the same corresponding period in the prior year. These increases in income were offset by the decrease in income from operations as previously discussed.

 

Liquidity and Capital Resources

 

The United States recently experienced a recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational, construction and real estate market activities and general discretionary consumer spending. Although capital market activity and liquidity have improved of late, the recovery from this recession period is fragile and, consequently, the Company’s liquidity and capital resources, cannot be estimated at this time but may likely be significant.

 

As disclosed above, the Company, from time to time, has made equity contributions to CCR in connection with CCR maintaining compliance with its debt covenants.  The Company has no current investment or other financing plans, and the Company’s recurring prospective need for liquidity and capital resources is principally associated with being a reporting company.

 

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On July 15, 2010, the Company borrowed $750,000 from certain affiliates of the Company in order to cover existing and future expenses of the Company anticipated to arise during the next two years. Interest accrued at the prime rate plus 2% on the outstanding principal amount, and unpaid interest is compounded monthly.  On October 30, 2013, the Company fully repaid these borrowings, including accrued interest.  To the extent the Company needs additional liquidity and capital resources to satisfy those needs, the Company’s members are the expected source of funding.

 

Inflation

 

The Company does not believe that inflation has had a material effect on its results of operations in recent years.  However, there is no assurance that inflation will not adversely affect its business in the future.

 

Off Balance Sheet Arrangements

 

Credit Agreements

 

On October 2, 2012, CCR entered into two new syndicated credit facilities totaling $590 million: a $425 million First Lien Credit Facility consisting of; (i) $385 million term loan borrowed at Closing Date; (ii) $40 million revolving loan unfunded at Closing Date, but available until the fifth anniversary of the Closing Date and; (iii) $165 million Second Lien Credit Facility (see Overview above).  Portions of the proceeds were used to retire $443.5 million of debt that was outstanding under the previously existing credit agreements and $86.9 of the proceeds was distributed to certain owners of the Series C Preferred Units. The remaining value of the Series C Preferred Units was contributed to CCR, and there are no remaining Series C Preferred Units outstanding.

 

Critical Accounting Estimates and Policies.

 

Although the Company’s consolidated financial statements necessarily make use of certain accounting estimates by management, at this time, we believe no matters are the subject of such estimates that are so highly uncertain or susceptible to change as to present a significant risk of a material impact on its financial condition or results of operations as more fully explained in the following paragraph. Moreover, except as discussed below, the Company does not employ any critical accounting policies that are selected from among available alternatives or require the exercise of significant management judgment to apply except for carrying its investments in unconsolidated investees on the equity method of accounting rather than the fair value option. Similarly, except for the selection of depreciable lives and depreciation methods and assumptions used to estimate the fair value of hedge agreements and investments, consisting of preferred auction rate securities, the accounting policies of the Company’s unconsolidated investees also do not require the exercise of significant management judgment to apply.

 

The realization of substantially all of the Company’s assets will likely be dependent upon an eventual sale of its investment in the unconsolidated investees following an economic recovery believed to be probable at a price sufficient to realize the carrying value of the Company’s assets.  The Company has recorded a valuation allowance to reduce the related deferred tax assets to the amount that is more likely than not to be realized.  These estimates are subject to material variation over the next year.

 

Recently Issued Accounting Pronouncements.

 

No recently issued accounting pronouncements not yet adopted are expected to have a material impact on our financial position, results of operations, or cash flows.

 

Item 3.         Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.   Controls and Procedures.

 

Disclosure Controls and Procedures.

 

As of the end of the period covered by this 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, as such term is defined under Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange of 1934, as amended (the “Exchange Act”).  Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of September 30, 2014, the Company’s disclosure controls and procedures are effective.

 

Changes in internal control over financial reporting.

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1.         Legal Proceedings.

 

As disclosed in Note 7 (Subsequent Events) to the unaudited consolidated financial statements of OCM, CCR is involved in litigation with GLPI relating to the PA Meadows transaction.

 

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.         Defaults Upon Senior Securities.

 

None.

 

Item 4.         Mine Safety Disclosures.

 

Not applicable.

 

Item 5.         Other Information.

 

None.

 

Item 6. Exhibits.

 

 

 

The following exhibits are filed or furnished with this report:

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Principal Executive Officer and Principal Financial Officer furnished as required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

 

OCM HOLDCO, LLC

 

Registrant

 

 

 

Date: November 13, 2014

By:

/s/ Stephen A. Kaplan

 

 

Stephen A. Kaplan

 

 

Manager (principal executive officer)

 

 

 

Date: November 13, 2014

By:

/s/ Ronald N. Beck

 

 

Ronald N. Beck

 

 

Manager (principal financial and chief accounting officer)

 

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