<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1998
REGISTRATION NO 333-53211
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT
NO. 2
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
HARD ROCK HOTEL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 7999 88-0306263
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
--------------------------
4455 PARADISE ROAD
LAS VEGAS, NEVADA 89109
(702) 693-5000
(Address, including zip code, and telephone number, including
area code of registrant's principal executive offices)
--------------------------
BRUCE R. DALL
CHIEF FINANCIAL OFFICER AND TREASURER
4455 PARADISE ROAD
LAS VEGAS, NEVADA 89109
(702) 693-5000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
MICHAEL A. WORONOFF
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 687-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this registration statement.
--------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
OFFER FOR ALL OUTSTANDING 9 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2005 IN
EXCHANGE FOR 9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2005, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
HARD ROCK HOTEL, INC.
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
, 1998, UNLESS EXTENDED.
Hard Rock Hotel, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange up to $120,000,000 aggregate principal amount of 9 1/4% Series B Senior
Subordinated Notes due 2005 (the "New Notes"), which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount at maturity of the issued and outstanding 9 1/4% Series A
Senior Subordinated Notes due 2005 (the "Old Notes" and, together with the New
Notes, the "Notes"). The terms of the New Notes are identical in all material
respects to the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes. The Company issued $120,000,000
aggregate principal amount of Old Notes on March 23, 1998, pursuant to
exemptions from, or transactions not subject to, the registration requirements
of the Securities Act and applicable state securities laws (the "Offering").
The Notes bear interest at the rate of 9 1/4% per annum, payable
semi-annually in arrears on April 1 and October 1 of each year, commencing on
October 1, 1998. The Notes mature on April 1, 2005. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after April 1,
2002 at the redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the redemption date. The Company will have the option to
direct a holder's disposition of the Notes or redeem the Notes pursuant to
certain regulatory requirements. On or before April 1, 2001, the Company may
redeem up to 35% in aggregate principal amount of the Notes originally issued at
a redemption price equal to 109.25% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the redemption
date, with the net proceeds of Equity Offerings (as defined). Upon a Change of
Control (as defined), the Company will be required to offer to repurchase the
Notes at a price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. There can be no assurance that the Company will have the financial
resources to repurchase the Notes in the event of a Change of Control. See
"Description of Notes."
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all Senior Indebtedness (as defined), including borrowings
under the New Credit Facility (as defined). As of April 30, 1998, the aggregate
amount of outstanding Senior Indebtedness was $0.3 million and the Company had
$67.0 million of undrawn availability under the New Credit Facility. The Company
anticipates incurring additional indebtedness under the New Credit Facility to
fund a portion of the Expansion (as defined). The Indenture (as defined) permits
the Company to incur additional indebtedness subject to certain limitations. See
"Description of Notes."
SEE "RISK FACTORS" BEGINNING AT PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED PRIOR TO ACQUIRING NEW NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This date of this Prospectus is August , 1998
<PAGE>
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from March 23, 1998. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders of Old Notes accepted for exchange will not receive any payment in
respect of accrued interest on such Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). The Company is making the Exchange Offer pursuant to the
registration statement of which this Prospectus is a part in reliance upon the
position of the staff of the Securities and Exchange Commission (the
"Commission") set forth in certain no-action letters addressed to other parties
in other transactions. However, the Company has not sought its own no-action
letter and there can be no assurance that the staff of the Commission would make
a similar determination with respect to the Exchange Offer. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act; (ii) an Initial Purchaser (as defined herein) or
holder of Old Notes who acquired the Old Notes directly from the Company solely
in order to resell pursuant to Rule 144A of the Securities Act or any other
available exemption under the Securities Act; or (iii) a broker-dealer who
acquired the Old Notes as a result of market making or other trading activities)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and such holder is not
participating and has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of such
New Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning or the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of at least 12 months
after the date upon which the Registration Statement, of which this Prospectus
is a part, is declared effective by the Commission, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses of the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. If the Company terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the Holders thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes. The
Initial Purchasers have advised the Company that they currently intend to make a
market in the New Notes. The Initial Purchasers are not obligated to do so,
however, and any market-making with respect to the New Notes may be discontinued
at any time without notice. The Company does not intend to apply for listing or
quotation of the New Notes on any securities
i
<PAGE>
exchange or stock market or register or qualify the New Notes for offer and sale
in any jurisdiction (other than the registration of the New Notes under the
Securities Act).
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the New Notes offered hereby,
reference is made to the Registration Statement. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement otherwise filed with the
Commission.
Upon the effectiveness of the Registration Statement, the Company will
become subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith will file
reports and other information with the Commission. The Registration Statement,
the exhibits forming a part thereof and the reports and other information filed
by the Company with the Commission in accordance with the Exchange Act may be
inspected, without charge, at the Public Reference Section of the Commission
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 7 World Trade Center, 13th Floor,
New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the material may be obtained
from the Public Reference Section of the Commission upon payment of the
prescribed fees. The Commission also maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information at
http:/www.sec.gov.
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus constitute "forward-looking
statements." Such forward-looking statements include the discussions of the
business strategies of the Company and expectations concerning future
operations, margins, profitability, liquidity, capital expenditures and capital
resources. Although management believes that the expectations in such
forward-looking statements are reasonable, it can give no assurance that any
forward-looking statements will prove to be correct. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the risks associated with new construction, competition and other
planned construction in Las Vegas, government regulation related to the gaming
industry, uncertainty of casino customer spending and vacationing in casino
resorts in Las Vegas, occupancy rates and average room rates in Las Vegas, the
popularity of Las Vegas as a convention and trade show destination, the
completion of infrastructure improvements in Las Vegas, including the on-going
expansion of McCarran International Airport, and general economic and business
conditions that may affect levels of disposable income of consumers and pricing
of hotel rooms. For a further discussion of such factors and others, see "Risk
Factors."
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE
NOTES THERETO APPEARING ELSEWHERE HEREIN. REFERENCES TO "FISCAL YEAR" HEREIN ARE
TO THE COMPANY'S FISCAL YEAR ENDING NOVEMBER 30.
THE COMPANY
The Company owns and operates the Hard Rock Hotel & Casino in Las Vegas,
Nevada, the world's first casino resort with a rock music theme (the "Resort").
The Resort is modeled after the highly successful Hard Rock
Cafe-Registered Trademark- restaurant chain and is decorated with an extensive
collection of rare rock memorabilia as well as a distinctive roof top
guitar-shaped neon sign that extends 180 feet into the Las Vegas skyline. The
original Hard Rock Cafe was co-founded in 1971 by Peter A. Morton, the Company's
Chairman, Chief Executive Officer and President, and "Hard Rock" has grown to
become a widely recognized name throughout the world. Since the Resort's opening
in March 1995, it has developed a strong following among its target customer
base of youthful individuals, generally between the ages of 25 and 45, who seek
a vibrant, energetic entertainment and gaming experience with the services and
amenities associated with a boutique luxury resort hotel. As evidence of its
appeal to its target customer base, the Resort was selected in CONDE NAST
TRAVELER as one of "The 25 Coolest Places to Stay Now" in the world and was also
recognized in the 1997 LAS VEGAS REVIEW JOURNAL'S "Best of Las Vegas" issue as
being "The Best Place to Take Out-of-Town Visitors" and for having "The Best
Hotel Pool," "Best Blackjack Tables" and "Best Live Music Club." In order to
capitalize on its current success, the Company intends to undertake an expansion
designed to significantly enhance and enlarge the Resort.
The Resort occupies one of the most highly visible and easily accessible
sites in Las Vegas. It is located on approximately 16.7 acres of land near the
intersection of Paradise Road and Harmon Avenue, approximately two miles from
McCarran International Airport and approximately one mile east of Las Vegas
Boulevard (the "Strip"), the main tourist area in Las Vegas. The Resort
represents an attractive alternative for tourists, business travelers and locals
who wish to avoid the crowds and congestion of the Strip, while maintaining
close and easy access to the Strip. The Company has agreements with major hotels
and casinos and retail establishments pursuant to which shuttle services are
provided between such locations and the Resort. The Resort's location is
particularly attractive due to its proximity to (i) a high concentration of
popular Las Vegas restaurants and nightclubs, (ii) the Las Vegas Convention
Center, (iii) the Thomas & Mack Center at the University of Nevada Las Vegas,
Las Vegas' primary sporting and special events arena and (iv) a number of
non-gaming hotels, which have an aggregate of more than 1,000 guest rooms.
The Resort currently consists of (i) an eleven-story hotel tower (the
"Hotel") with 339 guest rooms (including 28 deluxe suites), (ii) a 28,000
square-foot casino (the "Casino"), with 741 slot machines and 50 table games,
(iii) a 2,000 square-foot retail shop (the "Retail Store"), (iv) a nightclub and
live music concert hall with a capacity of 1,400 persons ("The Joint"), (v) an
outdoor swimming pool area with a tropical theme (the "Beach Club"), (vi) two
restaurants, (vii) three cocktail lounges and (viii) an exercise facility (the
"Athletic Club"). The Hotel's guest rooms and deluxe suites have an average size
of 450 square feet and are decorated in a modern, minimalist style that features
black and white photos of famous rock musicians. The Casino is designed with an
innovative circular layout around an elevated bar (the "Center Bar"), which
allows its patrons to see and be seen from nearly every area of the Casino. Rock
music is played continuously to provide the Casino with an energetic and
entertaining, club-like atmosphere. The Retail Store has an innovatively
designed decor with a guitar-shaped sales counter, where customers may purchase
a wide variety of merchandise displaying the popular "Hard Rock Hotel" and "HRH"
logos. The Joint, a premier live music venue, successfully draws audiences from
Las Vegas visitors and from the local Las Vegas population. The Beach Club
features a 175-foot long, sand bottomed pool with a waterslide and underwater
rock music, which was dubbed the "eighth wonder of Las Vegas" by VOGUE magazine.
The
1
<PAGE>
Resort's two restaurants offer fine dining at Mortoni's and 24-hour casual
dining with a rock music inspired atmosphere at Mr. Lucky's.
The Company has successfully differentiated itself in the Las Vegas market
by targeting a predominantly youthful and "hip" customer base, which management
believes consists primarily of rock music fans and youthful individuals, as well
as actors, musicians and other members of the entertainment industry. To attract
this target audience, the Company promotes the Resort as "the place to be" in
Las Vegas. The "Hard Rock Hotel" trademark and Mr. Morton's extensive network of
contacts in the music and entertainment industry have helped to attract a number
of famous actors, musicians and celebrities to the Resort. In addition, The
Joint has hosted numerous famous rock singers and popular music groups, such as
The Rolling Stones, The Eagles, No Doubt, Fiona Apple, The Wallflowers, Sheryl
Crow and Jewel. The Resort has also regularly hosted a variety of televised
special events that have reinforced the Resort's marquee image, such as segments
of, and the post awards party for, the Fox/Billboard Magazine Music Awards,
MTV's dance program THE GRIND, VH-1's Fairway to Heaven, a celebrity golf
tournament, the King of the Beach Invitational, a pro volleyball tournament, and
the premiere of the major motion picture CON AIR.
The success of the Resort's focused strategy is reflected in its strong
visitor traffic and high occupancy rates since its opening in March 1995. As
evidence of the strong demand for its rooms, the Hotel achieved a 99.5% and
100.0% occupancy rate in fiscal years 1996 and 1997, respectively (as compared
to the average occupancy rate of 93.4% and 90.3%, respectively, for all hotels
in Las Vegas in the calendar years 1996 and 1997). In addition, the Hotel's
average daily room rate, which includes complimentary rooms ("ADR"), increased
from $91.60 in 1996 to $96.36 in fiscal year 1997, despite the addition of
approximately 15,300 hotel and motel rooms in Las Vegas in calendar years 1996
and 1997. Management estimates that the Hotel turns away between 5,000 and
10,000 requests for reservations each month as a result of the lack of
sufficient hotel rooms to meet the high level of demand.
The Company emphasizes its non-gaming operations as an important source of
revenues. In fiscal year 1997, the Company's non-gaming operations, including
lodging, retail, food and beverage and other, collectively accounted for 57.1%
of the Company's gross revenues and generated an average gross margin of 52.1%.
The strength of the "Hard Rock Hotel-Registered Trademark-" trademark is
illustrated by strong sales of merchandise bearing the "Hard Rock Hotel" logo.
Merchandise sales comprised 18.7% of gross revenues and generated a gross margin
of 53.9% in fiscal year 1997.
THE EXPANSION
In order to capitalize on the strong popularity of the Resort, the Company
is undertaking an expansion (the "Expansion") that is designed to significantly
enlarge and enhance the Hotel, the Beach Club, the Retail Store and the variety
of restaurants and entertainment amenities offered to guests of the Resort. The
purpose of the Expansion is to attract a greater number of guests to the Resort,
especially during mid-week periods, and to increase the amount of time and money
guests spend at the Resort. Key elements of the Expansion include (i) nearly
doubling the number of hotel rooms, (ii) significantly increasing the size and
features of the Beach Club and (iii) the addition of other amenities including
three full-service restaurants, a 1,088 space parking garage, a full-service
health club and spa, a nightclub and larger convention and meeting facilities.
The Company is also moderately expanding the Casino by adding approximately 60
slot machines and 11 table games, opening a new, higher limit gaming area and
increasing the size of the race and sports book area by approximately 30%.
The Company has established a total construction budget for the Expansion of
$87.0 million (of which $8.2 million has been expended as of June 30, 1998),
including construction contingency, pre-opening costs and construction period
interest. Construction began in February 1998 and is expected to be completed in
the second quarter of 1999. The Company is using approximately $10.3 million of
the proceeds from the
2
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Offering for the Expansion, and is financing the remainder of the cost of the
Expansion through borrowings under the New Credit Facility and cash from
operations.
Construction of the Expansion has been planned in three separate phases in
order to minimize disruption of existing operations. Phase I consists of the
construction of the parking facility, which began in February 1998, and is
expected to be completed in the fall of 1998. Phase II, which includes the
development of the new nightclub and warehouse facility and the expansion of the
Retail Store, is expected to be completed by the end of 1998. Phase III, which
involves the development of the new hotel tower, expanded Beach Club, health
club and spa and the additional restaurants and meeting space, is expected to be
completed in the second quarter of 1999. Mr. Morton has provided a Completion
Guaranty for the Expansion. See "Risk Factors--Completion Guaranty" and
"Completion Guaranty."
------------------------
The Resort, which commenced operations in March 1995, was conceived and
founded by Peter A. Morton and developed in partnership with Harveys Casino
Resorts ("Harveys"). In October 1997, the Company redeemed Harveys' 40% equity
interest in the Company and terminated a management agreement (the "Management
Agreement") between the Company and Harveys (the "Buyout"). See "Certain
Relationships and Related Transactions--Harveys Buyout." In connection with the
Buyout, virtually all executive management employees working at the Resort at
the time of the Buyout remained with the Company, including Gary R. Selesner,
the Company's Senior Vice President of Operations and the Resort's General
Manager. The Resort's core management team has an average of 21 years of
experience within the gaming and lodging industry and has been integral to the
Company's success.
Mr. Morton co-founded the Hard Rock Cafe-Registered Trademark- restaurant
chain in London, England in 1971 and oversaw the expansion of restaurants and
the development of the Hard Rock Cafe brand name in certain territories until
1996. In June 1996, Mr. Morton and certain other investors sold the Hard Rock
Cafes and certain related assets to The Rank Organization plc ("Rank") for
approximately $410 million, pursuant to a transaction that provided Rank with
global control of all Hard Rock Cafes. In connection with such sale, Mr. Morton
and Rank entered into a trademark and licensing agreement pursuant to which Mr.
Morton was granted the right to use the "Hard Rock Hotel-Registered Trademark-"
and "Hard Rock Casino-Registered Trademark-" trademarks in perpetuity in
connection with hotel casinos and casinos in areas of the United States west of
the Mississippi River plus Illinois and Louisiana, but excluding Texas (other
than Houston), and in Australia, Brazil, Israel, Venezuela and metropolitan
Vancouver, British Columbia (collectively, the "Morton Territory"). Mr. Morton
has granted a sublicense to the Company, pursuant to which the Company holds the
exclusive right to use the "Hard Rock Hotel" and "Hard Rock Casino" trademarks
for the Resort's operations in Las Vegas. See "Certain Relationships and Related
Transactions."
The principal executive offices of the Company are located at 4455 Paradise
Road, Las Vegas, Nevada 89109, and its telephone number is (702) 693-5000.
3
<PAGE>
THE EXCHANGE OFFER
On March 23, 1998 the Company issued $120 million principal amount of Old
Notes. The Old Notes were sold pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. Bear Stearns & Co. Inc., BancAmerica,
Robertson Stevens and Donaldson Lufkin & Jenrette Securities Corporation (the
"Initial Purchasers"), as a condition to their purchase of the Old Notes,
requested that the Company agree to commence the Exchange Offer following the
offering of the Old Notes.
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SECURITIES OFFERED.................. Up to $120,000,000 principal amount or 9 1/4% Series
B Senior Subordinated Notes due 2005, which have been
registered under the securities Act. The terms of the
New Notes and the Old Notes are identical in all
material respects, except (i) that the New Notes have
been registered under the Securities Act, (ii) for
certain transfer restrictions and registration rights
relating to the Old Notes and (iii) that the New
Notes will not contain certain provisions relating to
additional interest to be paid to the holders of Old
Notes under certain circumstances relating to the
timing of the Exchange Offer and certain other
registration requirements described below under
"Description of Notes--Registration Rights;
Liquidated Damages."
THE EXCHANGE OFFER.................. The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance of
the New Notes is intended to satisfy obligations of
the Company contained in the Registration Rights
Agreement, dated as of March 23, 1998, among the
Company and the Initial Purchasers (the "Registration
Rights Agreement"). For procedures for tendering, see
"The Exchange Offer."
TENDERS, EXPIRATION DATE; The Exchange Offer will expire at 5:00 p.m. New York
WITHDRAWAL........................ City time, on , 1998, or such later date and
time to which it is extended. Each holder tendering
Old Notes must acknowledge that it is not engaging
in, nor does it intend to engage in, a distribution
of the New Notes. The tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior
to the Expiration Date (as defined herein). Any Old
Note not accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
CERTAIN CONDITIONS TO EXCHANGE The Exchange Offer is not subject to any condition,
OFFER............................. other than that the Exchange Offer does not violate
any applicable law, including in particular any
Nevada Gaming Law (as defined), or regulation or
interpretation of the staff of the SEC.
UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS.................... The exchange of Notes pursuant to the Exchange Offer
will not result in any income, gain or loss to the
holders thereof or the Company for United States
Federal income tax purposes. See "Certain United
States Federal Tax Consequences."
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<TABLE>
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USE OF PROCEEDS..................... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See
"Capitalization" and "Use of Proceeds."
EXCHANGE AGENT...................... U.S. Bank Trust, National Association is serving as
Exchange Agent in connection with the Exchange Offer.
SHELF REGISTRATION STATEMENT........ Under certain circumstances, certain holders of Notes
(including holders who are not permitted to
participate in the Exchange Offer or who may not
freely resell New Notes received in the Exchange
Offer) may, by giving the Company written notice on
or before the date specified in the Registration
Rights Agreement, require the Company to file, and
cause to become effective, a shelf registration
statement under the Securities Act, which would cover
resales of Notes by such holders. See Description of
the Notes--Registration Rights; Liquidated Damages."
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CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. See "Description of
Notes--Registration Rights; Liquidated Damages."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes. The New Notes will bear interest from the most recent
date to which interest has been paid on the Old Notes or, if no interest has
been paid on the Old Notes, from March 23, 1998. Accordingly, registered holders
of New Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid or, if no interest has
been paid, from March 23, 1998. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders whose Old Notes are accepted for exchange will not receive any payment
in respect of interest on such Old Notes otherwise payable on any interest
payment date the record date for which occurs on or after consummation of the
Exchange Offer.
<TABLE>
<S> <C>
ISSUER.............................. Hard Rock Hotel, Inc.
SECURITIES OFFERED.................. Up to $120,000,000 aggregate principal amount of
9 1/4% Series B Senior Subordinated Notes due 2005.
MATURITY DATE....................... April 1, 2005.
INTEREST............................ Interest on the New Notes will be payable on each
April 1 and October 1, commencing October 1, 1998.
RANKING............................. The New Notes will be general unsecured obligations
of the Company, subordinated in right of payment to
all existing and future Senior Indebtedness,
including all borrowings under
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
the New Credit Facility. As of April 30, 1998, the
aggregate amount of outstanding Senior Indebtedness
was $0.3 million and the Company had $67.0 million of
undrawn availability under the New Credit Facility.
See "Description of Notes-- Subordination."
CHANGE OF CONTROL................... Upon a Change of Control, the Company will be
required to make an offer to repurchase the New Notes
at a price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. See "Description of
Notes--Repurchase at the Option of Holders--Change of
Control."
OPTIONAL REDEMPTION................. The New Notes will be subject to redemption at the
option of the Company, in whole or in part, at any
time on or after April 1, 2002, at the redemption
prices set forth herein, plus accrued and unpaid
interest thereon, if any, to the redemption date. In
addition, on or prior to April 1, 2001, the Company
may redeem up to 35% of the original aggregate
principal amount of the New Notes at a redemption
price equal to 109.25% of the principal amount
thereof, plus accrued and unpaid interest thereon, if
any, to the redemption date with the net proceeds of
one or more Equity Offerings; PROVIDED that at least
65% of the aggregate principal amount of New Notes
originally issued remain outstanding immediately
after the occurrence of such redemption; and PROVIDED
FURTHER, that such redemption shall occur within 60
days of the date of the closing of such Equity
Offering. See "Description of Notes--Optional
Redemption."
REGULATORY REDEMPTION............... The Company will have the option to direct a holder's
disposition of the New Notes or redeem the New Notes
in connection with gaming laws and regulations of the
State of Nevada. See "Description of
Notes--Regulatory Redemption."
MANDATORY REDEMPTION................ None.
CERTAIN COVENANTS................... The Indenture contains covenants restricting or
limiting the ability of the Company and its
Restricted Subsidiaries to, among other things, (i)
pay dividends or make other restricted payments
(including investments), (ii) incur additional
indebtedness and issue certain preferred stock, (iii)
create certain liens, (iv) incur dividend and other
payment restrictions affecting subsidiaries, (v)
enter into certain mergers or consolidations, (vi)
utilize proceeds from asset sales and (vii) enter
into transactions with affiliates. These covenants
are subject to certain significant exceptions and
qualifications. See "Description of Notes--Certain
Covenants."
EXCHANGE OFFER; REGISTRATION Holders of New Notes are not entitled to any
RIGHTS............................ registration rights with respect to the New Notes.
Pursuant to the
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Registration Rights Agreement, the Company has agreed
to file an Exchange Offer Registration Statement or,
under certain circumstances, a Shelf Registration
Statement. The Registration Statement of which this
Prospectus is a part constitutes the Exchange Offer
Registration Statement. Under certain circumstances,
certain holders of Notes (including holders who may
not participate in the Exchange Offer) may require
the Company to file, and cause to become effective, a
shelf registration statement under the Securities
Act, which would cover resales of the Notes by such
holders. See "Description of Notes--Registration
Rights; Liquidated Damages."
USE OF PROCEEDS..................... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See
"Capitalization" and "Use of Proceeds."
</TABLE>
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors," which begins on page 9, before
making a decision to acquire New Notes.
7
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes certain selected historical income statement
data of the Company for fiscal years 1995, 1996 and 1997 that has been derived
from the Company's Financial Statements, which have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere herein. The
financial data for the six month periods ended May 31, 1997 and 1998 are derived
from unaudited financial statements included elsewhere herein. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended May 31, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending November 30, 1998.
The Company commenced operations on March 9, 1995, and therefore, fiscal year
1995 is not directly comparable to fiscal years 1996 and 1997. The summary
financial data set forth below should be read in conjunction with the Financial
Statements and notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY
YEARS ENDED NOVEMBER 30, 31,
--------------------------------- --------------------
1995(1) 1996 1997 1997 1998
----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues........................................... $ 55,738 $ 77,289 $ 77,048 $ 39,077 $ 40,003
Operating expenses(2).................................. 50,184 59,775 59,895 30,071 31,673
Management, incentive and supervisory fees............. 3,454 4,851 4,397 2,377 789
Charge for termination of Management Agreement......... -- -- 24,715 -- --
Income (loss) from operations.......................... 2,100 12,663 (11,959) 6,629 7,541
Interest income (expense), net......................... (4,930) (5,617) (5,585) 2,451 5,217
Net income (loss)...................................... (1,981) 4,467 (17,489) 2,668 (723)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............................................................................ $ 11,852
Total assets......................................................................................... 123,480
Total debt........................................................................................... 120,262
Shareholders' (deficit)(3)........................................................................... (8,659)
</TABLE>
- ------------
(1) The Company commenced operations on March 9, 1995, and therefore, fiscal
year 1995 is not directly comparable to fiscal years 1996 and 1997.
(2) Operating expenses for fiscal years 1995, 1996 and 1997 and the six months
ended May 31, 1997 and 1998 exclude fees paid pursuant to the Management
Agreement ($2.3 million, $3.3 million, $2.8 million, $1.6 million, and $0.0,
respectively), fees paid pursuant to the Supervisory Agreement (as defined)
($1.1 million, $1.5 million, $1.6 million, $0.8 million, and $0.8 million,
respectively), and the $24.7 million non-recurring charge for termination of
the Management Agreement in fiscal year 1997. Operating expenses for fiscal
year 1995 include $4.9 million of pre-opening expenses.
(3) Effective October 24, 1997, the Company redeemed Harveys' 40% equity
interest in the Company and its rights under the Management Agreement for
$45.0 million. The Company accounted for this transaction in its November
30, 1997 financial statements with a $21.2 million charge to paid-in-capital
and a $24.7 million charge to expense (which amounts include $0.9 million in
related transaction costs). See "Certain Relationships and Related
Transactions--Harveys Buyout."
8
<PAGE>
RISK FACTORS
THE FOLLOWING SPECIFIC RISK FACTORS, AS WELL AS THE OTHER INFORMATION SET
FORTH IN THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED BEFORE ACQUIRING NEW
NOTES.
SIGNIFICANT LEVERAGE
The Company is highly leveraged. The Company's earnings have been
insufficient to cover fixed charges in four of the last five years. As of May
31, 1998, the Company's total debt was $120.3 million. The Company expects to
incur additional indebtedness under the New Credit Facility to fund the
Expansion. The consequences of the Company's leverage include, but are not
limited to, the following: (i) upon full use of the New Credit Facility,
interest payments will be approximately $18 million per year which will require
a substantial portion of the Company's expected annual cash from operations for
the payment of interest on the Company's indebtedness, so long as the Notes are
outstanding (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, development financing or other
purposes may be limited and (iii) the Company will be susceptible to adverse
changes in the economy and the Las Vegas gaming market. Furthermore, the
Indenture and the New Credit Facility impose certain operating and financial
restrictions on the Company. Such restrictions limit, among other things, the
ability of the Company to incur additional indebtedness, create liens on its
assets, sell assets or engage in mergers or consolidations, make investments,
pay dividends or engage in intracorporate transactions. The failure by the
Company to comply with numerous restrictive covenants contained in the Indenture
and the New Credit Facility may result in a default which, if not cured or
waived, could have a material adverse effect on the Company.
ABILITY TO REPAY DEBT
The Company will be dependent to a significant extent upon the successful
completion of the Expansion and operation of the Resort before and after
completion of the Expansion for coverage of its debt service. The Company's
future operating performance is itself dependent on a number of factors, many of
which are outside of the Company's control, including prevailing economic
conditions and financial, business, regulatory and other factors. A significant
decrease in the Company's operations during the construction period would
negatively impact the Company's ability to complete the Expansion on time,
within the specified description or at all. Any significant increases in the
construction budget or delays in completing the construction and opening of the
Expansion would adversely affect the Company. There can be no assurance that
future cash flows of the Company will be sufficient to meet all of the Company's
obligations and commitments. If the Company were unable to generate sufficient
cash from its future operations to pay interest on the Notes or to satisfy any
other debt service requirements, or to pay its debts as they mature, the Company
would be required to explore alternatives, such as seeking additional debt or
equity financing, reducing or delaying capital expenditures or selling material
assets or operations. No assurance can be given that the Company would be
successful in implementing any of these alternatives, if necessary. In addition,
Nevada law contains certain restrictions on the ability of companies engaged in
the gaming business to undertake certain financing transactions. Such
restrictions, which are described in "Risk Factors--Government Regulation" and
"Regulation and Licensing," could cause delays in obtaining necessary capital.
See "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Regulation and Licensing."
SUBORDINATION OF NOTES
New Notes, like the Old Notes, will be general unsecured obligations of the
Company subordinated in right of payment to all existing and future Senior
Indebtedness, including all borrowings of the Company under the New Credit
Facility. Subject to certain limitations, the Indenture will permit the Company
to incur additional indebtedness, including Senior Indebtedness. As a result of
the subordination provisions contained in the Indenture, in the event of a
liquidation or insolvency, the assets of the Company will be
9
<PAGE>
available to pay obligations on the Notes only after all Senior Indebtedness has
been paid in full, and there can be no assurance that there will be sufficient
assets remaining to pay amounts due on any or all of the Notes then outstanding.
See "Description of the New Credit Facility" and "Description of Notes."
DEPENDENCE ON THE NEW CREDIT FACILITY
The Company is dependent on the availability of the New Credit Facility to
fund construction of the Expansion. In the event that the Company is unable to
generate cash flow sufficient to make required payments of principal and
interest on its indebtedness, or is otherwise in default with respect to the
covenants thereunder, the lenders under the New Credit Facility could elect to
declare all borrowings thereunder to be due and payable, together with accrued
and unpaid interest, and to terminate their commitments thereunder. If the
lenders for any reason require early repayment of the funds borrowed pursuant to
the New Credit Facility, or fail to provide funds pursuant to that agreement,
the Company may not be able to complete some or all of the Expansion.
Obligations under the New Credit Facility will be secured by liens on
substantially all assets of the Company. In addition, the indebtedness under the
New Credit Facility will become due prior to the maturity of the Notes. If New
Credit Facility creditors were to foreclose on the collateral securing the New
Credit Facility, it is possible that insufficient assets would remain after
satisfaction of such indebtedness to satisfy fully the claims of the holders of
the Notes. Upon an event of default and acceleration under the New Credit
Facility the lenders thereunder may exercise the right, subject to prior
approval by the Nevada Gaming Authorities of their application to acquire
control, to control the operation of the Resort.
Borrowings under the New Credit Facility will bear interest at floating
rates based on the Federal Funds Rate, the prime lending rate or LIBOR.
Increases in interest rates on indebtedness under the New Credit Facility would
increase the Company's interest payment obligations and could have an adverse
effect on the Company.
RISKS RELATING TO THE EXPANSION
Failure to complete the Expansion within the budget or on schedule may have
a material adverse effect on the Company. Although the Company expects that the
final stage of the Expansion will be completed in the second quarter of 1999,
the Company has not entered into a contract for the construction of the entire
Expansion and no assurances can be given that the Expansion will be completed by
then or any other time, or that the projected budget will not be exceeded. The
anticipated costs and completion date for the Expansion are based upon the
Company's budgets, conceptual design documents and construction schedule
estimates, prepared in part in consultation with architects and construction and
design consultants. Such estimates and projected completion dates may change
significantly as the Expansion progresses. Although the Company anticipates the
Expansion to take substantially the form described herein, construction plans
for the entire Expansion have not been completed and are subject to change. Any
such change may result in some or all of the Expansion being completed in a
manner substantially different from that described herein or not at all. Changes
in design and construction plans may require additional funds beyond those
provided by the Offering and the New Credit Facility. There can be no assurance
that other resources would be available to the Company under terms that would
not be disadvantageous to the Company.
Construction projects, such as the Expansion, can entail significant
development and construction risks including, but not limited to, labor
disputes, shortages of material and skilled labor, weather interference,
unforeseen engineering problems, environmental problems, geological problems,
construction, demolition, excavation, zoning, permitting or equipment problems
and unanticipated cost increases, any of which could give rise to delays or cost
overruns or otherwise have a material adverse effect on the Expansion and the
Company.
10
<PAGE>
In addition, the Expansion will require many permits, licenses and approvals
that have not yet been obtained. The scope of the approvals required for
projects of this nature is extensive, including, without limitation, state and
local land-use permits, building and zoning permits. Unexpected changes or
concessions required by local, state or federal regulatory authorities could
involve significant additional costs and delay the scheduled completion of the
Expansion. There can be no assurance that such conditions will not adversely
affect the Company or that such regulatory approvals will be obtained.
Although construction activities related to the Expansion are planned to
minimize disruption, construction noise and debris and the temporary closing of
certain facilities may disrupt the Resort's operations and unexpected delays in
construction for any reason could exacerbate or magnify these disruptions. There
can be no assurance that the construction of the Expansion will not have an
adverse effect on the Company.
RISK OF OVERCAPACITY; COMPETITION AND PLANNED CONSTRUCTION IN LAS VEGAS
The Company's success is dependent upon the success of the Resort and its
continuing ability to attract visitors and operate profitably. However, the
Company's operations are subject to significant business, economic, regulatory
and competitive uncertainties and contingencies, many of which are beyond the
control of the Company.
The Company, located less than one mile east of the Strip, competes with
other high-quality Las Vegas resorts and other Las Vegas hotel casinos,
including those located on the Strip, on the basis of overall atmosphere, range
of amenities, price, location, entertainment offered, theme and size. Currently,
there are approximately 24 major gaming properties located on or near the Strip,
13 additional major gaming properties in the downtown area and additional gaming
properties located in other areas of Las Vegas. Many of the competing
properties, such as the Rio, Sunset Station, the Mirage, Treasure Island,
Caesar's Palace, Luxor, New York-New York and the MGM Grand, have themes and
attractions that draw a significant number of visitors and directly compete with
the Company's operations. Some of these facilities are operated by companies
that have more than one operating facility and may have greater name recognition
and financial and marketing resources than the Company and market to the same
target demographic group as the Company. Moreover, an April 1, 1998, article
entitled "Gamble on Las Vegas Hotel-Casinos May Not Pay Off," in The Wall Street
Journal reported that in 1997 while the number of rooms rose by 6.3%, the number
of visitors rose only 2.8%. Hotel casinos under construction, such as the
Bellagio, the Mansion at MGM Grand, Mandalay Bay, Paris, The Venetian, Marriott
International, the Aladdin/Planet Hollywood and Aladdin sister properties, will
also directly compete with the Company's operations and together with other
projects are expected to add approximately 20,000 rooms to the market. While
there has been significant new hotel casino construction in Las Vegas in the
past, including approximately 15,300 hotel and motel rooms added in 1996 and
1997, the Las Vegas market has not previously witnessed the room capacity
additions expected in the next three years and management cannot estimate the
effect on the Company of these developments. Certain of these properties may
incorporate a music theme (and at least one has announced its intention to do
so) that may affect the Company negatively. There can be no assurance that
competition with existing and new gaming properties will not adversely affect
the Company. There also can be no assurance that the Las Vegas market will
continue to grow or that hotel casino resorts will continue to be popular, and a
decline or leveling off of the growth or popularity of such facilities would
adversely affect the Company.
OTHER FORMS OF COMPETITION
The Company will also face competition from competing "Hard Rock" hotels and
casinos that may be established in jurisdictions other than Las Vegas. The
Company has the exclusive right to exploit the "Hard Rock Hotel" and "Hard Rock
Casino" trademarks only in connection with the Resort in Las Vegas. Mr. Morton
holds the exclusive rights to exploit such trademarks in other parts of the
Morton Territory in connection with hotel casinos and casinos, and Rank holds
such rights in the remainder of the world.
11
<PAGE>
Neither Mr. Morton nor Rank may open a hotel/casino or casino using the "Hard
Rock" name in Las Vegas. Rank has the right to open hotels (without casinos)
under the "Hard Rock" name anywhere outside of the State of Nevada. The Company
has been informed that Rank intends to open several hotels using the "Hard Rock"
name in jurisdictions both inside and outside the Morton Territory. There can be
no assurance that the development by Rank or Mr. Morton of other hotels and
casinos using names that include the phrase "Hard Rock" outside of Las Vegas
will not adversely affect the Company. See "--Risks Associated with Shared Use
of the 'Hard Rock' Brand Names."
To a lesser extent, the Company competes with hotel casinos in the Mesquite,
Laughlin, Reno and Lake Tahoe areas of Nevada, Atlantic City, New Jersey and
other parts of the United States. The Company also competes with state-sponsored
lotteries, on- and off-track wagering, card parlors, and other forms of
legalized gaming in the United States, as well as with gaming on cruise ships
and international gaming operations. Continued proliferation of gaming
activities could significantly and adversely affect the Company. In particular,
the legalization of casino gaming in or near any metropolitan area (particularly
Southern California) from which the Company attracts customers would have a
material adverse effect on the Company. See "--Possible Legislation."
Many of the Company's competitors in the hotel casino industry are
emphasizing or are expected to emphasize their non-gaming businesses, including
retail sales. Consequently, the Company has recently experienced (and expects to
continue to experience) increased competition in the retail sales market in Las
Vegas. The Company's retail departmental revenues decreased by $1.9 million
(11.1%) during fiscal year 1997 relative to fiscal year 1996, and there can be
no assurance that retail departmental revenues will not continue to decrease.
DEPENDENCE UPON KEY MARKET AND LIMITED BASE OF OPERATIONS
All of the Company's revenues are generated from the Resort. The Company's
results of operations are dependent on conditions in Las Vegas, Nevada and,
indirectly, Southern California, where many of the Resort's targeted customers
reside. A decline in the local economies of Las Vegas or Southern California
could have a negative effect on the Company. In addition, because Las Vegas
draws from a national and international tourist base, a downturn in the domestic
or global economies could have a negative effect on operators of Las Vegas
casinos, including the Company. Furthermore, due to the Company's single
location, it is subject to greater risks than a more diversified hotel and
casino resort operator.
The combination of the single location and the significant investment
associated with it may cause the operating results of the Company to fluctuate
significantly and adversely affect the Company. Due to the single location, poor
operating results at the Resort would materially affect the profitability of the
entire Company. Future growth in revenues and profits will depend to a
substantial extent on the Company's ability to successfully execute the
Expansion and generate cash flow sufficient for working capital needs.
RELIANCE ON KEY PERSONNEL, CONTROL BY PRINCIPAL SHAREHOLDER
The ability of the Company to operate successfully and competitively is
dependent, in part, upon the continued services of certain of its employees,
particularly Peter A. Morton, Chairman of the Board, Chief Executive Officer,
President and Secretary, and Gary R. Selesner, Senior Vice President of
Operations and General Manager. In the event that either of Messrs. Morton and
Selesner were to leave the Company, there can be no assurance that a suitable
replacement could be found. Management believes that the loss of services by
either of these executives could have a material adverse effect on the Company.
The Company does not maintain key man life insurance for any officer or director
of the Company. Mr. Morton has several outside business interests and may have
additional business interests in the future. Although Mr. Morton currently
spends substantially all of his business time on the Company, there can be no
assurance that he will continue to do so in the future.
12
<PAGE>
Mr. Morton beneficially owns over 90% of the outstanding common stock of the
Company, including 100% of the outstanding voting common stock of the Company,
and therefore is able to control the election of the Board of Directors of the
Company and approve or disapprove any other matters submitted to the
stockholders.
In addition, while Mr. Morton has informed the Company that he believes he
will be able to perform his obligations under the Completion Guaranty, such
guaranty is not secured. If Mr. Morton were to die or become bankrupt or
insolvent, the performance of his obligations under the Completion Guaranty
could be delayed or adversely affected.
LACK OF SIGNIFICANT OPERATING HISTORY
From the inception of the Company to October 24, 1997, Harveys owned 40% of
the Company and managed the Resort pursuant to the Management Agreement.
Although no executive personnel changes at the Resort were effected by the
Buyout, Harveys had previously provided hotel and casino management expertise
and oversight and was responsible for the Resort's management information
systems, employee benefit programs and insurance policies. These
responsibilities were transferred to the Company in October 1997 and the Company
has not established a track record of independently operating a resort. The
continued success of the Company's operations will depend on the Company's
successful management and implementation of its own systems.
RISKS ASSOCIATED WITH HISTORICAL NET LOSSES
Although the Company maintained 100% occupancy of the Hotel for the six
months ended May 31, 1998, and for fiscal year 1997, the Company has recorded
net losses for the six months ended May 31, 1998 and in fiscal year 1997. The
net loss for the six months ended May 31, 1998 of $0.7 million is mostly
attributable to the write-off on loan fees net of taxes of $2.2 million
associated with the termination of the Old Credit Facility. The net loss for the
fiscal year 1997 of $17.5 million is largely attributable to the $24.7 million
non-recurring charge paid by the Company in connection with the Buyout.
Additionally, the Company has recorded a net loss for fiscal year 1995 of $2.0
million that is largely attributable to the pre-tax write-off of $4.9 million in
pre-opening expenses. There can be no assurances that the Company will not post
a net loss in the future.
RISKS ASSOCIATED WITH SHARED USE OF THE "HARD ROCK" BRAND NAMES
The Company benefits from the global name recognition and reputation
generated by the Hard Rock Cafes that are operated by Rank. At present, Rank
operates or franchises over 80 Hard Rock Cafes located in the United States and
abroad. Rank is, however, under no obligation to continue to own, operate or
franchise the Hard Rock Cafes, and there can be no assurance that Rank will not
sell, change the focus of, or manage such restaurants in a manner that would
adversely affect the Resort, which bears a similar name.
In addition, although the Company has obtained the exclusive right to use
and develop the "Hard Rock Hotel" and "Hard Rock Casino" trademarks in
connection with the Resort in Las Vegas, a subsidiary of Rank is the sole owner
of the rights to the "Hard Rock Cafe," "Hard Rock Hotel" and "Hard Rock Casino"
trademarks. As a result, Rank or its licensee can exploit the "Hard Rock" name
and logo (other than in connection with hotel casinos and casinos in the Morton
Territory), including marketing "Hard Rock" merchandise, anywhere in the world.
There can be no assurance that the Company will not be adversely affected by the
management and reputation of any such use of the "Hard Rock" brand name.
13
<PAGE>
COMPLETION GUARANTY
Pursuant to the Completion Guaranty, Peter A. Morton has guaranteed, subject
to certain conditions and limitations, payment of construction and development
costs of the Expansion in excess of $87.0 million, up to a maximum of $10.0
million. Mr. Morton's obligations under the Completion Guaranty will be deferred
during the pendency of any FORCE MAJEURE event or any other event that makes
completion of the Expansion physically impossible or unlawful. The Completion
Guaranty does not provide for the incurrence by Mr. Morton, directly or
indirectly, of any obligation, contingent or otherwise for the payment of the
principal, premium and interest on the Notes or any other indebtedness under the
financings described herein. If such construction and development costs exceed
the amount of funds available to the Company for the Expansion, including
amounts available under the Completion Guaranty, no assurance can be given that
Mr. Morton will provide any additional funds and no assurance can be given that
the Company will be able to raise additional funds. If Mr. Morton dies or
becomes bankrupt or insolvent, the performance of his obligation to put money
into the Company could be delayed or affected adversely. See "--Reliance on Key
Personnel, Control by Principal Shareholder" and "Completion Guaranty."
GOVERNMENT REGULATION
The gaming operations and the ownership of securities of the Company are
subject to extensive regulation by the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada State Gaming Control Board (the "Nevada Board") and the
Clark County Liquor and Gaming Licensing Board (the "CCLGLB" and, together with
the Nevada Commission and the Nevada Board, the "Nevada Gaming Authorities").
The Nevada Gaming Authorities have broad authority with respect to licensing and
registration of entities and individuals involved with the Company, including
holders of the Notes.
The Nevada Commission may, in its discretion, require the holders of the
Notes to file applications, be investigated and be found suitable to hold the
Notes. If requested, appropriate applications must be filed within 30 days of
the request.
Additionally, the Nevada Commission may, in its discretion, require the
holder of any debt security of a company registered by the Nevada Commission as
a publicly traded corporation ("Registered Corporation") to file an application,
be investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act"), the
Registered Corporation can be sanctioned, including the loss of its approvals,
if without the prior approval of the Nevada Commission, it: (i) pays to the
unsuitable person any dividend, interest, or any distribution whatsoever; (ii)
recognizes any voting right by such unsuitable person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction. The Company will be
required to be registered by the Nevada Commission as a Registered Corporation
upon the effectiveness of the Exchange Offer.
Each holder of Notes shall be deemed to have agreed (to the extent permitted
by law) that if the Nevada Gaming Authorities determine that a holder or
beneficial owner of the Notes must be found suitable, and if such holder or
beneficial owner either refuses to file an application or is found unsuitable,
such holder or beneficial owner shall, upon request of the Company, and by the
terms of the Notes, dispose of such holder's or beneficial owner's Notes within
30 days after receipt of such request or such earlier date as may be ordered by
the Nevada Gaming Authorities. Although not a regulatory requirement, the
Company also will have the right to call for the redemption of Notes by any
holders at any time to prevent the loss or material impairment of a gaming
license or an application for a gaming license at a redemption price equal to
the lesser of the principal amount thereof, the fair market value of such Notes
on the date of redemption or the price at which such holder or beneficial owner
acquired the Notes, together with, in either case, accrued and unpaid interest
to the earlier of the date of redemption or such
14
<PAGE>
earlier date as may be required by the Nevada Gaming Authorities or the date of
the finding of unsuitability by the Nevada Gaming Authorities, which may be less
than 30 days following the notice of redemption, if so ordered by the Nevada
Gaming Authorities. See "Description of Notes--Regulatory Redemption."
Although the Company currently holds a gaming license issued by the Nevada
Gaming Authorities, the Nevada Gaming Authorities may, upon the violation of a
gaming law or regulation and after disciplinary complaint and public hearing,
among other things, revoke, suspend, limit or condition the gaming license of
any corporate entity (a "Corporate Licensee") or the registration of a
Registered Corporation or any entity registered as a holding company of a
Corporate Licensee. In addition, the Nevada Gaming Authorities may revoke the
license or finding of suitability of any officer, director, controlling person,
shareholder, noteholder or key employee of a licensed or registered entity. If
the gaming licenses of the Company were revoked for any reason, the Nevada
Gaming Authorities could require the closing of the Resort's gaming operations,
which would result in a material adverse effect on the business of the Company.
The Company and certain of its officers, directors, shareholders and key
employees either have been licensed by, or have applied for licensing with, the
Nevada Gaming Authorities.
The Exchange Offer and any future public offering of debt or equity
securities by the Company requires the prior approval of the Nevada Commission,
if the securities or the proceeds from the sale thereof are intended to be used
by the Company to pay for construction of, or to acquire an interest in, any
gaming facilities in Nevada, to finance the gaming operations of an affiliated
company or to retire or extend obligations incurred for any such purpose. The
ability of the Company to effect the Exchange Offer is conditioned upon
approvals from the Nevada Commission. The Company is currently seeking such
approvals. See "Regulation and Licensing."
RISKS RELATED TO MARKET DATA
The Company has included market data and information with respect to the
performance of other gaming entities which are believed to be reasonably
accurate. This data and information have not been independently verified by the
Company and are subject to material uncertainties due to, among other things,
the unavailability of raw data, the voluntary nature of the data gathering
process and the inherent uncertainty of the estimation process. Accordingly,
investors should not place undue reliance on such market data and performance
data as there can be no assurance that such data and information are accurate in
all material respects.
ENVIRONMENTAL RISKS AND REGULATION
Under various federal, state and local laws, regulations and ordinances
(collectively, "Environmental Laws"), an owner or operator of real estate
interests may be liable for the costs of cleaning up, as well as certain damages
resulting from, past or present spills, disposals or other releases of hazardous
or toxic substances or wastes on, in or from a property. Certain Environmental
Laws impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances or wastes at or
from the property. An owner or operator of real estate or real estate interests
also may be liable under certain Environmental Laws that govern activities or
operations at a property having adverse environmental effects, such as
discharges to air and water as well as handling and disposal practices for solid
and hazardous or toxic wastes. In some cases, liability may not be limited to
the value of the property in question. The presence of such substances or
wastes, or the failure to properly remediate any resulting contamination, also
may adversely affect the owner's or operator's ability to sell, lease or operate
its property or to borrow using its property as collateral. The Company does not
have environmental liability insurance to cover such events.
15
<PAGE>
The Company has in the past engaged in real estate development projects and
has owned several parcels of real estate. Although there can be no assurance,
the Company is not aware of any condition at any such properties that would have
a material adverse effect on the Company's financial condition or results of
operations.
POSSIBLE LEGISLATION
California recently enacted the Gambling Control Act, which provides for a
state regulatory board to oversee existing forms of gambling in California. The
Gambling Control Act specifically maintains a strict categorical prohibition
over certain forms of gambling. Due to the recent enactment of the Gambling
Control Act, no assurances can be given regarding any effect that it may have on
the Company's operations. Additionally, the California Senate is currently
deliberating an amendment to the California constitution that would allow the
establishment and operation of casinos on Native American lands. The Company
believes that the expansion of casino gaming on Native American lands, or
otherwise, in California could have a material adverse effect on the Company.
The National Gambling Impact and Policy Commission has been formed to
conduct a comprehensive study of all matters relating to the economic and social
impact of gaming in the United States. Such commission is required to issue a
report to Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions by June 1999. Any
such recommendations, if enacted into law, could adversely affect the gaming
industry and have a material adverse effect on the Company.
Additionally, from time to time, certain federal legislators have proposed
the imposition of a federal tax on gaming revenues. Any such tax could have a
material adverse effect on the Company.
YEAR 2000 RISK
The Company believes that its systems are capable of functioning from and
after the year 2000 without any material additional costs. The ability of third
parties with whom the Company transacts business to adequately address their
year 2000 issues is outside of the Company's control. The Company is in the
process of creating a comprehensive list, which the Company intends to have
reviewed by a major independent accounting firm of its suppliers and food
vendors to assist the Company in addressing year 2000 issues. There can be no
assurance that the failure of the Company or such third parties to adequately
address their respective year 2000 issues will not have a material adverse
effect on the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any other
securities laws of any jurisdiction and, therefore, may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of
the Securities Act and any other applicable securities laws or pursuant to
exemptions from, or in transactions not subject to, those requirements and, in
each case, in compliance with certain other conditions and restrictions. Holders
of Old Notes who do not exchange their Old Notes for New Notes pursuant to the
Exchange Offer will continue to be subject to such restrictions on transfer of
such Old Notes as set forth in the legend thereon. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exemptions). The Company does not
currently anticipate that it will register or qualify any Old Notes which remain
outstanding after consummation of the Exchange Offer for offer or sale in any
jurisdiction (subject to limited exceptions, if applicable). To the extent that
Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered Old Notes could be adversely affected.
16
<PAGE>
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage thereof have taken
certain actions or exercised certain rights under the Indenture.
Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Description of
Notes--Registration Rights; Liquidated Damages."
ABSENCE OF PUBLIC MARKET
The Old Notes were issued to, and the Company believes such securities are
currently owned by, a relatively small number of beneficial owners. The Old
Notes have not been registered under the Securities Act and will be subject to
restrictions on transferability if they are not exchanged for the New Notes.
Although the New Notes may be resold or otherwise transferred by the holders
(who are not affiliates of the Company) without compliance with the registration
requirements under the Securities Act, they will constitute a new issue of
securities with no established trading market. There can be no assurance that
such a market will develop. In addition, the New Notes will not be listed on any
national securities exchange. The New Notes may trade at a discount from the
initial offering price of the Old Notes, depending upon prevailing interest
rates, the market for similar securities, the Company's operating results and
other factors. The Issuers have been advised by the Initial Purchasers that they
currently intend to make a market in the New Notes, as permitted by applicable
laws and regulations; however, the Initial Purchasers are not obligated to do
so, and any such market-making activities may be discontinued at any time
without notice. In addition, such market-making activity may be limited during
the Exchange Offer and the pendency of any Shelf Registration Statement.
Therefore, there can be no assurance that an active market for any of the New
Notes will develop, either prior to or after the Company's performance of its
obligations under the Registration Rights Agreement. If an active public market
does not develop, the market price and liquidity of the New Notes may be
adversely affected.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-marking activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the Company is required, subject to certain
conditions, to offer to purchase all outstanding Notes at a purchase price equal
to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of repurchase. The source
of funds for any such purchase would be the Company's available cash or cash
generated from other sources, including borrowings, sales of assets, sales of
equity or funds provided by a new controlling person. The New Credit Facility
will restrict the purchase of Notes upon a Change of Control. A Change of
Control likely would constitute an event of default under the New Credit
Facility that would permit the lenders to accelerate the debt thereunder. In
such event, the Company likely would attempt to refinance the indebtedness
outstanding under the New Credit Facility and the Notes. There can be no
assurance that sufficient funds will be available at the time of any Change of
Control to make any required purchases of the Notes tendered and to repay
indebtedness outstanding under the New Credit Facility. See "Description of New
Credit Facility" and "Description of Notes--Repurchase at the Option of
Holders--Change of Control."
17
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds to the Company from the Offering were $115.9 million. The Company used
the net proceeds of the Offering, to repay amounts outstanding under the
$120,000,000 credit agreement entered into by the Company with a consortium of
banks in September of 1997 (the "Prior Credit Facility"), and expects to use the
remaining $10.3 million from the Offering, borrowings under the New Credit
Facility and cash flow from operations to fund the Expansion. Concurrently with
the Offering, the Company entered into the New Credit Facility, which has a
maximum availability of $67.0 million, all of which remains undrawn as of June
30, 1998. Indebtedness under the Prior Credit Facility had a weighted average
interest rate of 9.22% per annum at November 30, 1997 and all tranches were
scheduled to expire between June 2002 and April 2006. Upon the repayment of the
total outstanding indebtedness of $105.6 million under the Prior Credit
Facility, such facility was terminated. See "Description of New Credit
Facility."
CAPITALIZATION
The following table sets forth the capitalization of the Company at May 31,
1998. This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and notes thereto appearing elsewhere in this Offering
Memorandum.
<TABLE>
<CAPTION>
AT MAY 31,
-------------
1998
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current maturities of long-term debt............................................................... $ 113
-------------
-------------
Long-term debt:
New Credit Facility(1)........................................................................... --
The Notes........................................................................................ 120,000
Other long-term debt and obligations............................................................. 149
-------------
Total long-term debt........................................................................... 120,149
Shareholders' deficit(2):
Common Stock..................................................................................... 1
Paid-in capital.................................................................................. 7,508
Accumulated deficit.............................................................................. (16,167)
-------------
Total shareholders' deficit.................................................................... (8,659)
-------------
Total capitalization........................................................................... $ 111,490
-------------
-------------
</TABLE>
- ---------------
(1) As of June 30, 1998, the Company had $67.0 million of undrawn availability
under the New Credit Facility. See "Description of the New Credit Facility."
(2) Effective October 24, 1997, the Company redeemed Harveys' 40% equity
interest in the Company and its rights under the Management Agreement for
$45.0 million. The Company accounted for this transaction in its November
30, 1997 financial statements with a $21.2 million charge to paid-in-capital
and a $24.7 million charge to expense (which amounts include $0.9 million in
related transaction costs). See "Certain Relationships and Related
Transactions--Harveys Buyout."
18
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The selected historical income statement data of the Company set forth below
for fiscal years 1995, 1996 and 1997 and the selected historical balance sheet
data set forth below at November 30, 1996 and 1997 have been derived from the
Company's Financial Statements, which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere herein. The selected historical
income statement data of the Company set forth below for the period from
inception (August 30, 1993) through November 30, 1993 and for the fiscal year
1994 and the selected historical balance sheet data set forth below at November
30, 1993, 1994 and 1995 have been derived from the Company's audited Financial
Statements not included herein. The financial data for the six month periods
ended May 31, 1997 and 1998 are derived from unaudited financial statements
included elsewhere herein. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the six months
ended May 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending November 30, 1998. The Company commenced
operations on March 9, 1995, and therefore, fiscal years 1993, 1994 and 1995 are
not directly comparable to fiscal years 1996 and 1997. The selected financial
and operating data set forth below should be read in conjunction with the
Financial Statements and notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED YEARS ENDED NOVEMBER 30, ENDED MAY 31,
------------- ---------------------------------------------- --------------------
1993(1) 1994(1) 1995(1) 1996 1997 1997 1998
------------- ----------- ----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Casino................................ $ -- $ -- $ 26,262 $ 36,560 $ 35,395 $ 18,126 $ 19,782
Lodging............................... -- -- 7,845 12,257 12,919 6,497 6,580
Food and beverage..................... -- -- 10,061 15,003 16,704 8,422 9,271
Retail................................ -- -- 13,984 17,336 15,404 7,758 6,407
Other income.......................... -- -- 1,290 1,901 2,076 996 1,171
Less complimentaries.................. -- -- (3,704) (5,768) (5,450) (2,722) (3,208)
------------- ----------- ----------- --------- --------- --------- ---------
Net revenues.......................... -- -- 55,738 77,289 77,048 39,077 40,003
COSTS AND EXPENSES:
Casino................................ -- -- 12,399 18,158 17,921 9,131 9,748
Lodging............................... -- -- 3,071 4,112 4,149 2,062 1,968
Food and beverage..................... -- -- 6,877 10,118 10,360 5,212 5,412
Retail................................ -- -- 6,325 7,869 7,102 3,635 3,020
Other................................. -- -- 821 949 943 447 436
Marketing............................. -- -- 4,686 2,975 3,174 1,726 2,646
General and administrative............ -- -- 10,647 14,922 15,140 7,452 6,426
Depreciation and amortization......... -- -- 3,870 5,523 5,503 2,783 2,806
Pre-opening expenses.................. -- -- 4,942 -- -- -- --
Charge for termination of Management
Agreement........................... -- -- -- -- 24,715 -- --
------------- ----------- ----------- --------- --------- --------- ---------
Total costs and expenses.............. -- -- 53,638 64,626 89,007 32,448 32,462
------------- ----------- ----------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........... -- -- 2,100 12,663 (11,959) 6,629 7,541
Interest income (expense), net........ 19 42 (4,930) (5,617) (5,585) (2,452) (5,217)
Other expenses, net................... (6) (487) (8) (54) (32) (21) 0
------------- ----------- ----------- --------- --------- --------- ---------
Income (loss) before income tax
provision (benefit) and
extraordinary loss.................. 13 (445) (2,838) 6,992 (17,576) 4,156 2,324
Income tax provision (benefit)........ 3 6 (857) 2,525 (1,168) (1,488) (836)
------------- ----------- ----------- --------- --------- --------- ---------
Income (loss) before extraordinary
loss................................ 10 (451) (1,981) 4,467 (16,408) 2,668 1,488
Extraordinary loss.................... -- -- -- -- (1,081) -- (2,211)
------------- ----------- ----------- --------- --------- --------- ---------
Net income (loss)....................... $ 10 $ (451) $ (1,981) $ 4,467 $ (17,489) $ 2,668 $ (723)
------------- ----------- ----------- --------- --------- --------- ---------
------------- ----------- ----------- --------- --------- --------- ---------
Diluted earnings (loss) per share....... $ .10 $ (4.32) $ (15.98) $ 35.25 $ (143.84) $ 21.06 $ (9.51)
------------- ----------- ----------- --------- --------- --------- ---------
------------- ----------- ----------- --------- --------- --------- ---------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED YEARS ENDED NOVEMBER 30, ENDED MAY 31,
------------- ---------------------------------------------- --------------------
1993(1) 1994(1) 1995(1) 1996 1997 1997 1998
------------- ----------- ----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Shares used in calculating diluted
earnings (loss) per share............. 100,000 104,480 123,965 126,705 121,586 126,705 76,023
------------- ----------- ----------- --------- --------- --------- ---------
------------- ----------- ----------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures(2)............... 911 44,860 39,118 4,006 2,557 6,370 6,017
Depreciation and amortization......... -- -- 3,870 5,523 5,503 2,783 2,805
Ratio of earnings to fixed
charges(3).......................... -- -- -- 2.2x -- 2.7x 1.4x
</TABLE>
<TABLE>
<CAPTION>
AT NOVEMBER 30, AT MAY 31,
----------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 8,945 $ 1,059 $ 3,634 $ 5,958 $ 4,214 $ 11,852
Total assets...................................... 16,826 56,570 99,855 109,044 109,556 123,480
Total debt........................................ -- 28,141 65,405 64,315 106,013 120,262
Shareholders' equity (deficit)(4)................. 16,710 18,275 26,295 30,762 (7,911) (8,659)
</TABLE>
- ------------------------------
(1) The Company was incorporated on August 30, 1993 and commenced operations on
March 9, 1995, and was considered a development stage company during this
period. Therefore, fiscal years 1993, 1994 and 1995 are not directly
comparable to fiscal years 1996 and 1997.
(2) Capital expenditures for fiscal years 1994, 1995 and 1996 exclude $0.3
million, $0.5 million and $6.4 million, respectively, of non-cash additions.
(3) In computing the ratio of earnings to fixed charges: (a) earnings have been
based on income (loss) before extraordinary items, income taxes and fixed
charges, net of interest capitalized, and (b) fixed charges consist of
interest, including amounts capitalized, amortization of debt, and the
estimated interest portion of rentals. Net losses for fiscal years 1994,
1995 and 1997 resulted in coverage deficiencies of $0.4 million, $2.3
million and $11.9 million, respectively.
(4) Effective October 24, 1997, the Company redeemed Harveys' 40% equity
interest in the Company and its rights under the Management Agreement for
$45 million. The Company accounted for this transaction in its November 30,
1997 financial statements with a $21.2 million charge to paid-in-capital and
a $24.7 million charge to expense (which amounts include $0.9 million in
related transaction costs). See "Certain Relationships and Related
Transactions--Harveys Buyout."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE COMPANY'S FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, AS WELL AS THE DISCUSSION UNDER "RISK FACTORS."
OVERVIEW
The Company's sole business is the operation of the Resort, which commenced
operations on March 9, 1995. Prior to the Resort's opening, the Company recorded
no operating revenue or income.
During fiscal year 1997, 42.9% of the Resort's revenues were derived from
gaming operations. The Company also seeks to maximize revenues from hotel,
retail, food and beverage and entertainment sales. The Company's business
strategy is to provide its guests with an energetic and exciting gaming and
entertainment environment with the services and amenities of a luxury, boutique
hotel. To capitalize on customer demand, the Company has begun construction of
the $87 million Expansion of the Resort.
The Company began construction of the Expansion in February 1998. The
Expansion has been designed to be constructed in phases in order to minimize
disruption at the Resort. However, if construction activities are more
disruptive than management currently anticipates, net revenues and EBITDA for
fiscal year 1998 could be lower than results achieved in fiscal year 1997.
Fiscal year 1998 operating results will also include the extraordinary pre-tax
loss resulting from the write-off of $3.5 million in unamortized loan fees and
financing costs in connection with the retirement of the Prior Credit Facility.
Also during 1998, the Company hosted the Rolling Stones at the Joint (the
"Rolling Stones Event"), a special marquee event, which generated significant
national and international publicity.
The Company believes that its systems are capable of functioning from and
after the year 2000 without any material additional costs. The ability of third
parties with whom the Company transacts business to adequately address their
year 2000 issues is outside of the Company's control. There can be no assurance
that the failure of the Company or such third parties to adequately address
their respective year 2000 issues will not have a material adverse effect on the
Company.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998 COMPARED TO SIX MONTHS ENDED MAY 31, 1997
NET REVENUES AND OPERATING INCOME. Net revenues increased 2.4% for the six
months ended May 31, 1998 to $40.0 million compared to $39.1 million for the
corresponding period of the prior year. Operating income increased 13.8% for the
six months ended May 31, 1998 to $7.5 million compared to $6.6 million for the
corresponding period of the prior year. The increase in revenues is primarily
attributable to strong table games (up 13.6%) and beverage revenues (up 16.8%)
partially offset by decreased retail revenue of 17.4%. Operating income
increased primarily as a result of the increased revenues and the elimination of
management fees paid to Harveys Casino Resorts.
CASINO. Casino revenues increased 9.1% for the six months ended May 31,
1998 to $19.8 million compared to $18.1 million for the corresponding period of
the prior year. The increase is primarily due to increased table game play
benefited by having 8 additional Blackjack tables (in place of approximately 75
slot machines) for the entire six months in 1998 versus only 24 days in the same
period of 1997 and strong table game and slot machine play surrounding the
Rolling Stones Event. Despite the reduction in the number of slot machines, net
slot machine revenue increased 2.1% for the six months ended May 31, 1998
compared to the corresponding period of the prior year. Casino departmental
income increased 11.5% for the six months ended May 31, 1998 to $10.0 million
from $9.0 million, primarily as a result of the increased revenues. Casino
departmental income as a percentage of casino revenues increased to 50.7% in
1998 from 49.6% in 1997, primarily as a result of spreading fixed costs over a
larger revenue base.
21
<PAGE>
LODGING. Lodging revenues increased 1.3% for the six months ended May 31,
1998 to $6.6 million from $6.5 million for the corresponding period of the prior
year. The ADR for the six months ended May 31, 1998 was $99, up 1.9% from $97
for the six months ended May 31, 1997. Hotel occupancy remained at 100%. Lodging
departmental income increased 4.0% for the six months ended May 31, 1998 to $4.6
million from $4.4 million. Lodging departmental income as a percentage of
Lodging revenues increased to 70.1% in 1998 from 68.3% in 1997.
FOOD AND BEVERAGE. Food and Beverage revenues increased 10.1% for the six
months ended May 31, 1998 to $9.3 million from $8.4 million for the
corresponding period of the prior year. The increase was related to a $300,000
increase in banquet food and beverage revenues, a $346,000 increase in Joint bar
revenues (attributable to operating the after hours Orbit Lounge in the Joint)
and a $258,000 increase in Center Bar/Las Vegas Lounge revenues. Food and
Beverage departmental income increased 20.2% for the six months ended May 31,
1998 to $3.9 million from $3.2 million, as a result of the increased revenues
and decreased operating costs as a percent of revenue. Food and Beverage
departmental income as a percentage of Food and Beverage revenues improved to
41.6% in 1998 from 38.1% in 1997, primarily as a result of the incremental
revenue.
RETAIL. Retail revenues decreased 17.4% for the six months ended May 31,
1998 to $6.4 million from $7.8 million for the corresponding period of the prior
year. Management believes the decrease is primarily attributable to a diluted
retail market from increased retail competition. Retail Departmental income
decreased 17.8% for the six months ended May 31, 1998 to $3.4 million from $4.1
million, as a result of the decreased revenues. Retail departmental income as a
percentage of Retail revenues decreased slightly to 52.9% in 1998 from 53.1% in
1997 as a result of managing retail expenses to the reduction in revenues.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, General and
Administrative expenses decreased 1.1% for the six months ended May 31, 1998 to
$9.1 million from $9.2 million for the corresponding period of the prior year.
The decrease is attributable to the elimination of management fees paid to
Harveys of approximately $1.6 million offset by the costs associated with
hosting The Rolling Stones event of approximately $1.1 million and higher
accrued management incentive fees of approximately $.4 million.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization expense
remained at $2.8 million for the six months ended May 31, 1998.
NET INTEREST EXPENSE. Net Interest expense increased 113% for the six
months ended May 31, 1998 to $5.2 million from $2.5 million for the
corresponding period of the prior year. The increase is attributable to the
financing of the buyout of Harveys 40% interest in the Resort and related
management agreement on October 24, 1997 for $45 million.
INCOME TAXES. The income tax provision reflects the federal statutory rate
adjusted for non-deductible expenses.
EXTRAORDINARY LOSS. In connection with securing expansion financing on
March 23, 1998, the Company wrote off $3.5 million in unamortized loan fee costs
associated with the retirement of the Prior Credit Facility.
NET INCOME. As a result of the factors described above, the Company
recorded a net loss for the six months ended May 31, 1998 of $1.3 million
compared to net income of $2.7 million for the corresponding period of the prior
year.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NET REVENUES AND OPERATING INCOME. Net revenues remained essentially
constant at $77.0 million in fiscal year 1997 compared to $77.3 million in
fiscal year 1996. Operating income increased 3.9% in fiscal year 1997 to $13.2
million (excluding the charge of $24.7 million for the termination of the
Management
22
<PAGE>
Agreement and other non-recurring financing fees of $0.4 million) from $12.7
million in fiscal year 1996. In fiscal year 1997, the Company maintained strong
operating performance despite the increased competitiveness in the Las Vegas
market, which included the addition of approximately 15,300 new hotel and motel
rooms in Las Vegas in 1996 and 1997. The Company continued to have strong demand
for its hotel rooms and was successful in marketing The Joint and the Beach Club
as banquet venues for large corporate events during major Las Vegas conventions.
CASINO. Casino revenues decreased 3.2% in fiscal year 1997 to $35.4 million
compared to $36.6 million in fiscal year 1996. Management believes the decrease
is due primarily to competition in the Las Vegas market and a reduction in the
number of slot machines. The decline in slot revenues was partially offset by a
4.0% increase in table game revenues due to an increase in the number of table
games. The Company replaced 75 underutilized slot machines with a pit containing
blackjack tables and added four blackjack tables at the Beach Club in order to
capture demand during peak periods. Casino departmental income decreased 5.0% in
fiscal year 1997 to $17.5 million from $18.4 million in fiscal year 1996, as a
result of a decline in casino revenues. Casino departmental income as a
percentage of casino revenues decreased to 49.4% in fiscal year 1997 from 50.3%
in fiscal year 1996, primarily as a result of the change in mix towards table
games, which yield lower margins than slot machines.
LODGING. Lodging revenues increased 5.4% in fiscal year 1997 to $12.9
million compared to $12.3 million in fiscal year 1996. The increase was related
to a 5.2% increase in ADR in fiscal year 1997 to $96.36 from $91.60 in fiscal
year 1996 due to improved yield management and rate utilization. The Hotel's
occupancy rate reached 100% in fiscal year 1997 compared to 99.5% in fiscal year
1996. Lodging departmental income increased 7.7% in fiscal year 1997 to $8.8
million from $8.1 million in fiscal year 1996 due to higher room revenue.
Lodging departmental income as a percentage of lodging revenues improved in
fiscal year 1997 to 67.9% from 66.5% in fiscal year 1996 due primarily to the
increase in ADR in fiscal year 1997.
FOOD AND BEVERAGE. Food and beverage revenues increased 11.3% in fiscal
year 1997 to $16.7 million compared to $15.0 million in fiscal year 1996. The
increase was primarily due to an increase in banquet revenues in fiscal year
1997 of $1.3 million, or 108.1%, from fiscal year 1996, resulting from increased
marketing efforts of the Resort's banquet services targeted to companies looking
to host large corporate events. The remainder of the increase in food and
beverage revenues was from higher beverage sales in the Resort's cocktail
lounges. Food and beverage departmental income increased 30.0% in fiscal year
1997 to $6.3 million from $4.9 million in fiscal year 1996. Food and beverage
departmental income as a percentage of food and beverage revenues improved in
fiscal year 1997 to 38.0% from 32.6% in fiscal year 1996 primarily due to an
increase in the higher margin banquet business and a decline in direct labor and
other operating expenses.
RETAIL. Retail revenues decreased 11.1% in fiscal year 1997 to $15.4
million compared to $17.3 million in fiscal year 1996. Management believes the
decline was primarily attributable to increased competition in the retail market
in Las Vegas and the benefits in the fourth quarter of 1996 of increased
clothing sales due to an unsolicited endorsement from a popular Japanese band.
During the last 18 months, the All-Star Cafe, Motown Cafe and Coca-Cola have all
opened retail stores in Las Vegas. Management plans to introduce new clothing
and other lines of retail merchandise to help mitigate the effects of the
increased retail competition in Las Vegas. Retail departmental income decreased
12.3% in fiscal year 1997 to $8.3 million from $9.5 million in fiscal year 1996
largely as a result of the decrease in retail revenues. Retail departmental
income as a percentage of retail revenues also declined slightly to 53.9% in
fiscal year 1997 from 54.6% in fiscal year 1996.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses remained at $17.9 million in fiscal year 1997, excluding
$414,000 of non-recurring financing fees in fiscal year 1997. The Company also
incurred a one-time charge of $24.7 million in fiscal year 1997 in connection
with the termination of the Management Agreement in connection with the Buyout.
Including the one-time charge
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related to the Buyout and other non-recurring financing fees, marketing, general
and administrative expenses would have been $43.0 million in fiscal year 1997.
See "Certain Relationships and Related Transactions--Harveys Buyout."
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
remained at $5.5 million in fiscal year 1997.
NET INTEREST EXPENSE. Net interest expense remained at $5.6 million for
fiscal year 1997 as a result of lower interest expense from the repayment of
principal in the beginning of fiscal year 1997 offset by higher interest expense
during the last two months of fiscal year 1997 in connection with the financing
of the Buyout. See "Certain Relationships and Related Transactions--Harveys
Buyout."
INCOME TAXES. The income tax benefit for fiscal year 1997 was 6.3% of
pre-tax loss as a result of establishing a valuation allowance due to the
Company's accumulated losses as of November 30, 1997.
EXTRAORDINARY LOSS. In connection with entering into the Prior Credit
Facility in fiscal year 1997, the Company wrote-off $1.1 million in unamortized
loan fee costs associated with the Company's retirement of the Old Credit
Facility (as defined).
NET LOSS. As a result of the factors described above, net loss was $17.5
million in fiscal year 1997 compared to net income of $4.5 million in fiscal
year 1996. The fiscal year 1997 loss has been impacted by the charge for
termination of the Management Agreement and the extraordinary loss noted above.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The Resort opened on March 9, 1995, and therefore, operating results for
fiscal year 1996 are not directly comparable to fiscal year 1995. Accordingly,
all revenue and expense items were higher in fiscal year 1996 than in fiscal
year 1995 due to a full year of operations in fiscal 1996.
NET REVENUES AND OPERATING INCOME. Net revenues and operating income
increased to $77.3 million and $12.7 million, respectively, in fiscal year 1996
from $55.7 million and $9.4 million, respectively, in fiscal year 1995,
excluding $4.9 million of pre-opening expenses and $2.4 million of grand opening
expenses in fiscal year 1995.
CASINO. Casino revenues increased 39.2% in fiscal year 1996 to $36.6
million compared to $26.3 million in fiscal year 1995. Casino departmental
income as a percentage of casino revenues decreased to 50.3% in fiscal year 1996
compared to 52.8% in fiscal year 1995. The decrease was due to a change in the
mix of casino revenues as table game revenue growth, which has a lower margin,
exceeded slot revenue growth, and due to an increase in complimentaries in
fiscal year 1996. During fiscal year 1995, the Company employed less generous
complimentary policies as the Resort continued to benefit from the significant
publicity surrounding the grand opening of the Resort.
LODGING. Lodging revenues increased 56.2% in fiscal year 1996 to $12.3
million compared to $7.8 million in fiscal year 1995. The Hotel's occupancy rate
increased to 99.5% in fiscal year 1996 from 95.0% in fiscal year 1995 and ADR
increased to $91.60 in fiscal year 1996 from $86.71 in fiscal year 1995 due to
improved yield management. Other lodging revenue increased 143.0%, primarily due
in part to higher PBX telephone charges. Lodging departmental income as a
percentage of lodging revenues improved in fiscal year 1996 to 66.5% from 60.9%
in fiscal year 1995 due to an increase in ADR, an increase in PBX telephone
charges and a reduction in hotel reservation costs related to the Company
operating the Resort's central reservation function, which was previously
handled by Harveys.
FOOD AND BEVERAGE. Food and beverage revenues increased 49.1% in fiscal
year 1996 to $15.0 million compared to $10.1 million in fiscal year 1995.
Banquet revenues increased to $1.2 million in fiscal year 1996 from $0.1 million
in fiscal year 1995 as a result of increased marketing efforts of the Resort's
banquet
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services to companies hosting large corporate events. Food and beverage
departmental income increased 53.4% in fiscal year 1996 to $4.9 million from
$3.2 million in fiscal year 1995. Food and beverage departmental income as a
percentage of food and beverage revenues increased to 32.6% in fiscal year 1996
from 31.6% in fiscal year 1995 primarily due to an increase in the higher margin
banquet business.
RETAIL. Retail revenues increased 24.0% in fiscal year 1996 to $17.3
million compared to $14.0 million in fiscal year 1995, mainly due to the
additional operating days during fiscal year 1996 and the benefits in the fourth
quarter of 1996 of increased clothing sales due to an unsolicited endorsement
from a popular Japanese band. Retail departmental income as a percentage of
retail revenue remained essentially the same at 54.6% in fiscal year 1996
compared to 54.8% in fiscal year 1995.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses increased 16.7% in fiscal year 1996 to $17.9 million
from $15.3 million in fiscal year 1995. Marketing expense for fiscal year 1995
includes $2.4 million of grand opening expenses and $4.9 million in pre-opening
expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 42.7% in fiscal year 1996 to $5.5 million from $3.9 million for fiscal
year 1995.
NET INTEREST EXPENSE. Net interest expense increased 13.9% in fiscal year
1996 to $5.6 million compared to $4.9 million in fiscal year 1995. A majority of
the increase resulted from interest expense on outstanding debt for an entire
year partially offset by a reduction of principal and a decline in interest
rates on the Company's borrowings.
NET INCOME. As a result of the factors described above, net income was $4.5
million in fiscal year 1996 compared to a net loss of $2.0 million in fiscal
year 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have been
cash flow from operations, borrowings under various credit agreements and equity
contributions. At May 31, 1998, the Company had $11.8 million of cash and cash
equivalents.
During fiscal year 1995, the Company's principal source of funds was bank
borrowings under its first mortgage financing to complete the construction of
the Resort and an equity contribution of $10 million from the issuance of stock.
The primary use in fiscal year 1995 was capital expenditures for the completion
of the Resort of $47.4 million.
During fiscal year 1996, the Company generated cash flows from operating
activities of $10.3 million. The primary uses of funds in fiscal year 1996 were
capital expenditures of $4.0 million and principal payments on long-term debt of
$4.5 million.
During fiscal year 1997, the Company generated negative cash flow from
operating activities of $13.3 million as a result of the Buyout. The Buyout
resulted in a one-time charge of $24.7 million to earnings in fiscal year 1997.
Excluding this one-time charge, cash flow from operating activities totaled
$11.4 million in fiscal year 1997. The Company's primary uses of funds for
investing activities in fiscal year 1997 were for acquisitions of property and
equipment of $2.6 million.
During fiscal year 1997, the Company generated $13.5 million of net cash
flows from financing activities. This consisted of $105.7 million of borrowings
under the Prior Credit Facility, offset by repayment of indebtedness aggregating
$67.4 million, the cash payment to Harveys in exchange for Harveys' 40% equity
interest in the Company and loan fees of $3.7 million on the Prior Credit
Facility.
In May 1997, the Company completed an exchange for a site adjacent to the
Resort, which was acquired for the initial phase of the Expansion. As part of
the consideration for the site, the Company paid $5.1 million in cash and
executed a $3.5 million promissory note payable to the seller. The promissory
note,
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along with accrued interest, was refinanced with a portion of the proceeds from
the Prior Credit Facility in September 1997.
In September 1997, the Company entered into the $120 million Prior Credit
Facility. At November 30, 1997, indebtedness under the Prior Credit Facility
totaled $105.7 million, of which $5.7 million was drawn under its revolving line
of credit and $100 million was outstanding under multiple term loans. On March
23, 1998, the Company completed the Offering of $120 million aggregate principal
amount of Notes; of this amount $105.6 million was used to repay the Prior
Credit Facility and approximately $4.1 million was used to pay fees associated
with the Offering. The Company has repaid all borrowings outstanding and
terminated the Prior Credit Facility with the net proceeds from the Offering.
The Company believes that at the time of repayment, the Company was in
compliance with all covenants under the Prior Credit Facility. Concurrent with
the closing of the Offering, the Company entered into the $67.0 million New
Credit Facility, which was undrawn at June 30, 1998. See "Use of Proceeds."
In July 1997, the Company and Lily Pond entered into an agreement to effect
the Buyout, pursuant to which the Company redeemed Harveys' 40% interest in the
Company and terminated the Management Agreement, which termination became
effective October 24, 1997. Under the terms of the Buyout, the Company paid
Harveys $45.0 million in cash. Of the $45 million, the amounts charged to
paid-in-capital and to expense followed the amounts negotiated and agreed to by
the parties as reflecting the market values associated with each component of
the Buyout in the above referenced agreement. See "Certain Relationships and
Related Transactions--Harveys Buyout." The Company funded this purchase through
proceeds from the Prior Credit Facility, and concurrent with this transaction,
refinanced existing indebtedness totaling $59.3 million. Subsequent to the
Buyout, Harvey's has no continuing interest in the Company.
For the six months ended May 31, 1998, the Company's principal sources of
funds were provided from operating activities of approximately $5.2 million and
net financing activities of approximately $8.9 million. The primary use of funds
was expansion and maintenance capital expenditures of $6.0 million.
Management anticipates funding the capital expenditures for the Expansion
and its operating liquidity needs from the funds remaining from the net proceeds
of the Offering, funds available under the $67.0 million New Credit Facility and
operating cash flow. The Company used a significant portion of the net proceeds
from the Offering to repay approximately $105 million of outstanding
indebtedness. The Expansion is budgeted to cost $87.0 million. Construction of
the Expansion commenced in February 1998 and is expected to be completed by the
second quarter of 1999. Based on current plans, approximately $42 million of
capital expenditures related to the Expansion is expected to be incurred in
fiscal year 1998, with the remaining $45 million expected to be incurred in
fiscal 1999. However, timing for capital expenditures relating to the Expansion
may change depending on the actual completion date for the Expansion. Failure to
complete the Expansion within budget or on schedule could have a material
adverse effect on the Company. Management believes that its current cash
balance, borrowings available under the New Credit Facility and cash flow from
operations, will be sufficient to fund the completion of the Expansion. However,
no assurances can be given with respect to the sufficiency of such amounts.
Peter A. Morton has entered into a Completion Guaranty, pursuant to which he
has guaranteed, subject to certain conditions and limitations, payment of
construction and development costs in excess of $87.0 million, up to a maximum
of $10.0 million. See "Risk Factors--Completion Guaranty" and "Completion
Guaranty."
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal (which together constitute the Exchange
Offer), the Company will accept for exchange Old Notes which are properly
tendered on or prior to 5:00 p.m., New York City time, on , 1998 and
not withdrawn as permitted below; provided, however, that if the Company, in its
sole discretion, has extended the period of time for which the Exchange Offer is
open, the term "Expiration Date" means the latest time and date to which the
Exchange Offer is extended.
As of the date of this Prospectus, $120,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date hereof, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth below. See "--Certain Conditions to the Exchange Offer."
The Company expressly reserves the right, at any time, or from time to time,
to extend the period of time during which the Exchange Offer is open by not more
than thirty days, and thereby delay acceptance for exchange of any Old Notes, by
giving oral or written notice of such extension to the holders thereof as
described below. During any such extension, all Old Notes previously tendered
will remain subject to the Exchange Offer and may be accepted for exchange by
the Company. Any Old Notes not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below. See "--Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Notes as promptly as practicable, such notice
in the case of any extension to be issued by means of a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal or (in the case of a book-entry transfer)
an Agent's Message in lieu of such Letter of Transmittal, to U.S. Bank Trust
National Association (the "Exchange Agent") at the address set forth below under
"Exchange Agent" on or prior to the expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date with the Letter of Transmittal or an Agent's Message in lieu of
such Letter of Transmittal, or (iii) the holder must comply with the guaranteed
delivery procedures described below. "Agent's Message" means a message,
transmitted by the Book-Entry Transfer Facility to and received by the
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Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgment
from the tendering participant, which acknowledgment states that such
participant has received and agrees to be bound by the Letter of Transmittal and
that the Company may enforce such Letter of Transmittal against such
participant. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a holder of the Old Notes who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion, duly executed by the registered national securities exchange
with the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form. eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Note not properly tendered or to not accept any particular
Old Note which acceptance might, in the judgment of the Company or its counsel,
be unlawful. The Company also reserves the absolute right to waive any defects
or irregularities or conditions of the Exchange Offer as to any particular Old
Note either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer as
to any particular Old Note either before or after the Expiration Date (including
the Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with the tenders of Old Notes for exchange must be cured within
such reasonable period of time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by powers of attorney, in either case signed by the registered
holder or holders exactly as the name or names of the registered holder or
holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorneys are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted with the Letter of Transmittal.
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By tendering, each holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the holder and that neither the holder nor such
other person has any arrangement or understanding with any person to participate
in the distribution of the Now Notes. If any holder or any such other person (a)
is an "affiliate", as defined under Rule 405 of the Securities Act, of the
Company, (b) is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such New Notes
to be acquired pursuant to the Exchange Offer, or (c) acquired Old Notes as a
result of market making or other trading activities, such holder or any such
other person (i) could not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes of the
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if the Company has given oral (promptly
confirmed in writing) or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to which
interest has been paid or, if no interest has been paid, from March 23, 1998.
Old Notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for such Old Notes or a timely Book
Entry Confirmation of such Old Notes into the Exchange Agent' s account at the
Book-Entry Transfer Facility, (ii) a properly completed and duly executed Letter
of Transmittal or an Agent' s Message in lieu thereof and (iii) all other
required documents. If any tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Old Notes will be returned without expense to
the tendering holder thereof (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry procedures described below, such
non-exchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFERS
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer Facility
systems must make book-entry delivery of Old Notes by causing the Book-Entry
Transfer Facility to transfer such Old Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility in accordance with such
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<PAGE>
Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. Such participant using ATOP should transmit its
acceptance to the Book-Entry Transfer Facility on or prior to the Expiration
Date or comply with the guaranteed delivery procedures described below. The
Book-Entry Transfer Facility will verify such acceptance, execute a book-entry
transfer of the tendered Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility and then send to the Exchange Agent confirmation of
such book-entry transfer, including an Agent' s Message confirming that the Book
Entry Transfer Facility has received an express acknowledgment from such
participant that such participant has received and agrees to be bound by the
Letter of Transmittal and that the Company may enforce the Letter of Transmittal
against such participant. However, although delivery of Old Notes may be
effected through book-entry transfer at the Book-Entry Transfer Facility, an
Agent's Message and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth below
under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a holder of the Old Notes desires to tender such Old Notes and the Old
Notes are not immediately available, or time will not permit such holder's Old
Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may he effected if (i) the tender is made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent
received from such Eligible Institution a Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of the Old Notes and
the amount of Old Notes tendered, stating that the tender is being made thereby
and guaranteeing that within three New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice or Guaranteed Delivery, the
certificates for all physically rendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation as the case may be, together with a properly
completed and duly executed appropriate Letter of Transmittal (or facsimile
thereof or Agent's Message in lieu thereof) with any required signature
guarantees and any other documents required by the Letter of Transmittal will be
deposited by the Eligible institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, together with a properly
completed and duly executed appropriate Letter of Transmittal (or facsimile
thereof or Agent's Message in lieu thereof) with any required signature
guarantees and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent." Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old Notes
to be withdrawn, (ii) identify the Old Notes to be withdrawn (including the
principal amount of such Old Notes), and (iii) (where certificates for Old Notes
have been transmitted) specify the name in which such Old Notes are registered,
if different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agents then, prior
to the release of such certificates the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt)
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of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the Exchange Offer.
Any Old Notes which have been tendered for exchange but which are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be credited
to an account maintained with such Book Entry Transfer Facility for the Old
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering Old Notes" above at any time on or prior to 5:00 p.m., New York City
time, on the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes, the Exchange Offer violates, or will
violate, any applicable law, including in particular any Nevada Gaming Law, or
regulation or interpretation by the staff by the SEC.
Additionally as a condition to its participation in the Exchange Offer
pursuant to the terms of the Registration Rights Agreement, each holder of Old
Notes will be required to furnish, upon the request of the Company, prior to the
Consummation thereof, a written representation to the Company (which may be
contained in the letter of transmittal contemplated by the Registration
Statement) to the effect that (a) it is not an affiliate of the Company, (b) it
is not engaged in, and does not intend to engage in, and has no arrangement or
understanding with any Person to participate in, a distribution of the New Notes
to be issued in the Exchange Offer and (c) it is acquiring the Notes in its
ordinary course of business.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
EXCHANGE AGENT
U.S. Bank Trust National Association ("U.S. Bank Trust") has been appointed
as the Exchange Agent for the Exchange Offer. All executed Letters of
Transmittal should be directed to the Exchange Agent at the address set forth
below. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
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Delivery to: U.S. Bank Trust National Association,
As Exchange Agent
<TABLE>
<S> <C>
BY MAIL: BY OVERNIGHT COURIER:
U.S. Bank Trust National Association U.S. Bank Trust National Association
U.S. Bank Trust Center U.S. Bank Trust Center
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Specialized Finance Department Attention: Specialized Finance Department
BY HAND: IN NEW YORK (AS DROP AGENT) BY HAND: IN ST. PAUL
U.S. Bank Trust National Association U.S. Bank Trust National Association
100 Wall Street, 20th Floor U.S. Bank Trust Center
New York, New York 10005 180 East Fifth Street, 4th Floor
St. Paul, Minnesota 55101
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer except for reimbursement of mailing
expenses.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$300,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection with that exchange, as well as any other sale
or disposition of the Old Notes. Holders who instruct the Company to register
New Notes in the name of, or request that Old Notes not tendered or not accepted
in the Exchange Offer be returned to, a person other than the registered
tendering holder will be responsible for the payment of any applicable transfer
tax thereon.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
state securities laws. The Company does not currently anticipate that they will
register under the Securities Act any Old Notes which remain outstanding after
consummation of the Exchange Offer (subject to such limited exceptions if
applicable). To the extent that Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected.
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Holders of the Old and New Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage thereof have taken
certain actions or exercised certain rights under the Indenture.
Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Description of
Notes--Registration Rights; Liquidated Damages."
Based upon no-action letters issued by the staff of the Commission to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer in exchange for the Old Notes may be offered for resale, resold or
otherwise transferred by a holder thereof (other than any (i) holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), (ii) an Initial Purchaser or holder of Old Notes who acquired the Old
Notes directly from the Company solely in order to resell pursuant to Rule 144A
of the Securities Act or any other available exemption under the Securities Act,
or (iii) a broker-dealer who acquired the Old Notes as a result of market making
or other trading activities) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating and has no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such Notes. However, the Company has not sought its own no-action letter
and there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of New
Notes, and has no arrangement or understanding to participate in a distribution
of New Notes. If any holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer, or
acquired the Old Notes as a result of market or other trading activities, such
holder (i) could not rely on the relevant determinations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that such Old Notes were acquired by
such broker dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of such New Notes. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company has agreed to register or qualify
the sale of the New Notes in such jurisdictions only in limited circumstances
and subject to certain conditions.
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BUSINESS
OVERVIEW
The Company owns and operates the Hard Rock Hotel & Casino in Las Vegas,
Nevada, the world's first casino resort with a rock music theme. The Resort is
modeled after the highly successful Hard Rock Cafe restaurant chain and is
decorated with an extensive collection of rare rock memorabilia as well as a
distinctive roof top guitar-shaped neon sign that extends 180 feet into the Las
Vegas skyline. The original Hard Rock Cafe was co-founded in 1971 by Peter A.
Morton, the Company's Chairman, Chief Executive Officer and President, and the
"Hard Rock" name has grown to become a widely recognized name throughout the
world. Since the Resort's opening in March 1995, it has developed a strong
following among its target customer base of youthful individuals, generally
between the ages of 25 and 45, who seek a vibrant, energetic entertainment and
gaming experience with the services and amenities associated with a boutique
luxury resort hotel.
The Resort currently consists of (i) an eleven-story hotel tower with 339
guest rooms (including 28 deluxe suites), (ii) a 28,000 square-foot casino, with
741 slot machines and 50 table games, (iii) a 2,000 square-foot retail shop,
(iv) The Joint, a nightclub and live music concert hall with a capacity of 1,400
persons, (v) an outdoor swimming pool area with a tropical theme, (vi) two
restaurants, (vii) three cocktail lounges and (viii) an exercise facility. The
Hotel's guest rooms and deluxe suites have an average size of 450 square feet
and are decorated in a modern, minimalist style that features black and white
photos of famous rock musicians. The Casino is designed with an innovative
circular layout around the Center Bar, which allows its patrons to see and be
seen from nearly every area of the Casino. Rock music is played continuously to
provide the Casino with an energetic and entertaining, club-like atmosphere. The
Retail Store has an innovatively designed decor with a guitar-shaped sales
counter, where customers purchase a wide variety of merchandise displaying the
popular "Hard Rock Hotel" and "HRH" logos. The Joint, a premier live music
venue, successfully draws audiences from Las Vegas visitors and from the local
Las Vegas population. The Beach Club features a 175-foot long, sand bottomed
pool with a waterslide and underwater rock music. The Resort's two restaurants
offer fine dining at Mortoni's and 24-hour casual dining in a rock music
inspired atmosphere at Mr. Lucky's.
In order to capitalize on the strong popularity of the Resort, the Company
is undertaking the Expansion designed to significantly enlarge and enhance the
Hotel, the Beach Club, the Retail Store and the variety of restaurants and
entertainment amenities offered to guests of the Resort. Current plans call for
key elements of the Expansion to include nearly doubling of the number of hotel
rooms, significantly increasing the size and features of the Beach Club, the
addition of three full-service restaurants, a 1,088 space parking garage, a
full-service health club and spa, a nightclub and larger convention and meeting
facilities. The Company is also moderately expanding the Casino by adding
approximately 60 slot machines and 11 table games, opening a new higher limit
gaming area and increasing the size of the race and sports book area by
approximately 30%. The Expansion is expected to be completed in the second
quarter of 1999 at a cost of $87.0 million.
BUSINESS STRATEGY
The Company's business and marketing strategy for the Resort is to create a
vibrant and energetic entertainment and gaming environment that primarily
appeals to a customer base of youthful individuals. The Company successfully
utilizes the Hard Rock theme, vibrant atmosphere and personalized service to
differentiate the facility from the substantially larger Strip "mega resorts."
Key elements of the Company's strategy include the following:
UNIQUE TARGET CLIENTELE. The Company has successfully differentiated itself
in the Las Vegas market by targeting a predominantly youthful and "hip" customer
base, which management believes consists primarily of rock music fans and
youthful individuals, as well as actors, musicians and other members of
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the entertainment industry. Management also believes that these customers form a
combined demographic group that is currently underserved by competing
facilities.
"HIP" ENTERTAINMENT. The Joint has hosted numerous famous rock singers and
popular music groups, such as The Rolling Stones, The Eagles, No Doubt, Fiona
Apple, The Wallflowers, Sheryl Crow and Jewel. Management believes that the
Joint has quickly become a favorite venue for musicians and guests due to its
relatively small capacity and intimate atmosphere. The Resort has also regularly
hosted special events such as segments of, and the post awards party for, the
Fox/Billboard Magazine Music Awards, MTV's dance program THE GRIND, VH-1's
Fairway To Heaven, a celebrity golf tournament, The King of the Beach
Invitational, a pro volleyball tournament, and the premiere of the major motion
picture CON AIR. The Company believes that The Joint's concerts and the Resort's
special events generate significant worldwide publicity and reinforces the
Resort's marquee image and unique position in the Las Vegas marketplace.
GAMING MIX TARGETED TO CUSTOMER BASE. The Casino currently includes 741
slot machines, 50 table games and a 1,000 square-foot race and sports book. The
Company's target gaming customer has a higher propensity to play table games and
the Company strives to create a fun and enthusiastic gaming environment through
the use of music themed gaming chips and playing surfaces as well as promoting
the interaction between table game dealers and customers. The Company also
features the latest slot machines, some of which also reflect the Company's rock
music theme, as well as more traditional machines to offer its customers a wide
variety of selections.
SIGNIFICANT REVENUE FROM NON-GAMING OPERATIONS. The Company derives a
majority of its revenues from non-gaming operations. The Company's Hotel, Beach
Club, retail, food and beverage and other operations allow the Resort to market
itself as a full-service destination resort. The diversified revenue base allows
the Company to be less dependent on the Casino as a source of revenues and
profits, which management believes results in less volatility in earnings.
UNSURPASSED CUSTOMER SERVICE. One of the cornerstones of the Company's
business strategy is to provide its customers with an extraordinary level of
personal service. Management trains its employees to interact with guests and
continually strives to instill in each employee a dedication to superior service
designed to exceed guests' expectations. Peter A. Morton is a visible proponent
of the Resort's emphasis on customer service and regularly speaks to employees
and customers. In addition, Mr. Morton and other members of management
personally respond to suggestions made on comment cards placed in each of the
Resort's hotel rooms.
The success of the Company's business strategy is evidenced by the large
number of awards the Resort has received. The Resort was selected in CONDE NAST
TRAVELER as one of "The 25 Coolest Places To Stay Now" in the world and was also
recognized in the 1997 LAS VEGAS REVIEW JOURNAL'S "Best of Las Vegas" issue as
being "The Best Place to Take Out-of-Town Visitors" and for having "The Best
Hotel Pool," "Best Blackjack Tables" and "Best Live Music Club." In addition,
the Beach Club, with its sand bottomed pool and underwater rock music, was
dubbed the "eighth wonder of Las Vegas" by VOGUE magazine.
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LOCATION
The followng map shows the location of the Resort relative to the Strip,
certain other hotel casinos in Las Vegas and McCarran International Airport.
[LOGO]
Map not to scale.
The Resort occupies one of the most highly visible and easily accessible
sites in Las Vegas. It is located on approximately 16.7 acres of land near the
intersection of Paradise Road and Harmon Avenue, approximately two miles from
McCarran International Airport and approximately one mile east of the Strip, the
main tourist area in Las Vegas. The Resort represents an attractive alternative
for tourists, business travelers and locals who wish to avoid the crowds and
congestion of the Strip, while maintaining close and easy access to the Strip.
The Company has agreements with major hotels and casinos and retail
establishments pursuant to which shuttle services are provided between such
locations and the Resort. The Resort's location is particularly attractive due
to its proximity to (i) a high concentration of popular Las Vegas restaurants
and nightclubs, (ii) the Las Vegas Convention Center, (iii) the Thomas & Mack
Center at the University of Nevada Las Vegas, Las Vegas' primary sporting and
special events arena and (iv) a number of non-gaming hotels, which have an
aggregate of more than 1,000 guest rooms.
THE RESORT
The Resort was modeled after the successful rock music oriented Hard Rock
Cafe restaurant chain and is decorated with an extensive collection of rare rock
memorabilia as well as a roof top guitar-shaped neon sign that extends 180 feet
into the Las Vegas skyline. The Resort currently consists of the Hotel, the
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Casino, the Retail Store, two restaurants, The Joint, the Beach Club, three
cocktail lounges and the Athletic Club. The Resort offers its patrons
high-quality customer service and excellent value in a vibrant, energetic
atmosphere that is both friendly and intimate.
THE HOTEL. The Hotel's eleven-story tower houses 339 spacious hotel rooms,
including 311 guest rooms and 28 deluxe suites. The guest rooms and deluxe
suites average approximately 450 square feet in size, which is larger than the
size of an average Las Vegas hotel room. Consistent with the Resort's
distinctive decor, the hotel rooms are stylishly furnished with modern
furniture, stainless steel bathroom sinks, leather headboards and
black-and-white photos of famous rock musicians. The rooms also include special
amenities such as large 27-inch screen televisions, stereo systems and French
doors that open to the outdoors. A full-service concierge and 24-hour room
service are available to all guests of the Hotel.
The Hotel's broad appeal to visitors to Las Vegas is reflected in its
consistently high occupancy rate and ADR. The Hotel has been operating at 100%
occupancy since February 1996, and reservations frequently must be made six
weeks to two months in advance. Management estimates that due to the Resort's
popularity and exclusivity, the Hotel turns away between 5,000 and 10,000
requests for reservations each month. Despite intense competition from other
hotels and a 9% growth in overall room capacity in Las Vegas, the Hotel
increased its occupancy rate from 99.5% in fiscal year 1996 to 100.0% in fiscal
year 1997 and increased its ADR from $91.60 in fiscal year 1996 to $96.36 in
fiscal year 1997.
The following table illustrates certain historical information relating to
the hotel since its construction in 1995:
<TABLE>
<CAPTION>
SIX MONTHS
ENDING MAY
1995 1996 1997 31, 1998
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Number of guest rooms................................................. 339 339 339 339
Average occupancy rate................................................ 95.0% 99.5% 100% 100%
Average daily rate(1)................................................. $ 86.71 $ 91.60 $ 96.36 $ 98.87
Revenue per average room.............................................. $ 82.34 $ 91.14 $ 96.36 $ 98.87
</TABLE>
- ------------
(1) Includes rooms provided on a complimentary basis
THE CASINO. The innovative, distinctive style of the 28,000 square-foot
circular Casino is a major attraction for both Las Vegas visitors and local
residents. The Casino is designed with an innovative circular layout around the
elevated Center Bar, which allows the Casino's patrons to see and be seen from
nearly every area of the Casino. Rock music is played continuously to provide
the Casino with an energetic and entertaining, club-like atmosphere. In
addition, the Casino promotes a friendly, intimate atmosphere by encouraging its
employees to smile at and interact with Casino players. Dealers, for example,
are encouraged to "High Five" winning players.
The Casino houses 50 table games including Blackjack, Craps, Roulette,
Caribbean Stud Poker, Mini-Baccarat and Pai-Gow Poker, 741 slot and video poker
machines, some of which feature guitar-neck-shaped levers and motorcycle
seat-shaped stools, an approximate 1,000 square-foot race and sports book as
well as the 1,963 square-foot Center Bar. The Casino also offers patrons other
attractions such as cutting edge slot technology, proprietary slot graphics and
distinctive slot signage. For example, Silicon Gaming's Odyssey Slot Machines
have been added to attract Las Vegas tourists, local residents and repeat
customers. The Company's table game operations often reach service capacity on
weekends, holidays and during special events and concerts held in The Joint or
at the Beach Club. For special events, the Company sets up table games in The
Joint and outdoor table games in the Beach Club area. Consistent with the
Company's rock music theme, the Company utilizes rock star images on the chips
used in the Casino, many of which are kept by visitors as souvenirs (generating
additional income for the Company) and rock star likenesses on slot machine
reels and glass.
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RETAIL. The Resort's retail operations consist of the Retail Store, a 2,000
square-foot retail shop, located at the Resort, and sales through its internet
web site. Because of the strong "Hard Rock Hotel" trademark and the Company's
experience in innovative retailing, the Retail Store generated sales for fiscal
year 1997 of approximately $7,700 per square foot. Visitors may purchase shirts,
hats, pins, golf bags, children's clothing, stationery, leather jackets,
collectible pin sets, sundry items and a variety of other merchandise displaying
the popular "Hard Rock Hotel" and "HRH" logos from the Retail Store, through the
web site and from a sundry store located in the Resort. The Company's retail
operations have been very successful and offer a convenient and inexpensive
outlet to market and advertise the "Hard Rock Hotel" trademark and attract other
Las Vegas visitors to the Resort. The Company's in-house design team is
responsible for maintaining the consistency of the Resort's image while creating
new merchandise to expand and diversify the retail selection.
THE JOINT. As a live music venue with a capacity of 1,400 persons, The
Joint successfully draws audiences from Las Vegas visitors and from the local
Las Vegas population. Management believes that as a result of hosting concerts
by famous musicians such as The Rolling Stones, The Eagles, No Doubt, The
Wallflowers, Sheryl Crow, Fiona Apple and Jewel, The Joint has become a premiere
venue in Las Vegas for live popular music. Some of these performances have been
broadcast by Fox Television Network, MTV and VH-1 and are an important part of
the Company's marketing strategy not only because they generate publicity for
the Resort, and attract large audiences to The Joint, but also because they
provide an added source of visitors for the Hotel, the Casino, and the Resort's
retail and food and beverage operations. In order to increase and retain
customer traffic in the Casino, the Company recently began operating The Joint
as an after hours (12:30 a.m. to 4:00 a.m.) nightclub on Friday and Saturday
nights.
THE BEACH CLUB. Situated outside the Hotel, the Beach Club features a
175-foot long, sand bottomed pool with a waterslide and underwater rock music,
which was dubbed "the eighth wonder of Las Vegas" by VOGUE magazine and was
recognized in the 1997 LAS VEGAS REVIEW-JOURNAL as the "Best Hotel Pool" in Las
Vegas. The Beach Club also includes two beaches with white sand imported from
Monterey, California, rock outcroppings and two whirlpools. In addition, guests
of the Hotel can rent private cabanas at the Beach Club, which include water
misters, a refrigerator, a television and (for an additional fee) an on-site
massage service.
FOOD AND BEVERAGE. The Resort offers its patrons a selection of
high-quality food and beverages at multiple price points. The Resort's food and
beverage operations include two restaurants (Mortoni's and Mr. Lucky's), two
bars in the Casino (the Las Vegas Lounge and the Center Bar), two bars in The
Joint, a bar at the Beach Club and catering service for corporate events,
conventions, banquets and parties. Mortoni's, an elegant 2,250 square-foot
restaurant with seating capacity for approximately 110 persons, serves its
diners upscale Italian cuisine, while Mr. Lucky's, a 3,800 square-foot 24-hour
restaurant with seating capacity for approximately 200 persons, specializes in
high-quality, moderately priced American cuisine such as hamburgers, pizza, ribs
and salads. Both the 1,800 square-foot Las Vegas Lounge and the 1,963
square-foot Center Bar have become popular with both Las Vegas tourists and
local residents who are attracted to the Resort's entertainment and vibrant,
energetic atmosphere. As a result, these bars have often reached their service
capacity on weekends, holidays and when special events and concerts have been
held in The Joint or at the Beach Club. In addition, The Joint and the Beach
Club offer their customers a limited selection of menu items and beverages.
THE ATHLETIC CLUB. The Athletic Club includes treadmills, stair-masters,
stationary bicycles, CYBEX machines, a variety of free-weights, steam rooms,
showers and a massage room. Plans for the Expansion include adding new state of
the art health club and spa facilities featuring amenities such as massage,
facial and other personal services, making the Athletic Club a facility suitable
for a first-class destination resort.
BANQUETS AND CORPORATE EVENTS. The Resort hosts a number of corporate
events, conventions, banquets and private parties. Past clients include Callaway
Golf, Buena Vista Pictures, Jack Daniels, Netspeed, Miller Beer and Ziff-Davis.
Depending upon the size of the event, customers can choose to host
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their corporate functions, conventions and banquets either indoors, at The Joint
or in the Resort's approximately 2,200 square-foot meeting room, or outdoors,
around the swimming pool at the Beach Club. The Resort's ability to cater such
events, however, has been constrained by its existing meeting space. Currently,
the Resort's indoor meeting space and The Joint, can hold up to 100 individuals
and 1,400 individuals, respectively. The Resort has also hosted corporate
events, conventions and banquets falling in the 100 to 1,500 person range by
catering parties, when possible, around the existing pool at the Beach Club.
Management estimates that due to the limitations of its indoor meeting space,
the Resort turns down five to ten corporate events, conventions and banquets per
month.
THE EXPANSION
The Company has started construction on a program to significantly enlarge
and enhance the Resort. The purpose of the Expansion is (i) to attract a greater
number of guests to the Resort, especially during mid-week periods, and (ii) to
increase the amount of time and money guests spend at the Resort. Components of
the Expansion are planned to include the following:
- HOTEL. The Hotel's occupancy rate for fiscal years 1996 and 1997 was 99.5%
and 100.0%, respectively, and management believes there is significant
unmet demand for hotel rooms based on the number of reservation requests
that the Hotel declines. In order to address this demand, the Company
plans to construct a new eleven-story hotel tower that will feature 326
guest rooms, including approximately 32 suites. The new tower will be
attached to, and seamlessly integrated with the existing Hotel. The new
guest rooms and deluxe suites are expected to be decorated in the same
modern, minimalist style as the existing rooms and are designed to have an
average size of 465 square feet, which is slightly larger than the average
size of the guest rooms and deluxe suites in the existing tower.
- CASINO. The Resort currently has a lower proportion of hotel rooms to
gaming positions relative to other properties in Las Vegas. Management
believes the increase in hotel rooms and amenities as a result of the
Expansion will add customer traffic to the Resort and increase utilization
of the Casino. To capitalize on the expected demand, the Company is
planning to add approximately 60 slot machines and 11 table games, open a
new higher limit gaming area and increase the race and sports book area by
approximately 30%. Management intends to attract higher income gaming
patrons through the bungalows, hotel suites, amenities and special events.
However management does not anticipate targeting customers whose wagering
practices are significantly above those of the Company's current higher
income customer base.
- BEACH CLUB. The Expansion will significantly enlarge the Beach Club, one
of the Resort's key attractions. The Beach Club, which currently occupies
approximately one acre, will be expanded to approximately 2.5 acres. Added
attractions include a second, substantially larger swimming pool featuring
an island, a sand beach, a flowing stream (which will connect the new pool
area to the existing pool area), a new more thrilling waterslide, and
additional white sand beach areas. The Beach Club will also serve as an
outdoor concert venue with a capacity of approximately 3,000 people. Plans
call for the expanded Beach Club to also provide its patrons with an
open-air casino consisting of three table games in, and three table games
adjacent to, the stream connecting the two swimming pools and a bank of
approximately 20 slot machines built into a rock formation. In addition,
the Company plans to surround the pools with approximately 40 Tahitian
styled, thatched roof cabanas, which can be rented on a daily basis.
- RESTAURANTS. The Resort currently features two full-service restaurants.
In order to attract additional visitors and offer guests of the Resort a
greater variety of dining choices, management plans for the Expansion to
include three new premier restaurants including a steakhouse, a Japanese
restaurant to be designed and operated by an internationally renowned chef
and a Mexican restaurant. Plans for the Expansion also include the
addition of a coffee shop in the Hotel and
39
<PAGE>
additional food and beverage service at the Beach Club. Management
believes that the greater variety of dining choices should be an effective
tool in attracting additional gaming customers and increasing the amount
of time and money guests spend at the Resort.
- RETAIL STORE. The Company plans to expand the Retail Store by
approximately 60% to a total of 3,045 square feet and to redesign and
reconfigure it to provide visitors with a variety of merchandise bearing
the "Hard Rock Hotel" and "HRH" logos.
- PARKING FACILITY. The Company is constructing a six-story parking facility
with a planned capacity of 1,088 cars, effectively increasing the Resort's
parking capacity by approximately 500 cars (net of surface parking space
eliminated from construction of the new hotel tower) to an aggregate of
approximately 1,700 parking spaces. The new parking facility, which is
designed to allow for the future addition of 450 additional parking
spaces, is expected to be completed in the fall of 1998.
- CONVENTION AND MEETING FACILITIES. Due to the significant demand from
convention groups, businesses and other parties for large meetings and for
special events, plans for the Expansion include a new 6,000 square-foot
meeting facility, which can be utilized as one large ballroom or
reconfigured into up to three smaller rooms. The Company anticipates using
The Joint and the expanded Beach Club, restaurants and meeting space to
host receptions and special events and to attract larger meetings and
groups than it has hosted in the past.
- OTHER. Plans for the Expansion also include a new approximately 8,000
square-foot health club and spa, an 8,000 square-foot nightclub and an
approximately 30,000 square-foot multi-functional warehouse, maintenance
and back of house facility. The health club and spa are expected to
feature state of the art exercise equipment as well as provide guests with
massage, facial and other personal services typically provided at
first-class destination resorts. The underground nightclub may also serve
as additional space that can be used for meetings, banquets and special
events.
Construction of the Expansion has been planned in three separate phases. The
Company plans to finish construction plans for each phase and obtain "Not to
Exceed" bids from experienced licensed general contractors for each phase. Phase
I consists of the construction of the parking facility, which began in February
1998 and is expected to be completed in the fall of 1998 at a cost of
approximately $8.0 million. The Company has arranged for additional parking at
an adjacent facility during the construction period. The Company has hired M.J.
Dean construction as the general contractor for Phase I. M.J. Dean has given the
Company a "Not to Exceed" contract for its portion of the construction. Phase II
involves the development of the new nightclub and warehouse facility and the
expansion of the Retail Store at a cost of approximately $10.0 million. The
existing Retail Store is expected to remain fully operational during the course
of construction. Phase III includes the development of the new hotel tower,
expanded Beach Club, health club and spa and the additional restaurants and
meeting space at an expected cost of approximately $69.0 million. The Company
has established a total construction budget for the Expansion of $87.0 million
(of which $4.2 million has been expended as of April 30, 1998), including
construction contingency, design costs, pre-opening costs and capitalized
construction period interest. Construction is expected to be completed in the
second quarter of 1999. Mr. Morton has agreed to provide a Completion Guaranty
for the Expansion. See "Risk Factors--Completion Guaranty" and "Completion
Guaranty."
MARKETING
The Company's marketing efforts are targeted at both the visitor market
(tourists and business travelers) as well as local patrons. The marketing
department uses both traditional and innovative marketing strategies to promote
the "Hard Rock Hotel" and "Hard Rock Casino" trademarks. The Company employs
targeted marketing programs through use of the Company's database which has
approximately 350,000 names. The Resort is aggressively marketed not only
through domestic and international public relations activities, direct mail,
print and radio advertising, but also through special arrangements with various
members of the entertainment industry. For example, for the past two years the
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Company has provided a number of rooms for the BILLBOARD Music Awards televised
on Fox Network TV in exchange for frequent media exposure during the telecast.
The Resort also hosts many well-publicized and often televised events such as
segments of, and the post-awards party for, the Fox/Billboard Magazine Music
Awards, MTV's dance program THE GRIND, VH-1's Fairway to Heaven Celebrity Golf
Tournament, the King of the Beach Pro Volleyball Tournament and the premiere of
the major motion picture CON AIR. These types of events are held at the Resort
because its stylish and distinctive atmosphere is consistent with the theme of
the events. The events, in turn, reinforce the Resort's image as a destination
resort among its target clientele. The concerts in The Joint by popular artists,
some of which have been televised, are another form of promotional activity that
reinforces the Resort's image.
The Casino marketing staff has developed the Back Stage Pass program for
visitors to the Casino. The Back Stage Pass is a casino player tracking card.
The program, which is available to all Casino visitors, tracks each patron's
gaming record, and based on the level of gaming activity, members may become
eligible for discount or complimentary services, invitations to special events
and merchandise at the Resort. Every visitor who joins the Back Stage Pass
program receives a Six-Pac of coupons redeemable at the Resort. The coupons are
redeemable for certain items available at the Resort such as a complimentary
shot glass or a complimentary beer at the Center Bar or the Las Vegas Lounge.
Management believes that the Expansion, as well as the Company's continued
marketing efforts, will further attract Las Vegas visitors, local residents and
repeat customers.
Management targets local residents through direct mail advertising as well
as through hosting special events and parties specifically geared to the local
population. For example, Swing Night, which is held every Wednesday evening
during the summer months, offers patrons the opportunity to dance to swing music
at the Beach Club and gamble at an outdoor blackjack pit. The Company has
attracted approximately 1,400 people each time it has hosted Swing Night. In
addition, management believes the off-Strip location and close proximity to a
variety of restaurants and nightclubs attracts local residents to the property.
TRADEMARKS
Hard Rock Hotel-Registered Trademark- and Hard Rock
Cafe-Registered Trademark- are registered trademarks of a wholly owned
subsidiary of Rank. Upon the sale of Mr. Morton's interest in the Hard Rock
Cafes to Rank in June 1996, Mr. Morton and Rank entered into a trademark
licensing agreement pursuant to which Rank granted to Mr. Morton an exclusive,
perpetual, royalty-free license (subject to certain termination provisions
designed to protect the quality of the trademarks) to use the "Hard Rock Hotel"
and "Hard Rock Casino" trademarks in connection with hotel casinos and casinos
in the Morton Territory. Mr. Morton has sublicensed to the Company the right to
use the "Hard Rock Hotel" and "Hard Rock Casino" trademarks at the Resort's
location in Las Vegas (subject to certain termination provisions designed to
protect the quality of the trademarks) for a term lasting as long as the Company
shall have any outstanding indebtedness pursuant to the Notes or the New Credit
Facility. The Company is currently a defendant in a lawsuit relating to the use
of certain marks and logos on the internet. See "--Legal Proceedings."
LAS VEGAS MARKET
Las Vegas is one of the fastest growing and largest entertainment markets in
the United States. For fiscal year 1997, gaming revenues in Clark County reached
a new 12 month record of $6.2 billion. The number of visitors traveling to Las
Vegas has increased at a steady and significant rate, from 16.2 million visitors
in 1987 to a record 30.5 million in 1997, representing a compound annual growth
rate of 6.5%. Aggregate expenditures by Las Vegas visitors increased at a
compound annual growth rate of 11.3% from $8.6 billion in 1987 to $22.5 billion
in 1996. The number of hotel and motel rooms in Las Vegas increased by
approximately 70.1% from 61,934 in 1988 to 105,347 in 1997, surpassing 100,000
rooms in January 1997, the first market to reach that level. According to an
April 1, 1998 article entitled "Gamble on Las Vegas Hotel--Casinos May Not Pay
Off," in The Wall Street Journal while the number of rooms in Las Vegas
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rose 6.3% in 1997, the number of visitors to Las Vegas rose 2.8%. Despite this
disparity, hotel occupancy rates exceeded on average 92.1% for the years 1993 to
1997. According to the Las Vegas Convention and Visitors Authority ("LVCVA"), by
the end of the decade, it is expected that in addition to the Company's hotel,
approximately 20,000 additional hotel rooms will be opened in Las Vegas,
including the Bellagio, Venetian, Paris and Mandalay Bay, which are currently
under construction, the expansion at the MGM Grand and the new developments
planned at the current Aladdin site. Management believes that the addition of
quality themed hotel casinos and resorts will continue to increase visitor
traffic to Las Vegas and benefit the Company in particular due to its unique
niche and proximity to the Strip.
The following table sets forth certain statistical information for the Las
Vegas market for the years 1993 through 1997, as reported by the LVCVA.
LAS VEGAS MARKET STATISTICS
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Visitor Volume (in thousands)................................ 23,523 28,214 29,002 29,637 30,465
Clark County Gaming Revenues (in millions)................... $ 4,727 $ 5,431 $ 5,718 $ 5,784 $ 6,152
Hotel/Motel Rooms............................................ 86,053 88,560 90,046 99,072 105,347
Average Hotel Occupancy Rate................................. 92.6% 92.6% 91.4% 93.4% 90.3%
Airport Passenger Traffic (in thousands)..................... 22,492 26,850 28,027 30,460 30,306
Convention Attendance (in thousands)......................... 2,440 2,684 2,925 3,306 3,519
</TABLE>
COMPETITION
The Company, located less than one mile east of the Strip, competes with
other high-quality Las Vegas resorts and other Las Vegas hotel casinos,
including those located on the Strip on the basis of overall atmosphere, range
of amenities, price, location, entertainment offered, theme and size. Currently,
there are approximately 24 major gaming properties located on or near the Strip,
13 additional major gaming properties in the downtown area and additional gaming
properties located in other areas of Las Vegas. Many of the competing
properties, such as the Rio, Sunset Station, The Mirage, Treasure Island,
Caesar's Place, Luxor, New York-New York and the MGM Grand have themes and
attractions which draw a significant number of visitors and directly compete
with the Company's operations. Some of these facilities are operated by
companies that have more than one operating facility and may have greater name
recognition and financial and marketing resources than the Company and market to
the same target demographic group as the Company. Additionally, some competing
properties may incorporate a music theme (and at least one has announced its
intention to do so) that may affect the Company negatively. In addition, a
significant number of additional hotel casinos are expected to open in Las Vegas
within the next three years. There can be no assurance that the Las Vegas market
will continue to grow or that hotel casino resorts will continue to be popular,
and a decline or leveling off of the growth or popularity of such facilities
would adversely effect the Company's financial condition and results of
operations. See "Risk Factors--Risk of Overcapacity; Competition and Planned
Construction."
The Company will also face competition from competing "Hard Rock" hotels and
hotel casinos that may be established in jurisdictions other than Las Vegas. The
Company has the exclusive right to use the "Hard Rock Hotel" and "Hard Rock
Casino" trademarks only in connection with the Resort in Las Vegas. Mr. Morton
holds the exclusive rights to exploit such trademarks in connection with hotel
casinos and casinos in other parts of the Morton Territory, and Rank holds such
rights in the remainder of the world. Neither Mr. Morton nor Rank may open a
hotel/casino or casino using the "Hard Rock" name in Las Vegas. Rank has the
right to open hotels (without casinos) using the "Hard Rock" name anywhere
outside of the State of Nevada. The Company has been informed that Rank intends
to open several hotels using the "Hard Rock" name in jurisdictions both inside
and outside the Morton Territory. See "Risk Factors-- Risks Associated with
Shared Use of the 'Hard Rock' Brand Names."
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To a lesser extent, the Resort competes with hotel casinos in the Mesquite,
Laughlin, Reno and Lake Tahoe areas of Nevada, and in Atlantic City, New Jersey.
The Company also competes with state-sponsored lotteries, on- and off-track
wagering, card parlors, riverboat and Native American gaming ventures and other
forms of legalized gaming in the United States, as well as with gaming on cruise
ships and international gaming operations. In addition, certain states have
recently legalized, and others may or are likely to legalize, casino gaming in
specific areas, and passage of the Indian Gaming Regulatory Act in 1988 has led
to rapid increases in Native American gaming operations. Continued proliferation
of gaming activities could significantly and adversely affect the Company's
business and prospects. In particular, the legalization of casino gaming in or
near any metropolitan area from which the Company intends to attract customers
would have a material adverse effect on the Company's financial condition and
results of operations. See "Risk Factors--Possible Legislation."
Many of the Company's competitors in the hotel casino industry are
emphasizing or are expected to emphasize their non-gaming businesses, including
retail sales. Consequently, the Company has recently experienced (and expects to
continue to experience) increased competition in the retail sales market in Las
Vegas. The Company's retail departmental income decreased during fiscal year
1997 relative to fiscal year 1996, and there can be no assurance that retail
departmental income will not continue to decrease. See "Risk Factors--Other
Forms of Competition."
EMPLOYEES
As of February 28, 1998, the Company had approximately 875 full-time
employees and 150 on-call employees who are employed on an as-needed basis. Upon
completion of the Expansion, the Company intends to employ approximately 1,200
full-time employees and 250 on-call employees. None of the Company's employees
are members of unions. The Company considers its relations with its employees to
be good and has never experienced an organized work stoppage, strike or labor
dispute.
PROPERTIES
The Company owns approximately 16.7 acres of land in Las Vegas where the
Resort, its parking facility and the area on which the Expansion will occur are
located.
LEGAL PROCEEDINGS
On January 5, 1998, Hard Rock Cafe International (USA) Inc. (f/k/a Rank
Licensing, Inc.), a subsidiary of Rank, filed an amended complaint in the United
States District Court for the Southern District of New York against Peter A.
Morton and the Company. The Plaintiff contends that the reservation and use by
Mr. Morton and the Company of the internet domain names "hardrock.com" and
"hardrockhotel.com" (the "Domain Names"), and the use of certain marks and logos
(the "Logos") in, and in connection with merchandise offered on, internet
websites operated under the Domain Names, violate terms of certain agreements
with Mr. Morton and federal and state trademark and unfair competition law. The
Plaintiff seeks an injunction against the use of the Domain Names and Logos by
Mr. Morton and the Company, an order requiring Mr. Morton and the Company to
assign the Domain Names to the Plaintiff, and over $100 million in damages.
During the course of litigation, Mr. Morton and the Company transferred the
domain name "hardrock.com" to the Plaintiff. Trial of this matter has concluded,
and the Company is awaiting a verdict. Management believes that the outcome of
such litigation will not have a material adverse effect on the Company, although
there can be no assurance of the outcome of the lawsuit. The Company will
expense, in the third quarter of fiscal year 1998, legal costs associated with
the lawsuit which aggregate approximately $1.3 million as of August 20, 1998.
Revenues from sales of merchandise over the internet for fiscal year 1997 were
less than $150,000.
Additionally, the Company is a defendant in various lawsuits relating to
routine matters incidental to its business. Management does not believe that the
outcome of any such litigation, in the aggregate, will have a material adverse
effect on the Company.
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<PAGE>
REGULATION AND LICENSING
The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively the "Nevada Act"); and (ii) various local regulations.
The Company's gaming operations are subject to the licensing and regulatory
control of the Nevada Gaming Authorities.
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.
The Company is required to be licensed by the Nevada Gaming Authorities. The
gaming license requires the periodic payment of fees and taxes and is not
transferable. No person may become a stockholder of, or receive any percentage
of profits from, the Company without first obtaining licenses and approvals from
the Nevada Gaming Authorities. The Company has obtained from the Nevada Gaming
Authorities the various approvals, permits and licenses required in order to
engage in its current gaming activities in Nevada. Additional approvals,
registrations and regulation waivers will be required for the Exchange Offer
contemplated herein.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company in order to
determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Company must file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation in which the burden
of proving one's suitability is always on the applicant. The applicant for
licensing or a finding of suitability must pay 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 for license, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Company would have to sever all relationships
with such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company is required to submit detailed financial and operating reports
to the Nevada Commission. Substantially all material loans, leases, sales of
securities and similar financing transactions by the Company must be reported
to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, the Company and the person involved could be subject to substantial
fines for each separate violation of the Nevada Act at the discretion of the
Nevada Commission. Further, a supervisor could be appointed by the Nevada
Commission to operate the Company's gaming properties
44
<PAGE>
and, under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the Company's gaming
properties) 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) materially adversely affect the
Company's gaming operations.
Any beneficial owner of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial owner of the Company's equity
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation. The Company
will remain privately held until such time as the Exchange Offer is effective
and until the Company's receipt of all regulatory approvals.
The Nevada Act requires that any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities must report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of the Company's voting securities apply to the Nevada
Commission for a finding of suitability within thirty 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 the Company's voting
securities may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investor shall 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 the Company,
any change in the Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding the 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: (i) voting on all matters voted on by stockholders; (ii) 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 its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty 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 if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company, the Company
(i) pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, (iii) pays remuneration
in any form to that person for services rendered or otherwise, or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally, pursuant to the
Clark County Code the CCLGLB has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
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<PAGE>
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting rights by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. Due to the
fact that the Company is a corporate gaming licensee, the Company's stock
certificates carry a restrictive legend indicating the stock of the company is
subject to the Nevada Act. Furthermore, any negative covenant that restricts the
transfer of the stock of a corporate licensee may require the prior approval of
the Nevada Gaming Commission.
The 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. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful. The Company has applied for approval
of its debt offering as well as a waiver of certain regulations of the Nevada
Gaming Commission that prohibit a public offering by a corporation holding a
Nevada gaming license. However, there can be no assurances that the Nevada
Gaming Commission will grant such approval. Furthermore, any such approval if
given does not constitute a finding, recommendation or approval by the Nevada
Gaming Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the debt securities offered. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or
asset acquisition, management or consulting agreements, or any act or conduct by
a person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having 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.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licenses, and Registered Corporations that are
affiliated with these operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by
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management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by the Company's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; (iii) the number of table games operated; or (iv) a
percentage of the room rate charged for each occupied room. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if the Licensee 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 that are harmful to the State of Nevada or its ability to collect
gaming taxes and fees, or employs a person in the foreign operation who has been
denied a license or finding of suitability in Nevada on the ground of personal
unsuitability.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth the names, ages and position of each person who is
a director, executive officer or key employee of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --------- --------------------------------------------------------------------
<S> <C> <C>
Peter A. Morton........... 50 Chairman of the Board, Chief Executive Officer, President and
Secretary
Gary R. Selesner.......... 44 Senior Vice President of Operations and General Manager
Bruce R. Dall............. 35 Chief Financial Officer and Treasurer
William R. Stephens....... 49 Vice President of Casino Operations
Christine R. Belcastro.... 49 Executive Director of Hotel Operations
Adam P. Titus............. 35 Executive Director of Construction
Gilbert B. Friesen........ 60 Director
Stephen A. Marks.......... 51 Director
</TABLE>
PETER A. MORTON. Mr. Morton has been the Chairman of the Board, Chief
Executive Officer and President of the Company since its formation and Secretary
of the Company since December 1997. Prior to June 1996, Mr. Morton was the
President and Chief Executive Officer of Hard Rock America. Mr. Morton, a third
generation restaurateur, co-founded the London Hard Rock Cafe in 1971, at the
age of 23. He also opened Mortons Restaurant in Los Angeles, California in 1979
and has developed Hard Rock Cafes in Aspen, Chicago, Hollywood, Honolulu,
Houston, Las Vegas, Los Angeles, Maui, New Orleans, Newport Beach, Phoenix, San
Diego, San Francisco and Sydney. In addition, Mr. Morton has developed the
following restaurants: Great American Disaster, London, England (1970); and
Mortons Bar and Grill, London, England (1975). Mr. Morton sits on the Board of
Trustees of the Natural Resources Defense Council.
GARY R. SELESNER. Mr. Selesner has been Senior Vice President of Operations
of the Company and General Manager of the Resort since October 1997. From March
1996 to October 1997 he was employed by Harveys as General Manager of the
Resort. From 1995 to 1996, he served as a Senior Vice President for Harveys
Casino Resorts. From 1992 to 1995, Mr. Selesner was Vice President--Sales and
Marketing of President Casinos, Inc., where he was responsible for all casino
marketing, player clubs, advertising, promotions, special events, marketing
analysis, public relations and communications. From 1990 to 1991, Mr. Selesner
served as President and Chief Operating Officer of Trump Plaza Hotel and Casino.
BRUCE R. DALL. Mr. Dall has been Chief Financial Officer and Treasurer at
the Company since December 1997. From October 1997 to December 1997, Mr. Dall
was employed by the Company as Director of Finance. From April 1996 to October
1997, Mr. Dall was employed by Harveys as the Controller of the Resort. From
1995 to 1996, he served as Controller of the Sheraton Desert Inn where he was
responsible for accounting, financial planning, cage, credit/collections,
purchasing and warehousing functions. From 1994 to 1995, Mr. Dall was the
Director of Financial Planning for the Desert Inn. From 1993 to 1994, he
established and ran Sheraton Gaming's Internal Audit Department. From 1988 to
1993, he served as Director of the Internal Audit Department at Caesars Palace.
WILLIAM R. STEPHENS. Mr. Stephens has been Vice President of Casino
Operations of the Company since December 1997. Mr. Stephens served as Director
of Casino Operations of the Company from October 1997 to December 1997. Mr.
Stephens was employed by Harveys as a Director of Casino Operations from 1993 to
October 1997. Mr. Stephens is responsible for directing all aspects of casino
operations for the Resort in accordance with corporate policy and Nevada Gaming
Regulations. He is also responsible for achieving revenue and income objectives,
market share and customer service objectives,
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casino marketing and sports book player development. From 1989 to 1993, he was a
Casino Shift Manager at both the Sands Hotel and Main Street Station in Las
Vegas.
CHRISTINE R. BELCASTRO. Ms. Belcastro has been Executive Director of Hotel
Operations of the Company since October 1997. From April 1996 to October 1997
Ms. Belcastro was employed by Harveys as Executive Director of Hotel Operations
of the Resort. From 1994 to 1996 she was employed by Harveys as Director of
Hotel Operations for the Resort. From 1992 to 1994, she was Director of Hotel
Operations at the Palace Station in Las Vegas, where she was responsible for
budgeting, forecasting and day-to-day operations of the Hotel Division,
including sales, PBX, room reservations, front desk, bell desk, valet parking,
internal maintenance, pool, transportation, housekeeping and lounge
entertainment. From 1991 to 1992, Ms. Belcastro served as Director of Hotel
Operations at the Sands Hotel.
ADAM P. TITUS. Mr. Titus has been the Executive Director of Construction of
the Company since October 1997. From August 1996 to October 1997 Mr. Titus was
employed by Harveys. From 1995 to August 1996 Mr. Titus was the Construction
Administrator for Caesars World, where he was responsible for completing
construction and installation of gaming equipment and services. From 1987 to
1995 Mr. Titus was the Chief Contracting Officer and Director of Construction
for Lady Luck where he was responsible for the construction of various casino
projects.
GILBERT B. FRIESEN. Mr. Friesen has been a Director of the Company since
December 1997. Currently, Mr. Friesen is a private investor. From 1994 to 1997,
he was Chairman of the Board of Classic Sports Network. Prior to 1994 he was a
private investor.
STEPHEN A. MARKS. Mr. Marks has been a Director of the Company since
December 1997. He is the founder of French Connection Group plc, an
international fashion company listed on the London Stock Exchange, and has been
its Chief Executive Officer and a Director since its formation in 1969.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation for serving on the Board of
Directors. All directors are reimbursed for expenses incurred in connection with
attendance at board or committee meetings.
49
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and the four other most highly compensated executive
officers (the "Named Executive Officers") for fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------- --------------------
NAME AND OTHER ANNUAL RESTRICTED STOCK
PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION AWARD(S)
- ----------------------------------------- --------- ------------ ----------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Peter A. Morton.......................... 1997 $ -- $ -- $ 1,556,435(3) $ --
Chairman of the Board, Chief Executive
Officer, President and Secretary
Gary R. Selesner......................... 1997 211,923 93,000 -- 951,250(4)
Senior Vice President of Operations and
General Manager
Bruce R. Dall............................ 1997 77,501 11,450 -- --
Chief Financial Officer and Treasurer
William R. Stephens...................... 1997 110,365 36,650 -- --
Vice President of Casino Operations
Christine R. Belcastro................... 1997 93,750 25,460 -- --
Executive Director of Hotel Operations
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION (2)
- ----------------------------------------- -------------------
<S> <C>
Peter A. Morton.......................... $ --
Chairman of the Board, Chief Executive
Officer, President and Secretary
Gary R. Selesner......................... 4,144
Senior Vice President of Operations and
General Manager
Bruce R. Dall............................ 1,358
Chief Financial Officer and Treasurer
William R. Stephens...................... 4,640
Vice President of Casino Operations
Christine R. Belcastro................... 4,369
Executive Director of Hotel Operations
</TABLE>
- ---------------
(1) Pursuant to the Management Agreement, Harveys provided for the procurement
of certain management services and in return the Company paid Harveys a
management fee. The Named Executive Officers, excluding Mr. Morton, were
employees of a subsidiary of Harveys through October 24, 1997 during which
time the Company reimbursed Harveys for the payment of salaries, bonuses and
benefits. On October 24, 1997, the Company and Harveys terminated the
Management Agreement. See "Certain Relationships and Related Party
Transactions".
(2) All Other Compensation consists of contributions made by the Company to the
Harveys 401(k) Plan on behalf of Mr. Selesner in the amount of $4,144, Mr.
Dall in the amount of $1,358, Ms. Belcastro in the amount of $3,917 and Mr.
Stephens in the amount of $4,083. In addition, All Other Compensation
consists of insurance premiums paid by the Company with respect to term life
insurance in the amount of $557 for Mr. Stephens and $452 for Ms. Belcastro.
(3) Mr. Morton received his compensation in the form of a supervisory fee. See
"Employment Agreements." A portion of the supervisory fee was paid directly
to the 510 Development Corporation, a corporation owned 100% by Mr. Morton.
(4) The Company estimates the value of the aggregate restricted stock holdings
at the end of the last completed fiscal year was $951,250. 768 shares of
non-voting common stock of the Company have been granted to Mr. Selesner,
20% of which will vest upon receipt of the requisite approvals of the Nevada
Gaming Authorities, provided that such 20% will be subject to forfeiture
upon Mr. Selesner's resignation or termination for Cause (as defined in the
Selesner Employment Agreement) prior to October 24, 1998. If Mr. Selesner is
not terminated by reason of death, disability, or Cause and does not resign,
an additional 20% of the shares will vest on each of October 24, 1998, 1999,
2000 and 2001, subject to receipt of the requisite approvals of the Nevada
Gaming Authorities. Each such 20% is subject to forfeiture upon Mr.
Selesner's resignation or termination for Cause within twelve months of the
date such 20% portion has vested. On October 24, 2001, 100% of such shares
will be vested. The shares are subject to certain transfer restrictions, put
rights and other provisions. See "--Employment Agreements."
EMPLOYMENT AGREEMENTS
Mr. Morton and the Company have entered into an amended and restated
supervisory agreement, which expires on December 31, 2022 (the "Supervisory
Agreement"). Mr. Morton has the option to renew the agreement for two successive
fifteen year terms. Pursuant to the terms of the agreement, Mr. Morton is to
provide consulting and supervisory services to the Company in exchange for 2.0%
of the Company's annual gross revenues (as defined therein), which excludes the
value of any complimentary goods or services. Such payments will be subordinated
to the Notes and the New Credit Facility. The Company will reimburse Mr. Morton
for all costs and expenses incurred by him in connection with services provided
to the Company. In the event either the Company or Mr. Morton is in Default (as
defined in the Supervisory
50
<PAGE>
Agreement), the non-defaulting party may terminate the agreement after the other
party has received the opportunity to cure such default.
Mr. Selesner has entered into an employment agreement, dated October 8, 1997
(the "Selesner Employment Agreement"), which has a term of four years. Mr.
Selesner will serve as Senior Vice President of Operations and General Manager
of the Company. The Company will pay Mr. Selesner a base salary of $250,000 per
year and an annual bonus determined by the Company's Board of Directors, which
will not in any event be less than $75,000 per year. In addition, Mr. Selesner
will receive use of an automobile. In the event of a Change in Control (as
defined in the Selesner Employment Agreement) all equity granted to Mr. Selesner
will vest and become exercisable. If Mr. Selesner is terminated without Cause
(as defined in the Selesner Employment Agreement), Mr. Selesner will (i) receive
his salary and bonus multiplied by the number of years, not less than one,
remaining in the employment term, (ii) vest in any non-vested equity granted to
him, (iii) receive health and medical benefits through the remainder of the
employment term (provided he does not breach the non-solicitation provision of
the Selesner Employment Agreement) and (iv) receive the amount of any
forfeitures that result from any non-vesting under any of the Company's employee
benefit plans.
Pursuant to an amended and restated letter agreement (the "Letter
Agreement") among the Company, Lily Pond Investments, Inc. ("Lily Pond") and Mr.
Selesner, the Company will issue to Mr. Selesner 768 shares of non-voting common
stock of the Company (the "Shares"), 20.0% of which vested on October 24, 1997
(subject to receipt of the requisite approvals of the Nevada Gaming
Authorities), provided that such 20% will be subject to forfeiture upon Mr.
Selesner's resignation or termination for Cause (as defined in the Selesner
Employment Agreement) prior to October 24, 1998. If Mr. Selesner is not
terminated by reason of death, disability, or Cause and does not resign, an
additional 20.0% of the Shares will vest on each of October 24, 1998, 1999, 2000
and 2001 (subject to receipt of the requisite approvals of the Nevada Gaming
Authorities). Each such 20.0% is subject to forfeiture upon Mr. Selesner's
resignation or termination for Cause within twelve months of the date such 20.0%
portion has vested. On October 24, 2001, 100% of such shares shall be vested. In
the event of a Change in Control (as defined in the Selesner Employment
Agreement) the remainder of the Shares not vested will immediately vest. Any
transfer of shares to Mr. Selesner may not be completed without the prior
approval of the Nevada Gaming Authorities. The Shares are subject to certain
transfer restrictions, put rights and other provisions contained in the Letter
Agreement. Among other things, if Mr. Selesner's employment is terminated for
any reason, other than voluntary resignation during the term of the Selesner
Employment Agreement or for Cause, upon written demand by Mr. Selesner, the
Company must purchase all of the vested shares for a price equal to $1,953.13
per share (or if an initial public offering has occurred, the initial public
offering price) (the "Purchase Price"). In addition, for a period of 30 days
from the second anniversary of the Commencement Date (as defined in the Selesner
Employment Agreement), Mr. Selesner may require the Company to purchase half of
the shares then vested for the Purchase Price. The Company has agreed to loan to
Mr. Selesner an amount equal to his Federal income tax liability due to the
vesting of the Shares.
Mr. Stephens has entered into an employment agreement, dated December 1,
1997, which has a term of two years and may be extended by mutual agreement for
successive one year terms on the same or mutually agreeable terms. Mr. Stephens
will serve as Vice President of Gaming Operations of the Company. The Company
will pay to Mr. Stephens a base salary of $125,000 per year and an annual bonus
to be determined by the Company's Board of Directors. If Mr. Stephens is
terminated by the Company without Cause (as defined in the agreement), the
Company will pay Mr. Stephens the lesser of $62,500 or the remainder of the base
salary which would otherwise be due under the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1997. Messrs.
Morton and Selesner each participated in the determination of officers'
compensation during 1997.
51
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY
Chapter 78 of the Nevada Revised Statutes (the "NRS"), Article SIXTH of the
Company's Articles of Incorporation and Article VII of the Company's Bylaws
contain provisions for indemnification of directors and officers of the Company.
The Bylaws require the Company to indemnify such persons to the fullest extent
permitted by Nevada law. Each person will be indemnified in any proceeding if he
acted in good faith and in a manner which he reasonably believed to be in, or
not opposed to, the best interests of the Company, and with respect to any
criminal proceeding, had no reasonable cause to believe, was unlawful.
Indemnification would cover expenses reasonably incurred, including attorneys'
fees, judgments, fines and amounts paid in settlement. The Company's Bylaws
provide that the Company's Board of Directors may cause the Company to purchase
and maintain insurance on behalf of any present or past director or officer
insuring against any liability asserted against such person incurred in the
capacity of director or officer or arising out of such status, regardless of
whether the Company would have the power to indemnify such person.
LIMITATION OF LIABILITY AND INDEMNIFICATION
In addition, the Company has, with the approval of the stockholders, entered
into an Indemnification Agreement with each of its directors. These agreements
will require the Company to indemnify any director, to the fullest extent
permitted by law, who is or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, or any inquiry or investigation
(including discovery), whether conducted by the Company or any other party, that
such director in good faith believes might lead to the institution of any
action, suit or proceeding, whether civil, criminal, administrative,
investigative or other by reason of (or arising in part out of) any event or
occurrence related to the fact that such director is or was a director, officer,
employee, agent or fiduciary of the Company, or is or was serving at the request
of the Company as a director, officer, employee, trustee, agent or fiduciary of
another corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, or by reason of anything done or not done by such director in
any such capacity.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company has included in its Articles of Incorporation a provision that
limits personal liability for breach of the fiduciary duty of its directors or
officers, except for liability for acts or omissions involving intentional
misconduct, fraud or a knowing violation of law and liability based on payments
of improper dividends.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with regard to the
beneficial ownership of the Company's Common Stock as of the date of this
Prospectus by (i) each person who, to the knowledge of management, owned
beneficially more than 5% of the outstanding shares of Common Stock or (ii) by
each director and Named Executive Officer and (iii) all directors and executive
officers as a group:
<TABLE>
<CAPTION>
COMMON STOCK OWNED(1)
----------------------------------------------
CLASS A CLASS B
(VOTING) (NON-VOTING)
---------------------- ----------------------
NAME AND ADDRESS OF OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Lily Pond Investments, Inc.(2)........................................... 12,000 100.0% 59,487 92.9%
Peter A. Morton(2)....................................................... 12,000 100.0% 59,487 92.9%
Gary R. Selesner(3)...................................................... -- -- 153 *
Bruce R. Dall............................................................ -- -- -- --
Christine R. Belcastro................................................... -- -- -- --
William R. Stephens...................................................... -- -- -- --
Gilbert B. Friesen....................................................... -- -- 250 *
Stephen A. Marks......................................................... -- -- 1,000 1.6%
All directors and officers as a group (5 persons)........................ 12,000 100.0% 60,890 95.1%
</TABLE>
- ------------
* Less than one percent
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person
has the right to acquire within 60 days after such date. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above on a given date, any security which such person or
persons has the right to acquire within 60 days after such date is deemed to
be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage of ownership of any other person. The address for
each of the stockholders in this table is 4455 Paradise Road, Las Vegas,
Nevada 89109.
(2) As the majority stockholder of Lily Pond, Mr. Morton controls the voting and
disposition of all the voting securities of the Company.
(3) Upon receipt of the requisite approvals of the Nevada Gaming Authorities,
Gary R. Selesner will be issued 153 shares of the Company's non-voting
Common Stock. See "Management--Employment Agreements."
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS RELATED TO THE "HARD ROCK" BRAND NAME
Prior to the sale to Rank of Mr. Morton's interest in the Hard Rock Cafe
businesses and ancillary rights in June 1996, Hard Rock Cafe Licensing
Corporation, which was 40.0% owned by Mr. Morton, owned the right to use the
"Hard Rock" name in connection with hotel casinos and casinos in the Morton
Territory. Hard Rock Cafe Licensing Corporation licensed this right to Mr.
Morton, who in turn sublicensed the right to use the "Hard Rock Hotel" trademark
in Las Vegas to Lily Pond and Lily Pond assigned such right to the Company.
Upon the sale of his interest in the Hard Rock Cafes to Rank in June 1996,
Mr. Morton and Rank entered into a trademark licensing agreement whereby Mr.
Morton received an exclusive, perpetual, royalty-free license (subject to
certain termination provisions designed to protect the quality of the
trademarks) to use the "Hard Rock Hotel" and "Hard Rock Casino" trademarks in
connection with hotel casinos and casinos in the Morton Territory. Mr. Morton in
turn entered into a sublicensing agreement with the Company in which the Company
obtained the exclusive right (subject to certain termination provisions designed
to protect the quality of the trademarks) to use the "Hard Rock Hotel" and "Hard
Rock Casino" trademarks in connection with the Resort for a term lasting as long
as the Company shall have any outstanding indebtedness pursuant to the Notes or
the New Credit Facility.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Peter A. Morton and the Company have entered into the Supervisory Agreement,
which expires on December 31, 2022. Subject to certain conditions, Mr. Morton
has the option to renew the agreement for two successive fifteen year terms.
Pursuant to the terms of the agreement, Mr. Morton is to provide consulting and
supervisory services to the Company in exchange for 2.0% of the Company's annual
gross revenues (as defined therein), which excludes the value of any
complimentary goods or services. The Company will reimburse Mr. Morton for all
costs and expenses incurred by him in connection with services he provides to
the Company. In the event either the Company or Mr. Morton is in Default (as
defined in the agreement), the non-defaulting party may terminate the agreement
after the other party has received the opportunity to cure such default. Total
supervisory fee expenses for fiscal years 1995, 1996 and 1997 were approximately
$1,123,000, $1,537,000, and $1,556,000, respectively.
Entities controlled by Peter A. Morton have provided, and will continue to
provide, additional support services for the development, opening and ongoing
improvement and operation of the Resort. These entities have, and will continue
to be, reimbursed for the expenses relating to the provision of these services
(including, without limitation, employee salary and benefits and allocated
overhead). Expenses related to these services aggregated approximately $923,857,
$224,858 and $281,000 for fiscal year 1995, fiscal year 1996 and fiscal year
1997, respectively.
Jeffrey Leeds, formerly Secretary/Treasurer and Director of the Company, is
currently President and co-founder of Leeds Group Inc. (the "Leeds Group"),
which has provided investment banking services to the Company and certain of its
affiliates, including providing advice on the Buyout and arranging the financing
of the Buyout. The Company paid the Leeds Group $0, $40,625, and $627,812 for
such investment banking services for fiscal years 1995, 1996 and 1997,
respectively. Jeffrey Leeds has periodically performed legal work for the
Company including the negotiation of employment agreements with key employees.
HARVEYS BUYOUT
In July 1997, the Company and Lily Pond entered into an agreement to effect
the Buyout, pursuant to which the Company redeemed Harveys' 40% interest in the
Company and terminated the Management
54
<PAGE>
Agreement, which termination became effective October 24, 1997. Under the terms
of the Buyout, the Company paid Harveys $45.0 million in cash.
Pursuant to the Management Agreement, Harveys provided hotel and casino
management expertise and oversight and was responsible for the Resort's
management information systems, employee benefit programs and insurance
policies. In return, the Company paid Harveys a base management fee equal to
4.0% of annual gross revenues, as defined, which excludes the value of any
complimentary goods or services for each fiscal year. Harveys was also entitled
to an incentive fee of up to 2.0% of annual net revenues, upon exceeding certain
return on investment targets in the Management Agreement. The Company paid
management fees to Harveys of approximately $2.2 million, $3.1 million and $2.8
million for fiscal year 1995, fiscal year 1996 and fiscal year 1997,
respectively, and incentive fees totaling approximately $84,000, $239,000 and
$65,000 for fiscal year 1995, fiscal year 1996 and fiscal year 1997,
respectively.
For certain additional disclosure regarding affiliate transactions see
footnote 5 to the Company's Financial Statements.
COMPLETION GUARANTY
Pursuant to the Completion Guaranty, Peter A. Morton has guaranteed, subject
to certain conditions and limitations, payment of construction and development
costs in excess of $87.0 million, up to a maximum of $10.0 million. Mr. Morton's
obligations under the Completion Guaranty will be deferred during the pendency
of any FORCE MAJEURE event or any other event that makes completion of the
Expansion physically impossible or unlawful. The Completion Guaranty does not
provide for the incurrence by Mr. Morton, directly or indirectly, of any
obligation, contingent or otherwise, for the payment of the principal, premium
and interest on the Notes or any other indebtedness under the financings
described herein. The Company will not implement a discretionary change that
would cause budgeted construction and development costs to exceed $87.0 million,
unless Mr. Morton increases the maximum amount available under the Completion
Guaranty, in the amount of such budgeted excess. If Mr. Morton provides funds
under the Completion Guaranty, the amount of such funds will be treated as
preferred stock of the Company purchased by Mr. Morton, or a junior subordinated
loan from Mr. Morton to the Company. If such funds are treated as preferred
stock, such preferred stock will have a redemption date not less than 91 days
following the earlier of the maturity or repayment of the Notes and accrue
dividends at a rate not in excess of the annual rate of interest payable on the
Notes. If such funds are treated as junior subordinated indebtedness, such
indebtedness will have a stated maturity not less than 91 days following the
earlier of the maturity or repayment of the Notes and accrue interest at a rate
per annum not in excess of the rate of interest payable on the Notes. Dividends
or interest, as the case may be, will be payable in cash only to the extent the
Company is able to make Restricted Payments (as defined) under the "Restricted
Payments Covenant" in the Indenture. See "Risk Factors--Completion Guaranty" and
"--Reliance on Key Personnel, Control by Principal Shareholder."
In addition, pursuant to the Indenture, the Trustee, on behalf of the
holders of the Notes, may not compel payment or exercise any other remedies
under the Completion Guaranty if a payment default or non-payment default exists
with respect to certain specified Senior Indebtedness until such defaults have
been cured or waived by the holders of such specified Senior Indebtedness or, in
the case of a non-payment default, 179 days after the date on which the
applicable Payment Blockage Notice (as defined) has been received.
Mr. Morton has also entered into a make-well agreement under the New Credit
Facility (the "Make-Well Agreement") pursuant to which he will contribute
certain amounts to the Company to ensure the Company meets certain covenants
under the New Credit Facility beginning in the third fiscal quarter of 1998,
including certain maximum leverage ratio tests and minimum fixed charge coverage
ratio tests.
55
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The following summaries of certain provisions of the New Credit Facility,
including the definitions of certain terms therein, do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
all of the provisions in the New Credit Facility.
Concurrent with the closing of the Offering, the Company replaced the Prior
Credit Facility with the New Credit Facility through a group of banks for which
Bank of America National Trust and Savings Association ("Bank of America NT&SA")
acts as administrative agent (the "Administrative Agent") and Bear, Stearns &
Co. Inc. ("Bear Stearns") serves as co-agent. The New Credit Facility provided
the Company with $67.0 million of senior secured reducing revolving borrowings.
Management anticipates using the New Credit Facility to fund the Expansion and
for general corporate purposes.
The loans made pursuant to the New Credit Facility bear interest at one of
two rates to be selected by the Company: (i) the higher of (a) the Federal Funds
Rate as published by the Federal Reserve Bank of New York plus 0.5% and (b) the
Reference Rate (as defined) announced by the Administrative Agent from time to
time (the "Base Rate") or (ii) the London Interbank Offered Rate ("LIBOR")
adjusted for reserves, plus, in each case, the applicable margin (as described
below). Interest on loans that bear interest based upon the Base Rate will be
payable at the end of each calendar month and interest on loans that bear
interest based upon LIBOR will be payable at the end of the interest period
applicable thereto or every three months thereafter, whichever is earlier. The
applicable margin varies based on the ratio, on the last day of each fiscal
quarter of, (a) a measure of the average aggregate principal indebtedness of the
Company for the proceeding quarter and (b) the annualized EBITDA (as defined)
for the proceeding 12 month period (the "Total Leverage Ratio") and whether the
Company elects the Base Rate or LIBOR.
The Company has agreed to pay commitment fees equal to between 0.375% and
0.500% per annum on the daily average unutilized commitment, certain fees with
respect to the issuance of letters of credit, a construction service fee for
monitoring services in connection with the Expansion and customary
administration fees.
The amount available under the New Credit Facility will begin reducing on
February 28, 2000 to: $58.3 million as of the last day of fiscal year 2000,
$45.2 million as of the last day of fiscal year 2001, $32.2 million as of the
last day of fiscal year 2002, $19.2 million as of the last day of fiscal year
2003 and will expire on March 23, 2004.
The New Credit Facility permits the Company to make voluntary prepayments
without premium or penalty in most circumstances. The Company will also be
required to make prepayments on the New Credit Facility (a) on April 1, of each
year beginning on April 1, 2000, in an amount equal to 80% of the Company's
EBITDA minus cash paid with respect to (i) principal and interest payments on
indebtedness for borrowed money, (ii) capital expenditures and (iii) income
taxes, in each case for the preceding fiscal year, and (b) 100% of the net cash
proceeds to the Company of issuances of equity or permitted indebtedness. These
requirements will terminate should the Company's Total Leverage Ratio fall below
4.25:1.00 for a period of four consecutive fiscal quarters.
The New Credit Facility contains covenants customarily found in credit
agreements including, among other things, financial covenants, limitations on
the Company from disposing of capital stock, entering into mergers and certain
acquisitions, incurring liens or indebtedness, making certain investments,
issuing dividends on stock, selling assets, entering into transactions with
affiliates under certain circumstances, changing accounting practices and
amending material agreements. Further, the New Credit Facility requires the
Company to provide detailed financial and narrative reports regarding the
Company's existing and projected financial status.
The New Credit Facility also contains customary events of defaults including
defaults in the payment when due of the principal of or interest on the loans,
breach of certain covenants, representations or warranties, ERISA violations,
insolvency, bankruptcy, failure of any of the security documents or collateral
56
<PAGE>
securing the New Credit Facility, failure of any guaranty, including the
Completion Guaranty, and control by Peter A. Morton of less than 51% of the
voting capital stock of the Company.
Mr. Morton also entered into a Make-Well Agreement (as defined in the New
Credit Facility) pursuant to which he will contribute certain amounts to the
Company to ensure the Company meets certain covenants under the New Credit
Facility beginning in the third fiscal quarter of 1998, including certain
maximum leverage ratio tests and minimum fixed charge coverage ratio tests.
57
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The New Notes will be issued pursuant to the Indenture, dated as of March
23, 1998 (the "Indenture"), between the Company and U.S. Bank National
Association, as trustee (the "Trustee"), a copy of which has been filed as an
exhibit to the Registration Statement of which this prospectus constitutes a
part. The New Notes are identical in all material respects to the terms of the
Old Notes except for certain transfer restrictions and registration rights
relating to the Old Notes. See "--Registration Rights, Liquidated Damages." The
Trustee will authenticate and deliver New Notes for original issue only in
exchange for a like principal amount of Old Notes. Any Old Notes that remain
outstanding after the consummation of the Exchange Offer, together with the New
Notes will be treated as a single class of Securities under the Indenture. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and Holders of
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. The
definitions of certain terms used in the following summary are set forth under
"--Certain Definitions."
The indebtedness evidenced by the Notes is and will continue to be general
unsecured obligations of the Company and will be subordinated in right of
payment to all existing and future Senior Indebtedness of the Company and senior
in right of payment to all existing and future Subordinated Indebtedness of the
Company. As of April 30, 1998, the Company's outstanding Senior Indebtedness was
approximately $0.3 million. In addition, on April 30, 1998, the Company had
$67.0 million of undrawn availability under the New Credit Facility. The Company
anticipates incurring additional indebtedness under the New Credit Facility to
fund a portion of the Expansion. The Indenture permits the Company to incur
additional indebtedness in the future, subject to certain limitations.
In addition, the Notes are and will continue to be effectively subordinated
to all indebtedness and other liabilities and commitments (including trade
payables and lease obligations) of the Company's Subsidiaries. Any right of the
Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the Holders of the
Notes to participate in those assets) will be effectively subordinated to the
claims of that Subsidiary's creditors, except to the extent that the Company is
itself recognized as a creditor of such Subsidiary, in which case the claims of
the Company would still be subordinated to any security interests in the assets
of such Subsidiary and any indebtedness of such Subsidiary senior to that held
by the Company. As of the date hereof, the Company has no Subsidiaries. Under
certain circumstances, the Company will be able to designate future Subsidiaries
as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Company issued $120.0 million in aggregate principal amount of Notes in
the Offering. The Notes will mature on April 1, 2005. Interest on the Notes
accrues at the rate of 9 1/4% per annum and is payable semi- annually in arrears
on April 1 and October 1, commencing on October 1, 1998, to Holders of record on
the immediately preceding March 15 and September 15, respectively. Interest on
the Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of original issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Registered Holders of New Notes on the relevant record date for the
first interest payment date following the consummation of the Exchange Offer
will receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid, from March 23, 1998. Old Notes
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accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old notes
otherwise payable on any interest payment date the record date for which occurs
on or after the consummation of the Exchange Offer. Principal, premium, if any,
and interest, if any, on the Notes will be payable at the office or agency of
the Company maintained for such purpose within the City and State of New York
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders of the Notes at their respective addresses set forth in
the register of Holders of Notes. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
SUBORDINATION
The payment of principal of, and premium and interest, if any, on, the
Notes, and any other amounts payable by the Company with respect to the Notes,
is subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness of the Company, whether outstanding
on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Indebtedness of the Company will
be entitled to receive payment in full of all Obligations due in respect of such
Senior Indebtedness (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Indebtedness) before
the holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Indebtedness of such
Issuer are paid in full in cash, any distribution to which the holders of Notes
would be entitled shall be made to the holders of such Senior Indebtedness
(except that holders of Notes may receive Capital Stock or any debt securities
that are subordinated at least to the same extent as the Notes to Senior
Indebtedness and any securities issued in exchange for Senior Indebtedness and
payment made from the trust described under "--Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the Notes
and may not offer to repurchase Notes (except in Capital Stock or subordinated
debt securities referred to above or from the trust described under "--Legal
Defeasance and Covenant Defeasance") and the Trustee, on behalf of the Holders
may not compel payment or exercise any other remedies with respect to any
payment under the Completion Guaranty, if (i) a default in the payment of the
principal of or interest on Designated Senior Indebtedness or any other amount
due in respect of Designated Senior Indebtedness occurs and has not been cured
or waived in writing (a "payment default") or (ii) any other default occurs and
is continuing with respect to Designated Senior Indebtedness that permits
holders of the Designated Senior Indebtedness as to which such default relates
to accelerate its maturity (a "non-payment default") and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or the
holders of any Designated Senior Indebtedness. The Company may and shall resume
payments on the Notes and the Trustee, on behalf of the Holders may exercise
remedies with respect to any payment under the Completion Guaranty, (a) in the
case of a payment default, upon the date on which such default is cured or
waived by the holders of Designated Senior Indebtedness in writing and (b) in
case of a nonpayment default, the earlier of the date on which such nonpayment
default is cured or waived by the holders of Designated Senior Indebtedness in
writing or 179 days after the date on which the applicable Payment Blockage
Notice is received, unless the maturity of any Designated Senior Indebtedness
has been accelerated. No new period of payment blockage or blockage of remedies
under the Completion Guaranty may be commenced unless and until 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee by any holders of
Designated Senior Indebtedness, and which
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is known to the holders of such Designated Senior Indebtedness, shall be, or be
made, the basis for a subsequent Payment Blockage Notice (unless such nonpayment
default shall have been cured or waived for a period of not less than 181 days).
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provision referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of the Notes to accelerate the
maturity thereof.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness of the receipt of an acceleration notice following an Event
of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. At April 30,
1998, the Company had approximately $0.3 million of Senior Indebtedness
outstanding and the Company had additional availability of $67.0 million for
borrowings under the New Credit Facility, all of which was Senior Indebtedness
of the Company. In addition, the Notes are structurally subordinated to the
liabilities of Subsidiaries of the Company. The Company anticipates incurring
additional indebtedness under the New Credit Facility to fund a portion of the
Expansion. Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company and its Subsidiaries may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Senior Indebtedness. See "--Certain
Covenants-- Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to April 1, 2002.
Thereafter, the Notes will be subject to redemption at any time at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. 104.625%
2003.............................................................................. 102.313%
2004 and thereafter............................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 1, 2001, the
Company may (but shall not have the obligation to) redeem, on one or more
occasions, up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued at a redemption price equal to 109.25% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the redemption date, with the net cash proceeds of one or more Equity
Offerings; PROVIDED that at least 65% of the aggregate principal amount of Notes
originally issued remain outstanding immediately after the occurrence of such
redemption; and PROVIDED FURTHER, that such redemption shall occur within 60
days of the date of the closing of such Equity Offering.
REGULATORY REDEMPTION
If any Gaming Authority requires that a Holder or beneficial owner of Notes
must be licensed, qualified or found suitable under any applicable gaming law
and such Holder or beneficial owner fails to apply for a license, qualification
or a finding of suitability within 30 days after being requested to do so by the
Gaming Authority (or such lesser period that may be required by such Gaming
Authority), or if such Holder or such beneficial owner is not so licensed,
qualified or found suitable, the Company shall have the
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right, at its option, (i) to require such Holder or beneficial owner to dispose
of such Holder's or beneficial owner's Notes within 30 days of receipt of such
notice of such finding by the applicable Gaming Authority or such earlier date
as may be ordered by such Gaming Authority or (ii) to call for the redemption of
the Notes of such Holder or beneficial owner at the lesser of the principal
amount thereof, the fair market value of such Notes on the date of redemption or
the price at which such Holder or beneficial owner acquired the Notes, together
with, in either case, accrued and unpaid interest to the earlier of the date of
redemption or such earlier date as may be required by such Gaming Authority or
the date of the finding of unsuitability by such Gaming Authority, which may be
less than 30 days following the notice of redemption, if so ordered by such
Gaming Authority. The Company shall notify the Trustee in writing of any such
redemption as soon as practicable and the redemption price of each Note to be
redeemed. The Holder of Notes or beneficial owner applying for a license,
qualification or a finding of suitability must pay all costs of the licensure
and investigation for such qualification or finding of suitability. Under the
Indenture, the Company is not required to pay or reimburse any Holder of the
Notes or beneficial owner who is required to apply for such license,
qualification or finding of suitability for the costs of the licensure and
investigation for such qualification or finding of suitability. Such expense
will, therefore, be the obligation of such Holder or beneficial owner. See "Risk
Factors--Government Regulation" and "Regulation and Licensing."
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed or repurchased in an offer
to purchase at any time, selection of Notes for redemption or repurchase will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed, or, if the
Notes are not so listed, on a pro rata basis; PROVIDED that no Notes of $1,000
or less shall be redeemed or repurchased in part. Notices of redemption or
repurchase shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date or repurchase date to each Holder of Notes to be
redeemed or repurchased at its registered address. If any Note is to be redeemed
or repurchased in part only, the notice of redemption or repurchase that relates
to such Note shall state the portion of the principal amount thereof to be
redeemed or repurchased. A new Note in principal amount equal to the unredeemed
or unrepurchased portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption or
repurchase date, interest ceases to accrue on Notes or portions of them called
for redemption or repurchase.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer to repurchase all or any part (equal to $1,000 or an integral
multiple thereof), of each Holder's Notes pursuant to the offer described below
(the "Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of repurchase (the "Change of
Control Payment"). Within 30 days following any Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Notes on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws
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and regulations are applicable in connection with the repurchase of the Notes as
a result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Indenture
relating to a Change of Control Offer, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described under this caption "--Repurchase at the
Option of Holders" by virtue thereof.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book-entry) to each Holder
a new Note equal in principal amount to the unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
If the payment date in connection with a Change of Control Offer hereunder
is on or after an interest payment record date and on or before the associated
interest payment date, any accrued and unpaid interest (and Liquidated Damages,
if any, due on such interest payment date) will be paid to the person in whose
name a Note is registered at the close of business on such record date, and such
interest (or Liquidated Damages, if applicable) will not be payable to Holders
who tender Notes pursuant to such Change of Control Offer.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility prohibits the Company from purchasing or redeeming
prior to maturity any Notes, and also provides that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements to which the Company becomes a
party may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing or
redeeming Notes, the Company could seek the consent of its lenders to purchase
or redeem the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing or redeeming
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture, which would, in turn,
constitute a default under the New Credit Facility. In addition, there can be no
assurance that the Company will have the financial resources to repurchase the
Notes in the event of a Change of Control. See "Risk Factors--Purchase of Notes
upon a Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act), other than to the Permitted Holders, (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, (iii) prior to
the first Equity Offering, the Permitted Holders cease to be the "beneficial
owner"
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(as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly, of a majority of the Voting Stock of the Company (as
measured by voting power rather than number of shares), (iv) after the first
Equity Offering, (A) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Permitted Holders, becomes the
"beneficial owner" (as defined above), directly or indirectly, of 35% or more of
the Voting Stock of the Company (measured by voting power rather than number of
shares) and (B) the Permitted Holders "beneficially own" (as defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the Voting Stock of the Company (measured by
voting power rather than number of shares) than such other person, (v) after the
first Equity Offering, Continuing Directors cease to constitute a majority of
the members of the Board of Directors of the Company or (vi) the Company
consolidates with, or merges with or into, any Person, other than the Permitted
Holders, or any Person, other than the Permitted Holders, consolidates with, or
merges with or into, the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company is converted into or exchanged
for cash, securities or other property, other than any such transaction where
the Voting Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee person (immediately after giving effect to such issuance).
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"PERMITTED HOLDERS" means Peter A. Morton and Lily Pond and any of their
respective Related Parties.
"RELATED PARTY" with respect to any Person, means (a) any Affiliate, or
spouse or immediate family member (in the case of an individual) of such Person,
or (b) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a majority
interest of which consist of such Person and/or such other Person referred to in
the immediately preceding clause (a), or (c) any trustee, executor or receiver
appointed to manage or administer the assets of a Person who is an individual
following the death of such individual.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (as determined
in good faith by the Board of Directors) of the assets or Equity Interests
issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; PROVIDED that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to an agreement that releases the Company or such
Restricted Subsidiary from further
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liability and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
promptly, but in no event more than 30 days after receipt, converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary may apply such Net Proceeds, at its
option, (a) to permanently reduce Senior Indebtedness (and to correspondingly
permanently reduce commitments with respect thereto in the case of revolving
borrowings), or (b) to the making of a capital expenditure in a Permitted
Business or the acquisition of other assets to be used in a Permitted Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Indebtedness under the New Credit Facility or invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the first
sentence of this paragraph will be deemed to constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will
be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase, in accordance with the procedures set
forth in the Indenture. To the extent that the aggregate amount of Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company may use any remaining Excess Proceeds for general corporate purposes. If
the aggregate principal amount of Notes surrendered by Holders thereof exceeds
the amount of Excess Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment record date and on or before the associated
interest payment date, any accrued and unpaid interest (and Liquidated Damages,
if any, due on such interest payment date) will be paid to the person in whose
name a Note is registered at the close of business on such record date, and such
interest (or Liquidated Damages, if applicable) will not be payable to Holders
who tender Notes pursuant to such Asset Sale Offer.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
Indenture relating to an Asset Sale Offer, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described under this caption "--Repurchase at the
Option of Holders" by virtue thereof.
CERTAIN COVENANTS
EXPANSION
The Indenture provides that, except during the pendency of any force majeure
event or any other event that makes completion of the Expansion physically
impossible or unlawful, the Company will cause the Expansion to be prosecuted
with reasonable diligence and continuity.
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COMPLETION GUARANTY
The Indenture provides that the Company shall not implement a discretionary
change to the plans relating to the Expansion that would cause budgeted
construction and development costs to exceed $87.0 million, unless Peter A.
Morton increases the maximum amount available under the Completion Guaranty, in
the amount of such budgeted excess.
MATERIAL CHANGES TO THE EXPANSION
The Indenture provides that prior to making a discretionary change to the
plans relating to the Expansion that is materially different from certain
minimum requirements set forth below, the Company shall obtain the prior written
consent of the Holders of a majority in principal amount of the Notes then
outstanding. The minimum requirements are as follows: (i) construction of a new
hotel tower with not less than 290 rooms; provided, that if the planned average
size of the rooms or ratio of suites to regular rooms is increased, the new
hotel tower shall contain not less than 270 rooms, (ii) enlargement of the Beach
Club to include a new swimming pool, (iii) addition of at least three new food
services establishments, (iv) expansion of the Retail Store, (v) construction of
a new expandable parking facility that will initially provide at least 400 net
additional parking spaces, (vi) construction of a new meeting facility, (vii)
construction of a new health club, or expansion and renovation of the existing
health club, (viii) construction of a new multi-functional warehouse,
maintenance and back of house facility, (ix) construction of a new nightclub or
expansion and renovation of the existing nightclub (i.e. The Joint), (x)
expansion of the casino through an enlargement of the sports book area within
the casino and the addition of at least thirty new slot machines and at least
five new table games.
RESTRICTED PAYMENTS
The Indenture provides that, except as otherwise provided below, the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted Subsidiaries'
Equity Interests including, without limitation, any dividend or distribution in
connection with any merger or consolidation involving the Company (other than
dividends or distributions by a Restricted Subsidiary so long as, in the case of
any dividend or distribution payable on or in respect of any class or series of
securities issued by a Restricted Subsidiary other than a Wholly Owned
Restricted Subsidiary, the Company or a Restricted Subsidiary receives at least
its PRO RATA share of such dividend or distribution in accordance with its
Equity Interests in such class or series of securities), or to the direct or
indirect holders of the Company's or any of its Restricted Subsidiaries' Equity
Interests in their capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent of
the Company; (iii) make any principal payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Subordinated Indebtedness, except a scheduled repayment of principal or a
payment of principal at Stated Maturity; (iv) make any payment of interest on
Subordinated Indebtedness issued pursuant to clause (xi) described under the
caption "Incurrence of Indebtedness and Issuance of Disqualified Stock," or (v)
make any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (v) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the
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Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under caption "--Incurrence of Indebtedness and
Issuance of Disqualified Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (ii), (iii), (iv), (vi) and (vii) of the following paragraph) is
less than the sum (without duplication) of (i) 50% of the Consolidated Net
Income of the Company for the period (taken as one accounting period) from
the beginning of the first fiscal quarter commencing after the Issue Date to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the Issue Date
of Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Restricted
Subsidiary of the Company), plus (iii) 100% of the aggregate net cash
proceeds received by the Company as an equity contribution from a holder or
holders of Equity Interests of the Company (other than Disqualified Stock)
but excluding Excluded Contributions, plus (iv) to the extent that any
Restricted Investment that was made after the Issue Date is sold or
otherwise liquidated or repaid, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment, plus (v) the
amount resulting from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries, such amount not to exceed the amount of Investments
made by the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary since the date of the Indenture that was treated as a Restricted
Payment under the Indenture, plus (vi) to the extent not otherwise included
in Consolidated Net Income, the amount of the net reduction in Investments
in Unrestricted Subsidiaries resulting from the payment of cash dividends
received by the Company or any Restricted Subsidiary of the Company from
such Unrestricted Subsidiaries, plus (vii) $5.0 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests of the Company in exchange for, or out
of the net cash proceeds of the substantially concurrent sale (other than to
a Restricted Subsidiary of the Company) of, other Equity Interests of the
Company (other than any Disqualified Stock); PROVIDED that the amount of any
such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded
from clause (c)(ii) or (iii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
Subordinated Indebtedness in exchange for or with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness or of the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of
Equity Interests in the Company (other than any Disqualified Stock);
PROVIDED that the amount of any such net cash proceeds that are utilized for
any such defeasance, redemption, repurchase or other acquisition shall be
excluded from clause (c)(ii) or (iii) of the preceding paragraph;
(iv) the repurchase, retirement or other acquisition or retirement for
value of common Equity Interests of the Company held by any future, present
or former employee or director of the Company or any of the Company's
Restricted Subsidiaries or the estate, heirs or legatees of, or any entity
controlled by, any such employee or director, pursuant to any management
equity plan or stock option plan or any other management or employee benefit
plan or agreement in connection with the termination of such person's
employment for any reason (including by reason of death or disability);
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PROVIDED, HOWEVER, that the aggregate Restricted Payments made under this
clause (iv) does not exceed (A) in the aggregate, the sum of $1.5 million
plus $250,000 for each twelve month period following the Issue Date and (B)
$1.5 million in any calendar year;
(v) the redemption or repurchase of any Capital Stock or Indebtedness of
the Company or any of its Subsidiaries (other than any Capital Stock or
Indebtedness that is held or beneficially owned by any Permitted Holder)
required by the Regulatory Redemption provisions of the Indenture (or any
substantially comparable provision governing other Indebtedness), or by any
Governmental Authority or by the Board of Directors of the Company if, in
any such case, the ownership of such Capital Stock or Indebtedness by the
holder thereof will preclude, interfere with, threaten or delay the
issuance, maintenance, existence or reinstatement of any gaming or liquor
license, permit or approval, or result in the imposition or burdensome terms
or conditions on such license, permit or approval;
(vi) so long as no Default or Event of Default shall have occurred and
be continuing, the declaration and payment of dividends to holders of any
such class or series of Disqualified Stock of the Company issued in
accordance with the covenant entitled "--Incurrence of Indebtedness and
Issuance of Disqualified Stock"; and
(vii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation is permitted by this covenant and
otherwise would not cause a Default. For purposes of making such determination,
all outstanding Investments by the Company and its Restricted Subsidiaries
(except to the extent repaid in cash) in the Subsidiary so designated will be
deemed to be Restricted Payments at the time of such designation and will reduce
the amount available for Restricted Payments under the first paragraph of the
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the greatest of (x) the net book value of such
Investments at the time of such designation, (y) the fair market value of such
Investments at the time of such designation and (z) the original fair market
value of such Investments at the time they were made. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be based on the good faith determination of
the Board of Directors.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness) and that the Company will not,
and will not permit any of its Restricted Subsidiaries to issue any shares of
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue preferred stock; PROVIDED, HOWEVER, that the Company and any Guarantor may
incur Indebtedness (including Acquired Indebtedness) or issue shares of
Disqualified Stock, and any Restricted Subsidiary may incur Acquired
Indebtedness, if the Fixed Charge Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least 2 to
1, determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
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The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) Indebtedness of the Company under the New Credit Facility with
respect thereto in an aggregate principal amount outstanding at any time not
to exceed $67.0 million, less the aggregate amount of all proceeds from all
Asset Sales that have been applied since the Issue Date to permanently
reduce the outstanding amount of such Indebtedness pursuant to the covenant
"Asset Sales";
(ii) the incurrence by the Company of Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes;
(iv) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness (including, without limitation, Indebtedness under the New
Credit Facility) represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price, lease or cost of
construction or improvement of property, plant or equipment (including
without limitation, slot machines and other gaming equipment) used in a
Permitted Business in an aggregate principal amount not to exceed $15.0
million at any time outstanding;
(v) the incurrence by the Company or its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred;
(vi) the incurrence by the Company or its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and its Restricted
Subsidiaries, PROVIDED, HOWEVER, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the Notes and
(ii) (A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or its Restricted Subsidiaries and (B) any sale or other transfer of
any such Indebtedness to a Person that is not the Company or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary;
(vii) the incurrence by the Company or its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating or variable rate
Indebtedness or for the purpose of protecting against fluctuation in
interest rates or the value of foreign currencies purchased or received, in
each case in respect of Indebtedness that is permitted by the terms of the
Indenture to be outstanding; PROVIDED, HOWEVER, that in the case of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risks with respect to Indebtedness, the notional principal amount of
any such Hedging Obligation does not exceed the principal amount of the
Indebtedness to which such Hedging Obligation relates and in the case of
Hedging Obligations incurred for the purpose of protecting against
fluctuations in interest rates or the value of foreign currencies purchased
or received, such Hedging Obligations do not increase the Indebtedness of
the Company and its Restricted Subsidiaries outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason of
fees, indemnities and compensation payable thereunder;
(viii) Indebtedness incurred solely in respect of performance, surety and
similar bonds or completion guarantees, to the extent that such incurrence
does not result in the incurrence of any obligation for the payment of
borrowed money to others;
(ix) Indebtedness arising in the ordinary course of business out of
standby letters of credit covering workers compensation, performance or
similar obligations;
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(x) any guarantee of the Company of Indebtedness or other obligations of
any of its Restricted Subsidiaries so long as the incurrence of such
Indebtedness incurred by such Restricted Subsidiary is permitted under the
terms of the Indenture;
(xi) the incurrence by the Company of Subordinated Indebtedness payable
to Permitted Holders in respect of payments made under the Completion
Guaranty or the Make-Well Agreement, which indebtedness shall have a stated
maturity not less than 91 days following the earlier of the maturity or
repayment of the Notes and accrue interest at a rate per annum not in excess
of the rate of interest payable on the Notes. Such Subordinated Indebtedness
may be incurred by the Company only if the Company is unable to obtain
approval from the appropriate Gaming Authorities for the issuance of
preferred stock to a Permitted Holder in respect of payments made under the
Completion Guaranty, which preferred stock shall have a redemption date not
less than 91 days following the earlier of the maturity or repayment of the
Notes and accrue dividends at a rate not in excess of the rate of interest
payable on the Notes; and
(xii) the incurrence by the Company of additional Indebtedness
(including, without limitation, Indebtedness under the New Credit Facility)
in an aggregate principal amount (or accreted value, as applicable) at any
time outstanding not to exceed $5.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xii) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Accrual of interest, the accretion of accreted value and
the payment of interest in the form of additional Indebtedness will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien securing Indebtedness or trade payables on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens, unless the
Notes are secured equally and ratably with (or prior to, in the case of
Subordinated Indebtedness) the obligation or liability secured by such Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Restricted Subsidiary to
(i) (a) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
The provisions of the first paragraph of this covenant will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date, (b) the New Credit Facility as in
effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such
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amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the New
Credit Facility as in effect on the date of the Indenture, (c) the Indenture and
the Notes, (d) applicable law, rules or regulations, or any order or ruling by a
Governmental Authority or a Gaming Authority, (e) any instrument of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (but not created in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, PROVIDED that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (f) customary non-assignment provisions in leases,
licenses, encumbrances, contracts or similar agreements entered into or acquired
in the ordinary course of business, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) on the property so acquired, (h) contracts for
the sale of assets, including, without limitation, customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary; and (i) Permitted Refinancing Indebtedness, PROVIDED
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(ii) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the obligations of the Company under the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default
exists;
(iv) except in the case of a merger of the Company with or into a Wholly
Owned Subsidiary of the Company, (A) the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Disqualified Stock" or
(B) after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, the Fixed
Charge Coverage Ratio of the Company or such Person, as the case may be,
shall be at least 1.75 to 1 and greater than the consolidated Fixed Charge
Coverage Ratio of the Company prior to giving pro forma effect to such
transaction;
(v) such transactions would not require any Holder of Notes to obtain a
Gaming License or be qualified under the laws of any applicable Gaming
Jurisdiction, PROVIDED that such Holder would not
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have been required to obtain a Gaming License or be qualified under the laws
of any applicable Gaming Jurisdiction in the absence of such transactions;
and
(vi) such transactions would not result in a loss of any qualification
or any material license of the Company or its Restricted Subsidiaries
necessary for any Permitted Business then operated by the Company or its
Restricted Subsidiaries.
Notwithstanding the foregoing clause (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
state of the United States so long as the amount of Indebtedness of the Company
and its Restricted Subsidiaries is not increased thereby.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to or Investment in, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction") unless:
(i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person; and
(ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1 million, a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration
in excess of $5 million, an opinion as to the fairness to the Holders of
such Affiliate Transaction from a financial point of view issued by an
investment banking firm of national standing in the United States, or in the
event such transaction is a type that investment bankers do not generally
render fairness opinions, a valuation or appraisal firm of national
standing.
The foregoing provisions will not apply to the following:
(i) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business of the Company or
such Restricted Subsidiary;
(ii) transactions between or among the Company and/or its Restricted
Subsidiaries;
(iii) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments";
(iv) (A) if no Default or Event of Default shall have occurred and be
continuing, the payment of a fee to Peter A. Morton in connection with the
rendering of services to or on behalf of the Company pursuant to the
Supervisory Agreement and (B) the reimbursement of expenses (including,
without limitation, allocated salaries and overhead) incurred by entities
controlled by Peter A. Morton in providing support and travel services to
the Company and its Restricted Subsidiaries in the ordinary course of
business, consistent with past practice;
(v) the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, officers, directors or employees of the Company or
any Restricted Subsidiary;
(vi) transactions in which the Company or any of its Restricted
Subsidiaries, as the case may be, delivers to the Trustee a letter from an
investment banking firm or valuation or appraisal firm, as the
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case may be, stating that such transaction meets the requirements of clause
(i) of the preceding paragraph;
(vii) loans to employees in the ordinary course of business of the
Company; PROVIDED that any such loan in excess of $200,000 must be approved
by a majority of the disinterested members of the Board of Directors of the
Company;
(viii) transactions contemplated by the Completion Guaranty and the New
Credit Facility; and
(ix) any agreement as in effect as of the Issue Date or any amendment
thereto (so long as any such amendment is no less favorable to the holders
of the Notes in any material respect than the original agreement as in
effect on the Issue Date) or any transaction contemplated thereby.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole. The
Company or its Restricted Subsidiaries may not enter into any Gaming
Jurisdictions in which the Company or its Restricted Subsidiary is not presently
licensed if all of the Holders of the Notes will be required to be licensed,
PROVIDED that this sentence shall not prohibit the Company or its Restricted
Subsidiary from entering any jurisdiction that does not require the licensing or
qualification of all of the Holders of the Notes, but reserves the discretionary
right to license or qualify any Holder of Notes.
SUBSIDIARY GUARANTEES
The Indenture provides that, prior to incurring any Indebtedness (other than
Acquired Indebtedness), a Restricted Subsidiary shall execute a guarantee (a
"Subsidiary Guarantee") and deliver an opinion of counsel relating to the
enforceability and authorization of such Subsidiary Guarantee in accordance with
the terms of the Indenture, pursuant to which such Subsidiary shall become a
Guarantor, on a senior subordinated basis (pursuant to subordination provisions
substantially similar to those described above under the caption
"--Subordination") of the Company's payment obligations under the Notes and the
Indenture.
The Indenture provides that, in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
PROVIDED that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. In addition, the
Indenture will provide that, in the event the Board of Directors of the Company
designates a Guarantor to be an Unrestricted Subsidiary, then such Guarantor
will be released and relieved of any obligations under its Guarantee; PROVIDED
that such designation is conducted in accordance with the applicable provisions
of the Indenture.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS
The Indenture provides that the Company will not directly or indirectly,
incur any Indebtedness (including Acquired Indebtedness) that is subordinate in
right of payment to any Indebtedness of the Company unless such Indebtedness is
either (a) PARI PASSU in right of payment with the Notes or (b) subordinate in
right of payment to the Notes.
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PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports, in each case within the
time periods set forth in the Commission's rules and regulations. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of such information and report with the Commission for
public availability within the time periods set forth in the Commission's rules
and regulations (unless the Commission will not accept such a filing).
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default; (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes; (ii) default in payment
when due of the principal of or premium, if any, on the Notes; (iii) failure by
the Company or any of its Restricted Subsidiaries to comply with the provisions
described under the captions "--Repurchase at the Option of the Holders--Change
of Control," "--Repurchase at the Option of the Holders--Asset Sales,"
"--Certain Covenants--Restricted Payments," "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock" or "--Certain
Covenants--Merger, Consolidation or Sale of Assets"; (iv) failure by the Company
or any of its Restricted Subsidiaries for 45 days after notice by the Trustee or
by the Holders of at least 25% of Notes then outstanding to comply with any of
its other agreements in the Indenture or the Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), other than
Indebtedness owed to the Company or a Restricted Subsidiary, whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay at final maturity
(giving effect to any applicable grace periods and any extensions thereof) the
principal amount of such Indebtedness (a "Payment Default") or (b) results in
the acceleration of such Indebtedness, prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days (net of applicable
insurance coverage which is acknowledged in writing by the insurer); (vii) Peter
A. Morton purports to revoke or rescind the Completion Guaranty, or denies in
writing his obligations thereunder; (viii) the loss of the legal right to
operate any Casino by the Company or any of its Restricted Subsidiaries
resulting in a cessation of operations for a period of more than 90 days; (ix)
failure by Peter A. Morton to comply with any of his payment obligations in the
Completion Guaranty;
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and (x) certain events of bankruptcy or insolvency with respect to the Company
or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, all outstanding Notes will become due
and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest Liquidated Damages, if any, premium, if any, on, or the principal of,
the Notes.
The Company is required to deliver to the Trustee annually an officers'
certificate regarding compliance with the Indenture, and the Company is required
upon becoming aware of any Event of Default, to deliver to the Trustee an
officers' certificate specifying such Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Notes, cash in United States dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest and Liquidated Damages, if any, on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may
be, and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii) the Company must have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for in the Indenture relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted
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by the Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the written consent of the Holders
of at least a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment, supplement or
waiver may not (with respect to any Notes held by a non-consenting Holder): (i)
reduce the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption price of the
Notes, (iii) reduce the rate of or change the time for payment of interest on or
Liquidated Damages, if any, with respect to any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
or Liquidated Damages, if any, on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Notes to receive payments
of principal of or premium, if any, or interest or Liquidated Damages, if any,
on the Notes (other than a payment required by one of the covenants described
above under the caption "--Repurchase at the Option of Holders") or (vii) make
any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions, however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder
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of Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business (provided that the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company and its Subsidiaries taken as a whole will be governed by
the provisions of the Indenture described above under the caption "--Redemption
at the Option of Holders--Change of Control" and/or the provisions described
above under the caption "--Certain Covenants--Merger, Consolidation or Sale of
Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Equity
Interests of any of the Company's Restricted Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions that have a fair market value (as determined in good faith by the
Board of Directors) in excess of $1.0 million or for net cash proceeds in excess
of $1.0 million. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company
or to another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii)
a Restricted Payment that is permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments," (iv) a disposition of cash
or Cash Equivalents; (v) a disposition of either obsolete equipment or equipment
that is damaged, worn out or otherwise no longer useful in the business; (vi)
any sale of Equity Interests in, or Indebtedness or other securities of, an
Unrestricted Subsidiary; (vii) any sale and leaseback of an asset within 90 days
after the completion of construction or acquisition of such asset; and (viii)
any surrender or waiver of contract rights or a settlement, release or surrender
of contract, tort or other claims of any kind or a grant of any Lien not
prohibited by the Indenture shall not be considered an Asset Sale.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company,
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partnership or membership interests (whether general or limited) and (iv) any
other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing
Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the full faith and credit of the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition, (iii)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any lender party to the New Credit Facility or with any domestic commercial
bank having capital and surplus in excess of $500.0 million and a Keefe Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(ii) and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") and in each case maturing within six
months after the date of acquisition, (vi) investment funds investing
substantially all of their assets in securities of the types described in
clauses (i)-(v) above and (vii) readily marketable direct obligations issued by
any state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
or S&P.
"CASINO" means any gaming establishment and other property or assets
directly ancillary thereto or used in connection therewith, including any
building, restaurant, hotel theater, parking facilities, retail shops, land,
golf courses and other recreation and entertainment facilities, vessel, barge,
ship and equipment.
"COMPLETION GUARANTY" means the completion guaranty by Peter A. Morton,
dated as of March 23, 1998, as such agreement may be amended, modified or
supplemented in accordance with the terms thereof.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the sum of, without duplication, the Consolidated Net Income of such Person for
such period plus (i) provision for taxes based on income or profits of such
Person and its Subsidiaries for such period, to the extent that such provision
for taxes was included in computing such Consolidated Net Income, plus (ii)
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, amortization of
deferred financing fees, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated Net
Income, plus (iii) the product of (a) all cash dividend payments, on any series
of preferred stock of such Person or any of its Restricted Subsidiaries, other
than dividend payments on Equity Interests payable solely in Equity Interests
(other than Disqualified Stock) of the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local effective tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP, plus (iv) consolidated depreciation, amortization and other non-cash
charges of the Person and its Subsidiaries required to be reflected as expenses
on the books and records of the Person, minus (v) cash payments with respect to
any non-cash charges previously added back pursuant to clause (iv), plus (vi)
preopening costs incurred in connection with the Expansion that are required by
GAAP to be charged as an expense prior to or upon opening, to the extent that
such preopening costs were deducted in computing such Consolidated Net Income.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Subsidiary of the referent Person shall be added to Consolidated Net Income
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to compute Consolidated Cash Flow only to the extent (and in same proportion)
that the Net Income of such Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; PROVIDED
that (i) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net
Income of any Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
government approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded, and (v) all other extraordinary gains
and extraordinary losses shall be excluded.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) Indebtedness outstanding under
the New Credit Facility and (ii) any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $25 million or more and that has
been designated by the Company as "Designated Senior Indebtedness."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, PROVIDED, HOWEVER, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof (or of any
security into which it is convertible or for which it is exchangeable) have the
right to require the issuer to repurchase such Capital Stock (or such security
into which it is convertible or for which it is exchangeable) upon the
occurrence of any of the events constituting an Asset Sale or a Change of
Control shall not constitute Disqualified Stock if such Capital Stock (and all
such securities into which it is convertible or for which it is exchangeable)
provides that the issuer thereof will not repurchase or redeem any such Capital
Stock (or any such security into which it is convertible or for which it is
exchangeable) pursuant to such provisions prior to compliance by the Company
with the provisions of the Indenture described under the caption "Repurchase at
the Option of Holders-- Change of Control" or "Repurchase at the Option of
Holders--Asset Sales," as the case may be.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any bona fide underwritten public offering of common
stock by the Company other than (i) issuances of Disqualified Stock, (ii)
issuances in payment of or to finance the purchase price of an acquisition or
(iii) issuances of common stock pursuant to employee benefit plans of the
Company or otherwise as compensation to employees of the Company.
"EXCLUDED CONTRIBUTIONS" means the net cash proceeds received by the Company
from Permitted Holders after the Issue Date and until the completion of the
Expansion from contributions to the equity capital of the Company and cash
proceeds received as a result of payments under the Completion Guaranty.
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"EXPANSION" means the expansion of the Company's hotel casino in Las Vegas,
Nevada, including (i) the construction of a new hotel tower, (ii) the addition
of new slot machines and table games, (iii) the construction of a new swimming
pool, (iv) the addition of new restaurant facilities, (v) an expansion of the
size of the retail store located in such hotel casino, (vi) the construction of
a new parking facility, (vii) the construction of a new health club and spa and
(viii) the construction of a new nightclub and warehouse facility.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees, repays or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the applicable
four-quarter reference period and in the case of revolving credit borrowings,
the Fixed Charge Coverage Ratio shall be computed based on the average daily
balance of such Indebtedness during the applicable reference period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date, and (iv) in the case of
Indebtedness bearing interest at a floating rate which is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate in
effect on the Calculation Date had been the applicable rate for the entire
period (taking into account any Hedging Obligation applicable to such
Indebtedness).
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs (other than amortization
of debt issuance costs related to the Notes and the New Credit Facility) and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or banker's acceptance
financings, and net payments (if any) pursuant to Hedging Obligations) and (ii)
the consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, and (iii) any interest expense on
Indebtedness of another Person that is Guaranteed by such person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Restricted Subsidiaries (whether or not such Guarantee or Lien is called
upon) and (iv) the product of (a) all cash dividend payments, on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments
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on Equity Interests payable solely in Equity Interests (other than Disqualified
Stock) of the Company, times (b) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local effective tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"GAMING AUTHORITY" means any Governmental Authority with the power to
regulate gaming in any Gaming Jurisdiction, and the corresponding Governmental
Authorities with the responsibility to interpret and enforce the laws and
regulations applicable to gaming in any Gaming Jurisdiction.
"GAMING JURISDICTION" means any Federal, state or local jurisdiction in
which any entity, in which the Company has a direct or indirect beneficial,
legal or voting interest, conducts casino gaming, now or in the future.
"GAMING LAW" means any law, rule, regulation or ordinance governing gaming
activities (including, without limitation, The Riverboat Gambling Act of
Illinois, The Louisiana Riverboat Economic Development and Gaming Control Act,
the Missouri Riverboat Gaming Act (Mo. Rev. Stat. Section 313.800 et seq.) and
the Nevada Gaming Control Act (Nev. Rev. Stat. Section 463.010 et seq.), in each
case including all amendments or modifications thereof), any administrative
rules or regulations promulgated thereunder, and any of the corresponding
statutes, rules and regulations in each Gaming Jurisdiction.
"GAMING LICENSE" means every license, franchise or other authorization
required to own, lease, operate or otherwise conduct gaming activities of the
Company or any of its Subsidiaries, including without limitation, all such
licenses granted under the Nevada Gaming Control Act, and the regulations
promulgated pursuant thereto, and other applicable federal, state, foreign or
local laws.
"GOVERNMENTAL AUTHORITY" means any agency, authority, board, bureau,
commission, department, office or instrumentality of any nature whatsoever of
the United States or foreign government, any state, any province or any city or
other political subdivision or otherwise and whether now or hereafter in
existence, or any officer or official thereof, and any maritime authority.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR" means each Restricted Subsidiary that has executed a Subsidiary
Guarantee, and their respective successors and assigns, unless and until
released therefrom, in each case in accordance with the applicable provisions of
the Indenture.
"HEDGING OBLIGATIONS" means with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements with respect to Indebtedness that
is permitted by the terms of the Indenture and (ii) other agreements or
arrangements designed to protect such Person against fluctuation in interest
rates or the value of foreign currencies purchased or received by such Person in
the ordinary course of business.
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"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, (i) in respect of borrowed money, or (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or reimbursement agreements in respect thereof (other than letters of
credit securing obligations not constituting Indebtedness that are issued in the
ordinary course of business by a Person to the extent not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit) or bankers' acceptances, or (iii)
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property, except any such balance that constitutes an
accrued expense or trade payable, or (iv) representing any Hedging Obligations,
in each case if and to the extent any of the foregoing indebtedness (other than
letters of credit and Hedging Obligations) would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, as well as all
Indebtedness of others secured by a Lien on any asset of such Person (whether or
not such Indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any Indebtedness of any
other Person.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or such other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means March 23, 1998.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"LIQUIDATED DAMAGES" has the meaning given to such term in the Registration
Rights Agreement.
"MAKE-WELL AGREEMENT" means the make-well agreement by Peter A. Morton,
dated as of March 23, 1998, as such agreement may be amended, modified or
supplemented in accordance with the terms thereof.
"NET CASH PROCEEDS" with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or (b) the disposition of any
securities by such Person or any of its Subsidiaries or the extinguishment of
any Indebtedness of such Person or any of its Subsidiaries and (ii) any
extraordinary
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or nonrecurring gain or loss, together with any related provision for taxes on
such extraordinary or nonrecurring gain or loss.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"NEW CREDIT FACILITY" means that certain credit agreement, dated as of March
23, 1998, by and among the Company and Bank of America National Trust and
Savings Association, as administrative agent, and Bear Stearns as co-agent, and
the lenders parties thereto, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced, extended, restated
or refinanced from time to time, whether by the same or any other agent, lender
or group of lenders; provided that the total amount of Indebtedness is not
thereby increased beyond the amount that may then be incurred at such time
pursuant to the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Disqualified Stock."
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), as reflected in the express terms of the instrument governing such
Indebtedness, or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any Indebtedness (other than the
Notes being offered hereby) of the Company or any of its Restricted Subsidiaries
to declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity.
"OBLIGATIONS" means any principal, interest, penalties, fees
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED BUSINESS" means the gaming business and other businesses
necessary for, incident to, connected with or arising out of the gaming business
(including developing and operating lodging, dining and nightclub facilities,
sports or entertainment facilities, transportation services, retail operations
and other related activities or enterprises and any additions or improvements
thereto) or any business that is reasonably similar thereto or a reasonable
extension, development or expansion thereof or ancillary thereto.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Restricted Subsidiary; (b) any Investment in Cash Equivalents; (c) any
Investment by the Company or any Restricted Subsidiary in a Person, if as a
result of such Investment (i) such Person becomes a Restricted Subsidiary or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Restricted Subsidiary; (d) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales"; (e) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company; (f) any Investment existing on the Issue
Date; (g) any Investment acquired by the Company or any of its Restricted
Subsidiaries (A) in exchange for any other Investment or accounts receivable
held by the Company or any such Restricted Subsidiary in connection
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with or as a result of a bankruptcy, workout, reorganization or recapitalization
of the issuer of such other Investment or accounts receivable or (B) as a result
of the transfer of title with respect to any secured investment in default as a
result of a foreclosure by the Company or any of its Restricted Subsidiaries
with respect to such secured Investment; (h) Hedging Obligations permitted under
the "--Certain Covenants; Limitation of Incurrence of Indebtedness and Issuance
of Disqualified Stock" covenant; (i) loans and advances to officers, directors
and employees for business-related travel expenses, moving expenses and other
similar expenses, in each case, incurred in the ordinary course of business; (j)
other loans and advances to officers, directors and employees in an aggregate
amount not to exceed $250,000 outstanding at any time; (k) any guarantees
permitted to be made pursuant to the covenant entitled "Certain
Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock"; (l) credit extensions to gaming customers in connection
with their gambling activities at facilities of the Company or its Subsidiaries;
and (m) other Investments in any Person primarily engaged in a Permitted
Business having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (m)
that are at the time outstanding, not to exceed $2.0 million.
"PERMITTED LIENS" means (i) Liens on assets of the Company or any of its
Subsidiaries securing Senior Indebtedness that was permitted by the terms of the
Indenture to be incurred (including pursuant to the New Credit Facility); (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; PROVIDED that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, PROVIDED that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory or regulatory obligations, leases, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (iv) of the second paragraph of
the covenant entitled "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Disqualified Stock" covering only the assets acquired with such
Indebtedness; (vii) Liens existing on the date of the Indenture; (viii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (ix) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (A) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (B)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (x) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries; (xi) Liens of carriers,
warehousemen, mechanics, landlords, materialmen, repairmen and for crew wages or
salvage or other like Liens arising by operation of law in the ordinary course
of business and consistent with industry practices and Liens on deposits made to
obtain the release of such Liens if (A) the underlying obligations are not
overdue for a period of more than 60 days or (B) such Liens are being contested
in good faith and by appropriate proceedings by the Company or its Subsidiary
and adequate reserves with respect thereto are maintained on the books of the
Company or such Subsidiary, as the case may be, in accordance with GAAP; (xii)
easements, rights-of-way, zoning and similar restrictions and other similar
encumbrances or title defects incurred or imposed, as applicable, in the
ordinary course of business and consistent with industry practices which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto (as such
property is used by the Company or its Subsidiary) or interfere with the
ordinary conduct of the business of the Company or such Subsidiary; provided,
however, that any such Liens are not incurred in connection with any borrowing
of money or any
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commitment to loan any money or to extend any credit; and (xiii) customary Liens
(other than any Lien imposed by ERISA) incurred or deposits made in the ordinary
course of business in connection with worker's compensation, unemployment
insurance and other types of social security legislation.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that:(i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith including
premiums paid, if any, to the holders thereof); (ii) such Permitted Refinancing
Indebtedness has a final maturity date at or later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SENIOR INDEBTEDNESS" means (i) the Indebtedness of the Company under the
New Credit Facility and (ii) any other Indebtedness of the Company permitted to
be incurred by it under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Notes, including, with respect
to (i) and (ii), interest accruing subsequent to the filing of, or which would
have accrued but for the filing of, a petition for bankruptcy, whether or not
such interest is an allowable claim in such bankruptcy proceeding.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (1) any liability for federal, state, local or other taxes owed
or owing by the Company, (2) any obligation of the Company to any of its
Subsidiaries, (3) any accounts payable or trade liabilities of the Company
arising in the ordinary course of business (including instruments evidencing
such liabilities) other than obligations in respect of bankers' acceptances and
letters of credit under the New Credit Facility, (4) any Indebtedness that is
incurred in violation of the Indenture, (5) Indebtedness which, when incurred
and without respect to any election under Section 1111 (b) of Title 11, United
States Code, is without recourse to the Company, (6) any Indebtedness, guarantee
or obligation of the Company which is subordinate or junior to any other
Indebtedness, guarantee or obligation of the Company, (7) Indebtedness evidenced
by the Notes and (8) Capital Stock of the Company.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the
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original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"SUBORDINATED INDEBTEDNESS" means all Indebtedness of the Company that is
subordinated in right of payment to the Notes.
"SUBORDINATION AGREEMENT" means the Subordination Agreement dated of the
date of the Indenture between the Company and Peter A. Morton, relating to the
subordination of the fees payable under the Supervisory Agreement.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"SUPERVISORY AGREEMENT" means the Amended and Restated Supervisory Agreement
dated as of October 21, 1997 between the Company and Peter A. Morton providing
for the payment by the Company of a management fee to Peter A. Morton in
connection with the rendering of management services to or on behalf of the
Company, which obligation of the Company to pay such management fee will be
subordinated to the prior payment in full of all obligations with respect to the
Notes pursuant to the Subordination Agreement and which obligation is otherwise
in lieu of the payment of any other compensation to Peter A. Morton in respect
of services rendered to the Company.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing conditions as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock" the Company shall be in default
of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"--Certain Covenants--
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Incurrence of Indebtedness and Issuance of Disqualified Stock," calculated on a
pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would be
in existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
The certificate representing the New Notes will be issued in fully
registered global form without interest coupons in minimum denominations of
$1,000 principal amount at maturity and integral multiples of $1,000 principal
amount at maturity in excess thereof (the "Global Notes"). Except as set forth
below, the Global Notes will be deposited with, or on behalf of, DTC, and
registered in the name of Cede & Co. ("Cede"), as DTC's nominee in the form of
one or more global certificates.
Except as set forth below, the record ownership of any Global Note may be
transferred, in whole or in part, only to DTC, another nominee of DTC or to a
successor of DTC or its nominee. Investors may hold their interests in any of
the Global Securities directly through DTC, or indirectly through organizations
which are participants in DTC ("Participants"). Transfers between Participants
will be effected in the ordinary way in accordance with DTC rules and will be
settled in immediately available funds.
Investors who are not Participants may beneficially own interests in a
Global Note held by DTC only through Participants, including certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly, and have indirect access to the DTC system ("Indirect
Participants"). So long as Cede, as the nominee of DTC, is the registered owner
of any Global Note, Cede for all purposes will be considered the sole Holder of
such Global Security. Except as provided below, owners of beneficial interests
in a Global Note will not be entitled to have certificates registered in their
names, will not receive or be entitled to receive physical delivery of
certificates in definitive form, and will not be considered the Holder thereof.
Neither the Company nor the Trustee (nor any registrar or paying agent) will
have any responsibility for the performance by DTC or its Participants or
Indirect Participants of its obligations under the rules and procedures
governing, its operations. DTC has advised the Company that it will take any
action permitted to be taken by a Holder of New Notes only at the direction of
one or more Participants whose accounts are credited with DTC interests in a
Global Security.
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Global notes, or notes held in street name have created gaming regulatory
concern in the past. Privately held gaming licensees must disclose all material
information regarding beneficial ownership of the securities of the corporate
gaming licensee. Companies registered with the Nevada Commission must render
maximum assistance to determine ownership of securities if requested to do so.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Notes and a successor depositary is not
appointed by the Company within 90 days, certificated securities will be issued
in exchange for the Global Notes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The following summary of certain provisions of the Registration Rights
Agreement does not purport to be complete, is subject to and is qualified in its
entirety by reference to all the Provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
to which this Prospectus forms a part.
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission the Exchange Offer Registration Statement on the appropriate
form under the Securities Act with respect to the New Notes, of which this
Prospectus forms a part. Upon the effectiveness of the Exchange Offer
Registration Statement and receipt of the requisite approvals of the Nevada
Gaming Authorities, the Company will offer to the Holders of Transfer Restricted
Securities pursuant to the Exchange Offer who are able to make certain
representations the opportunity to exchange their Transfer Restricted Securities
for New Notes. If (i) the Company is not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy or (ii)
any Holder of Transfer Restricted Securities notifies the Company within the
specified time period that (a) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (b) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not available for such resales or (c) that it is a broker-dealer
and owns Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions. For purposes of the foregoing, "Transfer Restricted
Securities" means each Old Note until (i) the date on which such Old Note has
been exchanged by a person other than a broker-dealer for an New Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Old Note for a New Note, the date on which such New Note is sold to
a purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of this Prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Old Note is distributed to
the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company file the
Exchange Offer Registration Statement with the Commission on or prior to 60 days
after the Closing Date, (ii) the Company will use its reasonable best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 180 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its reasonable best efforts
to issue on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New Notes
in exchange for all Old Notes tendered prior thereto in the Exchange Offer and
(iv) if obligated to file the Shelf Registration Statement, the Company will use
its reasonable best efforts to file the Shelf Registration Statement with the
Commission on or prior to 60 days after such filing obligation arises and to
cause the Shelf Registration to be declared effective by the Commission on or
prior to 90 days after such obligation arises (or, if later, 180 days after the
Closing Date). If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of
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such Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay damages to each Holder of Old
Notes, with respect to the first 90-day period immediately following the
occurrence of such Registration Default, in an amount equal to $.05 per week per
$1,000 principal amount of Old Notes held by such Holder. Such damages, together
with damages accrued by the Company pursuant to the next succeeding sentence,
are collectively referred to herein as "Liquidated Damages." The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Old Notes with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.40 per week per $1,000 principal amount of Notes. All
accrued Liquidated Damages will be paid by the Company on each interest payment
date to the record Holders in the same manner as interest will be payable on the
Old Notes. Following the cure or waiver of all Registration Defaults, the
accrual of Liquidated Damages will cease.
A privately held corporate gaming licensee may not make a public offering of
any security issued by the corporate gaming licensee. The regulations applicable
to public offerings will be applicable to the Exchange Offer. Accordingly, the
Company will be required to obtain a waiver of the regulation prohibiting public
offerings by corporate gaming licensees. No assurance can be made that such
waiver will be obtained.
Furthermore, registration as a publicly traded company and approvals of a
public offering of debt securities requires registration with the Commission.
There can be no assurance that the application for approval of the public
offering and the regulatory waiver will be approved by the Nevada Gaming
Authorities within the 180 day closing period. Additionally, there can be no
guarantee that a shelf registration will be approved.
Holders of Old Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time period set forth in
the Registration Rights Agreement in order to have their Old Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The following is a summary of certain United States Federal income tax
consequences associated with the exchange of Old Notes for New Notes and the
disposition of the New Notes. This summary is based upon existing United States
Federal income tax law, which is subject to change, possibly retroactively. This
summary does not discuss all aspects of United States Federal income taxation
which may be important to particular holders in light of their individual
investment circumstances, such as Notes held by investors subject to special tax
rules (e.g., financial institutions, insurance companies, broker-dealers,
tax-exempt organizations, or, except to the extent described below, Non-U.S.
Holders (as defined below)) or to persons that hold the Old Notes or will hold
the New Notes as a part of a straddle, hedge, or synthetic security transaction
for United States Federal income tax purposes or that have a functional currency
other than the United States dollar, all of whom may be subject to tax rules
that differ significantly from those summarized below. In addition, this summary
does not discuss any foreign, state, or local tax considerations. This summary
addresses tax consequences only to current holders of Notes and assumes that
such holders hold their Old Notes and will hold their New Notes as "capital
assets" (generally, property held for investment) under the United States
Internal Revenue Code of 1986, as amended (the "Code"). Holders
89
<PAGE>
are urged to consult their tax advisors regarding the United States Federal,
state, local and foreign income and other tax considerations associated with the
exchange of Old Notes for New Notes and the disposition of the New Notes.
For purposes of this summary, a "U.S. Holder" is a beneficial owner of a
Note that is (i) an individual who is a citizen or resident of the United
States, (ii) a corporation or partnership created or organized under the laws of
the United States or any state or political subdivision thereof, (iii) an estate
that is subject to United States Federal income taxation without regard to the
source of its income, or (iv) a trust the administration of which is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust. A "Non-U.S. Holder" is a beneficial owner of an Old Note
or New Note who is not a U.S. Holder.
U.S. HOLDERS AND NON-U.S. HOLDERS
There will be no United States Federal income tax consequences to a U.S.
Holder or Non-U.S. Holder who exchanges an Old Note for a New Note pursuant to
the Exchange Offer and such holder will have the same adjusted basis and holding
period in the New Note as it had in the Old Note immediately before the
exchange.
U.S. HOLDERS
DISPOSITION OF NEW NOTES. In general, subject to the market discount rules
discussed below, a U.S. Holder of a New Note will recognize capital gain or loss
upon the sale, redemption, or other disposition of the New Note in an amount
equal to the difference between the amount realized (except to the extent
attributable to accrued but unpaid interest) in such disposition and the
holder's adjusted tax basis in the New Note. Under recently adopted amendments
to the Code, net capital gain (I.E., generally capital gain in excess of capital
loss) recognized by an individual holder upon a disposition of a New Note that
has been held for more than 12 months will generally be subject to a maximum tax
rate of 20% or, in the case of a New Note that has been held for 12 months or
less, will be subject to tax at ordinary income tax rates. In addition, capital
gain recognized by a corporate holder will be subject to tax at the ordinary
income tax rates applicable to corporations.
MARKET DISCOUNT. Holders, other than original purchasers of the Old Notes
in the original offering, should be aware that the sale of the New Notes may be
affected by the market discount provisions of the Code. These rules generally
provide that if a holder of a Note purchased such note, subsequent to the
original offering, at a market discount in excess of a statutorily defined DE
MINIMIS amount, and thereafter recognizes gain upon a disposition (including a
partial redemption) of the New Note received in exchange for such Old Note, the
lesser of such gain or the portion of the market discount that accrued while the
Old Note and New Note were held by such holder will be treated as ordinary
interest income at the time of disposition. The rules also provide that a holder
who acquires a Note at a market discount may be required to defer a portion of
any interest expense that may otherwise be deductible on any indebtedness
incurred or maintained to purchase or carry such note until the holder disposes
of such note in a taxable transaction. If a holder of such a note elects to
include market discount in income currently, both of the foregoing rules would
not apply.
NON-U.S. HOLDERS
PAYMENTS OF INTEREST. Interest paid by the Company to Non-U.S. Holders will
not be subject to United States Federal income or withholding tax provided that
(i) such holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(ii) such holder is not a controlled foreign corporation that is related to the
Company through stock
90
<PAGE>
ownership, a foreign tax-exempt organization or foreign private foundation for
United States Federal income tax purposes, and (iii) the requirements of section
871(h) or 881(c) of the Code are satisfied as described below under the heading
"Owner's Statement Requirement". Notwithstanding the above, a Non-U.S. Holder
that is engaged in the conduct of a United States trade or business will be
subject to (i) United States Federal income tax on interest that is effectively
connected with the conduct of such trade or business and (ii) if the Non-U.S.
Holder is a corporation, a United States branch profits tax equal to 30% of its
"effectively connected earnings and profits" as adjusted for the taxable year,
unless the holder qualifies for an exemption from such tax or a lower tax rate
under an applicable treaty.
GAIN ON DISPOSITION. A Non-U.S. Holder will generally not be subject to
United States Federal income tax on gain recognized on a sale, redemption, or
other disposition of a New Note unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the Non-U.S.
Holder or (ii) in the case of a Non-U.S. Holder who is a nonresident alien
individual, such holder is present in the United States for 183 or more days
during the taxable year and certain other requirements are met. Any such gain
that is effectively connected with the conduct of a United States trade or
business by a Non-U.S. Holder will be subject to United States Federal income
tax on a net income basis in the same manner as if such holder were a United
States person, if such Non-U.S. Holder is a corporation, such gain may also be
subject to the 30% United States branch profits tax described above.
FEDERAL ESTATE TAXES. A New Note held by an individual who at the time of
death is not a citizen or resident of the United States will not be subject to
United States Federal estate tax as a result of such individual's death,
provided that (i) the individual does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote and (ii) the interest accrued on the New Note was not
effectively connected with a United States trade or business.
OWNER'S STATEMENT REQUIREMENT. Sections 871(h) and 881(c) of the Code
require that either the beneficial owner of a New Note or a securities clearing
organization, bank, or other financial institution that holds customer's
securities in the ordinary course of its trade or business (a "Financial
Institution") and that holds a New Note on behalf of such owner file a statement
with the Company or its agent to the effect that the beneficial owner is not a
United States person in order to avoid withholding of United States Federal
income tax. Under current regulations, this requirement will be satisfied if the
Company or its agent receives (i) a statement (an "Owner's Statement") from the
beneficial owner of a New Note in which such owner certifies, under penalties of
perjury, that such owner is not a United States person and provides such owner's
name and address or (ii) a statement from the Financial Institution holding the
New Note on behalf of the beneficial owner in which the Financial Institution
certifies, under penalties of perjury, that it has received the Owner's
Statement together with a copy of the Owner's Statement. The beneficial owner
must inform the Company or its agent (or, in the case of a statement described
in clause (ii) of the immediately preceding sentence, the Financial Institution)
within 30 days of any change in information on the Owner's Statement.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Current United States Federal
income tax law provides that in the case of payments of interest to Non-U.S.
Holders, the 31% backup withholding tax will not apply to payments made outside
the United States by the Company or a paying agent on a New Note if an Owner's
Statement is received or an exemption has otherwise been established; provided
in each case that the Company or the paying agent, as the case may be, does not
have actual knowledge that the payee is a United States person.
Under current Treasury Regulations, payments of the proceeds of the sale of
a New Note to or through a foreign office of a "broker" will not be subject to
backup withholding but will be subject to information reporting if the broker is
a United States person or a certain foreign entity with United States
connections, unless the broker has in its records documentary evidence that the
holder is not a United
91
<PAGE>
States person and certain other conditions are met or the holder otherwise
establishes an exemption. Payment of the proceeds of a sale to or through the
United States office of a broker is subject to backup withholding and
information reporting unless the holder certifies its non-United States status
under penalties of perjury or otherwise establishes an exemption.
Recently, the Treasury Department has promulgated final regulations (the
"Final Regulations") regarding the withholding and information reporting rules
discussed above. In general, the Final Regulations do not significantly alter
the substantive withholding and information reporting requirements but unify
current certification procedures and forms and clarify reliance standards. Under
the Final Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The Final Regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of at least 12
months after the date upon which the Registration Statement, of which this
Prospectus is a part, is declared effective by the Commission , it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until the Expiration Date,
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Notes may be
deemed to be an underwriter" within the meaning or the Securities Act and any
profit on any such resale of New Notes and any commission or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of at least 12 months after the date upon which the
Registration Statement of which this Prospectus is a part, is declared effective
by the Commission, the Company will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed to pay all expenses in connection with the Exchange Offer and
reimburse the Initial Purchasers for the reasonable fees and expenses of counsel
for the holders of the Notes. Each holder will pay all expenses of its counsel
other than as described in the preceding sentence, transfer taxes, if any, and
any commissions or concessions of any brokers or dealers. The Company has agreed
in the Registration Rights Agreement to indemnify the holders of the Notes
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act.
92
<PAGE>
In addition, to comply with the securities laws of certain jurisdictions,
the New Notes may not be offered or sold unless they have been registered or
qualified for offer and sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Notes for offer or
sale under all applicable federal and state securities laws by the time the
Registration Statement (of which this Prospectus forms a part) is declared
effective by the Commission.
LEGAL MATTERS
Certain legal matters in connection with the validity issuance and sale of
the New Notes will be passed upon for the Company by Gordon & Silver, Ltd., Las
Vegas, Nevada.
EXPERTS
The financial statements of the Company at November 30, 1996 and 1997, and
for each of the three years in the period ended November 30, 1997, appearing in
this Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
93
<PAGE>
HARD ROCK HOTEL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Balance Sheets at November 30, 1997 and May 31, 1998 (Unaudited)........................................... F-2
Unaudited Statements of Operations for the three-months and six-months ended May 31, 1997 and 1998......... F-3
Unaudited Statements of Cash Flows for the six-months ended May 31, 1997 and 1998.......................... F-4
Notes to Unaudited Financial Statements.................................................................... F-5
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-6
Balance Sheets at November 30, 1996 and 1997............................................................... F-7
Statements of Operations for the years ended November 30, 1995, 1996 and 1997.............................. F-8
Statements of Shareholders' Equity (Deficit) for the years ended November 30, 1995, 1996 and 1997.......... F-9
Statements of Cash Flows for the years ended November 30, 1995, 1996 and 1997.............................. F-10
Notes to Financial Statements.............................................................................. F-11
</TABLE>
F-1
<PAGE>
HARD ROCK HOTEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
1997
-------------- MAY 31,
1998
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 4,214,081 $ 11,852,421
Accounts receivable, net of allowance for doubtful accounts of $200,000 at
November 30, 1997 and $242,000 at May 31, 1998............................... 2,966,562 3,370,615
Income tax refund receivable................................................... 2,443,041 2,892,041
Inventories.................................................................... 1,065,873 1,026,527
Prepaid and other current assets............................................... 835,071 1,581,862
Deferred income taxes.......................................................... 733,650 733,650
-------------- --------------
Total current assets............................................................. 12,258,278 21,437,116
Property and equipment, net, at cost............................................. 89,768,576 92,980,025
Other assets..................................................................... 4,634,505 6,168,770
Deferred income taxes............................................................ 2,894,386 2,894,386
-------------- --------------
Total assets..................................................................... $ 109,555,745 $ 123,480,297
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 2,892,768 $ 1,176,514
Accrued expenses............................................................... 4,462,868 4,738,705
Interest payable............................................................... 77,187 2,158,333
Advances due to related party.................................................. 470,234 --
Current obligations under capital leases....................................... 108,325 112,899
Long-term debt due within one year............................................. 6,000,000 --
-------------- --------------
Total current liabilities........................................................ 13,934,195 8,186,451
Deferred income taxes............................................................ 3,628,036 3,628,036
Obligations under capital leases................................................. 204,490 149,493
Long-term debt due after one year................................................ 99,700,000 120,000,000
Commitments and contingencies.................................................... -- --
Redeemable common stock, no par value............................................ 25,000 175,000
Shareholders' equity (deficit)
Common stock, Class A voting, no par value:
Authorized shares--40,000
Issued and outstanding shares--12,000........................................ -- --
Common stock, Class B non-voting, no par value:
Authorized shares--160,000
Issued and outstanding shares--64,023........................................ -- --
Paid-in capital................................................................ 7,508,250 7,508,250
Retained earnings (accumulated deficit)........................................ (15,444,226) (16,166,933)
-------------- --------------
Total shareholders' equity (deficit)............................................. (7,935,976) (8,658,683)
-------------- --------------
Total liabilities and shareholders' equity (deficit)............................. $ 109,555,745 $ 123,480,297
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
HARD ROCK HOTEL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
------------------------------ ------------------------------
1997 1998 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Casino......................................... $ 9,355,333 $ 9,719,546 $ 18,126,126 $ 19,781,645
Lodging........................................ 3,485,336 3,486,893 6,497,208 6,580,358
Food and beverage.............................. 4,648,471 5,031,384 8,421,786 9,271,376
Retail......................................... 3,968,841 3,160,342 7,757,741 6,407,309
Other income................................... 588,141 670,907 996,260 1,170,442
-------------- -------------- -------------- --------------
22,046,122 22,069,072 41,799,121 43,211,130
Less complimentaries........................... (1,313,331) (1,533,934) (2,722,459) (3,208,252)
-------------- -------------- -------------- --------------
Net Revenues..................................... 20,732,791 20,535,138 39,076,662 40,002,878
Costs and expenses:
Casino......................................... 4,499,637 4,897,276 9,130,504 9,747,585
Lodging........................................ 1,045,216 1,060,432 2,062,279 1,968,477
Food and beverage.............................. 2,768,395 2,884,458 5,212,134 5,412,087
Retail......................................... 1,790,424 1,481,094 3,635,245 3,019,824
Other.......................................... 252,356 256,449 447,370 436,149
Marketing...................................... 794,098 690,581 1,725,591 2,646,121
General and administrative..................... 3,831,447 3,321,786 7,451,769 6,426,317
Depreciation and amortization.................. 1,396,320 1,409,593 2,783,066 2,805,410
-------------- -------------- -------------- --------------
Total costs and expenses......................... 16,377,893 16,001,669 32,447,958 32,461,970
-------------- -------------- -------------- --------------
Income from operations........................... 4,354,898 4,533,469 6,628,704 7,540,908
Interest and other:
Interest income (expense), net................. (1,242,543) (2,672,370) (2,451,483) (5,216,838)
Other expenses, net............................ (16,478) -- (21,478) --
-------------- -------------- -------------- --------------
(1,259,021) (2,672,370) (2,472,961) (5,216,838)
-------------- -------------- -------------- --------------
Income before extraordinary loss and provision
for income taxes............................... 3,095,877 1,861,099 4,155,743 2,324,070
Income tax provision............................. (1,110,000) (670,000) (1,488,000) (836,000)
-------------- -------------- -------------- --------------
Income before extraordinary loss................. 1,985,877 1,191,099 2,667,743 1,488,070
Extraordinary loss--early extinguishment of
debt--net of taxes............................. -- (2,210,777) -- (2,210,777)
-------------- -------------- -------------- --------------
Net income (loss)................................ $ 1,985,877 $ (1,019,678) $ 2,667,743 $ (722,707)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per share...................... $ 15.67 $ (13.41) $ 21.05 $ (9.51)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Shares used in per share calculation............. 126,705 76,023 126,705 76,023
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HARD ROCK HOTEL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
------------------------------
1997 1998
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ 2,667,743 $ (722,707)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................................ 2,783,066 2,805,410
Amortization of loan fees and organizational costs....................... 193,680 272,634
Issuance of common stock as compensation................................. -- 150,000
Early extinguishment of debt............................................. -- 3,495,777
Changes in operating assets and liabilities:
Accounts receivable.................................................... (395,002) (404,053)
Income tax refund receivable........................................... 521,125 (449,000)
Inventories............................................................ 16,072 39,346
Prepaid and other current assets....................................... (795,040) (726,791)
Accounts payable....................................................... (360,249) (1,716,254)
Income tax payable..................................................... (1,051,047) --
Interest payable....................................................... 45,700 2,081,166
Accrued expenses....................................................... 65,476 353,004
------------- ---------------
Net cash provided by operating activities.................................... 3,691,524 5,178,532
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (6,370,186) (6,016,859)
Change in advances due to related parties.................................... 410,994 (470,234)
Decrease (increase) in other assets.......................................... 111,128 87,004
------------- ---------------
Net cash used in investing activities........................................ (5,848,064) (6,400,089)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt............................................... 3,500,000 120,000,000
Incurrence of fees on New Credit Facility and Offering....................... -- (5,389,680)
Principal payments on long-term debt......................................... (2,400,000) (105,700,000)
Payments on capital lease obligations........................................ (49,637) (50,423)
------------- ---------------
Net cash provided by financing activities.................................... 1,050,363 8,859,897
------------- ---------------
Net increase (decrease) in cash and cash equivalents......................... (1,106,177) 7,638,340
Cash and cash equivalents at beginning of period............................. 7,343,383 4,214,081
------------- ---------------
Cash and cash equivalents at end of period................................... $ 6,237,206 $ 11,852,421
------------- ---------------
------------- ---------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MAY 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Hard Rock Hotel, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended May 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending November 30, 1998. The unaudited interim financial
statements contained herein should be read in conjunction with the audited
financial statements and footnotes for the year ended November 30, 1997.
2. LONG TERM DEBT
On March 23, 1998 the Company obtained funding of approximately $115.9
million in net proceeds from the offering of $120 million aggregate principal
amount of its 9.25%, Senior Subordinated Notes due in 2005 (the "Notes"). Of
this amount, approximately $105.6 million was used to pay off the Company's $120
million credit facility (the "Prior Credit Facility"), entered into in September
of 1997, including accrued interest. In addition, on March 23, 1998, the Company
secured a revolving line of credit of $67 million under a new credit facility
(the "New Credit Facility") through a group of banks for which Bank of America
National Trust and Savings Association acts as administrative agent. Borrowings
against the line of credit may require repayments beginning in February 2000. In
connection with the retirement of the Prior Credit Facility, the Company
incurred an extraordinary pre-tax loss resulting from the write-off of $3.5
million in unamortized loan fees and financing cost.
3. COMMITMENTS AND CONTINGENCIES
As part of the expansion (the "Expansion") of the Hard Rock Hotel & Casino,
the Company has signed contracts aggregating approximately $19 million. The
total estimated cost of the expansion project is approximately $87 million.
LEGAL PROCEEDINGS
On January 5, 1998, Hard Rock Cafe International (USA) Inc. (f/k/a Rank
Licensing, Inc.), a subsidiary of Rank, filed an amended complaint in the United
States District Court for the Southern District of New York against Peter A.
Morton and the Company. The Plaintiff contends that the reservation and use by
Mr. Morton and the Company of the internet domain names "hardrock.com" and
"hardrockhotel.com" (the "Domain Names"), and the use of certain marks and logos
(the "Logos") in, and in connection with merchandise offered on, internet
websites operated under the Domain Names, violate terms of certain agreements
with Mr. Morton and federal and state trademark and unfair competition law. The
Plaintiff seeks an injunction against the use of the Domain Names and Logos by
Mr. Morton and the Company, an order requiring Mr. Morton and the Company to
assign the Domain Names to the Plaintiff, and over $100 million in damages.
During the course of litigation, Mr. Morton and the Company transferred the
domain name "hardrock.com" to the Plaintiff. Trial of this matter has concluded,
and the Company is awaiting a verdict. Management believes the outcome of such
litigation will not have a material adverse effect on the Company, although
there can be no assurance of the outcome of the lawsuit. Revenues from sales of
merchandise over the internet for fiscal year 1997 were less than $150,000.
Additionally, the Company is a defendant in various lawsuits relating to
routine matters incidental to its business. Management does not believe that the
outcome of any such litigation, in the aggregate, will have a material adverse
effect on the Company.
F-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Hard Rock Hotel, Inc.
We have audited the accompanying balance sheets of Hard Rock Hotel, Inc. as
of November 30, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended November 30, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hard Rock Hotel, Inc. at
November 30, 1996 and 1997, and the result of its operations and its cash flows
for each of the three years in the period ended November 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Reno, Nevada
December 23, 1997
F-6
<PAGE>
HARD ROCK HOTEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 5,958,284 $ 4,214,081
Accounts receivable, net of allowance for doubtful accounts of $350,000 in 1996
and $200,000 in 1997......................................................... 2,672,411 2,966,562
Income tax refund receivable................................................... -- 2,443,041
Inventories.................................................................... 1,028,680 1,065,873
Prepaid and other current assets............................................... 811,052 835,071
Deferred income taxes.......................................................... 824,041 733,650
-------------- --------------
Total current assets............................................................. 11,294,468 12,258,278
Property and equipment, net, at cost............................................. 93,026,107 89,768,576
Other assets..................................................................... 2,468,297 4,634,505
Deferred income taxes............................................................ 2,255,000 2,894,386
-------------- --------------
Total assets..................................................................... $ 109,043,872 $ 109,555,745
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 1,958,739 $ 2,892,768
Accrued expenses............................................................... 4,681,933 4,462,868
Income taxes payable........................................................... 869,401 --
Advances due to related party.................................................. 286,720 470,234
Current obligations under capital leases....................................... 102,025 108,325
Current obligations on property to be developed................................ 3,354,201 --
Long-term debt due within one year............................................. 5,100,000 6,000,000
-------------- --------------
Total current liabilities........................................................ 16,353,019 13,934,195
Deferred income taxes............................................................ 2,816,000 3,628,036
Obligations under capital leases................................................. 312,820 204,490
Long-term obligations on property to be developed................................ 3,500,000 --
Long-term debt due after one year................................................ 55,300,000 99,700,000
Commitments and contingencies (NOTE 9)...........................................
Redeemable common stock, no par value (NOTE 11).................................. -- 25,000
Shareholders' equity (deficit):
Common stock, Class A voting, no par value:
Authorized shares--40,000
Issued and outstanding shares--20,000 in 1996; 12,000 in 1997................ -- --
Common stock, Class B non-voting, no par value:
Authorized shares--160,000
Issued and outstanding shares--106,705 in 1996; 64,023 in 1997............... -- --
Paid-in capital................................................................ 28,717,250 7,508,250
Retained earnings (accumulated deficit)........................................ 2,044,783 (15,444,226)
-------------- --------------
Total shareholders' equity (deficit)............................................. 30,762,033 (7,935,976)
-------------- --------------
Total liabilities and shareholders' equity (deficit)............................. $ 109,043,872 $ 109,555,745
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
HARD ROCK HOTEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Casino........................................................... $ 26,261,832 $ 36,560,422 $ 35,394,705
Lodging.......................................................... 7,845,089 12,256,687 12,919,081
Food and beverage................................................ 10,060,911 15,003,133 16,704,645
Retail........................................................... 13,983,844 17,336,352 15,404,467
Other income..................................................... 1,290,535 1,901,256 2,075,603
------------- ------------- --------------
59,442,211 83,057,850 82,498,501
Less complimentaries............................................. (3,704,082) (5,768,697) (5,450,065)
------------- ------------- --------------
Net revenues....................................................... 55,738,129 77,289,153 77,048,436
Costs and expenses:
Casino........................................................... 12,398,732 18,158,298 17,920,669
Lodging.......................................................... 3,071,139 4,111,646 4,148,942
Food and beverage................................................ 6,877,024 10,117,756 10,360,347
Retail........................................................... 6,325,369 7,869,189 7,102,229
Other............................................................ 820,827 949,352 942,920
Marketing........................................................ 4,686,217 2,974,547 3,173,822
General and administrative, including $414,000 in non-recurring
financing fees in 1997......................................... 10,647,443 14,922,228 15,140,052
Depreciation and amortization.................................... 3,869,817 5,523,149 5,503,071
Pre-opening expenses............................................. 4,941,829 -- --
Charge for termination of Management
Agreement (NOTE 5)............................................. -- -- 24,715,000
------------- ------------- --------------
Total costs and expenses........................................... 53,638,397 64,626,165 89,007,052
------------- ------------- --------------
Income (loss) from operations...................................... 2,099,732 12,662,988 (11,958,616)
Interest and other:
Interest income (expense), net................................... (4,929,728) (5,616,600) (5,585,280)
Other expenses, net.............................................. (8,014) (54,612) (31,763)
------------- ------------- --------------
(4,937,742) (5,671,212) (5,617,043)
------------- ------------- --------------
Income (loss) before extraordinary loss and provision (benefit) for
income taxes..................................................... (2,838,010) 6,991,776 (17,575,659)
Provision (benefit) for income taxes............................... (857,400) 2,525,000 (1,168,000)
------------- ------------- --------------
Income (loss) before extraordinary loss............................ (1,980,610) 4,466,776 (16,407,659)
Extraordinary loss--early extinguishment of debt (NOTE 3).......... -- -- (1,081,350)
------------- ------------- --------------
Net income (loss).................................................. $ (1,980,610) $ 4,466,776 $ (17,489,009)
------------- ------------- --------------
------------- ------------- --------------
Basic earnings (loss) per share.................................... $ (15.98) $ 35.25 $ (143.84)
------------- ------------- --------------
------------- ------------- --------------
Diluted earnings (loss) per share.................................. $ (15.98) $ 35.25 $ (143.84)
------------- ------------- --------------
------------- ------------- --------------
Shares used in calculating basic earnings (loss) per share......... 123,965 126,705 121,586
------------- ------------- --------------
------------- ------------- --------------
Shares used in calculating diluted earnings (loss) per share....... 123,965 126,705 121,586
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
HARD ROCK HOTEL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
COMMON STOCK COMMON STOCK RETAINED SHAREHOLDERS'
-------------------- -------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
--------- --------- --------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at November 30,
1994........................ 20,000 $ -- 84,480 $ -- $ 18,716,000 $ (441,383) $ 18,274,617
Net loss...................... -- -- -- -- -- (1,980,610) (1,980,610)
Issuance of Class B common
stock....................... -- -- 22,225 -- 10,001,250 -- 10,001,250
--------- --------- --------- --------- -------------- -------------- --------------
Balances at November 30,
1995........................ 20,000 -- 106,705 -- 28,717,250 (2,421,993) 26,295,257
Net income.................... -- -- -- -- -- 4,466,776 4,466,776
--------- --------- --------- --------- -------------- -------------- --------------
Balances at November 30,
1996........................ 20,000 -- 106,705 -- 28,717,250 2,044,783 30,762,033
Net loss...................... -- -- -- -- -- (17,489,009) (17,489,009)
Charge to paid-in
capital--Buyout Agreement
(NOTE 5).................... (8,000) -- (42,682) -- (21,209,000) -- (21,209,000)
--------- --------- --------- --------- -------------- -------------- --------------
Balances at November 30,
1997........................ 12,000 $ -- 64,023 $ -- $ 7,508,250 $ (15,444,226) $ (7,935,976)
--------- --------- --------- --------- -------------- -------------- --------------
--------- --------- --------- --------- -------------- -------------- --------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
HARD ROCK HOTEL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------------------------
1995 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................. $ (1,980,610) $ 4,466,776 $ (17,489,009)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................. 3,869,817 5,523,149 5,503,071
Amortization of loan fees and organization costs.............. 351,628 447,702 370,762
Early extinguishment of debt.................................. -- -- 1,081,350
Gain on sale of property and equipment........................ -- -- (35,834)
Deferred income taxes......................................... (1,152,088) 889,047 263,041
Changes in operating assets and liabilities:
Accounts receivable......................................... (1,647,883) (1,024,528) (294,151)
Income tax refund receivable................................ -- -- (2,443,041)
Inventories................................................. (1,041,447) 12,767 (37,193)
Prepaid and other current assets............................ (718,116) (9,847) (24,019)
Accounts payable............................................ 952,199 (1,384) 934,029
Accrued expenses............................................ 5,083,211 (617,140) (219,065)
Income taxes payable........................................ 281,188 588,213 (869,401)
-------------- ------------- --------------
Net cash provided by (used in) operating activities............... 3,997,899 10,274,755 (13,259,460)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................... (39,117,654) (4,005,685) (2,556,657)
Proceeds from sale of property and equipment...................... -- -- 346,951
Change in advances due to related parties......................... (35,052) (327,046) 183,514
Change in construction related payables........................... (8,280,984) -- --
Decrease (increase) in other assets............................... (784,686) 473,168 57,652
-------------- ------------- --------------
Net cash used in investing activities............................. (48,218,376) (3,859,563) (1,968,540)
CASH FLOWS FROM FINANCING ACTIVITIES
Charges to paid-in capital related to Buyout Agreement............ -- -- (21,209,000)
Incurrence of loan fees on Existing Credit Facility............... -- -- (3,675,972)
Proceeds from issuance of debt.................................... 38,014,098 500,000 105,700,000
Payment of obligations on property to be developed................ -- -- (6,854,201)
Principal payments on long-term debt.............................. (1,100,000) (4,500,000) (60,400,000)
Payments on capital lease obligations............................. (119,961) (90,502) (102,030)
Proceeds from issuance of stock................................... 10,001,250 -- --
Issuance of common stock as compensation.......................... -- -- 25,000
-------------- ------------- --------------
Net cash provided by (used in) financing activities............... 46,795,387 (4,090,502) 13,483,797
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents.............. 2,574,910 2,324,690 (1,744,203)
Cash and cash equivalents at beginning of year.................... 1,058,684 3,633,594 5,958,284
-------------- ------------- --------------
Cash and cash equivalents at end of year.......................... $ 3,633,594 $ 5,958,284 $ 4,214,081
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See accompanying notes.
F-10
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1995, 1996 AND 1997
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND NATURE OF BUSINESS
Hard Rock Hotel, Inc. (the "Company"), a Nevada corporation incorporated on
August 30, 1993, operates a hotel-casino in Las Vegas, Nevada. The Company was
formed as a joint venture between Lily Pond Investments, Inc. ("Lily Pond"), a
Nevada corporation wholly owned by Peter Morton, and Harveys Casino Resorts
("Harveys"), a Nevada corporation. Mr. Morton granted a sublicense to the
Company, pursuant to which the Company holds the exclusive right to use the
"Hard Rock Hotel" trademark for the Company's operations in Las Vegas. During
1997, the Company redeemed all of Harveys outstanding common stock in the
Company (Note 5).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks and interest
bearing deposits with maturities at the date of purchase of three months or
less. Cash equivalents are carried at cost which approximates market. The
Company maintains the majority of its cash and cash equivalents in one financial
institution. During the years ended November 30, 1995, 1996 and 1997, the
Company paid interest of approximately $5,020,000 (net of $1,212,000
capitalized), $5,358,000, and $5,230,000, respectively, and income taxes of
approximately $13,000, $1,050,000, and $2,025,000, respectively.
During the year ended November 30, 1995, the Company entered into non-cash
financing activities whereby capital lease obligations were incurred for new
equipment amounting to approximately $470,000. During the year ended November
30, 1996, the Company entered into non-cash investing activities whereby they
purchased property for future expansion (Note 6) in the amount of approximately
$6,354,000.
CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable are unsecured and are
due primarily from the Company's hotel and casino patrons and convention
functions. Non-performance by these parties would result in losses up to the
recorded amount of the related receivables. Management does not anticipate
significant non-performance, and believes that they have adequately provided for
uncollectible receivables in the Company's allowance for doubtful accounts.
INVENTORIES
Inventories are stated at the lower of cost (determined using the first-in,
first-out method), or market.
PRE-OPENING COSTS AND EXPENSES
Pre-opening costs and expenses associated with the acquisition, development,
and opening of the resort were capitalized and subsequently charged to expense
when the resort opened for business on March 9, 1995.
F-11
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
1. ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of buildings and improvements, equipment, furniture and
fixtures, and memorabilia is provided on the straight-line method over the
estimated useful lives of the respective assets which range from five to 45
years.
ADVERTISING COSTS
The Company expenses the costs of all advertising campaigns and promotions
as they are incurred. Total advertising expenses (exclusive of grand opening and
pre-opening) for the years ended November 30, 1995, 1996, and 1997 amounted to
approximately $626,000, $758,000, and $788,000, respectively. These expenses are
included in marketing expenses in the accompanying statements of operations.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
temporary differences are expected to reverse. Additionally, deferred tax assets
and liabilities are separated into current and non-current amounts based on the
classification of the related assets and liabilities for financial reporting
purposes.
CASINO REVENUES AND COMPLIMENTARIES
In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. Revenues in the accompanying statements of operations
exclude the retail value of rooms, food and beverage, and other complimentaries
provided to customers without charge. The estimated costs of providing such
complimentaries have been classified as casino operating expenses through
interdepartmental allocations as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Food and beverage................................... $ 1,900,006 $ 2,593,171 $ 2,415,203
Lodging............................................. 452,921 819,497 838,617
Other............................................... 91,231 195,930 122,371
------------ ------------ ------------
Total costs allocated to casino operating costs..... $ 2,444,158 $ 3,608,598 $ 3,376,191
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company has adopted the provisions of the Financial Accounting Standards
Board Statement of Financial Accounting No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived
F-12
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
1. ACCOUNTING POLICIES (CONTINUED)
Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires impairment losses to
be recognized for long-lived assets and identifiable intangibles used in
operations when indicators of impairment are present and the estimated
undiscounted cash flows are not sufficient to recover the asset's carrying
amount. The impairment loss is measured by comparing the fair value of the asset
to its carrying amount.
EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share." This Statement establishes standards for computing
and presenting both basic and diluted earnings per share and applies to entities
that are publicly held.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." The Statement established new rules for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. Management of the Company does
not believe this Statement will have a material impact on the financial
statements of the Company.
FINANCIAL INSTRUMENTS
The carrying values of the Company's borrowings from banks (Note 7) and
obligations on property to be developed (Note 6) approximate their fair value at
November 30, 1996 and 1997, based on current incremental borrowing rates for
similar types of borrowing arrangements.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Retail merchandise................................................ $ 649,883 $ 675,005
Restaurants and bars.............................................. 255,387 243,193
Operating supplies................................................ 123,410 147,675
------------ ------------
$ 1,028,680 $ 1,065,873
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Unamortized loan fees and financing costs on the Existing Credit Facility (Note 7),
net of accumulated amortization of $36,039 in 1997.................................. $ -- $ 3,639,933
Unamortized loan fees and financing costs on the Old Credit Facility (Note 7), net of
accumulated amortization of $713,485 in 1996 and $1,015,157 in 1997 (see below)..... 1,383,022 --
Organization costs, net of accumulated amortization of $102,264 in 1996 and $135,315
in 1997............................................................................. 170,528 156,008
Prepaid gaming taxes.................................................................. 389,076 367,404
China, glassware, utensils, linens, and other supplies................................ 525,671 471,160
------------ ------------
$ 2,468,297 $ 4,634,505
------------ ------------
------------ ------------
</TABLE>
Loan fees and other financing costs are being amortized over the life of the
respective loans. Organization costs are being amortized over a period of five
years. Base stocks of china, glassware, utensils and linens are being amortized
using the straight-line method over three years to 25% of original cost, with
replacements expensed at the time of purchase.
In connection with the execution of the Existing Credit Facility, the
Company's Old Credit Facility was paid in its entirety in October 1997 (Note 7).
In connection with this early retirement, the Company wrote-off approximately
$1,081,000 in unamortized loan fee costs in October 1997, which amounts were
recorded as an extraordinary loss in the accompanying statements of operations
for the year ended November 30, 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Land......................................................... $ 12,380,272 $ 21,015,060
Buildings and improvements................................... 65,514,502 65,593,316
Equipment, furniture and fixtures............................ 13,341,197 14,202,857
Memorabilia.................................................. 2,174,792 2,200,608
Construction in progress..................................... 303,328 1,256,112
Property to be developed (Note 6)............................ 8,559,952 --
-------------- --------------
102,274,043 104,267,953
Less accumulated depreciation and amortization............... (9,247,936) (14,499,377)
-------------- --------------
$ 93,026,107 $ 89,768,576
-------------- --------------
-------------- --------------
</TABLE>
Construction in progress relates to several existing property improvement
projects in progress at November 30, 1997.
F-14
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
5. AGREEMENTS WITH RELATED PARTIES
In July 1997, the Company and Lily Pond entered into a Stock Purchase and
Management Buyout Agreement (the "Buyout Agreement") with Harveys to terminate
the existing Management Agreement between Harveys and the Company (below). This
Buyout Agreement became effective October 24, 1997. Under the terms of the
Buyout Agreement, the Company purchased from Harveys its 40% share of the
outstanding common stock of the Company and its rights under the Management
Agreement. In consideration for this buyout, the Company paid $45,000,000 in
cash to Harveys. Of the $45 million, the amounts charged to paid-in capital and
to expense followed the amounts negotiated and agreed to by the parties as
reflecting the market values associated with each component of the Buyout
Agreement.
The Company accounted for this transaction in their November 30, 1997
financial statements with a charge to paid-in capital ($21,209,000), and a
charge to expense for the termination of the Management Agreement in the amount
of $24,715,000. These amounts include transaction costs aggregating
approximately $924,000.
The twenty-five year Management Agreement with Harveys provided for the
procurement of certain management services related to the design, construction,
maintenance, and continued management of the Company. As part of this agreement,
the Company paid Harveys a base management fee equal to four percent of annual
gross revenues, as defined, net of complimentaries for each fiscal year. In
addition, Harveys was entitled to an incentive fee of up to two percent of
annual gross revenues, net of complimentaries, upon exceeding certain return on
investment targets as defined in the Management Agreement. Total management fees
expenses for these services amounted to approximately $2,247,000, $3,075,000,
and $2,776,000 for the years ended November 30, 1995, 1996, and 1997,
respectively. Total incentive fees expenses for these services amounted to
approximately $84,000, $239,000, and $65,000 for the years ended November 30,
1995, 1996 and 1997, respectively. These expenses are included in general and
administrative expenses in the accompanying statements of operations. The unpaid
amounts at November 30, 1996 and 1997 ($542,000 and $0, respectively), are
included in accrued expenses in the accompanying balance sheets.
As discussed above, the Management Agreement was terminated during 1997 in
connection with the Buyout Agreement.
The Company entered into a twenty-five year Amended and Restated Supervisory
Agreement with Peter A. Morton, which provides for the supervision of the
development, improvement, operation, and maintenance of the Company through
2022. As part of this agreement, the Company pays to Morton a supervisory fee
equal to two percent of annual gross revenues (as defined) net of
complimentaries for each fiscal year. Total supervisory fee expenses for these
services for the years ended November 30, 1995, 1996 and 1997 amounted to
approximately $1,123,000, $1,537,000, and $1,556,000, respectively. These
expenses are included in general and administrative expenses in the accompanying
statements of operations. The unpaid amounts at November 30, 1996 and 1997
($127,000 and $140,000, respectively), are included in accrued expenses in the
accompanying balance sheets.
In December 1993, upon the funding of the Old Credit Facility (Note 7), all
rights and benefits accorded to the above two related parties were transferred
to the agent bank in the event of default on the loan by the Company.
In connection with its management of the resort, Harveys provides all
employees for the Company through one of its subsidiaries, Harveys L.V.
Management Company, Inc. (LVMC). The LVMC employees' compensation, including
benefits, are paid directly by the Company. Harveys also provides certain
F-15
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
5. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
administrative functions to the Company, including corporate information
systems, internal audit, and group medical claims administration, and charges
the Company for these services based upon allocations of time spent and costs
incurred. These charges are included in the accompanying statements of
operations and amounted to approximately $1,147,000, $324,000, and $367,000 for
the years ended November 30, 1995, 1996 and 1997, respectively. The Company has
received advances from Harveys for use in the payment of various costs and
expenses. These advances are repaid on a periodic basis. Amounts owing to
Harveys related to these advances and costs at November 30, 1996 and 1997,
included on the accompanying balance sheets, aggregated approximately $287,000
and $470,000, respectively.
Entities controlled by Peter Morton have provided additional technical
support services for the development, opening and ongoing improvement and
operation of the casino. These expenses aggregated approximately $924,000,
$225,000 and $281,000 for the years ended November 30, 1995, 1996 and 1997,
respectively, and are included in the accompanying statements of operations.
6. PROPERTY TO BE DEVELOPED
In July 1996, the Company entered into an exchange agreement whereby the
Company acquired property, developed and constructed a retail outlet on that
property, and exchanged it for land and a retail outlet adjacent to the
Company's existing hotel. After the exchange, which occurred in May 1997, the
Company demolished the acquired retail outlet to allow for a planned expansion
of its existing facilities. The cost of this transaction was approximately $8.6
million, of which $5,100,000 was expended prior to the exchange to acquire,
develop and construct the new retail outlet. The remaining cost consisted of a
$3.5 million promissory note payable to the seller, due in April 2000, with
interest payable at a rate of 7.5%. This note was classified as a long-term
liability at November 30, 1996 on the accompanying balance sheets. In connection
with the execution of the Existing Credit Facility, this note, along with
accrued interest, was paid in its entirety in 1997 (Note 7).
The cost of the acquisition was capitalized and recorded as property to be
developed and included in property and equipment on the accompanying balance
sheet at November 30, 1996. During 1997, upon completion of this project, this
asset was reclassified into land (Note 4). To finance this transaction, the
Company executed two lines of credit with Lily Pond and Harveys which allowed
the Company to borrow up to an aggregate of $8.5 million, with interest tied to
the Company's borrowing rate on the Old Credit Facility (Note 7). At November
30, 1996, the Company had outstanding borrowings of $500,000 on these lines,
which amount was included with current obligations on property to be developed
and classified as a current liability on the accompanying balance sheets. In
connection with the execution of the Existing Credit Facility as discussed in
Note 7, these lines of credit, along with accrued interest, were paid in their
entirety in 1997 and the lines were terminated.
7. LONG-TERM DEBT
In September 1997, the Company entered into a $120,000,000 credit agreement
(the "Existing Credit Facility") with a consortium of banks for the purpose of
financing the Buyout Agreement (Note 5) and retire existing debt (see below).
The Existing Credit Facility consists of promissory notes aggregating
$100,000,000 and a $20,000,000 revolving line of credit facility. Interest on
the promissory notes and the line of credit accrues on all individual borrowings
at an interest rate determined at the option of the Company, at either the LIBOR
Index plus an applicable margin (not to exceed 3.5% and aggregating 9.188% at
November 30, 1997), or the Alternate Base Rate, defined as the higher of the
Federal Funds
F-16
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
7. LONG-TERM DEBT (CONTINUED)
Rate plus .5%, or the prime rate, plus an applicable margin (not to exceed 2.5%,
and aggregating 11% at November 30, 1997). These margins are dependent upon the
Company's total debt to EBITDA ratio, as defined. Interest accrued on the
promissory notes is due and payable quarterly up to the maturity dates of the
notes, which mature between 2003 and 2006. Principal is due and payable in 34
successive quarterly installments up to the maturity dates, at which time all
remaining amounts then owing are due in full. Interest and principal under the
line of credit are due and payable in June 2002, the specified maturity date of
the line.
Following are the scheduled principal reductions of the Existing Credit
Facility by fiscal year of the Company as of November 30, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 6,000,000
1999.......................................................... 6,000,000
2000.......................................................... 8,000,000
2001.......................................................... 9,000,000
2002.......................................................... 15,700,000
Thereafter.................................................... 61,000,000
-----------
$105,700,000
-----------
-----------
</TABLE>
These funds consist of borrowings made on the promissory notes in the amount
of $100,000,000 and borrowings made on the line of credit in the amount of
$5,700,000, and were used principally to fund the Buyout Agreement ($45,000,000)
as discussed in Note 5, pay principal and interest ($55,593,000) relating to the
Old Credit Facility, and pay principal and interest ($3,612,000) relating to the
promissory note on property to be developed as discussed in Note 6.
The Existing Credit Facility is secured by substantially all of the
Company's property at the Las Vegas site. Under the Existing Credit Facility,
the Company is required to maintain certain debt to EBITDA ratios and debt
service coverage ratios, as defined. The Existing Credit Facility also imposes
certain limitations on capital expenditures, investments, payment of dividends,
and incurrence of additional indebtedness.
Long-term debt at November 30, 1996 consisted of a $66,000,000 reducing
revolving credit agreement (the "Old Credit Facility") with a consortium of
banks, with interest at the LIBOR Index plus 2.25% (aggregating 7.875% at
November 30, 1996). Interest accrued on all individual borrowings at an interest
rate determined at the option of the Company, of either the LIBOR Index plus an
applicable margin (not to exceed 2.5%), or the agent bank's prime rate plus an
applicable margin (not to exceed 1%). These margins were dependent upon the
Company's funded debt to EBITDA ratio, as defined. Interest accrued was due and
payable monthly up to the maturity date of the loan, November 9, 2000. Principal
was due and payable in twenty successive quarterly installments up to the
maturity date, at which time all amounts then owing under the Old Credit
Facility were due in full.
The Old Credit Facility was secured by substantially all of the Company's
property at the Las Vegas site. Under the Old Credit Facility, the Company was
required to maintain minimum net worth levels, debt to EBITDA ratios, and debt
service coverage ratios, as defined. The Old Credit Facility also imposed
F-17
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
7. LONG-TERM DEBT (CONTINUED)
certain limitations on capital expenditures, investments, advances to related
enterprises, payment of dividends, and incurrence of additional indebtedness.
In connection the execution of the Existing Credit Facility, the Old Credit
Facility was canceled and all outstanding principal and interest were paid in
their entirety in 1997.
8. INCOME TAXES
The provision (benefit) for income taxes presented in the accompanying
statements of operations consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------------
1995 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Current........................................... $ 294,688 $ 1,635,953 $ (905,000)
Deferred.......................................... (1,152,088) 889,047 (263,000)
------------- ------------ -------------
$ (857,400) $ 2,525,000 $ (1,168,000)
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The difference between the Company's provision (benefit) for income taxes as
presented in the accompanying statements of operations and the provision
(benefit) for income taxes computed at the federal statutory rate is comprised
of the items shown in the following table as a percentage of income (loss)
before income taxes:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory rate............... (34.0%) 34.0% (34.0%)
Nondeductible meals and entertainment.............................. 4.0 2.5 .8
Valuation allowance................................................ -- -- 26.9
Other, net......................................................... (.2) (.4) --
--------- --------- ---------
(30.2%) 36.1% (6.3%)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
8. INCOME TAXES (CONTINUED)
The significant components of the deferred income tax assets and liabilities
included in the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Deferred income tax assets:
Preopening costs, net of amortization.......................... $ 1,200,000 $ 831,000
Accrued expenses............................................... 675,000 631,000
Net operating loss carryforwards............................... -- 6,922,000
Alternative minimum tax credit carryforwards................... 1,424,000 475,000
------------ -------------
3,299,000 8,859,000
Less: valuation allowance........................................ -- (5,011,000)
------------ -------------
Total deferred income tax assets................................. 3,299,000 3,848,000
Deferred income tax liabilities:
Depreciation and amortization.................................. 2,703,000 3,469,000
Prepaid expenses............................................... 220,000 220,000
Other.......................................................... 113,000 159,000
------------ -------------
Total deferred income tax liabilities............................ 3,036,000 3,848,000
------------ -------------
Net deferred income tax asset.................................... $ 263,000 $ --
------------ -------------
------------ -------------
</TABLE>
A valuation allowance has been established due to the Company's accumulated
losses as of November 30, 1997. The Company has an operating loss carryforward
of approximately $20 million to reduce future taxable income, which will expire
in 2012.
9. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
A complaint has been filed in the United States District Court against the
Company and Mr. Morton involving the rights to the use of the Hard Rock name,
marks, and logos on the internet. The plaintiff is seeking monetary damages and
has sought an injunction against the use of the Hard Rock name and logos and an
order requiring Mr. Morton and the Company to assign the name to the plaintiff.
Management of the Company believes that this lawsuit is without merit and
intends to defend vigorously the allegation in this complaint, and believes that
the outcome of this litigation will not have a material adverse effect on the
Company.
LEASES
The Company leases certain equipment under leases classified as either
capital or operating leases.
F-19
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL LEASES
Future minimum lease payments under capital leases, together with the
present value of the net minimum lease payments as of November 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................. $ 137,258
1999............................................................. 120,533
2000............................................................. 97,920
---------
Minimum lease payments........................................... 355,711
Less amount representing interest................................ (42,896)
---------
Present value of minimum lease payments.......................... 312,815
Less amount due within one year.................................. (108,325)
---------
Amount due after one year........................................ $ 204,490
---------
---------
</TABLE>
OPERATING LEASES
The Company leases equipment under operating leases expiring through 1999.
Future minimum rental payments under these operating leases by fiscal year of
the Company are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 45,000
1999............................................................... 42,000
2000............................................................... 6,000
---------
$ 93,000
---------
---------
</TABLE>
Total rental expense was approximately $171,000, $325,000, and $297,000
during the years ended November 30, 1995, 1996 and 1997, respectively, and is
included in general and administrative expenses in the accompanying statements
of operations.
SELF-INSURANCE
The Company is included with Harveys and certain of its subsidiaries (the
Group) under a plan of partial self-insurance for medical coverage for
substantially all full-time employees and their dependents. The Group carries
stop loss insurance for claims exceeding $125,000 per individual. The Group is
also self-insured for workers' compensation claims up to an annual stop loss of
$300,000 per claim. Under the terms of the Buyout Agreement (Note 5), the
Company continued to be covered under the Group's medical plan through December
1997, and will reimburse Harveys for all claims costs incurred. The Company has
adopted their own plan of self-insurance for workers' compensation claims,
effective November 1, 1997, up to an annual stop loss of $300,000 per claim.
Management has established reserves they consider adequate to cover estimated
future payments on claims incurred by the Company through November 30, 1997.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a discretionary cash incentive bonus plan available to
eligible employees, based upon individual and company-wide goals that are
established by management and the Board of
F-20
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Directors of the Company on an annual basis. During the years ended November 30,
1995, 1996 and 1997, the Company recorded approximately $427,000, $336,000 and
$494,000, respectively, for these bonuses, which are included in the
accompanying statements of operations.
The Company maintains a 401(k) profit sharing plan whereby substantially all
employees over the age of 21 who have completed one year of continuous
employment and 1,000 hours of service are eligible for the plan. Such employees
joining the plan may contribute, through salary deductions, no less than 1% nor
greater than 20% of their annual compensation. The Company, at its discretion,
will match 50% of the first 6% of compensation contributed by employees. During
the years ended November 30, 1995, 1996 and 1997, the Company recorded
approximately $21,000, $191,000 and $356,000, respectively, for its portion of
plan contributions, which are included in the accompanying statement of
operations.
11. ISSUANCE OF COMMON STOCK AS COMPENSATION
In October 1997, the Company, Lily Pond, and an employee of the Company
entered into an agreement whereby the employee will receive 768 shares of the
Company's Class B common stock from the Company, 20% of which will vest in
October of each year until 2001, at which point the remaining 40% will vest,
provided the vesting period does not end upon the resignation or termination for
cause, as defined. If the employee is terminated without cause or if there is a
change of control of the Company, all remaining shares will vest. The Company,
under certain circumstances and upon written demand from the employee, must
purchase the vested shares of the employee for a price of $1,953 per share. The
aggregate redemption amount ($1,500,000) will be recorded as compensation
expense over the vesting period of four years. During the year ended November
30, 1997, the Company recorded $25,000 in expense related to this agreement,
which has been included in general and administrative expenses on the
accompanying statements of operations.
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chapter 78 of the Nevada Revises Statutes (the "NRS") empowers a Nevada
corporation to indemnify any persons who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such officer or director acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests, and, for criminal proceedings, had no reasonable
cause to believe his conduct was unlawful. A Nevada corporation may indemnify
officers and directors against expenses (including attorneys' fees) in an action
by or in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
Article VII of the By-laws of the Company, a copy of which is filed as
Exhibit 3.2 to this Registration Statement, allows the Company to maintain
director and officer liability insurance on behalf of any person who is or was a
director or officer of the Company or such person who serves or served as
director, officer, employee or agent, of another corporation, partnership or
other enterprise at the request of the Company. Article VII of the Company's
By-laws provides for indemnification of the officers and directors of the
Company to the fullest extend permitted by applicable law.
Pursuant to Article Sixth of the Second Amended and Restated Certificate of
Incorporation of the Company, a copy of which is filed as Exhibit 3.1 to this
Registration Statement, no director of the Company shall be personally liable to
the Company or its shareholders for monetary damages for any breach of his
fiduciary duty as a director; provided, however, that such clause shall not
apply to any liability of a director for acts or omissions involving intentional
misconduct, fraud or a knowing violation of law and liability based on payments
of improper dividends.
Additionally, the Company has entered into an Indemnification Agreement with
each of its directors, the form of which is filed as Exhibit 10.11 this
Registration Statement, that
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3. CERTIFICATE OF INCORPORATION AND BY-LAWS
*3.1 Second Amended and Restated Certificate of Incorporation of the Company.
*3.2 Second Amended and Restated By-Laws of the Company
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING INDENTURES.
*4.1 Indenture, dated as of March 23, 1998, between the Company, and First Trust National Association, as
Trustee, relating to the Notes.
*4.2 Form of 9 1/4% Senior Subordinated Notes due 2005 (included in Exhibit 4.1).
*4.3 Form of 9 1/4% Series B Senior Subordinated Note due 2005 (included in Exhibit 4.1).
*4.4 Registration Rights Agreement, dated as of March 23, 1998, by and among the Company, Bear Stearns Co.
Inc., BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette Securities Corporation.
*4.5 Completion Guaranty, dated as of March 23, 1998, by and among Peter A. Morton, Bank of America National
Trust and Savings Association, and First Trust National Association.
5. OPINIONS.
*5.1 Opinion of Gordon & Silver, Ltd., special Nevada counsel to the Company.
9. VOTING TRUST AGREEMENTS.
*9.1 Amendment, dated as of July 1, 1997 to Stockholder Agreement, dated August 30, 1993, among the Company
and certain stockholders listed therein.
*9.2 Stockholder Agreement, dated as of August 30, 1993, among the Company and certain stockholders listed
therein.
10. MATERIAL CONTRACTS.
*10.1 Loan Agreement, dated as of March 23, 1998, among the Company, as Borrowers, the Lenders party thereto,
Bank of America National Trust and Savings Association, as Agent, and Bear, Stearns & Co., Inc. as
Co-Agent.
*10.2 Make Well Agreement, dated as of March 23, 1998, among Peter A. Morton, Bank of America National Trust
and Savings Association and the Lenders party to the Loan Agreement, dated as of March 23, 1998.
*10.3 Amended and Restated Supervisory Agreement, dated as of October 21, 1997, between the Company and Peter
A. Morton.
*10.4 Employment Agreement, dated October 8, 1997, between the Company and Gary R. Selesner.
*10.5 Amended and Restated Letter Agreement, dated as of March 4, 1998, between the Company, Lily Pond
Investments, Inc. and Gary R. Selesner.
*10.6 Employment Agreement, dated December 1, 1997, between the Company and William R. Stephens.
*10.7 Trademark Sublicense Agreement, dated October 24, 1997, between the Company and Peter A. Morton.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.8 Amendment No.1 to Trademark Subliscense Agreement, dated as of March 23, 1998, between the Company and
Peter A. Morton.
*10.9 Construction Contract, dated February 17, 1998, between the Company and KLAI:JUBA.
*10.10 Letter of Intent, dated May 10, 1998, between the Company and Howa Construction, Inc.
10.11 Management Agreement, as amended as of September 16, 1993, between the Company and Harvey's Wagon Wheel,
Inc.
10.12 Stock Purchase and Management Buyout Agreement, dated as of July 1, 1997, by and among Harveys L.V.
Management Company, Inc., Harveys Casino Resorts, Lily Pond Investments, Inc. and the Company.
12. RATIO OF EARNINGS TO FIXED CHARGES.
*12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Company.
23. CONSENTS.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Gordon & Silver, Ltd., Special Nevada counsel to the Company (included in Exhibit 5.1)
24. POWERS OF ATTORNEY.
*24.1 Power of Attorney (included in signature page).
25. FORM T-1.
*25.1 Statement of Eligibility and Qualification on Form T-1 of U.S. Bank Trust National Association, as
Trustee under the Indenture relating to the Company's 9 1/4% Series B Senior Subordinated Notes due
2005.
27. FINANCIAL DATA SCHEDULE.
*27.1 Financial Data Schedule for fiscal quarters ended February 28, 1997 and 1998.
*27.2 Financial Data Schedule for fiscal years ending November 30, 1993, 1994 and 1995.
*27.3 Financial Data Schedule for fiscal years ending November 30, 1996 and 1997.
*27.4 Financial Data Schedule for fiscal quarters and six months ended May 31, 1997 and 1998.
99. MISCELLANEOUS.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter of Brokers, Dealers , Commercial Banks, Trust Companies and Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- ------------
* Previously filed
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, hereunto duly authorized in the City of Las Vegas, State of
Nevada on the twentieth day of August, 1998.
<TABLE>
<S> <C> <C>
HARD ROCK HOTEL, INC.
By: /s/ BRUCE R. DALL
-----------------------------------------
Bruce R. Dall
CHAIRMAN, PRESIDENT,
CHIEF FINANCIAL OFFICER
AND TREASURER
</TABLE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Financial Officer,
Treasurer (Principal
Accounting Officer) and as
duly appointed attorney
/s/ BRUCE R. DALL for Peter A. Morton,
- ------------------------------ Chairman, Chief Executive August 20, 1998
Bruce R. Dall Officer, President and
Secretary, Gilbert B.
Friesen and Stephen A.
Marks, each a Director
II-5
<PAGE>
EXHIBIT 10.11
AGREEMENT
THIS AGREEMENT is dated this 16th day of September, 1993 by and among HARVEY'S
WAGON WHEEL, INC., a Nevada corporation ("Harvey's"), and HARD ROCK HOTEL, INC.,
a Nevada corporation ("Company").
R E C I T A L S:
A. Harvey's and the Company are parties to a management agreement dated
August 31, 1993 ("Management Agreement") which provides for certain rights and
obligations of the parties with respect to the Project. Capitalized terms not
otherwise defined herein shall have the same meaning as set forth in the
Management Agreement.
B. The parties would like to provide for additional rights and
obligations with the same effect as if such terms and conditions were set forth
in the Management Agreement.
The parties agree as follows:
1. INDEMNIFICATION TO PROJECT MANAGER. Company agrees to indemnify and
hold Project Manager free and harmless from all loss, liability or cost
(including reasonable attorneys' fees) which is not covered by insurance
proceeds and which Project Manager may sustain, incur or assume as a result of
any claims which may be alleged, made, instituted or maintained against Project
Manager, Morton, Lily Pond, or Company, jointly or severally, arising out of or
based upon the ownership, management, operation, condition or use of the
Project, including, without limitation, injury to persons(s) and damage to
property or business by reason of any cause whatsoever in and about the Project
or elsewhere, including claims by the Hard Rock Cafe for injury or loss of
business; provided, however, Company shall not be liable to indemnify and hold
Project manager harmless from any such uninsured loss, liability or cost
(including costs of defense) which is the result of grossly negligent, willful
misconduct or criminal conduct of Project manager or its employees.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date and year first set forth above.
HARVEY'S: COMPANY:
HARVEY'S WAGON WHEEL, INC., HARD ROCK HOTEL, INC.,
a Nevada corporation a Nevada corporation
By: /S/ RICHARD KUDRNA By: /S/ PETER MORTON
---------------------------- ----------------------------
RICHARD KUDRNA, SR., PETER A. MORTON,
Chairman of the Board President
By: /S/ WILLIAM LEDBETTER By: /S/ TOM YTURBIDE
---------------------------- ----------------------------
WILLIAM LEDBETTER, TOM YTURBIDE,
President Secretary
By: /S/ BEVERLEE LEDBETTER
----------------------------
BEVERLEE LEDBETTER,
Secretary
2
<PAGE>
MANAGEMENT AGREEMENT
By and Between
HARD ROCK HOTEL, INC.,
A Nevada corporation
and
HARVEY'S WAGON WHEEL, INC.,
A Nevada corporation
DATED: August 30, 1993
3
<PAGE>
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT (hereinafter "Agreement") is made and
entered into in Stateline, Douglas County, Nevada, as of the 30th day of August,
1993, by and between HARD ROCK HOTEL, INC., a Nevada corporation, with its
principal place of business located at Hwy. 50 and Stateline Avenue, Stateline,
Nevada (hereinafter referred to as "Company"); and HARVEY'S WAGON WHEEL, INC., a
Nevada corporation, with its principal place of business located at Hwy. 50 and
Stateline Avenue, Stateline, Nevada, (hereinafter referred to as "Project
Manager").
RECITALS
WHEREAS, Company has the rights and expertise in the development,
construction, financing, and management of the Hard Rock Hotel; and
WHEREAS, Peter A. Morton is a licensee of the Hard Rock mark, logo, and
name, and all the exploitation rights with respect thereto in the State of
Nevada and elsewhere, as more particularly described in Section 1.27 below and
is the sole shareholder in Lily Pond Investments, Inc., a Nevada corporation;
and
WHEREAS, Project Manager is a Nevada Gaming Licensee and has expertise as a
developer and owner/operator as well as manager of hotel and casinos; and
WHEREAS, Company, Morton, Lily Pond Investments, Inc., and Project Manager
desire to enter into a series of agreements including a Management Agreement in
order to improve, develop, manage, operate, and maintain a Hard Rock
Hotel/Casino facility located in Las Vegas, Nevada (hereinafter the "Project")
in conformance with the terms and conditions of this Agreement in accordance
with local, state and federal law.
NOW, THEREFORE, in consideration with the mutual covenants contained
herein, the parties agree as follows:
4
<PAGE>
EXHIBIT 10.12
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Accounts: . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Annual Operating Budget . . . . . . . . . . . . . . . . . . . . 1
1.4 Annual Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Base Management Fee . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Capital Improvements. . . . . . . . . . . . . . . . . . . . . . 2
1.8 Capital Replacements. . . . . . . . . . . . . . . . . . . . . . 2
1.9 Company's Approval. . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Company's Bank Account. . . . . . . . . . . . . . . . . . . . . 2
1.11 Company's Return Account. . . . . . . . . . . . . . . . . . . . 2
1.12 Consumer Price Index. . . . . . . . . . . . . . . . . . . . . . 2
1.13 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.14 Design, Development & Construction Budget: . . . . . . . . . . 3
1.15 Effective Date: . . . . . . . . . . . . . . . . . . . . . . . 3
1.16 Fiscal Month. . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 Furniture, Fixtures and Equipment: . . . . . . . . . . . . . . 4
1.20 Generally Accented Accounting Principles: . . . . . . . . . . 4
1.21 General Manager . . . . . . . . . . . . . . . . . . . . . . . . 4
1.22 Gross Revenues. . . . . . . . . . . . . . . . . . . . . . . . . 4
1.23 Hotel/Casino. . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.24 Incentive Fee . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.25 Initial Term. . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.26 Lily Pond . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.27 Licensing Agreement . . . . . . . . . . . . . . . . . . . . . . 5
1.28 Mark. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.29 Morton. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.30 Opening: . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.31 Operating Accounts. . . . . . . . . . . . . . . . . . . . . . . 6
1.32 Operation Costs: . . . . . . . . . . . . . . . . . . . . . . . 6
1.33 Operating Equipment: . . . . . . . . . . . . . . . . . . . . . 8
1.34 Operating Supplies. . . . . . . . . . . . . . . . . . . . . . . 8
1.35 Operational Standards . . . . . . . . . . . . . . . . . . . . . 8
1.36 Pre-Opening . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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1.37 Pre-Opening Program . . . . . . . . . . . . . . . . . . . . . . 9
1.38 Project: . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.39 Project Manager's Incentive Account . . . . . . . . . . . . . . 9
1.40 Reserve Fund. . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.41 Return on Investment. . . . . . . . . . . . . . . . . . . . . . 9
1.42 Site. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.43 Stockholders Agreement. . . . . . . . . . . . . . . . . . . . . 9
1.44 Structure: . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.45 Sublicense Agreement. . . . . . . . . . . . . . . . . . . . . . 10
1.46 Supervisory Agreement . . . . . . . . . . . . . . . . . . . . . 10
1.47 Supervisory Fees. . . . . . . . . . . . . . . . . . . . . . . . 10
1.48 Technical Assistance Services . . . . . . . . . . . . . . . . . 10
1.49 Total Development Cost. . . . . . . . . . . . . . . . . . . . . 10
1.50 Working Capita1 Loans . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 2 TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Initial Term. . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Renewal Terms.. . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Exclusivity.. . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 3 ANCILLARY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 12
3.1 Stockholders Agreement. . . . . . . . . . . . . . . . . . . . . 12
3.2 Supervisory Agreement.. . . . . . . . . . . . . . . . . . . . . 12
3.3 Sublicense Agreement. . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 4 SCOPE OF RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . 13
4 (A) (1) Technical Assistance Services. . . . . . . . . . . . . . 13
4 (A) (2) Pre-Opening Program. . . . . . . . . . . . . . . . . . . 14
4 (A) (3) Budget.. . . . . . . . . . . . . . . . . . . . . . . . . 16
4 (A) (4) Financial Capital Requirements.. . . . . . . . . . . . . 16
4 (A) (5) Operational Standards. . . . . . . . . . . . . . . . . . 16
4 (A) (6) Operating Accounts.. . . . . . . . . . . . . . . . . . . 16
4 (A) (7) Developing Pre-Opening Program.. . . . . . . . . . . . . 16
4 (A) (8) Pre-Opening Inspection.. . . . . . . . . . . . . . . . . 17
4 (A) (9) Permits and Licenses.. . . . . . . . . . . . . . . . . . 17
CONSTRUCTION AND RESPONSIBILITIES. . . . . . . . . . . . . . . . . . . . . 17
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4 (B) (1) Construction Duties. . . . . . . . . . . . . . . . . . . 17
4 (B) (2) Conformance with Specifications. . . . . . . . . . . . . 18
4 (B) (3) Retention of Third Parties.. . . . . . . . . . . . . . . 18
4 (B) (4) Taxes and Assessments. . . . . . . . . . . . . . . . . . 19
OPENING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 19
4 (C) (1) Permits. . . . . . . . . . . . . . . . . . . . . . . . . 19
4 (C) (2) Equipment and Supplies.. . . . . . . . . . . . . . . . . 19
4 (C) (3) Personnel. . . . . . . . . . . . . . . . . . . . . . . . 20
4 (C) (4) Sales. . . . . . . . . . . . . . . . . . . . . . . . . . 22
4 (C) (5) Maintenance and Repairs. . . . . . . . . . . . . . . . . 22
4 (C) (6) Capital Expenditures. . . . . . . . . . . . . . . . . . 23
4 (C) (7) Compliance with Legal Requirements. . . . . . . . . . . 26
4 (C) (8) Accounting Matters and Fiscal Periods. . . . . . . . . . 27
4 (C) (9) Financial Statements. . . . . . . . . . . . . . . . . . 27
4 (C) (10) Annual Plan. . . . . . . . . . . . . . . . . . . . . . . 28
4 (C) (11) Bank Accounts. . . . . . . . . . . . . . . . . . . . . . 31
4 (C) (12) Priority of Disbursements. . . . . . . . . . . . . . . . 32
4 (C) (13) Adjustment to Bank Account.. . . . . . . . . . . . . . . 33
4 (C) (14) Insurance Coverage. . . . . . . . . . . . . . . . . . . 33
4 (C) (15) Insurance Policies. . . . . . . . . . . . . . . . . . . 34
4 (C) (16) Waiver of Liability. . . . . . . . . . . . . . . . . . . 35
4 (C) (17) Indemnification to Project Manager.. . . . . . . . . . . 35
4 (C) (18) Indemnification to Company.. . . . . . . . . . . . . . . 36
4 (C) (19) Legal Fees, etc.; Procedures.. . . . . . . . . . . . . . 36
4 (C) (20) Indemnified Parties. . . . . . . . . . . . . . . . . . . 37
4 (C) (21) Survival. . . . . . . . . . . . . . . . . . . . . . . . 37
4 (C) (22) Defense. . . . . . . . . . . . . . . . . . . . . . . . . 37
4 (C) (23) Hotel/Casino Brand Store Operations. . . . . . . . . . . 37
4 (C) (24) Lease Agreements. . . . . . . . . . . . . . . . . . . . 38
4 (C) (25) Consultation.. . . . . . . . . . . . . . . . . . . . . . 38
4 (C) (26) Inventory, Working Capita1 and Operating Expenses. . . . 38
4 (C) (27) Maintenance Agreements. . . . . . . . . . . . . . . . . 39
4 (C) (28) Employee Benefit Plans.. . . . . . . . . . . . . . . . . 39
4 (C) (29) Legal Action.. . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 5 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1 Base Management Fee.. . . . . . . . . . . . . . . . . . . . . . 39
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5.2 Incentive Fee.. . . . . . . . . . . . . . . . . . . . . . . . . 40
5.3 Distributions.. . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 6 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6.1 Default.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6.2 Default by Project Manager. . . . . . . . . . . . . . . . . . . 41
6.3 Default by Company. . . . . . . . . . . . . . . . . . . . . . . 42
6.4 Curing Default. . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE 7 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.2 Terminating Under Default.. . . . . . . . . . . . . . . . . . . 43
7.3 Condemnation or Destruction. . . . . . . . . . . . . . . . . . 44
7.4 Failure to Achieve Financial Results. . . . . . . . . . . . . . 44
7.5 Transfer of Interest. . . . . . . . . . . . . . . . . . . . . . 44
7.6 Sale or Lease of Project. . . . . . . . . . . . . . . . . . . . 45
7.7 Reduction of Interest.. . . . . . . . . . . . . . . . . . . . . 45
7.8 Termination Notice. . . . . . . . . . . . . . . . . . . . . . . 45
7.9 Rights and Remedies Upon Termination. . . . . . . . . . . . . . 45
7.10 Pre-Opening Termination.. . . . . . . . . . . . . . . . . . . . 45
7.11 Post-Opening Termination. . . . . . . . . . . . . . . . . . . . 45
7.12 Winding Up. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE 8 MORTGAGES AND DEBT ENCUMBRANCES . . . . . . . . . . . . . . . . 46
8.1 Non-Encumbrance.. . . . . . . . . . . . . . . . . . . . . . . . 46
8.2 Notices to Mortgagees.. . . . . . . . . . . . . . . . . . . . . 47
8.3 Cure by Mortgagee. . . . . . . . . . . . . . . . . . . . . . . 47
8.4 Access to Premises. . . . . . . . . . . . . . . . . . . . . . . 47
8.5 Foreclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.6 Estoppel Certificates.. . . . . . . . . . . . . . . . . . . . . 47
ARTICLE 9 CONDEMNATION AND DESTRUCTION. . . . . . . . . . . . . . . . . . 48
9.1 Condemnation and Destruction. . . . . . . . . . . . . . . . . . 48
9.2 Continuation. . . . . . . . . . . . . . . . . . . . . . . . . . 48
9.3 Destruction.. . . . . . . . . . . . . . . . . . . . . . . . . . 48
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9.4 Termination.. . . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.2 Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
10.3 Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . 50
10.4 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 50
10.5 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . 50
10.6 Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
10.7 Waiver and Modification.. . . . . . . . . . . . . . . . . . . . 51
10.8 Attorney's Fees.. . . . . . . . . . . . . . . . . . . . . . . . 51
10.9 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . 52
10.10 Understandings and Agreements. . . . . . . . . . . . . . . . . 52
10.11 Covenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
10.12 Power of Authority. . . . . . . . . . . . . . . . . . . . . . . 52
10.13 Interest and Penalties. . . . . . . . . . . . . . . . . . . . . 52
10.14 Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . 52
10.15 Incorporation of Documents. . . . . . . . . . . . . . . . . . . 53
10.16 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 53
EXHIBIT "A" CURRENT PROJECT MANAGER AFFILIATES . . . . . . . . . . . 55
EXHIBIT "B" PROJECTED ANNUAL OPERATING BUDGET. . . . . . . . . . . . 56
EXHIBIT "C" FIRST FISCAL YEAR'S ANNUAL PLAN. . . . . . . . . . . . . 57
EXHIBIT "D" STOCKHOLDERS AGREEMENT . . . . . . . . . . . . . . . . . 58
EXHIBIT "E" DESIGN, DEVELOPMENT AND CONSTRUCTION BUDGET. . . . . . . 59
EXHIBIT "F" LICENSE AGREEMENT . . . . . . . . . . . . . . . . . . . 60
EXHIBIT "G" OPERATIONAL STANDARDS. . . . . . . . . . . . . . . . . . 61
EXHIBIT "H" SITE . . . . . . . . . . . . . . . . . . . . . . . . . . 62
EXHIBIT "J" SUPERVISORY AGREEMENT . . . . . . . . . . . . . . . . . 63
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EXHIBIT "K" TARGETS FOR RETURN ON INVESTMENT . . . . . . . . . . . . 64
EXHIBIT "L" MINIMUM FINANCIAL RESULTS . . . . . . . . . . . . . . . 65
EXHIBIT "M" POST-OPENING TERMINATION FORMULA . . . . . . . . . . . . 67
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ARTICLE 1
DEFINITIONS
As used herein, the following terms shall have the respective meanings
indicated below. Terms not capitalized or otherwise defined herein shall
have the same meaning as in the Stockholders Agreement (as defined below).
1.1 ACCOUNTS: Those bank or financial institution accounts as are
necessary for the day-to-day and long-term management and operation of the
Project, including the Operating Costs Bank Account as defined in Section
4(C)(11)(a) (as defined below).
1.2 AFFILIATE: Any person or entity which, directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with the subject entity. "Control" shall mean having ownership
of twenty percent (20%) or more of the (i) voting equity interests in an
entity; (ii) partnership interests in a partnership; (iii) general
partnership interests in a limited partnership; or (iv) voting or economic
benefit of any other type of entity. The current Affiliates of Project
Manager as of the date of this Agreement are set forth in Exhibit "A"
attached hereto and incorporated herein.
1.3 ANNUAL OPERATING BUDGET: operating Budget for each Fiscal Year,
as determined by Project Manager and approved by Company, projecting an
estimated income, wages and salaries, prizes, utilities, insurance, marketing
expenses, supervisorial costs, and any other overhead costs associated with
the Project, including all fees and reimbursements to Project Manager
provided for in this Agreement. A copy of the Projected Annual Operating
Budget for the upcoming Fiscal Year will be attached hereto and incorporated
herein as Exhibit "B" within one hundred eighty (180) days of execution of
this Agreement.
1.4 ANNUAL PLAN: stimated income and expense statements and budget
estimates for the upcoming Fiscal Year including pre-opening budget and
operations budget and programs. This plan shall also provide an Annual
Operating Budget for each upcoming Fiscal Year. The plan shall also include
budgets and estimates for expenditures for revisions, alterations,
rebuilding, replacements, additions and improvements in and to the Project,
the site, the building, and the furnishings and equipment, estimated working
capital requirements and expenditures with estimated payment and deposit
dates. The Annual Plan shall also include a concise written
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narrative regarding Operating standards, policies and procedures for
day-to-day operations and projections concerning rooms, food, beverage,
entertainment, hotel merchandise sales, labor, credit, marketing and
advertising, and related matters. A copy of the First Fiscal Year's Annual
Plan will be attached hereto and incorporated herein as Exhibit "C" within
one hundred eighty (180) days of execution of this Agreement.
1.5 BASE MANAGEMENT FEE: Base Management Fee to be equal to four
percent (4%) of the annual Gross Revenues for each Fiscal Year to be payable
for each Fiscal Month, and as further defined in Section 5.1.
1.6 BOARD OF DIRECTORS: The Board of Directors shall be the Board of
Directors of Company as defined in the Stockholders Agreement, consisting of
seven (7) Managers (hereinafter "Board").
1.7 CAPITAL IMPROVEMENTS: All revisions, alterations, rebuilding,
replacements, additions and improvements in and to the Site, the Structure,
the Furniture, Fixtures and Equipment, other than Operating Equipment, as
determined under Generally Accepted Accounting Principals (as defined below).
1.8 CAPITAL REPLACEMENTS: Any modifications, refurbishing,
remodeling, alterations, additions, rebuilding or renovation of any portion
of the Project, including the Furniture, Fixtures, and Equipment associated
with the Project, as determined under Generally Accepted Accounting
Principals (as defined below).
1.9 COMPANY'S APPROVAL: A simple majority vote of the then existing
Board with respect to any matter submitted to Company for approval will be
required unless the context herein, or in a collateral instrument, requires a
greater vote.
1.10 COMPANY'S BANK ACCOUNT: That Bank Account established by Company
in which only Company or its designees are entitled or authorized to draw
upon said account, as more particularly described in Section 4(C)(11)(d).
1.11 COMPANY'S RETURN ACCOUNT: The account established on the books
and records of the Project which is more particularly described in Section
5.2.
1.12 CONSUMER PRICE INDEX: The "U.S. City Average, All Items" Consumer
Price Index (C.P.I.) for All Urban Consumers published by the Bureau of Labor
Statistics of the United States Department of Labor (Base: 1982-1984=100),
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or any successor index thereto. If the Price Index is hereafter converted to
a different standard reference base or otherwise revised, any determination
hereunder which uses the Price Index shall be made with the use of such
conversion factor, formula or table for converting the Price Index as may be
published by the Bureau of Labor Statistics, or, if the Bureau of Labor
Statistics shall no longer publish the same, then with the use of such
conversion factor, formula or table as may be published by Prentice Hall,
Inc., or failing such publication, by any other nationally recognized
publisher of similar statistical information. If the Price Index shall cease
to be published, then for the purposes of this Agreement there shall be
substituted for the Price Index such other similar index as Company and
Project Manager shall reasonably agree.
1.13 DEFAULT: Those events as defined in Article 6.
1.14 DESIGN, DEVELOPMENT & CONSTRUCTION BUDGET: Total invested capital
in Project, approved by Company, Lily Pond (as defined below), and Project
Manager, and subject to periodic adjustments as approved by Company,
including real estate, all costs associated with structure and improvements,
allowances for Furniture, Fixtures and Equipment attached or used within the
Site and Structure, Construction, and Design Fees, Permits and Licenses,
Pre-Opening Program Costs, capitalized interest, and all associated financing
fees through the date that the Project receives a final Certificate of
Occupancy from the applicable governmental authority, but in no event not to
exceed EIGHTY MILLION DOLLARS ($80,000,000.00). A copy of the Design,
Development & Construction Budget will be attached hereto and incorporated
herein as Exhibit "E" within one hundred eighty (180) days of execution of
this Agreement.
1.15 EFFECTIVE DATE: Shall mean the latter date upon which all parties
have properly executed this Agreement, the Stockholders Agreement, and the
date the articles of incorporation of the Company have been filed.
1.16 FISCAL MONTH: Individual monthly accounting period ending on the
close of business on the last day of each calendar month.
1.17 FISCAL YEAR: Annual accounting period ending on the close of
business at the end of November 30th of each year.
1.18 FORCE MAJEURE: During the Term, or prior to the commencement
thereof, any (i) strike(s), lockout(s) or labor dispute(s); (ii) inability to
obtain labor or
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materials, or reasonable substitutes therefore; or (iii) acts of God,
governmental restrictions, regulations or controls, enemy or hostile
governmental action, civil commotion, fire or other casualty, or other
conditions similar or dissimilar to those enumerated in this item (iii)
beyond the reasonable control of the party obligated to perform. If Company
or Project Manager shall, as the result of any of the above-described events,
fail punctually to perform any obligation on its part to be performed under
this Agreement, then such failure shall be excused and not be a breach of
this Agreement by the party in question, but only to the extent occasioned by
such event. If any right or option of either party to take any action under
or with respect to this Agreement is conditioned upon the same being
exercised within any prescribed period of time and such named date, then such
prescribed period of time and such named date shall be deemed to be extended
or delayed, as the case may be, for a period equal to the period of the delay
occasioned by any above-described event.
1.19 FURNITURE, FIXTURES AND EQUIPMENT: All Furniture, Fixtures and
Equipment (exclusive of Operating Equipment and fixtures attached to and
incorporated as a part of the Project) reasonably required for the operation
of the Project pursuant to the terms of this Agreement including, but not
limited to, office furniture, specialized equipment necessary for the
operation of a first class hotel and casino, food and beverage equipment,
laundries, and recreational facilities. Such items shall also include
specialized casino equipment, including cashier, money sorting and money
counting equipment, slot machines, table games, video gaming equipment, and
other similar gaming equipment as well as surveillance equipment. Above items
shall also include computer and communication systems.
1.20 GENERALLY ACCENTED ACCOUNTING PRINCIPLES: Accepted accounting
procedures and practices for the maintenance of books of account and records
on a daily, monthly and annual basis for hotel/casino operations, also known
as "GAAP".
1.21 GENERAL MANAGER: The individual selected and appointed by Project
Manager to represent the Project Manager at the Project and to manage and
supervise the activities of the Project on a day-to-day basis.
1.22 GROSS REVENUES: All revenues and income of any kind derived
directly or indirectly from the use or operation of the Project determined
substantially in accordance with Generally Accepted Accounting Principles
including, without limitation, total room sales; and gaming 'Gross Revenues',
as that term is defined in Nevada Revised Statutes 463.0161 as of the date of
this Agreement; and food and beverage sales; gross receipts from all
entertainment programs and mer-
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chandise sales; and telephone, telegraph and telex revenues; rental or other
payments from lessees, sublessees and concessionaires and others occupying
space or rendering services at the Project (but not the gross receipts of
such lessees, sublessees or concessionaires unless the same is part of such
lessees', sublessees', or concessionaires' rental payments); and the actual
cash proceeds of business interruption or similar insurance and of temporary
condemnation awards after deducting necessary expenses in connection with the
adjustment or collection of such proceeds; excluding, however, any proceeds
from the sale, financing or refinancing or other disposition of the Project;
any proceeds from the sale, financing, refinancing or other disposition of
the Furniture, Fixtures and Equipment or other capital assets; proceeds of
any fire, extended coverage or other insurance policies (excluding any
proceeds of business interruption or similar insurance, as provided above);
condemnation (other than temporary) awards and other amounts received by
Company in lieu of or threat of condemnation; credits or refunds to guests,
gratuities or service charges or other similar receipts which Company or
Project Manager pays to employees, lessees or concessionaires; excise, sales,
gross receipts, admission, entertainment, tourist, taxes or similar charges
collected from patrons or guests or as part of the sale price for goods,
services or entertainment; any sum and credits received for lost or damaged
merchandise; any interest paid with respect to any Reserve Fund or Bank
Account; and the cost or value of any complimentary goods or services
(including, but not limited to, rooms, food and beverages) given or awarded
to employees, patrons or guests of the Project.
1.23 HOTEL/CASINO: As defined in Section 1.38, and including all
Furniture, Fixtures, and Equipment, Operating Equipment and Operating
Supplies as defined in Sections 1.19 and 1.33 and 1.24.
1.24 INCENTIVE FEE: All fees due and owing to Project Manager as
defined pursuant to Article 5.2.
1.25 INITIAL TERM: Shall commence on the date of execution of this
Agreement, plus a twenty-five (25) year period, commencing on the Opening as
set forth in Section 1.30.
1.26 LILY POND: Lily Pond Investments, Inc., a Nevada corporation,
wholly owned by Peter A. Morton, assignee, or his estate.
1.27 LICENSING AGREEMENT: The agreement entered into between Morton
and Hard Rock Cafe, Licensing Corporation, a New York corporation ("HRCLC"),
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whereby "HRCLC" has granted to Peter A. Morton an exclusive license to use
the brand, name, mark and logo of "HARD ROCK HOTEL", pursuant to certain
terms and restrictions, a copy of which is attached hereto and incorporated
herein as Exhibit "F".
1.28 MARK: The registered name, trademark, service mark, and
associated logos of the brand "Hard Rock Hotel".
1.29 MORTON: Peter A. Morton, the individual or any successor
designated by Peter A. Morton, or his successor, or the estate of Peter A.
Morton, or his successor.
1.30 OPENING: Date on which the Project is first opened to the public
and commences business.
1.31 OPERATING ACCOUNTS: Bank or financial institution accounts
maintained by Project Manager in the name of the Project for the day-to-day
management of Project.
1.32 OPERATION COSTS: All costs and expenses of maintaining,
conducting and supervising the operation of the Project incurred pursuant to
this Agreement or as otherwise specifically provided herein which are
properly attributable to the Fiscal Month or Fiscal Year under consideration
under Generally Accepted Accounting Principles including, without limitation:
(a) the cost of all food and beverages sold or consumed
by Company, Project Manager, concessionaires or otherwise and of all
Operating Equipment and Operating Supplies, with the exception of the cost of
food and beverages and other items sold or consumed by lessees and
sublessees;
(b) salaries, wages and other benefits of Project
personnel, including costs of payroll taxes and employee benefits and all
other similar expenses not otherwise specifically referred to in this
definition which are referred to as "Administrative and General Expenses"
under Generally Accepted Accounting Principles. The salaries, wages,
benefits, and expenses including travel expenses of other employees or
executives of Project Manager, its Affiliates, Morton, Lily Pond or of
specialists not regularly employed by Project Manager, Morton, and/or Lily
Pond for use in the Project with respect to those individuals allocating time
or services to the Project on a non-exclusive basis up to maximum amounts to
be agreed
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upon in writing by Company and Project Manager from time to time. Except as
herein otherwise expressly provided, all remaining salaries, wages, or other
benefits of employees or executives of Project Manager, its Affiliates,
Morton, and/or Lily Pond will not be deemed to be Operating Costs;
(c) the cost of all other goods and services obtained by
Project Manager in connection with its operation of the Project including,
without limitation, heat and utilities, office supplies and all services
performed by third parties, including leasing and expenses in connection with
telephone and data processing equipment and such other equipment as Company
shall designate;
(d) the cost of repairs to and maintenance of the Project
to the extent not paid for by the actual cash proceeds of any fire or casualty
insurance after deducting necessary expenses in connection with the adjustment
or collection of such proceeds;
(e) insurance premiums for all insurance maintained by
Company or Project Manager as provided in this Agreement with respect to the
Project, including, without limitation, property damage insurance, public
liability insurance, workers' compensation insurance, or insurance required
by similar employee benefits acts and such business interruption or other
insurance as may be provided for protection against claim, liabilities and
losses incurred with respect to deductibles applicable to the foregoing types
of insurance;
(f) all taxes, assessments, water/sewer charges, and
other charges (other than federal, state or local income taxes and franchise
taxes or the equivalent) payable by or assessed against Project Manager or
Company with respect to the operation of the Project;
(g) legal fees and fees of any accountants for services
related to the operation of the Project (including, but not limited to, the
audits required under Article 4 (C) (8) (b));
(h) the costs and expenses of technical consultants and
specialized operational experts, including key personnel of Morton, Lily
Pond, and Project Manager, as agreed on from time to time, for specialized
services in connection with non-recurring work on operational, functional,
decorating, design or construction problems and activities (but only to the
extent not included in the Design, Development and Construction Budget);
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(i) all expenses for marketing the Project, including all
expenses of advertising, sales promotion and public relations activities;
(j) all Base Management and Incentive Fees;
(k) Supervisory Fees as defined in Section 1.47;
(l) to the extent not already excluded from Gross
Revenues, real estate taxes, ad valorem taxes, personal property taxes,
utility taxes and other taxes (as those terms are defined in the Generally
Accepted Accounting Principles), assessments for public improvements, and
municipal, county and state license and permit fees; and
Operating costs shall not include (i) depreciation and amortization
except as otherwise provided in this Agreement; (ii) debt service on any
mortgage; (iii) principal and interest payments on Working capital Loans;
(iv) payments allocated or made to the Reserve Fund; (v) expenses incurred
pursuant to the Design, Development and Construction Budget; (vi) any amount
which Company and Project Manager agree is a cost attributable to the
organization of Company (e.g., incorporation or other formation costs of
Company, preparation of Company's tax returns, audits of Company's books and
records, etc.) and should be considered an expense of Company.
1.33 OPERATING EQUIPMENT: All equipment necessary for the day-to-day
operation of the Hotel/Casino, including but not limited to, chips, tokens,
uniforms, playing cards, glassware, linens, silverware, utensils, and
dishware.
1.34 OPERATING SUPPLIES: All food, beverage, and immediately
consumable items utilized in operating the Project such as soap, cleaning
materials, matches, stationary, brochures, folios, and other similar items.
1.35 OPERATIONAL STANDARDS: As defined in Section 4 (A) (5), said
standards shall address all customer service departments where there is
customer contact. Department, position and activity standards will contain,
at a minimum, customer service and contact elements, procedural and personnel
service standards, staff or casting and scheduling requirements, as well as
staffing effectiveness and standards fulfillment tracking, and quality
assurance measurements and controls. A copy of
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the Operational standards will be attached hereto and incorporated herein as
Exhibit "G" within one hundred eighty (180) days of execution of this
Agreement.
1.36 PRE-OPENING: That time period from Effective Date to the Opening
of the Project.
1.37 PRE-OPENING PROGRAM: As part of the Design, Development and
Construction Budget, a concise, written action plan delineating the key
actions to be taken by Project Manager to properly prepare the Project for a
successful opening including recruitment, training, marketing, advertising,
building preparation, Furniture, Fixture and Equipment installation,
operations planning and cost estimates.
1.38 PROJECT: A 305-room hotel and casino, 28,000-square feet of
casino space, two restaurants, several bars, Hotel Brand retail store,
parking garage, outdoor swim park, and recreational facilities located on 7.6
acres in Las Vegas, Nevada, on the Site (as defined below) together with all
entrances, exits, rights of ingress and egress, easements, and appurtenances
thereunto at the intersection of Paradise Road and Harmon Avenue.
1.39 PROJECT MANAGER'S INCENTIVE ACCOUNT: The account established on
the books and records of the Project which is more particularly described in
Section 5.2.
1.40 RESERVE FUND: A fund maintained for capital replacements and
improvements for the Project to be maintained on the books of the Project by
Project Manager, with said fund being maintained in designated bank accounts
in the name of Owner and/or the Project.
1.41 RETURN ON INVESTMENT: Negotiated minimum return on investment at a
mutually acceptable cost of capital level which shall be defined and initially
established in Section 5.2.
1.42 SITE: Parcel or parcels of real estate located in Las Vegas,
Nevada, as more particularly described in Exhibit "H" attached hereto and
made a part hereof.
1.43 STOCKHOLDERS AGREEMENT: The Stockholders Agreement of Hard Rock
Hotel, Inc., a Nevada corporation, Harvey's Wagon Wheel, Inc. and Lily Pond
Investments, Inc., a Nevada corporation, wholly owned by Morton. A copy of
the document is attached hereto and incorporated herein as Exhibit "D".
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1.44 STRUCTURE: All buildings, structures and improvements now located
or to be constructed on the Site and all fixtures and equipment attached to,
forming a part of and necessary for the operation of such buildings,
structures or improvements as a Project as contemplated by this Agreement
(including, without limitation, heating, lighting, plumbing, sanitary, air
conditioning, laundry, refrigeration, kitchen, elevator and similar items or
systems), guest rooms, and such (i) restaurants, bars and banquet, meeting
and other public areas, (ii) commercial space, including concessions and
shops, (iii) garage and parking space, (iv) storage and service areas, (v)
recreational facilities and areas, (vi) public grounds and gardens, (vii)
permanently affixed signage, (viii) aquatic facilities, and (ix) other
facilities and appurtenances, as reasonably necessary for the operation of
the building as a Project in accordance with the standards set forth in this
Agreement.
1.45 SUBLICENSE AGREEMENT: Any agreements or assignments entered into
by and between Morton, Lily Pond, and/or Company, incorporating by reference
the Licensing Agreement, whereby Company receives a license to use the name,
mark, and logo of "Hard Rock Hotel", in Clark County, Nevada pursuant to the
terms and restrictions of the Licensing Agreement, a copy of said Sublicense
Agreement is attached hereto and incorporated herein as Exhibit "I".
1.46 SUPERVISORY AGREEMENT: Agreement between Company and Morton giving
Morton certain supervisory and oversight rights for a term of fifty-five (55)
years and a two percent (2%) fee, the supervisory fee, to be payable to Morton
based upon annual Gross Revenues which Agreement shall also incorporate the
Operational Standards. A copy of the Supervisory Agreement is attached hereto
and incorporated herein as Exhibit "J".
1.47 SUPERVISORY FEES: A fee to be payable from Company to Morton for
supervisory and oversight services at a sum of two- percent (2%) of Annual
Gross Revenues of Project.
1.48 TECHNICAL ASSISTANCE SERVICES: See Section 4 (A) (l).
1.49 TOTAL DEVELOPMENT COST: The sum of the total development cost of
the Project through the date the Project receives a final certificate of
occupancy from the relevant governmental authority, to the extent approved by
the approved mortgagee (including all hard and soft costs and all Pre-Opening
expenses, but excluding post completion operating shortfall reserves).
Within thirty (30) days following the Opening of the Project, Company and
Manager shall execute an addendum to this
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Agreement setting forth the actual amount of the Total Development Cost,
which shall not exceed EIGHTY MILLION DOLLARS ($80,000,000.00).
1.50 WORKING CAPITA1 LOANS: Those funds furnished by Company to
Project Manager, upon the notification of Project Manager to Company of any
deficiency of a minimum balance as required by Section 4 (C) (11) (a).
Company shall furnish Project Manager with sufficient funds to make up any
said deficiency, which shall constitute a "Working Capital Loan", and shall
bear interest at a rate equal to the Prime Rate in effect from time to time
at First Interstate Bank of Nevada, N.A., or any successor thereto, plus
three (3) percentage points.
ARTICLE 2
TERM
2.1 INITIAL TERM. Initial term of this Agreement shall commence as
of the day of execution hereof, plus a period of twenty-five (25) years
commencing at 12:01 a.m. on the Opening, and shall terminate on midnight the
day before the anniversary date of Opening in the year 2018, subject to
sooner termination or extension as provided herein.
2.2 RENEWAL TERMS. Project Manager shall have an option to renew and
continue this Agreement for a period of fifteen (15) years (hereinafter "2nd
Term"). Project Manager shall also have an option to continue this Agreement
for a fifteen (15) year renewal period at conclusion of the 2nd Term which
shall be designated as the "3rd Term". Project Manager shall notify Company,
in writing, of its intent to exercise its option to perform under the renewal
term not less than one year prior to the date on which each respective
renewal term is to commence. Notwithstanding the foregoing, the Project
Manager's right to exercise said options is subject to the terms and
conditions of this Agreement regarding defaults by Project Manager or any
event which would constitute the event of default under Article 6 of this
Agreement. If at the time of exercise of the Option by Project Manager,
Project Manager has an uncured default or is not diligently pursuing cure of
default, then the Option for renewal shall be deemed null and void. Further,
said Option shall be deemed null and void with respect to the exercise of
termination by either party pursuant to Article 7.
2.3 EXCLUSIVITY. In the event the Project Manager participates in
other "Hard Rock Hotel" projects that include as a source of revenue a casino
operation, pursuant to Section 3.3 of the Stockholders Agreement, Project
Manager shall have
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the right to serve as project manager for such future project(s) upon similar
terms and conditions as stated herein. In the event that the parties cannot
agree upon the terms and conditions of the management agreement of such
future project(s), if any, the dispute shall be settled by arbitration
administered by the American Arbitration Association in accordance with its
Commercial Arbitration Rules. The rights and obligations of the Project
Manager, pursuant to this Section 2.3, shall in all cases be subject to
identical rights of termination as set forth in Article 6 and Sections 7.4,
7.5, and 7.7 of this Agreement and Section 3.3 of the Stockholders Agreement.
ARTICLE 3
ANCILLARY AGREEMENTS
3.1 STOCKHOLDERS AGREEMENT. Lily Pond and Project Managers Stockholders
Agreement concerning the formation of Hard Rock Hotel, Inc., a Nevada
corporation, and the development, ownership and control of the Project. The
Stockholders Agreement shall be the controlling document with respect to the
Project, and shall be deemed controlling with respect to any conflicts between
this Management Agreement, the Supervisory Agreement, and the stockholders
Agreement.
3.2 SUPERVISORY AGREEMENT. Morton and Company shall enter into a
Supervisory Agreement whereby Morton is given certain supervisory and
oversight rights with respect to the Project. This Agreement shall contain
Operational Standards by which both parties shall operate under the terms of
the Stockholders Agreement and subject to this Management Agreement. Morton
and Company agree to execute this Supervisory Agreement, and will assist with
the development, ownership and management of the Project. Any conflicts
between the Management and Supervisory Agreement, not addressed in the
Stockholders Agreement shall be resolved by Company, Project Manager and
Morton in accord with the Annual Plan, Operational standards, Annual
Operating Budgets and best business judgment to carry out the intent of the
parties.
3.3 SUBLICENSE AGREEMENT. Lily Pond and Company shall enter into a
Sublicense Agreement whereby Company is given an exclusive right and, license
to use the name, logo and Mark of the "Hard Rock Hotel" in Clark County,
Nevada, subject to the terms and conditions of the Licensing Agreement as set
forth in Exhibit "F". Lily Pond represents and warrants that Lily Pond has a
license to use the Mark and the right to sublicense the use of the Mark, and
the same is registered with the
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United States Department of Commerce. Lily Pond further warrants that Morton
has an exclusive license to parts of the Western United States, including the
State of Nevada and foreign countries for use of the Mark as more
particularly described in Exhibit "F". Pursuant to said Licensing Agreement,
Project Manager agrees that it shall maintain and promote the Project and all
related goods and services, as set forth in this Agreement, at the same level
of quality required in the terms of the Licensing Agreement and Sublicense
Agreement. Project Manager further agrees that it will protect the Mark as
is required by the terms of said License and Sublicense Agreement to the best
of its ability, and will notify Lily Pond of any known infringement thereon.
Lily Pond and Company shall simultaneously execute said Sublicense Agreement
at the time of execution of this Agreement.
ARTICLE 4
SCOPE OF RESPONSIBILITIES
A.
PRE-OPENING RESPONSIBILITIES. For the period commencing as of the date hereof
and until the opening date (hereinafter the "Pre-Opening"), the Project
Manager shall furnish the following benefits, services, and facilities:
4 (A) (1) TECHNICAL ASSISTANCE SERVICES. Project Manager shall make
available Technical Assistance Services embodying Project Manager's unique
experience in the designing and planning of modern first class hotels and
casinos by causing specialists to prepare a preliminary, architectural and
construction program and general outline for furnishing and equipping the
Project as is provided in the Stockholders Agreement. Project Manager shall
also provide advice, guidance, and supervision to Owner in connection with
the planning, designing, equipping, decorating, and furnishing of the
building relative to Furniture, Fixtures and Equipment. In this regard,
Project Manager shall prepare and submit for approval to the Company, a
Design, Development and Construction Budget with respect to the construction,
design, Furniture Fixtures and Equipment for the Project. Project Manager
shall also designate a construction coordinator for the purpose of
coordinating and effectuating the work of the various agents and specialists.
In the performance of such duties, Project Manager agrees to make available
to the Company the following:
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(a) All information which Project Manager has with respect to
costs, quality, or otherwise of, Furniture, Fixtures and Equipment generally
used in Projects, including Furniture, Fixtures and Equipment used in other
hotel and casinos owned or operated by Project Manager; and
(b) All of its facilities and contacts for the purchase of
equipment, furnishings, and other personal property appropriate for the
Project and in connection therewith, to make purchases in accordance with the
Design, Development and Construction Budget approved by the Company. Title
to any such purchases shall be taken in the name of Company. All purchase
requisitions and orders shall be approved by the Company, and duplicates
thereof shall be sent to Project Manager.
Company shall reimburse Project Manager for all costs and expenses
incurred by Project Manager in connection with the rendition of the Technical
Assistance Services herein described, but not to exceed amounts set forth in
the Design, Development and Construction Budget prepared by Project Manager
and approved by Company except as may be modified by mutual agreement of
parties from time to time. Said costs shall include managers, attorneys, or
employees (on an allocated basis, in relation to proportion of time spent, in
the case of officers and employees not exclusively assigned to Project) or by
specialists not regularly employed by Project Manager, including related
business and travel expenses incurred by said individuals. Anything
contained herein or in the Design, Development and Construction Budget to the
contrary notwithstanding, Project Manager, at its sole discretion, may incur
such costs and expenses in connection with the rendition of only those
services as defined in this Section 4 (A) (l), it deems necessary or
desirable provided the aggregate of such costs shall not exceed the overall
Design, Development and Construction Budget limit therefore. Monthly
statements covering such costs and expenses shall be submitted by the Project
Manager to, and shall be paid by, the Company within thirty (30) days
thereafter.
4 (A) (2) PRE-OPENING PROGRAM. Project Manager further agrees to the
following:
(a) Prepare and submit for Company approval within one- hundred
eighty (180) days after the Effective Date, add put into effect within thirty
(30) days after receiving such approval, a plan for the organization,
services, sales and marketing program of the Project, and to engage a General
Manager and such assistants as may be necessary; and
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(b) In the performance of the duties set forth in sub-paragraph
4 (A) (2) above, and consistently with the approved plan herein mentioned, to
direct to the attention of the Company and to consummate for the benefit of
the Company subject to its prior approval, agreements and arrangement with
concessionaires, licensees, tenants, suppliers, sub-contractors or other
intended users of the facilities of the Project to initiate and make efforts
to conclude programs and commitments for the period after the opening date of
the Project; and
(c) To recruit and train for and on behalf of the Company the
initial staff of the Project through such training programs and other
training techniques as Project Manager shall deem advisable and to test the
proposed operation of the Project by furnishing services usually necessary in
the operation of a hotel/casino, preparing the serving of food and beverages
and generally operating the Project for a test period to be agreed upon by
Company and Project Manager, which shall not exceed sixty (60) days,
immediately prior to the Opening date.
Project Manager shall submit to Company for its approval within one hundred
eighty (180) days after the Effective Date, an Annual Plan for the Project
governing Project Manager's conduct of its management duties. The Annual
Plan shall include, but not be limited to, drafting of Operational standards,
marketing and sales programs, capital expenditure plans, adequate accounting
procedures, internal control, and human resource policies and procedures.
The Company shall pay or reimburse Project Manager in full for all
costs, expenses of the training and Pre-Opening Program, as well as
pre-operational staffing, organization, and pre-opening operations (including
transportation, subsistence, telephone, pro rata costs of management or its
Affiliates and facilities used for such purposes or in connection with the
recruitment, training of staff and personnel, pre-operational staffing,
organization, pre-opening operations, and any other costs or expense in
connection therewith), and put forth the cost of all advertising, promotion,
literature, travel and business entertainment, including opening celebrations
and ceremonies, which occurred prior to or concurrently with the opening date
of the Project. Project Manager shall submit a budget for such costs and
expenses for approval by the Company, in the Design, Development and
Construction Budget and the parties shall comply therewith; any departures
therefrom shall be subject to the mutual approval in writing of Company and
Project Manager. Monthly statements with respect to such costs and
expenses, as shall be advanced by Project Manager, shall be submitted by
Project Manager to the Company and shall be paid by the Company within thirty
(30) days thereafter.
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4 (A) (3) BUDGET. Project Manager shall develop and submit to Company
for its approval, within one hundred eighty (180) days after the Effective
Date, a Proposed Design, Development and Construction Budget. Said budget
shall estimate income, wages and salaries, prizes, utilities, insurance,
marketing expenses, and other overhead costs.
4 (A) (4) FINANCIAL CAPITAL REQUIREMENTS. Project Manager shall take
all steps reasonably necessary to consult with Lily Pond as necessary and
make application for, and to acquire sufficient financing for capitalization
of the Project as may be required and approved by Company in furtherance of
the stockholders Agreement.
4 (A) (5) OPERATIONAL STANDARDS. Project Manager shall prepare and
submit to Company for its approval, within one hundred eighty (180) days of
the Effective Date, Operational Standards. Operational Standards shall
address all customer service departments as identified by Project Manager.
Department, position, and activity standards will contain, at a minimum,
customer service and contact elements; procedural and personal service
standards; staff forecasting and scheduling requirements; staffing
effectiveness and standards fulfillment tracking and quality assurance
measurements and controls.
4 (A) (6) OPERATING ACCOUNTS. Project Manager shall establish one or
more bank accounts at a financial institution to be chosen by Project Manager
(hereinafter "Operating Accounts"). All signers of the Operating Accounts
shall be bonded and in an amount acceptable to both Project Manager and
Company, indemnifying the Project, and the parties hereto against any loss,
theft, embezzlement, or other fraudulent acts on the part of such signatory.
Accounts will be in the name of the Company, but only Project Manager, and
its designees shall be authorized to draw upon said accounts. Company shall
be required to deposit such sums or amounts in said accounts, that may be
established by the parties pursuant to the Design, Development and
Construction Budget and Pre-Opening Program, and shall always maintain
sufficient funds therein to pay all Pre-Opening expenses in accordance with
the monthly schedules and statements to be prepared by Project Manager.
4 (A) (7) DEVELOPING PRE-OPENING PROGRAM. The parties agree that
Morton and Project Manager both have considerable experience concerning
various aspects of operating hotel/casinos and attendant services.
Accordingly, any Operational standards to be prepared by Project Manager
shall be subject to input and approval by Morton solely as to food and
beverage issues. However, Morton
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shall defer to Project Manager with respect to Operational standards
concerning gaming, lodging, marketing, and related support services.
4 (A) (8) PRE-OPENING INSPECTION. Prior to Opening, Project Manager
shall conduct a pre-opening inspection. Project Manager shall prepare a list
of all substantial and material deviations, if any, from plans and
specifications, contracts, or other requirements, which Company shall be
required to remedy or commence reasonable cure within ten (10) days of
receipt of same as a pre-condition to Project Manager's acceptance of the
Project. The Design, Development and Construction Budget may be
automatically increased upon the mutual approval of Company and Project
Manager to allow for any additional costs occasioned by any postponement
resulting from said material deviations. Project Manager may elect to
conditionally accept the Project and relieve Company from its obligations to
promptly remedy any material deficiency if done so in writing. In no event
shall Project Manager delay the opening of the Project to the public more
than ten (10) days after a receipt of a final Certificate of Occupancy for
all public areas of the Project and ninety percent (90%) of all guest rooms,
as well as, the requirements of all Clark County, Nevada Ordinances regarding
use and occupancy of a hotel/casino at the location of Project having been
met.
4 (A) (9) PERMITS AND LICENSES. Project Manager shall be obligated
to obtain all liquor and gaming licenses and permits (except those legally
required to be obtained by Company) but shall not be obligated to pay any
fees or costs associated with same or obligated to obtain bonds or offer
Project Manager's credit in order to secure such licenses and/or permits.
Project Manager, as an Operating Cost, shall make all reasonable efforts
within Project Manager's control, and comply with any conditions or
requirements set out in any such licenses and/or permits, and at all times
operate and manage the Project in accordance with such conditions and
requirements.
B.
CONSTRUCTION AND RESPONSIBILITIES. The Project shall be constructed in Las
Vegas, Nevada, as set forth in the stockholders Agreement, and subject to the
following:
4 (B) (1) CONSTRUCTION DUTIES. Company agrees, under the plan of
financing initially agreed upon, and as set forth in the Stockholders
Agreement, to proceed with all reasonable diligence, to build a 305-room
Project on the Site. Said
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structure shall include a 28,000 square foot casino, two restaurants, bars
and a retail store with "Hard Rock Hotel" merchandise, as well as parking
garage, outdoor aquatic facilities, recreational facilities, as well as other
facilities and appurtenances as are necessarily desirable for the operation
of a first class hotel/casino, together with all Furniture, Fixtures and
Equipment requisite for the operation of the Structure for purposes of the
Project (herein including, without limitation, heating, lighting, sanitation,
air conditioning, laundry, refrigeration, kitchen, elevator, and other
similar fixtures and equipment). Company shall further provide and install in
the structure at its sole cost and expense, the following:
(a) All Furniture, Fixtures, and Equipment;
(b) Office Furniture and Equipment;
(c) Operating Equipment; and
(d) Such other Furniture, Fixtures and Equipment as are
requisite for the efficient operation of a first class hotel and casino.
4 (B) (2) CONFORMANCE WITH SPECIFICATIONS. Company further agrees,
subject to the provisions of Section 4 (A) (8) that the Project shall be
constructed, outfitted, and completed in strict accordance with the plans,
specifications and designs as may be modified by Company and Project Manager
from time to time pursuant to written change orders and developed pursuant to
this Agreement and the stockholders Agreement, unless otherwise agreed to by
Project Manager.
4 (B) (3) RETENTION OF THIRD PARTIES. Company agrees to engage and
retain, at its expense, a firm or firms of architects, contractors, and such
engineers, designers, decorators, landscape architects, and other specialists
and consultants as shall be necessary and appropriate and as shall be
designated by the parties, each of whom shall have been approved in advance
by Company and Manager, all under written contracts approved by Company and
Project Manager. Project Manager shall submit, as promptly as possible, a
preliminary architectural program and general outline for the construction,
furnishing and equipping of the Project. Project Manager shall have the
right and obligation to cause such firms and persons to prepare full and
adequate plans, layouts, specifications, drawings and designs, both interior
and exterior, with respect to the Site, the Structure, and the Furniture,
Fixtures and Equipment. All such plans, layouts, specifications, drawings,
and designs, and any changes in or departures therefrom subsequently made or
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authorized, shall be subject to the final mutual approval, in writing, of the
parties hereto.
4 (B) (4) TAXES AND ASSESSMENTS. Subject to Company's right to sell
or lease the Project in accordance with, and subject to the provisions of
this Agreement and the stockholders Agreement, Company covenants and agrees
that during the term of this Agreement, it will maintain full ownership of
the Site and building, and full ownership of the Furniture, Fixtures and
Equipment therein, excepting Company's right to finance and lease Furniture,
Fixtures and Equipment as necessary. Company further agrees that throughout
the term of this Agreement, Company will pay, keep, observe, and perform all
payments, terms, covenants, conditions, and obligations to be made, kept,
observed, or performed by the Company under any lease, concession, or other
agreement or security instrument in respect to the Site, the Structure, or
the Furniture, Fixtures and Equipment. Company further agrees that Project
Manager shall have the right and authority for and on behalf of Company, but
no obligation to pay prior to delinquency, all taxes, assessments, and
charges of every kind, including, without limitation, real estate taxes and
assessments, personal property taxes, gaming taxes; and water and sewer
charges, which may become a lien on the Project or any part thereof, and
which may be due and payable during the term of this Agreement, unless
payment thereof is in good faith being contested by Company, at Company sole
expense, and without cost to Project Manager, so long as enforcement thereof
is stayed.
C.
OPENING OPERATIONS
4 (C) (1) PERMITS. Company or Project Manager, if Company so elects
and Project Manager is legally able or legally required to do so, at the sole
cost and expense of Company, shall obtain on or before the Opening and
thereafter keep in full force, and effect, all licenses and permits,
including gaming, liquor, bar, restaurant, sign and hotel licenses, as may be
required for the operation of the Project as a first class hotel and casino
as contemplated hereunder. Project Manager agrees upon request from Company
to assist in Owner's efforts to obtain licenses and permits required to
operate the Project and to advise Company of the need for any licenses or
permits required for the operation of the Project.
4 (C) (2) EQUIPMENT AND SUPPLIES. After Opening, Project Manager
shall obtain and maintain all Operating Supplies and Operating Equipment as
Project
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Manager deems reasonably necessary for the operation of the Project in
accordance with this Agreement and subject to the then current provisions of
the Annual Plan and Operational standards.
4 (C) (3) PERSONNEL.
(a) Project Manager, either directly or through its designated
Affiliates and subsidiaries, will hire, supervise, direct, discharge and
determine the compensation, other benefits and terms of employment of Project
Manager's personnel working in the Project. Project Manager or its
designated subsidiary is to be the sole judge of the fitness and
qualifications of such personnel and is vested with absolute discretion in
hiring, supervising directing, discharging and determining the compensation,
other benefits and terms of employment of such personnel. It is expressly
understood and agreed that all personnel (other than the personnel of any
lessee or concessionaire of food and beverage, gift shop, or other concession
with respect to the Project) shall be solely the employees of Project Manager
or its designated subsidiary. Company, Lily Pond, and Morton may consult,
advise or communicate with Project Manager and its designated subsidiary or
the General Manager of the Project regarding Project personnel or problems
related to personnel at any time, but Company, Lily Pond, and Morton shall
not interfere with or give orders or instructions to any personnel employed
at the Project. Subject to the Annual Plan, Company shall be solely
responsible for and shall reimburse Project Manager for any and all expenses
incurred by Project Manager at the Project by Project Manager (including, by
way of example only, all salaries, wages and other compensation and benefits
and other amounts that may be required by any current or future union plans).
Notwithstanding the above, Project Manager shall consult (which consultation
may include, at the request of Company, Lily Pond, or Morton, a review of a
resume, an interview, etc.) with a designated representative of Company, Lily
Pond, and Morton prior to the hiring, termination or transfer of the General
Manager of the Project and those individuals in charge of hotel, casino,
entertainment, human resources, marketing and sales of food and beverage.
Project Manager shall seriously consider all objections and comments of
Company, Lily Pond, and Morton, but Project Manager shall make the final
decision on any such action with respect to the individuals in charge of
hotel, casino, entertainment, human resources, marketing, sales of food and
beverage.
(b) Subject to the Annual Plan, Company shall reimburse Project
Manager for all reasonable travel expenses incurred by any of Project
Manager's employees or employees of Project Manager's subsidiaries relative
to (i) developing,
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constructing renovating, furnishing and supplying the Project; (ii) hiring
and training Project employees; (iii) maintaining the physical condition and
appearance of the Project; (iv) maintaining and promoting proper operational
procedures and practices; (iv) maintaining books and records; and (v)
otherwise performing duties undertaken by or rights granted to Project
Manager in this Agreement. Project Manager shall have sole discretion, which
shall be reasonably exercised, to determine the necessity of such travel.
Those employees of Project Manager who are not on-site Project personnel
shall also be provided with complimentary or discounted lodging, as an
Operating Cost of the Project, whenever said employees are on the premises of
the Project or in the vicinity to perform projects for the direct benefit of
the Project. All other complimentary requests made by employees of Project
Manager, its subsidiaries, Morton, or Company shall be subject to the
reasonable approval of Project Manager. Project Manager agrees to honor
complimentary requests subject to availability and upon reasonable notice by
telephone or in writing from an authorized employee of Company or Lily Pond.
(c) Not later than ninety (90) days prior to the Opening and
not less than thirty (30) days prior to scheduled expiration date of required
insurance policies, Project Manager shall provide evidence to Company of
statutory or self-insured Worker's Compensation Insurance and/or Employer's
Liability Insurance, with waiver of subrogation endorsements in favor of
Company and Project Manager and any applicable subsidiary and an endorsement
to include Project Manager as an additional insured, for each such employee.
The insurance coverages required hereunder (including, without limitation,
the carrier, policy limits of each and waiver of subrogation endorsements
must be in form, substance and amount satisfactory to Company in all respects
and if not, Project Manager shall obtain such insurance from another provider
selected by Company in its sole and absolute discretion). Any statutory
Worker's Compensation and/or Employer's Liability Insurance provided by
Project Manager or its designated subsidiary may be effected under a
self-insured retention or other form of self-insurance permitted by law. The
maximum cost to be incurred by Company under any such plan shall be the
lesser of the actual incurred expense as determined by the administrator of
the plan or the applicable manual class rates issued by the Nevada Rating
Bureau multiplied times the payroll per $100 multiplied times the experience
modification factor assigned by the Nevada Rating Bureau to the
management/employer.
(d) The general hiring and discharge policies of employees at
the Project shall, in all respects, comply with all "Equal Employment
Opportunity" laws and regulations, and Project Manager agrees to comply with
all laws, regulations and
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ordinances regarding the employment and payment of persons engaged in the
operation of the Project including, without limitation, all "Equal Employment
Opportunity" laws and regulations.
(e) Project Manager shall keep Company informed of all
negotiations with labor unions representing such employees at the Project,
and Project Manager or its subsidiaries shall not sign any union contracts
covering such employees at the Project which have not been previously
approved in writing by Company, unless required by law to do so without
Company's approval (which, in all cases, shall be furnished to Company as
soon as reasonably possible).
4 (C) (4) SALES. Marketing and Advertising. Subject to the Annual
Plan but at Company's sole and absolute discretion, after the Opening,
Project Manager, as an Operating Cost, shall advertise and promote the
business of the Project, institute and supervise a sales and marketing
program solely in Company's name (separate and independent of the local and
national sales and marketing programs of Project Manager or Morton and other
hotels, casinos, bars, and restaurants managed, operated and/or owned by
Project Manager, Lily Pond, or Morton), and coordinate with tour programs
marketed by airlines, travel agents and government tourist departments when
Project Manager deems the same to be advisable for the operation of the
Project. Subject to the Annual Plan, Project Manager may cause the Project
to participate in sales and promotional campaigns and activities involving
complimentary rooms, food and beverages to bona fide travel agents, tourist
officials and airline representatives where such is customary in the travel
industry. Anything to the contrary notwithstanding contained in this Section
4 (C) (4), Project Manager shall not use the Mark in any manner in connection
with, or otherwise engage in, sales, marketing or advertising except in
accordance with the provisions of section 3.3, the License Agreement and
Supervisory Agreement.
4 (C) (5) MAINTENANCE AND REPAIRS. Subject to the Annual Plan,
Project Manager shall make or cause to be made, all repairs, replacements,
corrections and maintenance items to the Project as shall be required in the
normal and ordinary course of operation of the Project and as shall be
required to comply with Operational Standards. In conjunction therewith and
subject to Section 4 (C) (2), Project Manager is authorized to make and enter
into in the name of, for the Account of and at the expense of Company, all
such contracts and agreements as in Project Manager's opinion are reasonably
necessary for the repair and maintenance of the Project and to cause the same
to be paid when due.
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4 (C) (6) CAPITAL EXPENDITURES.
(a) Company recognizes the necessity of making Capital
Replacements, the cost of which are capitalized and amortized, rather than
being expensed, in accordance with the Generally Accepted Accounting
Principles. Company agrees to expend such amounts for Capital Replacements
as shall be reasonably required in the normal and ordinary course of
operation of the Project to operate the Project in accordance with the
Operational standards. Project Manager shall have the responsibility of
recommending to Company the desired and reasonably necessary Capital
Replacements and the design and specifics thereof. Unless Company and
Project Manager otherwise agree, Project Manager shall be responsible for the
design, selection and installation of Capital Replacements subject to the
terms of the Supervisory Agreement. All Capital Replacements, so long as
there is compliance with Operational Standards (regardless whether
implemented by Company or Project Manager), shall be made to the extent
reasonably feasible in a manner that will minimize any adverse impact on the
operation of the Project and the guests of the Project.
(b) It is recognized that expenditures for Capital Replacements
are incapable of precise calculation in advance. Therefore, there shall be
paid over in cash in each Fiscal Month after Opening, a percentage of Gross
Revenues, into a Reserve Fund to pay for Capital Replacements. Contributions
to this Reserve Fund shall be two percent (2%) of Gross Revenues for the
first three years of this Agreement, and three percent (3%) of Gross Revenues
thereafter, provided, however, that Company will no longer be required to
deposit funds into the Reserve Fund once the Reserve Fund equals or exceeds
an amount equal to twice the then current budget for Capital Replacements.
Project Manager shall establish the Reserve Fund in Company' s name at a bank
or banks selected by Company and approved in writing by Project Manager
(which approval shall not be unreasonably withheld or delayed), with
signatures of Project Manager and Company or their designees being jointly
required and authorized on said accounts. If Project Manager is responsible
for implementing a Capital Replacement in accordance with the provisions of
Section 4 (C) (6) (a), any expenditures for Capital Replacements during any
Fiscal Year which have been budgeted in the Annual Plan or otherwise approved
in writing by Company may be made by Project Manager without Company's
additional approval (provided that Project Manager may not exceed any line
item by more than ten percent (10%) of the amount originally budgeted
therefore in the Annual Plan) and, to the extent funds are available, shall
be made by Project Manager from the Reserve Fund (including accrued interest
and unused accumulations from earlier years). In
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the event that Company elects to be responsible for implementing a Capital
Replacement, the cost thereof shall be paid or reimbursed to Company from the
Reserve Fund to the extent funds are available. Any amounts remaining in the
Reserve Fund at the close of each respective Fiscal Year shall be carried
forward and retained in the Reserve Fund until fully used as herein provided.
To the extent the Reserve Fund is insufficient at a particular time, or to
the extent the Reserve Fund plus anticipated contributions for the ensuing
Fiscal Year is less than the amount required by the Annual Plan for the
ensuing Fiscal Year, then in either such event, Company shall supply the
necessary funds by deposit to the Reserve Fund within ninety (90) days of
delivery of notice from Project Manager to that effect; provided, however,
that during such ninety (90) day period, Company and Project Manager have
jointly agreed that such additional funds are reasonably necessary for the
proper operation of the Project. Company and Project Manager shall cooperate
in good faith to the extent feasible to schedule the dates for implementing
Capital Replacement items to avoid the necessity of depositing additional
funds in anticipation of Reserve Fund contributions to be received at a later
date. All proceeds from the sale of capital items no longer needed for the
operation of the Project shall be deposited to the Reserve Fund. Sale of
such items shall be at the reasonable discretion of Project Manager and
conducted in a commercially reasonable manner after prior written notice to
Company. Notwithstanding anything herein to the contrary, Company's written
approval (which shall not be unreasonably withheld or delayed) shall be
required with respect to the sale of any capital item with a fair market
value of TEN THOUSAND DOLLARS ($10,000) or more (unless otherwise previously
approved in the Annual Plan). Upon termination of this Agreement for any
reason, Project Manager's right to expend any unused portion of the Reserve
Fund shall terminate and the balance of the fund shall be paid over to
Company, less any sums then due to Project Manager.
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(c) In addition to Capital Replacements provided for in the
then current Annual Plan, Project Manager shall have the further right to
make such alterations, additions or improvements in or to the Project which
Project Manager reasonably deems to be beneficial to the Project or its
operations; provided, however, that no such alterations, addition, or
improvement shall be made without Company's prior written approval if the
amount payable under the contract for said alteration, addition or
improvement is not budgeted for in the Annual Plan or exceeds the sum of TEN
THOUSAND DOLLARS ($10,000) in the aggregate per Fiscal Year (which amount is
based upon the purchasing power of money upon Opening and shall be
periodically adjusted by Project Manager with reference to the Consumer Price
Index defined in Section 1.9 above, to retain the same purchasing power).
Expenditures under this Article 4 (C) (6) (c) shall be paid from the Reserve
Fund. Notwithstanding the foregoing, Company shall have the right to
contract for, supervise and control any such alterations, additions or
improvements whose costs exceed TEN THOUSAND DOLLARS ($10,000) (which amount
is based upon the purchasing power of money upon Opening and shall be
periodically adjusted by Project Manager with reference to the National
Average of the Consumer Price Index to retain the same purchasing power).
Project Manager shall have the right to consult with Company regarding any
such plans prepared by or on behalf of Company with respect to such
alterations, additions or improvements.
(d) In the event a condition should exist in, on, or about the
Project of an emergency nature, including structural repairs, which requires
that immediate repairs are necessary to preserve and protect the Project and
assure its continued operation and to protect the health and safety of the
guests or employees, Project Manager, on behalf of Company and as an
Operating Cost, is authorized to take all steps and to make all expenditures
reasonably necessary to repair and correct any such condition, whether or not
provisions have been made in the applicable Annual Plan for any such
emergency expenditures. Project Manager agrees that it shall make such
repairs and replacements only after Project Manager has made a reasonable
attempt (if circumstances permit) to inform Company of the existence of such
emergency, the repairs and replacements Project Manager proposes to make, and
the estimated amount of expenditures to be incurred. If Project Manager has
been unable to advise Company in advance, it shall promptly notify Company
after taking any necessary action. Expenditures made by Project Manager in
connection with an emergency shall be paid for first from the Reserve Fund to
the extent funds are available, and then from the Operating Cost Bank
Account. Company shall replenish funds paid from the Reserve Fund with any
insurance proceeds received by Company in connection with the emergency
condition or situation, and Company
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shall replenish any difference between the insurance proceeds and the amount
used for such emergency from the Reserve Fund. If circumstances require,
Company shall also immediately replenish the Operating Cost Bank Account to
the extent funds were withdrawn there from for the purposes of this
subsection 4 (C) (6) (d)
(e) In the event that repairs to, or additions, changes, or
corrections in the Project of any nature shall be required by reason of any
laws, ordinances, rules or regulations now or hereafter in force, or by order of
any governmental or municipal power, department, agency, authority or officer,
such repairs, additions, changes or corrections shall be made at the direction
of Company, unless Project Manager and Company otherwise agree. Project
Manager shall have the right to reasonably consult with Company regarding any
such plans and specifications prepared by or on behalf of Company with respect
to such alterations, additions, or improvements. Project Manager shall inform
Company of the existence of the governmental regulations and the repairs,
additions, changes or corrections Project Manager believes are required to be
made and the estimated expenditures to be incurred. Company shall designate
(subject to Project Manager's approval which shall not be unreasonably withheld
or delayed) the work to be performed and a schedule for its implementation.
Such work shall be accomplished with as little hindrance to the operation of the
Project and the Project guests as possible. If expenditures are required to be
made to comply with governmental requirements that were not anticipated in the
Annual Plan, the Annual Plan shall be revised by Project Manager and Company and
payment therefore shall be made in accordance with the provisions of Section 4
(C) (6) (d). Company shall have the right to contest the validity or
application of any such governmental requirements.
4 (C) (7) COMPLIANCE WITH LEGAL REQUIREMENTS. Company and Project
Manager shall take reasonable actions (to the extent of the delegation of
responsibilities hereunder) as may be necessary to comply with any and all laws,
orders or requirements of any federal, state, county, or municipal agency
affecting the Project or the ownership or operations thereof by Company or
Project Manager or other authority having jurisdiction thereover. Project
Manager, however, shall not take any such action in accordance with this Section
4 (C) (7) as long as Company notifies Project Manager and Company is diligently
contesting, or has affirmed its intention to contest, and promptly institutes
proceedings contesting any tax payment or assessment, or any governmental or
regulatory order or requirement (except that, where failure to comply promptly
with any such order or requirements might expose Project Manager to criminal
liability or materially and adversely affect the operation of the Project,
Project Manager may take such action without Company's approval)
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and Company agrees to indemnify Project Manager for all loss, cost and
expense incurred by Project Manager because of Company's contest of any such
tax, payment or assessment, order or requirements. Project Manager promptly
shall notify Company in writing of all such orders and notices or
requirements that are received by Project Manager.
4 (C) (8) ACCOUNTING MATTERS AND FISCAL PERIODS.
(a) The books and records reflecting the Project operations
shall be kept by Project Manager in accordance with the Generally Accepted
Accounting Principles applied on a consistent basis, and shall be maintained
at the Project. Company's, Lily Pond's, and Project Manager' s independent
accounting firms shall each have the right and privilege of examining the
books and records of the Project upon reasonable prior notice to Project
Manager.
(b) Company, as an Operating Cost, shall cause a certified
audit of the Project operations to be performed annually at the end of each
Fiscal Year (and upon termination of this Agreement if not coincident with a
Fiscal Year End) by a nationally recognized, independent "Big Six" Certified
Public Accounting firm, with expertise in gaming, appointed by Company.
(c) The Generally Accepted Accounting Principles, which provide
for an annual fiscal accounting period, shall be the accounting system utilized
for the Project.
Project Manager will deliver or cause to be delivered to Company the
statements and documents set forth in Section 4 (C) (9) below.
4 (C) (9) FINANCIAL STATEMENTS. On or before the twentieth (20th) day
of each Fiscal Month, Project Manager shall deliver to Company, a profit and
loss statement, statement of income, balance sheet, and statement of cash flows
showing the results of the operation of the Project for the preceding Fiscal
Month and the year-to-date, and having attached thereto a computation of the
management fees for such preceding months and the year-to-date. Within ninety
(90) days after the end of the operating year, Project Manager shall cause to be
delivered to Company a balance sheet and related statement of profit and loss
(including all supporting departmental schedules of revenues and expenses),
showing the assets employed in the operation of
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the Project and the liabilities incurred in connection therewith as of the
last day of the Project's preceding Fiscal Year, the net results of the
operation of the Project during the preceding year, and having attached
thereto a computation of the Supervisory Fees and Management Fees for such
year. Project Manager shall also provide the following:
(a) within ninety (90) days after the end of each Fiscal Year, a
balance sheet, together with a comparison to the previous Fiscal Year (after the
first full Fiscal Year) and a related detailed statement of profit and loss
(including all supporting departmental schedules of revenues and expenses),
together with a comparison to the previous Fiscal Year and the current Annual
Plan, and having annexed thereto a computation in reasonable detail of the
Management Base Fees and Management Incentive Fees for such Fiscal Year;
(b) upon Company's request, on a weekly basis (by no later than
the close of business on Monday), a summary of the previous week's revenue and
estimated expenses; and
(c) upon Company's request, such other additional statements,
computations and reports as Company shall reasonably request in writing.
4 (C) (10) ANNUAL PLAN.
(a) Not less than sixty (60) days prior to the commencement of
each full Fiscal Year thereafter, Project Manager shall submit to Company, for
Company's approval, the proposed Annual Plan.
(b) In connection with the submission of the Annual Plan to
Company, Company will meet with Project Manager within fifteen (15) days after
the date the proposed Annual Plan is delivered to Company to conduct an in-depth
review of same.
(c) Each Annual Plan will be subject to the approval of Company
which shall not be unreasonably withheld or delayed. It is the intention of the
parties to complete the review and approval of a proposed Annual Plan no later
than forty-five (45) days after the initial delivery of it to Company. Company
shall be required to approve or disapprove each proposed Annual Plan within
thirty (30) days after the date Company and Project Manager have met to discuss
each such proposed Annual Plan by providing written notice to Project Manager.
Any notice that disapproves a proposed Annual Plan must contain specific
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objections thereto in reasonable detail. If Company fails to provide written
notice to Project Manager of any specific objections to a proposed Annual
Plan within such thirty (30) day period, Project Manager shall be entitled to
provide written notice of such fact to Company, requesting Company's
response. If. Company fails to provide Project Manager with specific written
objections to the proposed Annual Plan within ten (10) days following such
written notice, the proposed Annual Plan submitted by Project Manager shall
be deemed to be approved. In the event Company disapproves or raises any
objections to any items contained in a proposed Annual Plan or any revisions
thereto, Company and Project Manager agree to cooperate with each other in
good faith to discuss and resolve the disputed or objectionable proposed
items. In the event Company and Project Manager are not able to reach a
mutually acceptable agreement concerning any disputed or objectionable item
within a period of fifteen (15) days after the date Company provides written
notice of its objections to Project Manager, if the disputed or objectionable
item would not materially or adversely affect Project Manager's ability to
comply with operating objectives, Company's decision with respect thereto
shall govern, but if the disputed or objectionable item would materially or
adversely affect Project Manager's ability to comply with operating
objectives, either party shall be entitled to submit the dispute to
arbitration in accordance with the provisions of the Uniform Arbitration Act,
except as set forth below:
(i) The accounting firm selected to review and audit the records
of the Project, set forth in Section 4 (C) (8) (b), shall select an independent
nationally recognized accounting firm experienced in gaming, upon the written
request of any party hereto with respect to any dispute as to the provisions of
Section 4 (C) (10). The arbitrating accounting firm shall be required to render
a decision in fifteen (15) days after being notified of its selection. Fees and
expenses of the arbitrating accounting firm will be paid by the non-prevailing
party, or if there is no prevailing party, then said costs and expenses shall be
borne equally between Company and Project Manager. The decision of the
arbitration accounting firm shall be binding to all parties hereto, but shall
not be construed as modifying or altering the terms of this Agreement or the
parties' rights and responsibilities with respect thereto.
(d) Project Manager shall reforecast the Annual Plan from time to
time to reflect any unanticipated significant changes, variables or events or to
include significant additional unanticipated items of income or expense. Any
such revision shall be submitted to Company for approval, which approval shall
not be unreasonably withheld and shall be deemed given and accepted unless a
specific written objection thereto is delivered by Company to Project Manager
within thirty (30) days after submission thereof. Upon request of Company,
Project Manager shall
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provide Company with a summary of the data and information utilized in
preparing an Annual Plan and any revisions thereto. Project Manager shall
not be deemed to have made any guarantee, warranty or representation
whatsoever in connection with any Annual Plan, and Company acknowledges that
an Annual Plan is intended only to be a reasonable estimate. Company
acknowledges that there may be unforeseen expenditures required to complete
or correct deficiencies in the Project and that any such expenditures may not
be reflected in the Annual Plan or capable of being paid from the Reserve
Fund.
(e) On a monthly basis, Project Manager's representative shall
meet with Company to discuss the performance of the Project over the prior
Fiscal Month and Project Manager's plans and expectations for the ensuing Fiscal
Month.
(f) Project Manager shall be permitted to reallocate part or all
of the amount budgeted with respect to any line item of the Annual Plan to
another line item in the same department, but may not reallocate from one
department to another department without the prior written consent of Company.
(g) If Project Manager encounters circumstances which require
unbudgeted and unexpected expenditures not foreseen at the time of preparation
of the Annual Plan and which Project Manager deems reasonably necessary, in
addition to and without limiting the instances described in Article 4 (C) (10)
(f), Project Manager may, without Company's approval but only after delivering
prior written notice to Company, make such expenditures for so long as the same
will not, in any Fiscal Month, exceed ten percent (10%) of the amount budgeted
for any department or, if greater, with respect to expenditures for gaming,
room, entertainment, food, and/or beverage departments, such expenditures will
not exceed an amount such that the ratio of the amount so expended to the
revenues of the affected department exceeds the ratio (expressed as a
percentage) of the expenses budgeted to the revenues forecast, rounded up to the
next full percentage point. If Project Manager expects that such future
expenditures will in any Fiscal Month exceed (i) ten percent (10%) of the amount
budgeted for such department or, if greater, (ii) an amounts such that the ratio
of the amount so expended to the revenues of gaming, room, entertainment, food,
and/or beverage departments will exceed the ratio (expressed as a percentage) as
forecast, rounded up to the next full percentage point, Project Manager shall
have the right, from time to time during such Fiscal Year, to submit a revision
to the Annual Plan to Company for approval, which approval shall be granted or
denied in the same manner as the initial Annual Plan.
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4 (C) (11) BANK ACCOUNTS.
(a) Project Manager shall select and establish bank Accounts at
one or more banking institutions in Company's name. The Bank Account for
Operating Costs ("The Operating Costs Bank Account") shall be separate and
distinct from any other accounts, reserves, or deposits required by this
Agreement and Project Manager's designees shall be the only parties authorized
to draw upon said Account. The Operating Costs Bank Account shall be an
interest bearing account if such an account is reasonably available and all
interest earned shall be credited to the Operating Costs Bank Account. Company
shall deposit in the Operating Costs Bank Account an amount of money to be
agreed upon by Company and Project Manager as and when needed (which amount
shall be adjusted by Project Manager as provided below). This amount as
adjusted shall be the "Minimum Balance" required to be maintained by Company in
the Operating Costs Bank Account during the term of this Agreement. After the
first twelve (12) full Fiscal Months after Opening, the Minimum Balance shall be
adjusted, so as to in no event be less than the Operating Costs for the
preceding Fiscal Month plus all amounts reserved in said Account for amounts
accrued but not paid on a monthly basis as provided in Article 4 (C) (12). This
Minimum Balance shall serve as working capital for Project operations. Upon
notification of any working capital deficiency from Project Manager, accompanied
by an explanation of the reason for the deficiency, Company shall furnish
Project Manager immediately upon request with sufficient funds to make up any
deficiency in the Minimum Balance which funds shall constitute "Working Capital
Loans" and shall bear interest at a rate equal to the Prime Rate of interest in
effect from time to time at First Interstate Bank of Nevada, N.A., or its
successor, plus three (3) percentage points. In the alternative, Project Manager
may elect, upon approval of Company, to either furnish sufficient funds to
make-up any deficiency on the Minimum Balance which funds shall be considered
"Working Capital Loans", and shall bear interest as set forth herein above, or
Project Manager, with consent of Company, may guarantee "Working Capital Loans"
from third parties, and any said monies loaned or guaranteed by Project Manager
shall be used to increase Project Manager's equity in the Project, as is set
forth and defined in detail in Article V of the Stockholders Agreement as
"Contribution Loans". Working Capital Loans shall be repaid to Company and/or
Project Manager in the priority set forth in Article 4 (C) (12).
(b) Subject to the terms and conditions of this Agreement, all
sums received from the operation of the Project and all sums advanced by Company
for purposes other than Capital Replacement shall be deposited in the Operating
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Costs Bank Account. Project Manager may make payments pursuant to this
Agreement from the Operating Costs Bank Account for the purposes described in
Article 4 (C) (12), or may make such payments from its own account(s) and
obtain immediate reimbursement from the Operating Costs Bank Account.
(c) Nothing herein contained shall be construed to deprive
Project Manager of the right to maintain separate payroll and/or credit card
collection accounts or petty cash funds (all in Company's name) and to make
payments therefrom as permitted pursuant here to and as the same are customary
in the Project business or Project Manager's other business.
(d) On a monthly basis, Project Manager shall transfer all
amounts in the Operating Costs Bank Account in excess of the Minimum Balance to
Company's Bank Account pursuant to Article 4 (C) (13). Company's Bank Account
shall be established at one or more banking institutions selected by Company and
Company's designees shall be the only parties authorized to draw upon Company's
Bank Account.
4 (C) (12) PRIORITY OF DISBURSEMENTS. All Gross Revenues shall be
deposited in the Operating Costs Bank Account on a daily basis. Project Manager
shall disburse funds from the Operating Costs Bank Account on at least a monthly
basis, for and on behalf of Company (or, to the extent Company has a duty from
time to time to make such expenditures, directly to Company), in the following
order of priority and to the extent available:
(a) all Operating Costs as defined in Section 1.32, excepting
those costs set forth in Section 1.32(j) and 1.32(k); and
(b) the payment of all principal and interest on any Approved
Mortgage; and
(c) all remaining Operating Costs, not included in Section 4 (C)
(l2) (a) above, including, without further limitation, Base Management Fees,
Supervisory Fees and Incentive Fees; and
(d) the payment for emergency expenditures to the extent paid
from the Bank Account or deposited in the Reserve Fund as provided under Section
4(C) (6) (d); and
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(e) deposits into the Reserve Fund under Article 4 (C) (6); and
(f) deposits into the Operating Costs Bank Account to maintain
the Minimum Balances as provided under Section 4 (C) (11) (a); and
(g) the payment of all accrued and unpaid interest on any Working
Capital Loans; and
(h) the payment of all outstanding principal on any Working
Capital Loans; and
(i) the remaining balance thereof to Company.
In following the above order of priority, Project Manager will reserve
funds in the Bank Account each Fiscal Month for payment of any Operating
Costs or any of the above items which Project Manager has a duty to pay that
are not paid on a monthly basis (e.g., real estate taxes, insurance premiums
and so on). Project Manager shall perform the function of paying all
Operating Costs and other items set forth above (including, but not limited
to, debt service, real estate taxes, insurance premiums, etc.) unless
otherwise instructed by Company and Company supplies Project Manager with
adequate information.
4 (C) (13) ADJUSTMENT TO BANK ACCOUNT. After the disbursements pursuant
to Article 4 (C) (12), any excess funds remaining in the Bank Account over the
Minimum Balance shall be disbursed immediately to Company's Bank Account as soon
as reasonably possible following the close of the financial reports for the
Fiscal Month (but in no event later than twenty (20) days after the end of each
such Fiscal Month). Correspondingly, any deficiency in the Bank Account shall be
remedied by Company as required in Section 4 (C) (11) (a) or shall be provided
by Project Manager as required in Article 5, if applicable. Notwithstanding that
Project Manager is authorized to and shall make disbursements in the order set
forth in Article 4 (C) (12) to the extent funds are available (subject to the
then current Annual Plan), Company solely will be liable for all Operating
Costs.
4 (C) (14) INSURANCE COVERAGE. Company, or Project Manager if Company
so elects, agrees to procure and maintain at all times during the term hereof,
as an Operating Cost, property, casualty, and liability insurance in such
amounts and coverages as Company may from time to time desire which shall be no
less than that necessary to conform to reasonable industry standards for a
similar
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hotel and casino, taking into consideration inflation and any events or
trends of liability which affect the risks attendant to owning and operating
the Project.
4 (C) (15) INSURANCE POLICIES.
(a) All insurance provided for under this Article 4 shall be
effected by policies issued by insurance companies of good reputation and of
sound financial responsibility and licensed by the State of Nevada.
(b) notwithstanding anything herein to the contrary, Project
Manager's obligations under this Agreement shall not be effective until all
required insurance coverage has been obtained. Such insurance shall include,
during the Pre-Opening Program, builder's risk and liability insurance (but not
innkeeper's or garage keeper's liability) and upon Opening, all coverages
referenced in Article 4, except builder's risk.
(c) All liability, business interruption and crime insurance
policies shall be written in the name of Company with Project Manager and
Company being named thereon as additional insureds.
(d) All insurance policies shall be endorsed specifically to the
effect that the proceeds of any crime or business interruption losses shal1 be
made payable to Company and Project Manager jointly, as their interests may
appear. All such policies of insurance shall also be endorsed specifically to
the effect that such policies shall not be canceled or materially changed
without at least thirty (30) days prior written notice to Company and Project
Manager. To the extent obtainable without significantly increasing the premium
cost, all policies of comprehensive public liability insurance and comprehensive
crime insurance shall contain an endorsement to the effect that such insurance
shall be primary to any other similar insurance carried by Company or Project
Manager.
(e) Certificates of Insurance shall be sent to:
Harvey's Resort Hotel and Casino
P.O. Box 128
Stateline, NV 89449
Attn: Corporate Controller
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or to such other address as to which Project Manager may from time to time
designate by written notice to Company.
(f) if Company fails, within fifteen (15) days after notice of
such failure from Project Manager, to provide insurance as required by this
Article 4, or to pay any premiums therefore when due, Project Manager shall have
the right (but not the obligation) to procure such insurance or pay such
premiums, and any cost or expense thus incurred by Project Manager shall be
immediately reimbursed to Project Manager from the Bank Account or from funds
provided directly by Company.
4 (C) (16) WAIVER OF LIABILITY. To the extent covered by insurance,
Project Manager, and Company each waives, releases and discharges the other from
all claims or demands which each may have or acquire against the other, or
against each other's directors, officers, agents, employees or partners, with
respect to any claim for any losses, damages, liability or expenses (including
attorneys' fees) incurred or sustained by either of them on account of injury to
persons or damage to property or business arising out of the ownership,
management, operation and maintenance of the Project, regardless whether any
such claim or demand may arise because of the fault or negligence of the other
party or its officers, directors, partners, agents and employees. To the extent
a loss, damage or expense is a result of the other party's negligence, in the
event of any such loss, damage, liability or expense, Company and Manger each
shall look to the insurance maintained with respect to the Project or otherwise
by such party and shall not make any claim or seek any recovery against the
other party. Each policy of insurance maintained with respect to the Project
shall contain a specific waiver of subrogation reflecting the provisions of this
Section 4 (C) (16), or a provision to the effect that the existence of the
preceding waiver shall not affect the validity of any such policy or the
obligation of the insurer to pay the full amount of any covered loss sustained.
4 (C) (17) INDEMNIFICATION TO PROJECT MANAGER. Company agrees to
indemnify and hold Project Manager free and harmless from all loss, liability or
cost (including reasonable attorneys' fees) which is not covered by insurance
proceeds and which Project Manager may sustain, incur or assume as a result of
any claims which may be alleged, made instituted or maintained against Project
Manager, Morton, Lily Pond, or Company, jointly or severally, arising out of or
based upon the ownership, management, operation, condition or use of the
Project, including, without limitation, injury to persons(s) and damage to
property or business by reason of any cause whatsoever in and about the Project
or elsewhere; provided, however,
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Company shall not be liable to indemnify and hold Project Manager harmless
from any such uninsured loss, liability or cost (including costs of defense)
which is the result of grossly negligent, willful misconduct or criminal
conduct of Project Manager or its employees.
4 (C) (18) INDEMNIFICATION TO COMPANY. Project Manager agrees to
indemnify and hold Company free and harmless from all loss, liability, or cost
(including reasonable attorneys' fees) which is not covered by insurance
proceeds and which Company may sustain, incur, or assume as a result of any
claims which may be alleged, made, instituted or maintained against Project
Manager, Morton, Lily Pond, or Company, jointly or severally, arising out of or
based upon the ownership, management, operation, condition or use of the Project
including, without limitation, injury to person(s) and damage to property or
business by reason of any cause whatsoever in and about the Project or
elsewhere, and any requirement or award relating to course of employment,
working conditions, wages and/or compensation of employees or former employees
at the Project, only to the extent any such injury or damage is caused by the
gross negligence, willful misconduct or criminal conduct of Project Manager or
its employees. However, Project Manager shall not be liable to indemnify and
hold Company, and Lily Pond harmless from any such uninsured loss, liability or
cost (including costs of defense) which is the result of grossly negligent,
willful misconduct, or criminal conduct of Company or their employees.
4 (C) (19) LEGAL FEES, ETC.; PROCEDURES. Each indemnitor under this
Article 4 shall reimburse each indemnitee for any legal fees and costs,
including reasonable attorneys' fees and other litigation expenses, reasonably
incurred by such indemnitee in connection with investigating or defending
against claims with respect to which indemnity is provided hereunder; provided,
however, that an indemnitor shall not be required to indemnify an indemnitee for
any payment made by such indemnitee to any claimant in settlement of claims
unless such settlement has been previously approved by the indemnitor, which
approval shall not be unreasonably withheld or delayed. If claims are asserted
or threatened, or if any action or suit is commenced or threatened with respect
thereto, for which indemnity may be sought against an indemnitor hereunder, the
indemnitee shall notify the indemnitor in writing within ten (10) days after the
indemnitee shall have had actual knowledge of the threat, assertion or
commencement of the claims, which notice shall specify in reasonable detail the
matter for which indemnity may be sought. The indemnitor shall have the right,
upon notice to the indemnitee given within thirty (30) days following its
receipt of the indemnitee's notice (or shorter period if such notice
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specifies such shorter period and provides reasonable reason therefore), to
take primary responsibility for the prosecution, defense or settlement of
such matter, including the employment of counsel chosen by the indemnitor
with the approval of the indemnitee, which approval shall not be unreasonably
withheld or delayed, and payment of expenses in connection therewith. The
indemnitee shall provide, without cost to the indemnitor, all relevant
records and information reasonably required by the indemnitor for such
prosecution, defense or settlement and shall cooperate with the indemnitor to
the fullest extent possible. The indemnitee shall have the right to employ
its own counsel in any such matter with respect to which the indemnitor has
elected to take primary responsibility for prosecution, defense or
settlement, but the fees and expenses of such counsel shall be the expense of
the indemnitee.
4 (C) (20) INDEMNIFIED PARTIES. The indemnities contained in this
Article shall run to the benefit of Project Manager, and Company, and their
respective Affiliates, and the shareholders, directors, officers, partners and
employees of Project Manager and Company, and of their respective Affiliates.
4 (C) (21) SURVIVAL. The provisions of this Article 4 shall survive any
cancellation, termination or expiration of this Agreement and shall remain in
full force and effect until such time as the applicable statute of limitation
shall cut off all claims that are the subject of the provisions of this Article.
4 (C) (22) DEFENSE.
(a) Notwithstanding anything herein to the contrary, Company
agrees to defend promptly and diligently, as an Operating Cost, any claim,
action or proceeding brought against Project Manager, or Company jointly or
severally arising out of or connected with any of the matters referred to in
Section 4 (C) (17).
(b) If any claim contains an allegation that Project Manager, its
agents, shareholders, officers, directors, employees or independent contractors,
has been grossly negligent or has engaged in willful misconduct, but such
allegations are not proven or upheld in any action, proceeding, charge or
prosecution, the rights of the parties under Article 4(C) (16), 4(C) (17), 4(C)
(18), and 4(C) (19) shall be governed based upon the holding or findings
rendered with respect to any such claim rather than the allegations.
4 (C) (23) HOTEL/CASINO BRAND STORE OPERATIONS. Project Manager and
Company agree that Morton shall have the exclusive right to supervise, oversee,
and
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direct Project brand store operations to be sold in the Project including
design, display, pricing, merchandising and related Operational Standards,
subject to Company's prior written approval and budgets as set forth in the
Annual Plan. Revenue received for the sale of said merchandise shall be deemed
part of the Gross Revenues under this Agreement.
4 (C) (24) LEASE AGREEMENTS. Project Manager shall be responsible for
the leasing of space in the Project in Company's name to lessees, subject to
lease or occupancy agreements, and keeping with the Operational Standards of the
Project, and subject to Company's prior written approval. Project Manager will
supervise and control operations of all lessees in a manner which is consistent
with the Operational Standards, and which will generate maximum revenues to
Company. Revenues received by Company under any lease or occupancy agreements
shall be deemed a part of the Gross Revenues as defined under this Agreement.
4 (C) (25) CONSULTATION. Subject to the terms and conditions of this
Agreement, Project Manager shall keep designated representatives of Lily Pond,
as well as Company, informed of operational and critical events, including a
monthly written report to Lily Pond and Company of same. In any event, Project
Manager shall make designated representatives available to Company and Lily Pond
for questions or consultations with respect to the day-to-day activities of
Project Manager and the Project. Unless otherwise provided herein, Project
Manager shall have the discretion and responsibility with respect to such items
as guest admittance, gaming policies and layouts, guest service charges and room
rates and labor. Notwithstanding the foregoing, the Food and Beverage services
and Entertainment standards and policies shall be approved by Morton subject to
the provisions of this Agreement and consistent with Operational Standards,
budgets, Supervisory Agreement, and Annual Plans as agreed upon by Company, Lily
Pond and Project Manager from time to time, including such standards as
necessary to maintain, preserve, and promote the quality and integrity of the
name and mark.
4 (C) (26) INVENTORY, WORKING CAPITA1 AND OPERATING EXPENSES. Subject to
the prior written approval by Company in compliance with the provisions set
forth in this Agreement and without exceeding any expense as authorized in the
applicable Annual Plan and Operational Standards, Company agrees to provide at
its expense, and Project Manager shall order on behalf of Company, sufficient
initial inventories of Operating Supplies. Company further agrees to provide
and maintain working capital sufficient at all times to ensure the uninterrupted
and efficient operation of the Project, including sufficient funds to pay
current liabilities as they fall due, and to
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replace necessary operating inventories as they are consumed, all in
compliance with the detailed procedures set forth in the Annual Business Plan
and Operational Standards.
4 (C) (27) MAINTENANCE AGREEMENTS. Project Manager shall be responsible
for entering into any and all agreements and incur necessary expenses, on behalf
of Company, to conduct and maintain day-to-day activities in the Project, in
keeping with the provisions of the Operating Standards and Annual Plans.
4 (C) (28) EMPLOYEE BENEFIT PLANS. If in the reasonable opinion of
Project Manager, it is desirable at any time, during the term of this Agreement
to provide for the benefit of the employees of the Project, pension, profit
sharing, or other employee retirement, disability or benefit plans similar to
those now or hereafter applicable to employees of Project Manager or its
subsidiaries or Affiliates or other hotels/casinos operated by Project Manager
or any of its subsidiaries or Affiliates, Project Manager shall either: (a)
elect to adopt such a plan or plans as an employer, provided the provisions of
such plan or plans permit such action and Project is designated as an affiliated
company by Project Manager, or (b) establish a similar independent plan or plans
for the benefit of the employees of the Project.
4 (C) (29) LEGAL ACTION. Project Manager shall have the right to
institute in its own name or in the name of Company, as an Operating Cost, any
and all legal actions or proceedings to collect charges, rent or other income
from Project or to remove any tenants, terminate a lease, license, or concession
agreement, a breach thereof or default entered by any tenant, licensee or
concessionaire or supplier. Company may take at Company's expense any
appropriate steps to protect and/or litigate to final decision in any
appropriate forum, any violation, or rule or regulation concerning the Project.
Any counsel to be engaged under this paragraph shall be selected by Project
Manager, and agreed upon by Company.
ARTICLE 5
FEES
5.1 BASE MANAGEMENT FEE. In consideration of the services to be
provided by Project Manager, Company agrees to pay Project Manager a Base
Management Fee. Said Base Management Fee shall be equal to four percent (4%) of
the estimated annual Gross Revenues, to be calculated computing estimated Gross
Revenues on a monthly basis of the Project. Gross Revenues shall be calculated
as
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defined in Article I above. The Base Management Fee shall be due and payable
the twentieth (20th) day of each month, representing compensation for the
preceding month. Should the actual aggregate installments of the Base
Management Fee paid in any Fiscal Year be more or less than the total annual
Management fee due for the entire Fiscal Year, Project Manager or Company, as
the case may be shall pay to the other the amount of such overpayment or
underpayment within ninety (90) days after the end of such Fiscal Year.
5.2 INCENTIVE FEE. In addition to the Base Management Fee, and as
further consideration for the services of Project Manager, Project Manager shall
be entitled to an Incentive Fee of up to two percent (2%) of annual Gross
Revenues, as defined in Article I, upon exceeding certain Return On Investment
targets as set forth below: (a) Return on Investment shall be defined as
follows:
(1) Investment shall be the Total Development Cost (as defined in
Section 1.49), adjusted annually as follows:
(i) commencing on the Opening Day of the Initial Term and
continuing for the balance of the term, Investment shall be deemed to increase
cumulatively at a rate equal to the annual Consumer Price Index (as defined in
Section 1.12), such rate not to exceed six percent (6%) per annum; and
(ii) shall be deemed to increase by the actual. cost of
additions or alterations to the Project, after the receipt of the final
certificate of occupancy for the Project, which are not paid from the Reserve
Fund and/or are not deemed Operating Costs, but only with respect to that
portion thereof which Company and Project Manager in good faith agree, on a
prospective basis (before such addition or alteration commences) is reasonably
projected to produce a Return at least equal to that of the target, as
established herein, of such additional amount of the Total Development Cost of
the proposed additions or alterations.
(2) Return shall be the Cash Flow from Operations equaling:
(i) Net income before tax plus interest expense, plus
depreciation and amortization expense, less actual operating capital
expenditures (within the parameters of the Annual Plan and which in no Fiscal
Year shall be less than one percent (1%) of Gross Revenues) excluding capital
expenditures for facility additions and/or alterations as specified above; and
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(ii) in the event that Incentive Fees have been accrued,
they will be added back to the net income amount.
The Return, as defined above, shall be divided by the Investment, as defined
above, and the quotient shall equal the Return on Investment. The annual Return
on Investment targets and Incentive Fee Achievement schedule are set forth in
Exhibit "X", attached hereto and incorporated herein.
5.3 DISTRIBUTIONS. Project Manager shall be paid an Incentive Fee as
calculated in section 5.2, the twentieth (20th) day of each month immediately
following the prior Month once the Incentive Fee targets have been achieved,
and thereafter, on the twentieth (20th) day of each Fiscal Month during the
remaining Fiscal Year. If the aggregate installments of the Incentive Fees paid
in any Fiscal Year shall be more or less than the total actual Incentive Fees
due for the entire Fiscal Year, Project Manager or Company, as the case may be,
shall pay to the other the amount of such overpayment or underpayment within
ninety (90) days after the end of each such operating year.
ARTICLE 6
DEFAULT
6.1 DEFAULT. Upon the occurrence of any event of default, this
Agreement may be terminated at the option of the non-defaulting party which
shall be effective within thirty (30) days after written notice of same and
subject to the provisions of Section 6.4. Default shall include the events set
forth in Sections 6.2 and 6.3 below.
6.2 DEFAULT BY PROJECT MANAGER.
(a) Project Manager applies for or consents to the appointment of
receiver, trustee, or liquidator of Project Manager; or
(b) Project Manager files a voluntary petition for bankruptcy, or
makes a general assignment for benefit of creditors; or
(c) Involuntary bankruptcy proceedings or any order, judgment or
decree shall be entered by any court of competent jurisdiction or the
application of a creditor, adjudicating Project Manager bankrupt or insolvent,
and such order,
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judgment or decree shall continue unstayed and in effect for a period of
ninety (90) days; or
(d) Project Manager shall fail to keep, observe, or perform any
material covenant, agreement, term, or provision of this Agreement to be kept or
observed or performed by Project Manager, which is not directly caused by
Company, and such default shall continue for a period of thirty (30) days after
written notice thereof by Company to Project Manager; or
(e) The Nevada Gaming Commission or Nevada Gaming Control Board
issues any notification that Project Manager or any of its officers or directors
is in violation or unsuitable under any Nevada Gaming statutes or regulations;
or
(f) Any uncured default by Project Manager, in its capacity as
shareholder of Company, under the Stockholders Agreement; or
(g) Any material and unauthorized interference by Project Manager
with Morton's rights and obligations under the Supervisory Agreement.
6.3 DEFAULT BY COMPANY.
(a) Company shall fail to keep, observe, or perform any material
covenant, agreement, term or provision of this Agreement to be kept, observed,
or performed by Company, which is not directly caused by Project Manager and
such default shall continue for a period of thirty (30) days after notice
thereof by Project Manager to Company; or
(b) Company shall apply for or consent to the appointment of a
receiver, trustee or liquidator of Company, or a substantial part of Company's
assets; or
(c) Company files a voluntary petition for bankruptcy or makes a
general assignment for the benefit of creditors; or
(d) An order, judgment or decree is entered by any Court of
competent jurisdiction, or the application of a creditor adjudicating the
Company bankrupt or insolvent, or approving a petition of reorganization of the
Company or appointing a receiver, trustee, or liquidator of the Company or all
or a substantial part
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of the assets of the Company, and such order, judgment or decree shall
continue unstayed and in effect for a period of thirty (30) days; or
(e) The Nevada Gaming Commission, or Nevada Gaming Control Board
issues any notification that Company or any of its officers or directors is in
violation or unsuitable under any Nevada Gaming statutes and regulations; or
(f) Notwithstanding Section 6.3(a) above, if Company fails to
timely pay Project Manager the fees set forth in this Agreement within five (5)
days after written notice thereof, by Project Manager to Company, and said
failure was not caused by the acts of Project Manager; or
(g) Any uncured default by Morton or Lily Pond under the
stockholders Agreement, the Supervisory Agreement, or Sublicense Agreement.
6.4 CURING DEFAULT. Upon receipt of any notice of default, the
defaulting party shall immediately undertake to cure within said period as
identified in Article 6. If such default is not susceptible to being cured with
all due diligence within the stated cure period, the defaulting party shall
proceed promptly with all due diligence to cure the same and thereafter to
prosecute the curing of such default with all due diligence. The time for the
defaulting party to cure the same shall be extended for such periods as may be
necessary to cure the same with due diligence. However, the cumulative total of
said extensions shall not exceed ninety (90) days without the written consent of
the non-defaulting party. After cure, the default shall be of no force and
effect, and the after cure rights and obligations of the parties shall be the
same as existed prior to the giving of notice of the default.
However, this provision shall not apply to Section 6.3(f).
ARTICLE 7
TERMINATION
7.1 TERMINATION. Either party may terminate this Agreement for any
reason set forth in this Article 7.
7.2 TERMINATING UNDER DEFAULT. Any party may terminate this Agreement
in the event of a default, as set forth in Article 6 above, at the option of the
non-defaulting party, subject to all applicable notice and cure requirements.
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7.3 CONDEMNATION OR DESTRUCTION. Either party may terminate this
Agreement for the condemnation or destruction of the Project subject to the
terms and conditions set forth in Article 9 of this Agreement.
7.4 FAILURE TO ACHIEVE FINANCIAL RESULTS.
(a) Either party shall have the right to terminate this Agreement
in the event that minimum Return on Investment levels are not achieved at
specified times and under certain conditions which are set forth in Exhibit "L"
attached hereto and incorporated herein. Notwithstanding the foregoing, to the
extent adverse operating results are directly attributable (as reasonably
determined by the accountants for the Project) to any reason of force majeure,
or other similar circumstance beyond the control of Project Manager, such
operating results shall be disregarded for the purpose of this Section.
(b) If either party terminates this Agreement pursuant to Section
7.4(a), such right may be exercised provided that (i) notice of termination
shall be given within sixty (60) days after the receipt by both parties of the
certified profit and loss statement for such Fiscal Year, and (ii) the notice
shall specify a termination date not less than thirty (30) days after giving of
such notice.
7.5 TRANSFER OF INTEREST. The parties hereto expressly agree and
acknowledge that the rights and duties set forth in this Management Agreement
are personal to Project Manager and Company, and that the parties have entered
into this Agreement in reliance on the business skills and personal character of
each other. Accordingly, neither party may assign its interest unless the
provisions of Section 10.5 are complied with. Any attempt to do any of the
foregoing without the prior express written permission of the non-transferring
party shall be null and void and of no effect, and shall constitute a material
breach of this Agreement for which the non-transferring party may terminate
subject to the provisions of this Article 7. Notwithstanding the foregoing, any
public stock offering by either Company, Lily Pond or Project Manager shall be
excepted from the provisions of this Section 7.5, and either party shall have
the right to make said offering without the express written permission of the
non-offering party, subject to the terms of the stockholders Agreement.
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7.6 SALE OR LEASE OF PROJECT. Project Manager shall have the right to
terminate this Agreement should Company elect to sell, assign, convey, or lease
all or, substantially all, of the Project.
7.7 REDUCTION OF INTEREST. Should Project Manager reduce its equity
interest in the Project below twenty percent (20%) of its initial cumulative
total of Class A and Class B stock or cease to own or maintain gaming operations
elsewhere, then Company shall have the right to terminate this Agreement. If
the current shareholders of Project Manager cease to own forty percent (40%) or
more of the overall voting power of Project Manager (including, without
limitation, the right to elect directors), the Company shall have the right to
terminate this Agreement.
7.8 TERMINATION NOTICE. Any termination given pursuant to this Article
shall be effective as of the date specified in the notice of termination which
will not be less than thirty (30) nor more than one-hundred eighty (180) days
after the date of such notice, excepting notification requirements as set forth
in Article 6 for any default set forth therein.
7.9 RIGHTS AND REMEDIES UPON TERMINATION. A party terminating this
Agreement shall retain all other rights and remedies which may be provided at
law or equity in addition to any rights provided in this Agreement including the
right of termination.
7.10 PRE-OPENING TERMINATION. Company shall have the right to terminate
this Agreement, at any time prior to opening of the Project, should Company
elect not to develop the Project. Notwithstanding the foregoing, Company shall
be required, on or before the date of termination, to reimburse and compensate
Project Manager for all fees, costs, expenses, and payments due and owing to
Project Manager up to the time of termination, and assume all liabilities
incurred by Project Manager pursuant to this Agreement.
7.11 POST-OPENING TERMINATION. Excepting the provisions of Article 6,
Company shall not have the right to terminate this Agreement at its sole
discretion without liability until three years after the opening of the Project.
Company shall be required to pay and reimburse Project Manager for all fees,
costs, expenses, and payments due Project Manager up to the time of termination,
as well as a termination fee to be calculated for certain time periods from the
term of this Agreement as set forth in Exhibit "M" attached hereto and
incorporated herein.
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7.12 WINDING UP. Upon any termination of this Agreement, for any reason
whatsoever, each party shall immediately pay all fees and payments due under the
terms of the Agreement up to the date of termination. The parties shall provide
the other party with an itemized statement showing all fees, charges and
expenses, and other matters that may be due or owing therein. Project Manager
shall deliver to Company, or its designated agents, copies of all books and
records maintained by Project Manager for the Project, and all funds in the
possession of the Project Manager which may be belonging to Company subject to
Project Manager's rights of setoff for any monies that may be due and owing
under the terms of this Agreement. Project Manager shall release, assign and
transfer any and all interests it may have in the real and personal property and
any agreements or encumbrances with respect thereto or the Project, other than
those items of real and personal property which were paid for and owned by
Project Manager. Project Manager shall make itself available for a period of
thirty (30) days after termination to consult with and advise Company regarding
the operation and maintenance or closure of the Project upon receipt of a
reasonable consultation fee to be agreed upon by Project Manager and Company.
Company shall be solely responsible for, and shall pay the costs of cancellation
of any agreements or continued performance under any agreements entered into by
Project Manager or Company prior to the date of termination. Company shall
further be solely responsible for all severance and termination benefits due to
the employees of Company and/or Project Manager whose services are terminated.
Company shall further continue to honor all commitments concerning the Project
including guest room reservations, conventions, bookings, banquets, tours, and
any other commitments outstanding as of the time of termination. This paragraph
shall be deemed a covenant running with the Project, and shall survive
termination or expiration of this Agreement, and shall be specifically
enforceable by Project Manager and Company.
ARTICLE 8
MORTGAGES AND DEBT ENCUMBRANCES
8.1 NON-ENCUMBRANCE. Project Manager shall not mortgage or encumber the
Project, including the real and personal property, Furniture, Fixtures and
Equipment therein without the prior written consent of Company. Company shall
provide Project Manager at the commencement of each Fiscal Year, a listing of
all mortgages and encumbrances on the Project including all real and personal
property, Furniture, Fixtures and Equipment, and shall identify the mortgage or
debt
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encumbrance holders, the nature of the encumbrances, and the amount of the
encumbrances.
8.2 NOTICES TO MORTGAGEES. Project Manager shall be required to give a
copy of any notice of default or notice of termination that it receives under
this Agreement to any mortgagee or encumbrance holder designated in Company's
list of encumbrances or as the Company may designate from time to time, and as
is required by the provisions of this Agreement for giving of notices. Project
Manager may also provide any notice of default or termination that Company may
receive to the designated mortgagee or debt encumbrance holder as Company may
designate.
8.3 CURE BY MORTGAGEE. Should Company default, or should an event of
termination occur as set forth in Articles 6 or 7, and any mortgagee or
encumbrance holder shall be entitled to cure the default on behalf of Company
pursuant to the provisions of Article 6 and 7, then Project Manager shall accept
same.
8.4 ACCESS TO PREMISES. Upon reasonable advance notice from any
mortgagee or debt encumbrance holder designated by Company, Project Manager
shall accord the entity and its agents the right to enter upon any part of the
Project premises at any reasonable time for the purposes of examining,
inspecting and copying the books and records of the Project.
8.5 FORECLOSURE. If any mortgagee or debt encumbrance holder shall
obtain ownership of the Project due to any legal proceedings, foreclosure, or
conveyance in lieu of foreclosure and shall have cured any existing defaults of
Company, Project Manager may elect to continue with the Management Agreement
with said mortgagee or debt encumbrance holder or may elect to terminate this
Agreement. If the mortgagee or debt encumbrance holder continues with this
Agreement, Company and Project Manager shall acknowledge the same in writing.
8.6 ESTOPPEL CERTIFICATES. Project Manager shall provide, at the request
of Company, to those mortgagees or debt encumbrance holders designated by
Company, a statement in writing certifying this Agreement has not been modified
and is in full force and effect, or if there have been such modifications
stating the modifications. Said estoppel certificate shall also require Project
Manager to state whether or not, to the best of Project Manager's knowledge,
there exists any default or termination, and if so, specifying the event of
default or termination. Said estoppel certificate shall be delivered within ten
(10) days of receipt of a written
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request. Company shall be required to provide a similar estoppel certificate
to Project Manager upon request.
ARTICLE 9
CONDEMNATION AND DESTRUCTION
9.1 CONDEMNATION AND DESTRUCTION. If the whole of the Project shall be
taken or condemned in any eminent domain, condemnation, compulsory acquisition
or like proceeding by any competent authority for any public or quasi-public use
or purpose, or a portion thereof is condemned such as to make it imprudent or
unreasonable, in Company's and Project Manager's reasonable opinion, to use the
remaining portion of the Project for a first class hotel and casino of the type
and class agreed upon immediately preceding such taking of condemnation, and in
any such event, the term of this Agreement shall cease and terminate as of the
date in which Company shall be required to surrender possession of the Project
as a consequence of such taking or condemnation. Project Manager shall continue
to supervise and direct the management and operation of the Project until such
time as Company is required to surrender possession of the Project as a
consequence of such taking or condemnation. Project Manager shall be
compensated, pursuant to the terms of this Agreement, for services provided up
to the date of surrender and possession. Upon surrender and possession, this
Agreement shall immediately terminate, and Project Manager shall not be entitled
to share in any award granted to Company for such taking or condemnation other
than as it may be entitled to as an equity holder.
9.2 CONTINUATION. If this Agreement is not terminated as set forth in
Section 9.1, then Company shall be required to immediately undertake efforts to
repair or rebuild the Project, or any part thereof to its pre-condemnation
status to the extent reasonably possible. Company shall be responsible for
immediately commencing and diligently proceeding with said repairs, alterations,
or modifications pursuant to a timeframe to be agreed to by Project Manager,
with Project Manager having the right to participate in supervision of said work
pursuant to Article 4(A) and 4(B). The obligations of Company, pursuant to this
Agreement, shall abate during the period of said repairs if the entire Project
is required to be inoperable, so long as Company diligently proceeds with the
requirements of restoration.
9.3 DESTRUCTION. If the Project is destroyed in whole or in part by
fire or other casualty, then Company shall be required to commence necessary
repairs,
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construction, or modifications within thirty (30) days after the date of said
casualty, and shall continue to diligently repair, construct, or modify the
Project. If the Project continues to operate throughout the reconstruction,
repair, or modification, then this Agreement shall remain in full force and
effect, however, should the Project cease to operate during the period of
construction, repair, or modification, then the provisions of this Agreement
will abate during this period, other than right of Project Manager to
participate in the construction, repair and modification of the facility as
set forth in the provisions of Article 4(A) and 4(B).
9.4 TERMINATION. Notwithstanding Sections 9.2 and 9.3, should the
Project be materially destroyed during the term of this Agreement by fire or
other casualty which would make it imprudent or unreasonable in Company's
absolute discretion to rebuild and operate the Project and Company gives Project
Manager written notice thereof within thirty (30) days after the date of said
casualty, and Company elects to terminate the operation of the Project for one
year or more, then Company and Project Manager shall each have the right and
option, upon thirty (30) days advance written notice, to terminate this
Agreement subject to the provisions of Section 7.11. If neither party shall
elect to terminate this Agreement, then Company shall be required to immediately
commence with construction, repair, or modification of the premises within
thirty (3O) days after the date of casualty and diligently pursue same.
ARTICLE 10
MISCELLANEOUS
10.1 NOTICES. All notices or other communications required pursuant to
this Agreement shall be in writing and personally served or delivered by
overnight express mail, or by certified or registered mail to the
representatives of Company or Project Manager as set forth below. Delivery will
be deemed complete upon mailing or delivery to overnight courier
If to Company: If to Project Manager:
HARD ROCK HOTEL HARVEY'S RESORT Hotel&Casino
P.O. Box 128 P.O. Box 128
U.S. Hwy. 50 & Stateline Ave. U.S. Hwy. 50 & Stateline Ave.
Stateline, Nevada 89449 Stateline, Nevada 89449
Attn:________________________ Attn: President and Chief Executive Officer
49
<PAGE>
With Courtesy Copy of all notices to Project Manager and Company to be
provided to:
Scarpello & Alling, Ltd. Jeffrey Leeds, Esq.
P.O. Box 3390 230 Park Avenue, Ste. 1440
276 Kingsbury Grade, Ste. 2000 New York, New York 10169
Stateline, Nevada 89449-3390
Attn: Ronald D. Alling, Esq.
Gordon & Silver, Ltd.
Lily Pond Investments, Inc., 3800 Howard Hughes Pkwy.
a Nevada corporation 14th Floor
510 North Robertson Boulevard Las Vegas, Nevada 89109
Los Angeles, CA 90048 Attn: Jeffrey Silver, Esq.
10.2 AGENCY. Nothing herein shall be deemed to be construed to create a
relationship of employee/employer, joint venturers or partners of Project
Manager, Lily Pond and Company or each other, and neither partner shall have the
power or authority to enter into any agreement without the other party's consent
except as may be provided for in this Agreement.
10.3 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Nevada. Jurisdiction and venue with
respect to any legal action to interpret or enforce the terms of this Agreement
shall be brought in any appropriate court or other forum in the State of Nevada.
10.4 SEVERABILITY. Should any Court, administrative or legislative body
uphold or declare any of the terms or provisions hereof to be invalid or
unenforceable for any reason, the validity or unenforceability of said
provisions shall not affect the remaining terms or provisions of this Agreement.
10.5 SUCCESSORS AND ASSIGNS. Neither party shall have the right to assign
this Agreement or any obligations or rights hereunder without the prior written
consent of the non-assigning party. Notwithstanding the foregoing, Project
Manager may assign its rights and obligations herein to any majority owned
subsidiary or Affiliate of Project Manager so long as said Affiliate or
subsidiary is of like experience, ability and reputation, and complies with all
terms and requirements of this Agreement. Further, Project Manager may assign
this Agreement to any successor or assignee manager which may result from any
incorporation, merger or
50
<PAGE>
result from a consolidation or reorganization of Project Manager, provided
that Project Manager maintains majority ownership of any entity resulting
from such incorporation, merger, consolidation or reorganization. However,
any public stock offering referenced in Section 7.5 shall not be subject to
the provisions of this Section 10.5. All attempted assignments of this
Agreement by any party not in compliance with the provisions hereof, shall be
void as to the party not having consented to such assignment. With respect to
any assignment prohibited by this section, Company shall be deemed to have
accepted any assignment by Project Manager as provided herein unless a
written objection is delivered within ten (10) days of receipt of written
notice of Project Manager's proposed assignment. Any information or
documents provided to Company by Project Manager or its proposed assignee
shall be kept in confidence and shall not be disclosed to any parties,
persons or organizations without the prior written consent of the
non-disclosing parties as may be required by law. Should Company elect to
sell the Project to a purchaser, Company shall notify Project Manager in
writing no less than ninety (90) days prior to any such intended sale of the
Project. As part of such notification, Company shall provide Project Manager
with the identity of the purchaser and reasonably complete information
regarding the purchase to the extent necessary so that Project Manager can
assess the purchaser's qualifications and standards to make an election as to
whether to continue this Agreement with the new purchaser. Should Project
Manager elect to continue the Agreement, then it shall notify Company and any
prospective purchaser within thirty (30) days of receipt of notice from
Company of the intended sale.
10.6 SUCCESSORS. Subject to the conditions set forth in this Agreement,
this Agreement shall inure to the benefit of, and be binding upon the parties
hereto, and their respective heirs, legal representatives, successors, and
assigns.
10.7 WAIVER AND MODIFICATION. Neither party may modify or be deemed to
have waived its rights or obligations under the terms or provisions of this
Agreement without said waiver or modification being set forth in writing and
executed by the party to be charged. Waiver of any requirement of strict
performance, covenant, agreement, term, or condition or breach of this Agreement
shall not alter or affect the remaining terms of this Agreement and each and
every covenant, agreement, term and condition of this Agreement shall continue
in full force and effect with respect to any other existing or subsequent breach
by any party or so-called rights and remedies of the parties.
51
<PAGE>
10.8 ATTORNEY'S FEES. Should either party commence any legal action to
interpret or enforce the provisions of this Agreement, then the prevailing party
in any such action shall be entitled to a reasonable award of attorney's fees
and costs associated therewith.
10.9 FORCE MAJEURE. If Project Manager, in its reasonable opinion,
determines it is necessary to cease operations of the Project in order to
protect the Project, Company, Project Manager, or the health, safety and welfare
of the patrons and employees for any reason of force majeure or act of God, then
in such event, Project Manager shall have the right to close and cease or
suspend such operations for up to a period of sixty (60) days. If after sixty
(60) days, conditions which would cause the interruption have not been improved
sufficiently to allow reasonable resumption of operations, as reasonably
determined by Project Manager, then either party may terminate this Agreement
upon thirty (30) days advance written notice after the sixtieth (60th) day of
suspension of operations.
10.10 UNDERSTANDINGS AND AGREEMENTS. This Agreement, the Stockholders
Agreement, Supervisory Agreement, and the Sublicense Agreement constitute all of
the understandings and agreements of the parties of whatsoever nature or kind,
whether oral or written. No other representations have been made or relied upon
other than as set forth therein.
10.11 COVENANT. Any covenant, term, or provision of this Agreement, which
in order to be effective, must survive the termination of this Agreement, shall
survive any such termination.
10.12 POWER OF AUTHORITY. The parties hereto represent and warrant that
they have full power and authority to enter into and execute this Agreement and
to be bound and perform the terms hereof, and that the parties executing this
Agreement on behalf of Company, and Project Manager respectively are fully
authorized to act on behalf of said respective parties. Upon request, each party
shall furnish the other evidence of such authority.
10.13 INTEREST AND PENALTIES. Any amounts payable, due and owing
hereunder by any party shall bear interest at a rate equal to the greater of (a)
the Prime Rate in effect from time to time at First Interstate Bank of Nevada,
N.A., plus three (3) percentage points, or (b) eighteen percent (18%) per annum
until paid in full, if not paid within the time provisions as required by this
Agreement.
52
<PAGE>
10.14 BROKERAGE. The parties hereto each represent and warrant to the
other that neither has sought the services of a broker or agent in this
transaction, and neither has employed nor authorized any persons to act in such
capacity. Project Manager and Company each hereby agree to indemnify and hold
the other harmless from and against any and all claims, loss, liability, damage,
or expense (including court costs, and reasonable attorney's fees) suffered or
incurred by the other party as a result of a claim brought by any person or
entity claiming to be engaged as a client or broker or agent by the indemnifying
party.
10.15 INCORPORATION OF DOCUMENTS. All references to ancillary agreements,
documents and exhibits in this Agreement shall be deemed to be an incorporation
of said documents, agreements, and exhibits to this Agreement, and both parties
hereto represent and warrant that they have had an opportunity to review and
approve all such documents, agreements, and exhibits.
10.16 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
constitute one and the same Agreement.
53
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement effective the day and year first above written.
COMPANY: PROJECT MANAGER:
HARD ROCK HOTEL, INC., HARVEY'S WAGON WHEEL, INC.,
A Nevada corporation a Nevada corporation
By: /S/ PETER MORTON By: /S/ RICHARD KUDRNA
---------------- ----------------------
Richard Kudrna, Sr.
Its: PRESIDENT Chairman of the Board
----------------
By: /S/ WILLIAM LEDBETTER
----------------------
William Ledbetter
President
By: /S/ BEVERLEE LEDBETTER
----------------------
Beverlee Ledbetter
Secretary
<PAGE>
EXHIBIT "A"
CURRENT PROJECT MANAGER AFFILIATES
STATES WHERE
OWNERSHIP, DIRECTORS, QUALIFIED TO DO
NAME OFFICERS BUSINESS
- ---- ------------------------- ---------------
WestAd 100% owned by Harvey's Nevada
Wagon Wheel, Inc.
Richard Kudrna
William Ledbetter
Tom Yturbide
Wagon Wheel Stages, Inc. 100% owned by Harvey's Nevada
Wagon Wheel, Inc. California
Beverlee Ledbetter
William Ledbetter
Reno Projects, Inc. 100% owned by Harvey's Nevada
Wagon Wheel, Inc.
Ron Alling
Beverlee Ledbetter 53.l9% owner of Harvey's N/A
Wagon Wheel, Inc.
<PAGE>
EXHIBIT "B"
PROJECTED ANNUAL OPERATING BUDGET
The Annual Operating Budget will be prepared by Project Manager for submission
to the Board of Directors of Hard Rock Hotel, Inc., a Nevada corporation, within
one hundred eighty (180) days after execution of the Management Agreement, as
provided for in Section 4 (A) (2) (d) of the Management Agreement.
Defined at 1.3, incorporated as a component of the Annual Plan (defined at
1.4), Exhibit "C".
Referenced within body of document: 4 (A) (2) (d), 1.32 (detail of
Operating Costs).
Description: The Annual Operating Budget will be comprised of various
financial and statistical reports by operating and support departments and
functions, projecting income and expenses by detail line item (see
Operating Costs, 1.32) for the next Fiscal Year in monthly series.
Departmental and functional operating assumptions in support of financial
projections will include, but not be limited to, major program plans
(marketing and sales, promotions, hotel sales, human resources and
benefits, capital expenditures, etc.) and department specific objectives
prepared by operating and administrative managers.
<PAGE>
EXHIBIT "C"
FIRST FISCAL YEAR'S ANNUAL PLAN
The Annual (business) Plan, governing the conduct of operations of the Hard Rock
Hotel, Inc., a Nevada corporation, will be prepared by the Project Manager for
submission to the Board of Directors within one hundred eighty (180) days after
execution of the Management Agreement, as provided for in Section 4 (A) (2) (d)
of the Management Agreement.
Each Annual (business) Plan for subsequent Fiscal Years after Opening will be
presented to the Board of Directors by Project Manager at least sixty (60) days
prior to the start of the referenced Fiscal Year, as provided for in Section 4
(C) (10) of the Management Agreement.
Defined at 1.4, incorporating and/or referencing other elements:
Annual Operating Budget, 1.3, Exhibit "B"
Capital Improvements, 1.7
Capital Replacements, 1.8
Operating Costs, 1.32
Operating Equipment, 1.33
Operating Supplies, 1.34
Operational Standards, 1.35, Exhibit "G"
Capital Expenditures, 4 (C) (6)
Referenced within body of document: 4 (A)(2)(d), 4(C)(2), 4(C)(3),
4(C)(4), 4(C)(6), 4(C)(10), 4(C)(23), 4(C)(24), 4(C)(25), 4(C)(26),
4(C)(27).
Description: The Annual (business) Plan for each Fiscal Year subsumes the
Annual Operating Budget (with Projected Operating Costs), Capital
Expenditures (Improvements and Replacements), Operating Equipment and
Supplies, and Operational Standards. Key Programming assumptions,
financial plans and budgets associated therewith, Operational Standards,
operating and regulatory rules, policies, and procedures, and managerial
and departmental objectives will be documented by Project Manager for
approval by the Board of Directors and will be subject to change as part of
the Annual Plan process and periodically
<PAGE>
throughout the subject Fiscal Year, as provided for in Section 4(C)(10)(d)
and (g) in the Management Agreement.
<PAGE>
EXHIBIT "D"
STOCKHOLDERS AGREEMENT
<PAGE>
EXHIBIT "E"
DESIGN, DEVELOPMENT AND CONSTRUCTION BUDGET
The Design, Development and Construction Budget will be prepared by Project
Manager's construction coordinator, the General Manager and Project design and
development consultants and sub-contractors for submission to the Board of
Directors within one hundred eighty (180) days after the execution of the
Management Agreement, as provided for in Section 4(A)(3) of the Management
Agreement.
Defined at 1.12, incorporating and referencing other elements:
Furniture, Fixtures & Equipment, 1.19
Pre-Opening Program, 1.37
Referenced within body of document: 4(A)(l), 4(A)(2), 4(A)(3),
4(A)(7), 4(A)(8), 4(B)(l)
Description: Total invested capital to build and open the Project for
operation will not exceed EIGHTY MILLION DOLLARS ($80,000,000), including
the value of the land; all design, permitting and construction costs: all
furniture, fixtures and equipment; financing fees paid during the
construction period under terms of debt financing commitment; capitalized
interest incurred during construction period; all costs associated with
Pre-Opening program; and working capital requirements to establish start-up
Operating Supplies and other inventories.
<PAGE>
EXHIBIT "F"
LICENSE AGREEMENT
<PAGE>
EXHIBIT "G"
OPERATIONAL STANDARDS
Operational Standards, associated with the Annual (business) Plan, will be
prepared by the Project Manager as part of the First Fiscal Year's Annual Plan,
within one hundred eighty (180) days after execution of the Management Agreement
for submission to the Board of Directors, as provided for in Section 4 (A) (5)
of the Management Agreement.
Defined at 1.35, incorporating and referencing other elements:
Annual Plan, 1.4, Exhibit "C"
Annual Operating Budget, 1.3, Exhibit "B"
Referenced within body of document: 4(A)(2)(d), 4(A)(5), 4(A)(7),
4(C)(2), 4(C)(6), 4(C)(10), 4(C)(23), 4(C)(24), 4(C)(25), 4(C)(26),
4(C)(28).
Description: Operational Standards - to be developed by department, job
classification and function - will include service and procedural
standards; operating and regulatory rules, policies and procedures;
training and orientation programs; and quality assurance and regulatory
compliance tracking/monitoring processes.
<PAGE>
EXHIBIT "H"
SITE
The estate of interest in the land described or referred to in this Schedule
covered by this report is:
A FEE
Title to said estate or interest at the date hereof is vested in:
RED, WHITE AND BLUE PICTURES, INC., a California corporation
The land referred to in this report is situated in the State of Nevada, County
of Clark, and is described as follows:
That portion of the Northwest Quarter (NW 1/4) of Section 22, Township 21 South,
Range 61 East, M.D.B. & M., described as follows:
Parcel One (1) as shown by map thereof in File 61 of Parcel Maps, Page 52, in
the Office of the County Recorder of Clark County, Nevada.
<PAGE>
EXHIBIT "J"
SUPERVISORY AGREEMENT
<PAGE>
EXHIBIT "K"
TARGETS FOR RETURN ON INVESTMENT
Pursuant to Section 5.2, the following shall represent the Return on Investment
targets relevant to Incentive Fee achievements:
Year 1 15%
Year 2 16.5%
Year 3 and thereafter 17.5%
A. Accounts:
During the term of this Agreement, Company's Return Account and Project
Manager's Incentive Account shall be established and maintained on the books and
records for the Project. Company's Return Account is established for the sole
purpose of determining when the Incentive Fee begins to accrue and does not
create any obligation to pay any Cash Flow from Operations to Company. Each
amount allocated to Project Manager's Incentive Account pursuant to Section 5.2
shall constitute a credit to that account and each amount distributed on account
of Project Manager's Incentive Account pursuant to Section 5.2 shall constitute
a debit to that account. During each Fiscal Year, Cash Flow from Operations for
each Fiscal Month shall be allocated to Company's and Project Manager's Account
at the end of each Fiscal Month in the following manner and priority:
B. Incentive Fee Achievement Schedule:
(i) First, all Cash Flow from Operations for each Fiscal Month shall be
credited to Company's Return Account until the amount credited to Company's
Return Account during the then current Fiscal Month equals an amount equal to
one-twelfth (1/12) of Company's Return on Investment.
(ii) Second, all Cash Flow from Operations in excess of that amount
credited to Company's Return Account under subsection (i) above for each Fiscal
Month shall be credited fifteen percent (15%) to Project Manager's Incentive
Account and eighty-five percent (85%) to Company's Return Account;
(iii) The cumulative amount credited to Project Manager's Incentive Account
under subsection (ii) above during any Fiscal Year shall never exceed the amount
equal to two percent (2%) of cumulative Gross Revenues for the relevant Fiscal
Year-to-Date. All Cash Flow from Operations in excess of the two percent (2%) of
Gross Revenue limitation otherwise allowable to Project Manager's Incentive
Account under subsection (ii) above shall be credited to Company's Return
Account.
<PAGE>
EXHIBIT "L"
MINIMUM FINANCIAL RESULTS
Pursuant to Section 7.4, the following minimum Return targets are established
for the specified times and under the conditions as outlined below:
Minimum Return
FISCAL YEAR (AS DEFINED IN SECTION 5.2)
Through the end of Fiscal Year 2 None
Fiscal Year 3 10% per annum
Fiscal Year 4 11% per annum
Fiscal Year 5 and thereafter 12% per annum
Notwithstanding Section 7.4 (a), Company's right to terminate this Agreement
pursuant to Section 7.4 (b), in the event that minimum Return on Investment
targets referred to above are not met in any one Fiscal Year shall be subject to
the following:
(i) subject to subsections (ii) and (iii) below, if the Rolling Average, as
defined below, equals or exceeds the Return on Investment target required for
the then current Fiscal Year, Company shall not have the right to terminate this
Agreement as a result of Project Manager's failure to achieve minimum Return on
Investment for the then current Fiscal Year. In the event that the Rolling
Average does not equal or exceed the Return on Investment required for the then
current Fiscal Year, this Agreement shall continue in full force and effect
provided that the minimum Return on Investment target for the next Fiscal Year
is achieved; if not, Company shall have the right to terminate this Agreement;
and,
(ii) during the Initial Term of the Agreement, Project Manager may avail
itself of the Rolling Average cure provision set forth in subsection (i) above
no more than three (3) times during the Initial Term of this Agreement, and, for
the balance of the term of this Agreement (including all Renewal Terms), Project
Manager may avail itself of the Rolling Average cure provision set forth in
subsection (i) above no more than three (3) additional times during the
remaining term of this Agreement; and
(iii) notwithstanding the provision of subsections (i) and (ii) above, in
the event that the minimum Return On Investment target is not achieved for two
(2) consecutive Fiscal Years, Company shall have the right to terminate this
Agreement.
<PAGE>
(iv) Rolling Average is defined as the average of the then current Fiscal
Year's Return on Investment plus the two (2) immediately preceding Fiscal Years'
Return on Investment.
<PAGE>
EXHIBIT "M"
POST-OPENING TERMINATION FORMULA
Pursuant to Section 7.11, in the event of a Post-Opening Termination by Company,
Project Manager shall receive a termination fee as follows:
(A) Company may not terminate this Agreement before the end of the third
full year of operation from the date of Opening.
(B) In the event that termination occurs after the completion of the
third full year of operation from the date of Opening, the
termination fee will be an amount calculated as follows:
(1) the actual Base Management Fee and Incentive Fees earned in
the three (3) most recently completed full Fiscal Years shall
be summed and divided by three to determine the actual
average annual fee amount; and
(2) the amount in (B) (1) above shall be extended on an annual
basis ("the Annual Fee") for the balance of years remaining
in the Initial or any applicable Renewal Term of this
Agreement; and
(3) the resulting stream of actual average Annual Fee amounts
shall be discounted at a rate of 13% to determine the
termination fee payment.
<PAGE>
EXHIBIT 10.12
EXECUTION COPY
______________________________________________________________________________
STOCK PURCHASE
AND
MANAGEMENT BUYOUT AGREEMENT
AMONG
HARVEYS L.V. MANAGEMENT COMPANY, INC.,
HARVEYS CASINO RESORTS
LILY POND INVESTMENTS, INC.
AND
HARD ROCK HOTEL, INC.
______________________________________________________________________________
Dated as of July 1, 1997
<PAGE>
TABLE OF CONTENTS
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ARTICLE I
CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.1 Certain Defined Terms. . . . . . . . . . . . . . . . . . . 3
Section 1.2 Other Definitional Provisions. . . . . . . . . . . . . . . 6
ARTICLE II
SALE OF STOCK; TERMINATION OF MANAGEMENT AGREEMENT; CLOSING. . . . . . . . . . 6
Section 2.1 Stock Repurchase; Management Buyout. . . . . . . . . . . . 6
Section 2.2 Closing; Closing Date. . . . . . . . . . . . . . . . . . . 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HARVEYS. . . . . . . . . . . . . . . . . . . 7
Section 3.1 Authority of Harveys . . . . . . . . . . . . . . . . . . . 7
Section 3.2 Authority of HLVMC . . . . . . . . . . . . . . . . . . . . 7
Section 3.3 Title to the Common Stock. . . . . . . . . . . . . . . . . 7
Section 3.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.5 Consents and Approvals . . . . . . . . . . . . . . . . . . 8
Section 3.6 Government Licenses, Permits and Related Approvals . . . . 8
Section 3.7 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.8 Employee Information; Extraordinary Payments . . . . . . . 8
Section 3.9 Labor Relations. . . . . . . . . . . . . . . . . . . . . . 9
Section 3.10 Employee Benefit Plans . . . . . . . . . . . . . . . . . . 9
Section 3.11 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.13 Transactions with Affiliates . . . . . . . . . . . . . . . 11
Section 3.14 Use of Certain Ideas . . . . . . . . . . . . . . . . . . . 11
Section 3.15 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.16 Leases of Real Property. . . . . . . . . . . . . . . . . . 11
Section 3.17 No Other Agreements to Sell. . . . . . . . . . . . . . . . 11
Section 3.18 Governmental Relations . . . . . . . . . . . . . . . . . . 11
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LILY POND. . . . . . . . . . 12
Section 4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . 12
Section 4.2 Authority of the Purchasers. . . . . . . . . . . . . . . . 12
Section 4.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . 12
Section 4.4 Consents and Approvals . . . . . . . . . . . . . . . . . . 12
Section 4.5 No Registration. . . . . . . . . . . . . . . . . . . . . . 13
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Section 4.6 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE V
CERTAIN AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.1 Conduct of Business. . . . . . . . . . . . . . . . . . . . 13
Section 5.2 Regulatory and Other Authorizations and Consents . . . . . 14
Section 5.3 Further Actions. . . . . . . . . . . . . . . . . . . . . . 14
Section 5.4 Books and Records. . . . . . . . . . . . . . . . . . . . . 15
Section 5.5 [Intentionally Left Blank] . . . . . . . . . . . . . . . . 15
Section 5.6 Stockholders Agreement; By-laws. . . . . . . . . . . . . . 15
Section 5.7 Commission Filing. . . . . . . . . . . . . . . . . . . . . 15
Section 5.8 [Intentionally Left Blank] . . . . . . . . . . . . . . . . 15
Section 5.9 Operating and Capital Budgets. . . . . . . . . . . . . . . 16
ARTICLE VI
CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.1 Conditions Precedent to Obligations of Parties . . . . . . 16
Section 6.2 Conditions of the Company's and Lily Pond's Obligation
to Close . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.3 Conditions to Harveys' Obligations to Close. . . . . . . . 18
ARTICLE VII
EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 7.1 Continuity of Employment . . . . . . . . . . . . . . . . . 19
Section 7.2 Transfer of Plans. . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VIII
INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.1 Indemnity of the Company . . . . . . . . . . . . . . . . . 20
Section 8.2 Indemnity of Lily Pond . . . . . . . . . . . . . . . . . . 20
Section 8.3 Indemnity of Harveys and HLVMC by the Company. . . . . . . 21
Section 8.4 Indemnity of Harveys and HLVMC by Lily Pond. . . . . . . . 21
Section 8.5 Indemnification Procedures . . . . . . . . . . . . . . . . 21
Section 8.6 Other Agreements Concerning Indemnity. . . . . . . . . . . 22
ARTICLE IX
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 9.1 Termination and Abandonment. . . . . . . . . . . . . . . . 22
Section 9.2 Fees and Expenses; Transfer Taxes. . . . . . . . . . . . . 23
Section 9.3 Survival of Representations and Warranties . . . . . . . . 23
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Section 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.6 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . 24
Section 9.7 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.8 Successors and Assigns . . . . . . . . . . . . . . . . . . 26
Section 9.9 Headings; Definitions. . . . . . . . . . . . . . . . . . . 26
Section 9.10 Amendments and Waivers . . . . . . . . . . . . . . . . . . 26
Section 9.11 Severability . . . . . . . . . . . . . . . . . . . . . . . 26
Section 9.12 Integration. . . . . . . . . . . . . . . . . . . . . . . . 27
Section 9.13 Joint and Several. . . . . . . . . . . . . . . . . . . . . 27
Section 9.14 No Third Party Beneficiaries . . . . . . . . . . . . . . . 27
Section 9.15 Communications . . . . . . . . . . . . . . . . . . . . . . 27
SCHEDULE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SCHEDULE 3.7 CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SCHEDULE 3.8(c) EMPLOYMENT CONTRACTS . . . . . . . . . . . . . . . . . . . . . 34
SCHEDULE 3.10(a) EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . 35
SCHEDULE 3.10(d) CERTAIN PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . 36
SCHEDULE 3.11 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SCHEDULE 3.12 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SCHEDULE 3.13 TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . . 39
SCHEDULE 4.7 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SCHEDULE 6.3(h). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
CERTIFICATE OF HARD ROCK HOTEL, INC.,
A NEVADA CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
EXHIBIT LIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
SCHEDULES:
-iii-
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Schedule 3.7 Contracts
Schedule 3.8(c) Employee Information
Schedule 3.10(a) Employee Benefit Plans
Schedule 3.10(d) Certain Payments
Schedule 3.11 Insurance
Schedule 3.12 Litigation
Schedule 3.13 Transactiosn with Affiliates
Schedule 4.7 Litigation
Schedule 6.3(h) Financial Obligaitons
EXHIBITS:
EXHIBIT A Form of Transition Services Agreement
EXHIBIT B Form of Amendment to the Stockholders
Agreement
EXHIBIT C-1 Form of Release of Harveys
EXHIBIT C-2 Form of Release of HLVMC
EXHIBIT D-1 Form of Release of Lily Pond
EXHIBIT D-2 Form of Release of Morton
</TABLE>
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<PAGE>
STOCK PURCHASE and MANAGEMENT BUYOUT AGREEMENT (this "AGREEMENT")
dated as of July 1, l997, among HARD ROCK HOTEL, INC., a Nevada corporation
(the "COMPANY"), LILY POND INVESTMENTS, INC., ("LILY POND" and, together with
the Company, the "PURCHASERS"), HARVEYS L.V. MANAGEMENT COMPANY, INC., a
Nevada corporation ("HLVMC"), and HARVEYS CASINO RESORTS, a Nevada
corporation formerly known as Harveys Wagon Wheel, Inc. ("HARVEYS")
W I T N E S S E T H:
WHEREAS, Harveys is the record and beneficial owner of 40% of the
outstanding capital stock of the Company;
WHEREAS, Harveys and the Company are parties to the Management
Agreement, dated as of August 30, 1993 (the "MANAGEMENT AGREEMENT"), setting
forth certain rights and obligations relating to, INTER ALIA, the management
and operation of the Hotel;
WHEREAS, the Company desires to terminate, and Harveys desires to
have terminated, the Management Agreement, upon the terms and subject to the
conditions set forth herein (such termination, the "MANAGEMENT BUYOUT");
WHEREAS, Harveys desires to sell to the Company, and the Company
desires to repurchase from Harveys, all of the outstanding shares of Harveys
Class A Common Stock, no par value per share ("CLASS A COMMON STOCK"), and
Harveys Class B Common Stock, no par value per share ("CLASS B COMMON STOCK";
and, together with such Class A Common Stock, the COMMON STOCK"), of the
Company, upon the terms and subject to the conditions set forth herein (such
purchase the "STOCK REPURCHASE");
WHEREAS, in connection with this Agreement, the Stockholders
Agreement, dated as of August 30, 1993 (the "STOCKHOLDERS AGREEMENT"), by and
among the Company, Harveys and Lily Pond, will be cancelled, all as more
fully set forth herein; and
WHEREAS, upon the consummation of the transactions contemplated
herein, the Management Agreement will be terminated and the Common Stock will
be held in treasury by the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
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<PAGE>
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 CERTAIN DEFINED TERMS. As used in this Agreement
the following terms shall have the following meanings:
"AFFILIATE" means, with respect to any Person, any other Person
that directly or indirectly controls, is controlled by, or is under common
control with such Person or (if such Person is an individual) is a member of
such person's family. As used in this definition of "AFFILIATE," the term
"CONTROL" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a person or
entity, whether through ownership of voting securities, by contract or
otherwise.
"BUSINESS DAY" means any day which is not a Saturday, a Sunday or
such other day on which banking institutions in New York, New York, generally
are authorized or required by law or executive order to be closed.
"CASINO" means the casino located at the Hotel.
"CLASS A COMMON STOCK" has the meaning set forth in the recitals of
this Agreement.
"CLASS B COMMON STOCK" has the meaning set forth in the recitals of
this Agreement.
"CLOSING means the consummation of the transactions contemplated
by Article II of this Agreement.
"CLOSING DATE" has the meaning set forth in Section 2.2.
"CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
"COMMON STOCK" has the meaning set forth in the recitals of this
Agreement.
"COMPANY" has the meaning set forth in the opening paragraph of
this Agreement.
"COMPANY'S PLANS" has the meaning set forth in Section 7.1.
"ERISA" has the meaning set forth in Section 3.10.
"GOVERNMENTAL AUTHORITY" means any nation or government (domestic
or foreign), any state or other political subdivision thereof and any entity
or person exercising executive,
3
<PAGE>
legislative, judicial (including any court) regulatory or administrative
functions of or pertaining to government.
"HARVEYS" has the meaning set forth in the opening paragraph of
this Agreement.
"HARVEYS PLANS" has the meaning set forth in Section 7.1.
"HLVMC" has the meaning set forth in the opening paragraph of this
Agreement.
"HOTEL" means the property known as the Hard Rock Hotel & Casino,
located at 4455 Paradise Road, Las Vegas, Nevada.
"HOTEL EMPLOYEES" means persons employed by HLVMC or Harveys and
who perform work at the Hotel or Casino.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
l976, as amended.
"INDEBTEDNESS" means, for any Person (without duplication) (a)
obligations created, issued or incurred by such Person for borrowed money;
(b) obligations of such Person to pay the deferred purchase or acquisition
price of property or services, other than trade accounts payable (other than
for borrowed money) arising, and accrued expenses incurred, in the ordinary
course of business; (c) Indebtedness of others secured by a Lien on the
property of such Person, whether or not the respective Indebtedness so
secured has been assumed by such Person; (d) obligations of such Person in
respect of letters of credit or similar instruments issued or accepted by
banks and other financial institutions for account of such Person; (e)
capital lease obligations of such Person; (f) all obligations of such Person
to pay a specified purchase price for goods or services whether or not
delivered or accepted, I.E., take-or-pay and similar obligations; and (g)
Indebtedness of others guaranteed by such Person or for which such Person may
become contingently liable.
"INDEMNIFIED PARTY" has the meaning set forth in Section 8.5.
"LIEN" means any mortgage, pledge, hypothecation, assignment,
encumbrance, lien (statutory or otherwise), security interest, security
agreement or arrangement (including any conditional sale or other title
retention agreement or any financing lease having substantially the same
economic effect as any of the foregoing) or other restriction or charge of
any kind or nature whatsoever.
"LOSSES" has the meaning set forth in Section 8.1.
"MANAGEMENT AGREEMENT" has the meaning set forth in the recitals to
this Agreement.
4
<PAGE>
"MANAGEMENT BUYOUT" has the meaning set forth in the recitals to
this Agreement.
"MATERIAL ADVERSE EFFECT" means a material adverse effect,
individually or in the aggregate, on the business, assets, condition
(financial or otherwise), results of operations or prospects of the Company.
"MORTON" means Peter A. Morton, the individual, or the estate of
Peter A. Morton.
"NEVADA GAMING AUTHORITIES" means the Nevada Gaming Commission,
Nevada State Gaming Control Board, Clark County Liquor and Gaming Licensing
Board and any other governmental or administrative agency having jurisdiction
over the gaming operations of the Company in the State of Nevada.
"PERSON" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"PLAN" has the meaning set forth in Section 3.10.
"PROCESS AGENT" has the meaning set forth in Section 9.6.
"PURCHASE PRICE" has the meaning set forth in Section 2.2.
"SEC" means the Securities and Exchange Commission and any
successor organization.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time, and the rules and regulations of the SEC promulgated from time
to time thereunder.
"SMSA" means Standard Metropolitan Statistical Area.
"STOCKHOLDERS AGREEMENT" has the meaning set forth in the recitals
to this Agreement.
"STOCK REPURCHASE" has the meaning set forth in the recitals of
this Agreement.
"TRANSFERRED EMPLOYEES" means (i) any employee offered employment
by the Company immediately after the Closing, and who accepts such offer of
employment at that time, including in each case those on vacation who were
employed by HLVMC immediately prior to the Closing, and (ii) any employee on
leave of absence or disability who returns to active employment within one
year (or 18 months in the case of individuals who are disabled due to an
injury or illness for which workers compensation benefits are payable after
the Closing), in each case on terms that are substantially similar in the
aggregate (including salary, job responsibility
5
<PAGE>
and location) to those provided to such employees immediately prior to the
Closing or leave, as the case may be.
"TRANSITION SERVICES AGREEMENT" means the Transition Services
Agreement to be entered into between HLVMC and the Company, substantially in
the form of Exhibit A.
Section 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Terms defined
in this Agreement apply equally to both the singular and plural forms of the
terms defined. Whenever the context may require, any pronoun includes the
corresponding masculine, feminine and neuter forms. Unless otherwise
required by the context, the words "include," "includes" and "including" are
deemed to be followed by the phrase "without limitation."
(b) References to a Section or an Article are, unless
otherwise specified, to one of the Sections or Articles of this Agreement,
and references to a Schedule or Exhibit are, unless otherwise specified, to
one of the Schedules or Exhibits attached hereto.
ARTICLE II
SALE OF STOCK; TERMINATION OF MANAGEMENT AGREEMENT; CLOSING
Section 2.1 STOCK REPURCHASE; MANAGEMENT BUYOUT. On the basis
of the representations, warranties, covenants and agreements and subject to
the satisfaction or waiver of the conditions set forth herein, at the
Closing, Harveys shall sell to the Company, and the Company shall repurchase
from Harveys, (i) the Common Stock and (ii) Harveys' rights under the
Management Agreement. At the Closing, the Company will deliver by wire
transfer, in immediately available funds, to the account specified by Harveys
$45,000,000 in United States dollars (the "PURCHASE PRICE"), in consideration
for the repurchase of the Common Stock and the buyout of the Management
Agreement. The Purchase Price will be allocated to the purchase of the
Common Stock and the buyout of the Management Agreement in the manner set
forth in Schedule I. At the Closing, Harveys shall deliver to the Company,
free and clear of Liens, for cancellation by the Company, certificates
representing the Common Stock, with appropriate share transfer forms
attached, duly endorsed in blank, together with evidence of payment of any
applicable transfer taxes.
Section 2.2 CLOSING; CLOSING DATE. Upon the terms and subject
to the conditions set forth herein, the Closing will take place on the
Closing Date at 10:00 a.m., New York City time, at the offices of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York or such other
place as shall be agreed upon by the parties hereto. The "CLOSING DATE"
shall be the date on which the Closing occurs and shall mean the fifth
Business Day after the satisfaction (or waiver) of the conditions to the
Closing set forth in Article VI of this Agreement, or such other date and
time as may be agreed by the parties hereto.
6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HARVEYS
Harveys hereby represents and warrants to the Company on the date
hereof and on the Closing Date as follows:
Section 3.1 AUTHORITY OF HARVEYS. Harveys is a corporation
duly organized, validly existing and in good standing under the laws of
Nevada. Harveys has the power and authority to execute and deliver this
Agreement and each other agreement entered into in connection herewith to
which it is a party and to perform its obligations hereunder and thereunder
and consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement, the performance of Harveys'
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary proceedings on the part of the board of directors and the
stockholders of Harveys. This Agreement has been, and at the Closing Date
each of such other agreement will have been, duly executed and delivered by
Harveys, and, assuming the due execution hereof or thereof by the Company,
constitutes (or, in the case of such other agreement, on the Closing Date
will constitute) the legal, valid and binding agreement of Harveys,
enforceable against Harveys in accordance with its terms.
Section 3.2 AUTHORITY OF HLVMC. HLVMC is a corporation duly
organized, validly existing and in good standing under the laws of Nevada.
HLVMC has the power and authority to execute and deliver this Agreement, the
Transition Services Agreement and each other agreement entered into in
connection herewith to which it is a party and to perform its obligations
hereunder and thereunder and consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the Transition
Services Agreement, the performance of HLVMC's obligations hereunder and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary proceedings on the part of the board of
directors and the stockholders of HLVMC. This Agreement has been, and at the
Closing Date each of such other agreement will have been, duly executed and
delivered by HLVMC and, assuming the due execution hereof or thereof by the
Company, constitutes (or, in the case of such other agreement, on the Closing
Date will constitute) the legal, valid and binding agreement of HLVMC,
enforceable against HLVMC in accordance with its terms.
Section 3.3 TITLE TO THE COMMON STOCK. Upon consummation of
the Stock Repurchase at the Closing as contemplated by this Agreement, the
Company will acquire from Harveys good and valid title to the Common Stock
free and clear of any Liens.
Section 3.4 NO CONFLICTS. The execution, delivery and
performance by each of Harveys and HLVMC of this Agreement and the other
agreements entered into in connection herewith and the consummation of the
transactions contemplated hereby and thereby will not (i) violate or conflict
with any provision of Harveys or HLVMC's Articles of Incorporation or by-
7
<PAGE>
laws or similar organizational instrument, subject to obtaining the consents
and approvals disclosed in Section 3.5, (ii) violate or conflict with any
law, rule or regulation or any court or administrative order, process,
judgment or decree to which each of Harveys or HLVMC is a party or by which
each of them (or any of their respective properties or assets) is bound or
(iii) violate, breach or conflict with any provision of, or result in the
acceleration of or entitle any party to accelerate (whether after notice or
lapse of time or both) any obligation under or pursuant to any provision of,
any indenture, agreement, contract or other instrument to which Harveys is a
party or by which any of its assets is bound.
Section 3.5 CONSENTS AND APPROVALS. Except for the requisite
approvals of the Nevada Gaming Authorities, no registration, filing,
application, notice, consent, approval, order, qualification or waiver is
required to be made, filed, given or obtained by Harveys or HLVMC with, to or
from any persons or Governmental Authorities or private agencies in
connection with the consummation of the Stock Repurchase, the Management
Buyout or the other transactions contemplated hereby (including, without
limitation, the execution of the Transition services Agreement) or the
performance of the obligations of Harveys and HLVMC hereunder except for
those that have already been made, filed, given or obtained and are in full
force and effect.
Section 3.6 GOVERNMENT LICENSES, PERMITS AND RELATED
APPROVALS. The Company has each license, permit, consent, approval,
authorization, qualification and order of any Governmental Authority
necessary to enable it to conduct its business, except where the failure to
have any such license, permit, consent, approval, authorization,
qualification or order could not, individually or in the aggregate, have a
Material Adverse Effect. All such licenses, permits, consents, approvals,
authorizations, qualifications and orders were validly issued, are in full
force and effect, and the Company is in compliance with the terms and
conditions thereof, except where the failure to be in such compliance has not
resulted in and could not, individually or in the aggregate, result in a
Material Adverse Effect.
Section 3.7 CONTRACTS. Schedule 3.7 contains a true and
correct list of all contracts and agreements in effect entered into by
Harveys or HLVMC on behalf of, or for the benefit of, the Company.
Section 3.8 EMPLOYEE INFORMATION; EXTRAORDINARY PAYMENTS.
Harveys has furnished to the Company a complete list of all full and
part-time Hotel Employees and a description of all compensation for each of
such employees (on a year-to-date basis) as of June 8, 1997.
(a) The transactions contemplated by this Agreement will not
trigger any extraordinary payments of any kind to Harveys or Affiliate of
Harveys or any Hotel Employee.
(b) Except as provided in Schedule 3.8(c), no Hotel Employee
has any employment contract (oral or written).
8
<PAGE>
(c) The Company is in compliance in all material respects
with all applicable laws, rules and regulations relating to the employment of
labor, including those relating to discrimination, wages, hours, and the
payment of social security and similar taxes.
Section 3.9 LABOR RELATIONS. (a) There are no controversies
pending or, to the knowledge of Harveys, threatened between the Company,
Harveys or HLVMC on the one hand, and any of the Hotel Employees, prospective
Hotel Employees, former Hotel Employees (including retirees), or labor unions
or other collective bargaining representatives representing Hotel Employees
on the other; (b) no unfair labor practice complaints have been filed against
the Company, Harveys or HLVMC and none of the Company, Harveys or HLVMC has
received any notice or communication reflecting an intention or a threat to
file any such complaint with respect to any Hotel Employee; (c) there is no
labor strike, dispute, slow-down or stoppage pending or, to the knowledge of
Harveys, threatened against the Company; (d) no representation petition is
pending with the National Labor Relations Board (or any other labor relations
board) in respect of any of the Hotel's or Casino's operations; (e) HLVMC has
paid in full to all Hotel Employees all wages, salaries, commissions,
bonuses, benefits and other compensation due to such employees; (f) none of
the Company, Harveys or HLVMC has effectuated any layoffs of employees or
implemented any early retirement, separation or window program within the
past three years, nor has the Company, Harveys or HLVMC planned or announced
any such action or program for the future; (g) no promises of benefit
improvements under the Plans have been made by the Company, Harveys or HLVMC
or any Affiliate thereof to any Hotel Employee; (h) no grievance (including
without limitation, any discrimination charge) is pending which might have a
Material Adverse Effect; (i) with respect to any Hotel Employee, each of the
Company, Harveys and HLVMC is in compliance with its obligations pursuant to
the Worker Adjustment and Retraining Notification Act of 1988, and all other
notification and bargaining obligations arising under any collective
bargaining agreement, statute or otherwise, the non-compliance with which
could, individually or in the aggregate, have a Material Adverse Effect; and
(j) since December 31, 1996, except in the ordinary course of business
consistent with past practice, there has not been any general increase in the
wages, salaries, compensation, pension or other benefits payable to Hotel
Employees, or any specific increase in the wages, salaries, compensation,
pension or other benefits payable to any Hotel Employee that receives in
excess of $30,000 per annum in base salary, nor has there been any
commitment, agreement or resolution to make any commitment or enter into any
agreement relating to any such increase.
Section 3.10 EMPLOYEE BENEFIT PLANS. Schedule 3.10(a)
contains a correct and complete list of each "employee benefit plan" (within
the meaning of section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), (including, without limitation, multiemployer
plans within the meaning of Section 3(37) of ERISA), stock purchase, stock
option, severance, employment, change-in-control, fringe benefit, collective
bargaining, bonus, incentive, deferred compensation and all other employee
benefit plans, agreements, programs, policies or other arrangements, whether
or not subject to ERISA (including any funding mechanism therefor now in
effect or required in the future as a result of the transaction
9
<PAGE>
contemplated in this Agreement or otherwise), whether formal or informal,
oral or written, legally binding or not under which any Hotel Employee or
former Hotel Employee or any member of the Company's or Harveys' Controlled
Group (defined as organizations which are members of a controlled group of
organizations within the meaning of sections 414 (b), (c), (m) or (o) of the
Code), has any present or future right to benefits or under which the Company
had or has any past, present or future liability. All such plans,
agreements, programs, policies and arrangements are referred to collectively
as "Plans." No Plan is an "EMPLOYEE PENSION PLAN" within the meaning of
section 3(2) of ERISA or a "MULTIEMPLOYER PLAN" within the meaning of Section
3(37) of ERISA.
(a) [Intentionally Left Blank]
(b) (i) Each Plan has been established and administered in
accordance with its terms, and in compliance with the applicable provisions
of ERISA, the Code and other applicable laws, rules and regulations; (ii)
with respect to any Plan, no actions, suits or claims (other than routine
claims for benefits in the ordinary course) are pending or threatened, no
facts or circumstances exist which could give rise to any such actions, suits
or claims and Harveys will promptly notify the Company in writing of any
pending or threatened claims arising between the date hereof and the Closing
Date; (iii) none of HLVMC, Harveys nor the Company or any other party has
engaged in a prohibited transaction, as such term is defined under Section
4975 of the Code or Section 406 of ERISA, which could subject Harveys, HLVMC,
the Company or the Company to any taxes, penalties or other liabilities under
Section 4975 of the Code or Sections 409, 502(i) or 502(l) of ERISA; (iv) no
event has occurred and no condition exists that would subject the Company,
either directly or by reason of its affiliation with any member of its
Controlled Group, to any tax, fine or penalty imposed by ERISA, the Code or
other applicable laws, rules and regulations; (v) all insurance premiums
required to be paid with respect to any Plan as of the Closing Date have been
or will be paid prior thereto and adequate reserves have been provided for on
the Company's balance sheet for any premiums (or portion thereof)
attributable to service on or prior to the Closing Date; (vi) for each Plan
with respect to which a Form 5500 has been filed, no material change has
occurred with respect to matters covered by the most recent Form since the
date hereof; and (vii) each Plan may be amended or terminated without
obligation or liability (other than those obligations and liabilities for
which specific assets have been set aside in a trust or other funding
vehicle) including any Plan that provides life, health or other welfare
benefits to retirees, other than continuation coverage under Section 4980B of
the Code and Part 6 Subtitle B of ERISA.
(c) Except as set forth on schedule 3.10(d), no Plan exists
which could result in the payment to any Hotel Employee of any money or other
property or rights or accelerate or provide any other rights or benefits to
any Hotel Employee as a result of the transactions contemplated in this
Agreement.
Section 3.11 INSURANCE. The Company has maintained in full
force and effect the insurance on the properties, assets and business of the
Company as described on Schedule
10
<PAGE>
3.11 at all times since December 31, 1993. The Company maintains and will
continue to maintain in full force and effect such insurance.
Section 3.12 LITIGATION. Except as set forth in schedule 3.12,
neither Harveys nor HLVMC is a party to, nor, to the knowledge of Harveys,
are either of them threatened in writing with any legal action or other
proceeding before any Governmental Authority which (i) asserts the invalidity
of this Agreement or (ii) questions the consummation by Harveys or HLVMC of
any of the transactions contemplated hereby.
Section 3.13 TRANSACTIONS WITH AFFILIATES. From and after the
closing, except for the Transition Services Agreement and the Mutual
Releases, the Company will not be a party to any contract or agreement
(whether written or oral) with Harveys, HLVMC or any Affiliate of Harveys
other than those described on Schedule 3.13.
Section 3.14 USE OF CERTAIN IDEAS. Neither Harveys nor any of
its Affiliates has any intention to directly or indirectly manage, own any
part of, operate, advise or become an officer, employee, director or
consultant of any Person which manages, owns any part of, operates, or serves
as an advisor to a hotel/casino located within the Las Vegas, Nevada SMSA
whose decor is principally based on "rock 'n' roll" music memorabilia.
Section 3.15 BROKERS. Except for Donaldson, Lufkin & Jenrette
Securities Corporation (the fees and expenses of whom will be borne solely by
Harveys and HLVMC), neither Harveys nor HLVMC has employed, or is subject to
the valid claim of, any broker, finder, consultant or other intermediary in
connection with this Agreement or the transactions contemplated hereby.
Section 3.16 LEASES OF REAL PROPERTY. Neither Harveys nor
HLVMC has leased any space within the Hotel.
Section 3.17 NO OTHER AGREEMENTS TO SELL. Except for the
Stockholders Agreement, neither Harveys nor any Affiliate thereof has any
agreement, absolute or contingent, with any other Person to sell the Common
Stock, or to effect any merger, consolidation or other reorganization of the
Company, or to enter into any agreement with respect thereto.
Section 3.18 GOVERNMENTAL RELATIONS. Neither Harveys, HLVMC
nor the Company has received any notice with respect to the Company from a
Governmental Authority of (i) a pending audit adjustment or assessment or
(ii) a pending disciplinary action.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LILY POND
The Company hereby represents and warrants to Harveys and HLVMC on
the date hereof and the Closing Date with regard to matters affecting the
Company, and Lily Pond hereby represents and warrants to Harveys and HLVMC on
the date hereof and the Closing Date with regard to matters affecting Lily
Pond, as follows:
Section 4.1 ORGANIZATION. Lily Pond is validly existing and
in good standing under the laws of the state of its incorporation.
Section 4.2 AUTHORITY OF THE PURCHASERS. Each of the Company
and Lily Pond has the power and authority to execute and deliver this
Agreement, to perform its respective obligations hereunder and, subject to
the receipt of the requisite approvals of the Nevada Gaming Authorities, to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement, the performance of the Company's and Lily Pond's
obligations hereunder and the consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary proceedings on
the part of the Company and Lily Pond. This Agreement has been duly executed
and delivered by each of the Company and Lily Pond and, assuming the due
execution hereof by HLVMC and Harveys, this Agreement constitutes the legal,
valid and binding agreement of the Company and Lily Pond, enforceable against
the Company and Lily Pond in accordance with its terms.
Section 4.3 NO CONFLICTS. The execution, delivery and
performance by the Company and Lily Pond of this Agreement and the other
agreements entered into in connection herewith and the consummation of the
transactions contemplated hereby and thereby will not (i) violate or conflict
with any provision of the Company's or Lily Pond's Articles of Incorporation
or by-laws or similar organizations instrument, subject to obtaining the
consents and approvals disclosed in Section 4.4, (ii) violate or conflict
with any law, rule or regulation or any court or administrative order,
process, judgment or decree to which Lily Pond is a party or by which it (or
any of its properties or assets (other than the Company) is bound or (iii)
violate, breach or conflict with any provision of, or result in the
acceleration of or entitle any party to accelerate (whether after notice or
lapse or time or both) any obligation under or pursuant to any provision of,
any indenture, agreement, contract or other instrument to which Lily Pond is
a party or by which any of its assets (other than the Company) is bound.
Section 4.4 CONSENTS AND APPROVALS. Except for the requisite
approvals of the Nevada Gaming Authorities, no registration, filing,
application, notice, consent, approval, order, qualification or waiver is
required to be made, filed, given or obtained with, to or from any persons or
Governmental Authorities or private agencies in connection with the
consummation of the stock Repurchase, the Management Buyout or the other
transactions contemplated hereby (including, without limitation, the
execution of the Transition Services Agreement) or the
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performance of the obligations of Lily Pond and the Company hereunder except
for those that have already been made, filed, given or obtained and are in
full force and effect.
Section 4.5 NO REGISTRATION. The Company acknowledges that
the Common stock has not been registered for sale under the Securities Act,
or under any state securities laws.
Section 4.6 BROKERS. Except for Leeds Group Inc. (the fees
and expenses of whom will be borne solely by the Company), neither Lily Pond
nor the Company has employed nor is subject to the valid claim of, any
broker, finder, consultant or other intermediary in connection with this
Agreement or the transactions contemplated hereby.
Section 4.7 LITIGATION. Except as set forth in schedule 4.7,
Lily Pond is not a party to, nor, to the knowledge of Lily Pond, is it
threatened with, any legal action or other proceeding before any Governmental
Authority which (i) asserts the invalidity of this Agreement or (ii)
questions the consummation by Lily Pond of any of the transactions
contemplated hereby, and Lily Pond does not have any knowledge of any basis
for any such legal action or proceeding.
ARTICLE V
CERTAIN AGREEMENTS
Section 5.1 CONDUCT OF BUSINESS. Each of Harveys and HLVMC
agrees that, unless the prior written consent of Lily Pond is obtained to do
otherwise, during the period commencing on the date hereof and ending on the
Closing Date:
(i) the business of the Company will be conducted by
HLVMC in accordance with the Management Agreement and only in
accordance with the most recent approved Annual Operating Budget (as
defined in the Management Agreement), consistent with past practice, and
the Company and HLVMC shall each use its reasonable commercial efforts
to preserve the Company's present business organization intact and keep
available the services of the Hotel Employees;
(ii) HLVMC shall maintain the books, accounts and
recordsrelating to the Hotel and Casino in the usual, regular and
ordinary manner, on a basis consistent with past practice, and shall
cause the Company to comply with and perform in all material respects
all laws and contractual and other obligations applicable to it and its
business;
(iii) HLVMC shall not enter into, on behalf of the
Company, any contract, agreement or other commitment which is outside
the ordinary course of business except agreements for services to be
rendered after the Closing;
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(iv) Harveys shall not settle or compromise any
litigation (whether or not commenced prior to the date of this
Agreement) related to the Hotel and Casino;
(v) neither Harveys nor HLVMC shall take any action or
fail to take any action that would cause the representations and
warranties to become untrue; and
(vi) neither Harveys nor HLVMC nor the Company shall
authorize any of, or commit or agree to take any action inconsistent
with the foregoing.
(a) Lily Pond agrees that, unless the prior written consent of
Harveys is obtained to do otherwise, during the period commencing on the date
hereof and ending on the Closing Date:
(i) it will not direct the Company nor will it take
any action (or refrain from taking any action) that would interfere
with the conduct of the business of the Hotel including the commencement
of any construction or similar activities to expand the Hotel; and
(ii) it wi1l not make requests or impose requirements
on Gary Selesnar or any members of his staff that would interfere
with any of them devoting their full business time and attention to the
management of the business as currently carried on by the Hotel.
Section 5.2 REGULATORY AND OTHER AUTHORIZATIONS AND CONSENTS.
Each of the parties hereto will use its reasonable efforts to obtain the
timely authorizations, consents, orders and approvals of Governmental
Authorities and officials and of other third parties that may be or become
necessary, proper or advisable in connection with the performance of its
obligations pursuant to this Agreement and the consummation of the
transactions contemplated hereby and will cooperate fully with each other in
promptly seeking to obtain such authorizations, consents, orders and
approvals as may be necessary, proper or advisable for the performance of its
respective obligations pursuant to this Agreement including, without
limitation, the receipt of all requisite approvals of the Nevada Gaming
Authorities. The parties hereto will promptly file any additional
information requested as soon as practicable after receipt of the request,
will not take any action which will have the effect of delaying, impairing or
impeding the receipt of any required approvals and will use their reasonable
efforts to secure such approvals as promptly as possible.
Section 5.3 FURTHER ACTIONS. Subject to the terms and
conditions hereof, each of the parties hereto agrees to use its reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable to consummate and make
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effective the transactions contemplated by this Agreement. Without limiting
the generality of the foregoing, the parties agree to cooperate with each
other in order to obtain the regulatory approvals necessary to enable the
consummation of the transactions contemplated hereby.
(a) Upon request Harveys and HLVMC shall make available to
the Company a current, accurate and complete copy (or, to the extent no such
copy exists, an accurate description) of each Plan and, to the extent
applicable, with respect to each Plan, (i) any related trust agreement,
annuity contract or other funding instrument; (ii) the most recent
determination letter; (iii) any summary plan description and other written
communications (or a description of any oral communications) by the Company
or HLVMC to Hotel Employees concerning the extent of the benefits provided
under a Plan; and (iv) for the three most recent years, the Form 5500 and
attached schedules.
Section 5.4 BOOKS AND RECORDS. On the Closing Date, HLVMC and
Harveys shall transfer to the Company all contracts, agreements, commitments,
books, records, files and other data relating to the Hotel and/or Casino,
including any of the foregoing stored on computer.
Section 5.5 [INTENTIONALLY LEFT BLANK]
Section 5.6 STOCKHOLDERS AGREEMENT; BY-LAWS. Concurrently
with the execution and delivery of this Agreement the parties shall execute
and deliver an amendment to the stockholders Agreement substantially in the
form of Exhibit B hereto.
(a) Prior to the Closing Date, the Company shall amend its
by-laws to provide for the waiver of Nevada Revised Statutes Sections 78.378
through 78.3793, inclusive.
(b) Prior to the Closing Date, the Company shall amend its
Articles of Incorporation to provide that the Company shall be excluded from
the application of Nevada Revised Statutes Section 78.288.2(b).
(c) Prior to the Closing Date, the Company shall not (i)
issue any capital stock, (ii) incur any Indebtedness or (iii) declare or pay
any dividend or distribution, in each case without the prior written consent
of Morton.
Section 5.7 COMMISSION FILING. Lily Pond agrees to prepare a
transfer of interest application form, and Morton agrees to file an amended
shareholder's application form and an operator's application form with the
Nevada Gaming Authorities no later than thirty (30) days after the date
hereof. Each of Harveys, HLVMC, Lily Pond and Morton agree to cooperate with
the Nevada Gaming Authorities' investigation, including the furnishing of all
information and/or documents requested by said Authorities.
Section 5.8 [INTENTIONALLY LEFT BLANK]
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Section 5.9 OPERATING AND CAPITAL BUDGETS. Immediately upon
the execution hereof the Annual Operating Budget and Annual Plan (each as
defined in the Management Agreement) previously submitted by HLVMC to the
Company on September 30, 1996, shall be deemed approved NUNC PRO TUNC as of
November 1, 1996.
ARTICLE VI
CONDITIONS
Section 6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES.
The respective obligations of the parties hereto are subject to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions:
(a) NO INJUNCTION, ETC. There shall not be in effect any
preliminary or permanent injunction or other order issued by any federal or
state court of competent jurisdiction in the United States or by any United
States federal or state governmental or regulatory body nor any statute,
rule, regulation or executive order promulgated or enacted by any United
States federal or state governmental authority which restrains, enjoins or
otherwise prohibits the Closing.
(b) NO PROCEEDING OR LITIGATION. No suit, action or
governmental proceeding before any court or other Governmental Authority
shall have been commenced and be pending or currently threatened by any
Governmental Authority against Harveys, HLVMC or the Company or any of their
Affiliates seeking to restrain, prevent or change in any material respect the
transactions contemplated in this Agreement or seeking material damages in
connection with any of such transactions.
Section 6.2 CONDITIONS OF THE COMPANY'S AND LILY POND'S
OBLIGATION TO CLOSE. The Company's and Lily Pond's obligation to consummate
the Closing is subject to the satisfaction on or prior to the Closing Date of
each of the following additional conditions:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of Harveys and HLVMC contained herein shall be
true and correct (in all material respects, in the case of those
representations and warranties which are not by their express terms qualified
by reference to materiality) at and as of the Closing Date (other than
Section 3.14), with the same force and effect as though made at and as of the
Closing Date, except to the extent that any representation or warranty is
made as of a specified date, in which case such representation or warranty
shall be true and correct (in all material respects, in the case of those
representations and warranties which are not by their express terms qualified
by reference to materiality) as of such date.
(b) PERFORMANCE OF AGREEMENT. Each of Harveys and HLVMC
shall have performed in all material respects all obligations and agreements,
and complied in all
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material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by such party prior to or at the
Closing Date.
(c) CERTIFICATE OF HARVEYS. The Company shall have received
a certificate of Harveys and HLVMC, dated the Closing Date, executed on
behalf of Harveys and HLVMC by the President or a Senior Vice President, to
the effect that the conditions specified in (a) and (b) above have been
fulfilled.
(d) APPROVAL OF THE NEVADA GAMING AUTHORITIES. All approvals
from the Nevada Gaming Authorities necessary or advisable for the performance
of the transactions contemplated herein shall have been obtained, without the
imposition of conditions on such approvals unacceptable to the Company in its
sole and absolute discretion. The parties hereto acknowledge that the
requirement for obtaining such approvals may not be waived.
(e) DEBT FINANCING. The Company shall have received the
proceeds of debt financing sufficient to consummate the transactions
contemplated by this Agreement and to repay all outstanding principal of and
interest on Indebtedness owed by the Company to Wells Fargo Bank on terms
satisfactory to the Company in its sole discretion.
(f) POWERS OF ATTORNEY. Harveys shall have delivered to the
Company instruments or certificates of cancellation, discharge and release in
form and substance satisfactory to the Company, effecting or evidencing the
cancellation, discharge or release of all powers of attorney related to the
Hotel and Casino.
(g) BANK ACCOUNTS. Either Harveys or HLVMC shall have
delivered to the Company, or the Company shall otherwise have obtained, such
instruments in form and substance satisfactory to the Company, effecting or
evidencing the cancellation, discharge or release of HLVMC of all ownership
and control, in favor of the Company or its designee(s), of all bank accounts
of the Company.
(h) TRANSITION SERVICES AGREEMENT. HLVMC shall have executed
and delivered to the Company the Transition Services Agreement.
(i) SECRETARY'S OR ASSISTANT SECRETARY'S CERTIFICATE. The
Company shall have received from Harveys and HLVMC certificates, dated the
Closing Date, of a Secretary or Assistant Secretary, Harveys or HLVMC, as the
case may be, certifying the incumbency of those officers of Harveys or HLVMC,
as the case may be, executing this Agreement and any closing document
delivered hereunder. Attached to such certificate as Exhibit A shall be a
copy of the Certificate of Incorporation and By-Laws of Harveys or HLVMC, as
the case may be, certified by such Secretary or Assistant Secretary as in
effect (except as otherwise specified in such certificate) at all times since
the date of the first resolution referred to in the next succeeding sentence.
Attached to such certificate as Exhibit B shall be certified copies of the
resolutions of the Board of Directors of Harveys or HLVMC, as the case may
be, authorizing the execution and
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delivery of this Agreement and the Transition Services Agreement and the
consummation of the transactions contemplated herein and therein.
(j) RESIGNATION OF OFFICERS AND DIRECTORS. Any Person who is an
officer or director of the Company and who is an Affiliate of either Harveys or
HLVMC shall have resigned such position.
(k) RELEASES. Harveys and HLVMC shall have executed and
delivered releases in the forms of Exhibits C-1 and C-2, respectively.
(l) GARY SELESNAR. Gary Selesnar shall be employed by Harveys
as the general manager of the Hotel and there shall not have been any diminution
of his duties since the date hereof.
Section 6.3 CONDITIONS TO HARVEYS' OBLIGATIONS TO CLOSE.
Harveys obligations to consummate the Closing are subject to the satisfaction on
or prior to the Closing Date of each of the following additional conditions:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
Representations and warranties of the Company and Lily Pond contained herein
shall be true and correct (in all material respects, in the case of those
representations and warranties which are not by their express terms qualified
by reference to materiality) at and as of the Closing Date, with the same
force and effect as though made at and as of the Closing Date, except to the
extent that any representation or warranty is made as of a specified date, in
which case such representation or warranty shall be true and correct (in all
material respects, in the case of those representations and warranties which
are not by their express terms qualified by reference to materiality) as of
such date.
(b) PERFORMANCE OF AGREEMENTS. The Company and Lily Pond
shall have performed in all material respects all obligations and agreements,
and complied in all material respects with all covenants and conditions,
contained in this Agreement to be performed or complied with by them prior to
or at the Closing Date.
(c) Harveys shall have received a certificate of the Company
and Lily Pond, dated the Closing Date, executed by Lily Pond and on behalf of
the Company, by a Vice President, to the effect that the conditions specified
in paragraphs (a) and (b) above have been fulfilled.
(d) SECRETARY'S OR ASSISTANT SECRETARY'S CERTIFICATE. Harveys
shall have received from the Company and Lily Pond certificates, dated the
Closing Date, of a Secretary or Assistant Secretary of the Company or Lily
Pond, as the case may be, certifying the incumbency of those officers of the
Company or Lily Pond, as the case may be, executing this Agreement and any
closing document delivered hereunder. Attached to such certificate as Exhibit
A shall be a
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copy of the Certificate of Incorporation and By-Laws of the Company or Lily
Pond, as the case may be, certified by such Secretary or Assistant Secretary
as in effect (except as otherwise specified in such certificate) at all times
since the date of the first resolution referred to in the next succeeding
sentence. Attached to such certificate as Exhibit B shall be certified copies
of the resolutions of the Board of Directors of the Company or Lily Pond, as
the case may be, authorizing the execution and delivery of this Agreement and
the consummation of the transactions contemplated herein.
(e) FEES AND REIMBURSABLE EXPENSES OWED. Harveys shall have
received the Base Management Fee and Incentive Fee (each as defined in the
Management Agreement) and all fees and expenses reimbursable under the
Management Agreement accrued up to the Closing Date.
(f) TRANSITION SERVICES AGREEMENT. The Company shall have
executed and delivered to Harveys the Transition Services Agreement.
(g) RELEASES. Lily Pond and Morton shall have executed and
delivered releases in the forms of Exhibits D-l and D-2, respectively.
(h) FINANCIAL OBLIGATIONS. All financial and other
obligations of HLVMC or Harveys pertaining to the Company or the management
of the Company and described on Schedule 6.3(h) shall have become the
obligations of the Company.
ARTICLE VII
EMPLOYEE MATTERS
Section 7.1 CONTINUITY OF EMPLOYMENT. The parties hereto
intend that there shall be continuity of employment with respect to all the
Transferred Employees. The Company will offer employment as a successor
employer immediately after the Closing to Hotel Employees. Any Hotel
Employee on leave of absence or disability who returns to active employment
within one year (or 18 months in the case of individuals who are disabled due
to an injury or illness for which workers compensation benefits are payable)
after the Closing shall be offered employment by the Company on such date
and, upon acceptance of such offer of employment shall thereupon become a
Transferred Employee. Nothing in this Section 7.1 shall interfere with or
curtail the ability of the Company to make employment decisions with respect
to the Transferred Employees subsequent to the Closing.
Section 7.2 TRANSFER OF PLANS. (a) No assets or liabilities
with respect to any plan, program or arrangement established by Harveys or
any other employer for the benefit of any employees of the Hotel (the
"HARVEYS PLANS") shall be transferred as a result of this Agreement.
Benefits payable to any Transferred Employees under the Harveys Plans
(including, for the purposes of this Section 7.2, any related supplemental
nonqualified plan maintained for the benefit of any Transferred Employee
whose benefits under Harveys' Plans would otherwise
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have been limited under the Code (a "SERP")) through the Closing shall be
payable to such Transferred Employees pursuant to the terms of, and at the
time and in the amounts provided under, the Harveys Plans based upon such
Transferred Employees' years of service with, and compensation received from,
Harveys through the Closing (including periods of employment with any other
employer which is taken into account under any of the Harveys Plans). All
Transferred Employees who are not fully vested as of the Closing in benefits
accrued as of such date under the Harveys Plans (other than a SERP) will
become fully vested in such accrued benefits. All Harveys stock options
granted to Transferred Employees shall become fully vested upon the Closing.
(b) As soon as practicable after the Closing, the Company
shall cause the Transferred Employees to be enrolled in the employee benefit
plans, programs and arrangements of the Company in which they are eligible to
participate. Subject to any necessary approvals of both of the applicable
pension boards, all such employees shall be granted service credit under each
corresponding plan of the Company for purposes of eligibility and vesting,
for creditable service performed prior to Closing.
(c) Harveys shall be responsible for all medical, dental and
other insurance claims incurred by Hotel Employees prior to becoming
Transferred Employees but will be reimbursed by the Company as soon as
practicable after the Closing.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 INDEMNITY OF THE COMPANY. On and after the
Closing Date, Harveys and HLVMC jointly and severally agree to defend,
indemnify, reimburse and hold harmless, up to an amount not to exceed $45
million in the aggregate, the Company, each of the Company's Affiliates and
each officer and director thereof against any and all (i) losses, debts,
liabilities, damages, obligations, claims, demands, judgments or settlements
of any nature or kind, known or unknown, liquidated or unliquidated,
including all reasonable out-of-pocket costs and expenses relating thereto
(legal, accounting or otherwise) (collectively, "Losses") arising out of or
resulting from (X) any breach of any representation or warranty by or on
behalf of Harveys contained in Article III hereof; PROVIDED, that the
aggregate amount of such Losses exceed $500,000 and then from the first
dollar of all such Losses, or (Y) any other covenant or agreement of Harveys
or HLVMC contained in this Agreement or the Transition Services Agreement,
unless such breach of such covenant or agreement was waived by the Company in
writing, or (ii) 40% of all Losses arising out of or resulting from any
business or activity of HLVMC, as the manager of the Hotel prior to the
Closing Date, or any litigation relating thereto, other than in connection
with the ordinary course of business.
Section 8.2 INDEMNITY OF LILY POND. On and after the Closing
Date, Harveys and HLVMC jointly and severally agree to defend, indemnify,
reimburse and hold harmless, up
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to an amount not to exceed $45 million in the aggregate, Lily Pond, each of
Lily Pond's Affiliates and each officer and director thereof against any and
all Losses arising out of or resulting from (i) any breach of any
representation or warranty by or on behalf of HLVMC contained in Article III
hereof; PROVIDED, that the aggregate amount of such Losses exceed $500,000
and then from the first dollar of all such Losses, or (ii) any other covenant
or agreement of Harveys or HLVMC contained in this Agreement or the
Transition Services Agreement, unless such breach of such covenant or
agreement was waived by Lily Pond in writing.
Section 8.3 INDEMNITY OF HARVEYS AND HLVMC BY THE COMPANY. On
and after the Closing Date, the Company agrees to defend, indemnify,
reimburse and hold harmless, up to an amount not to exceed $45 million in the
aggregate, each of Harveys and HLVMC, their respective Affiliates and each
officer and director thereof against any and all Losses arising out of or
resulting from any breach of (i) any representation or warranty by or on
behalf of the Company contained in Article IV hereof; PROVIDED, that the
aggregate amount of such Losses exceed $500,000 and then from the first
dollar of all such Losses, and (ii) any other covenant or agreement of the
Company contained in this Agreement or the Transition Services Agreement,
unless such breach of such covenant or agreement was waived by each of
Harveys and HLVMC.
Section 8.4 INDEMNITY OF HARVEYS AND HLVMC BY LILY POND. On
and after the Closing Date, Lily Pond agrees to defend, indemnify, reimburse
and hold harmless, up to an amount not to exceed $45 million in the
aggregate, each of Harveys and HLVMC, their respective Affiliates and each
officer and director thereof against any and all Losses arising out of or
resulting from any breach of (i) any representation or warranty by or on
behalf of Lily Pond contained in Article IV hereof; PROVIDED, that the
aggregate amount of such Losses exceed $500,000 and then from the first
dollar of all such Losses, and (ii) any other covenant or agreement of Lily
Pond contained in this Agreement, unless such breach of such covenant or
agreement was waived by each of Harveys and HLVMC.
Section 8.5 INDEMNIFICATION PROCEDURES. In the event that any
Person shall incur or suffer any Losses in respect of which indemnification
may be sought hereunder, such Person (an "INDEMNIFIED PARTY") may assert a
claim for indemnification by written notice to the indemnifying parties under
this Article VIII. In the case of Losses arising or which may arise by
reason of any third-party claim, promptly after receipt by the Indemnified
Party of notice of the assertion of the claim, the Indemnified Party shall
promptly notify the indemnifying parties in writing of the claim; PROVIDED
that the failure to notify the indemnifying parties will not relieve such
indemnifying parties from any liability which they may have to such
Indemnified Party, except to the extent that (and only to the extent that)
such failure results in a failure of actual notice to the indemnifying
parties and such indemnifying parties are damaged as a result of such failure
to give notice. In any such action brought against an Indemnified Party, the
indemnifying parties will be entitled to participate therein and, to the
extent that they may wish (and provided that they will have acknowledged in
writing to the Indemnified Party the obligation of the indemnifying parties
to indemnify the Indemnified Party in respect of such claim or action fully
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pursuant to this Article VIII and have provided reasonable assurance of their
financial ability to satisfy such obligations), to assume the defense thereof
with counsel reasonably satisfactory to such Indemnified Party. After notice
from the indemnifying parties to the Indemnified Party of its election to
assume the defense of such claim or action, the indemnifying parties will not
be liable to the Indemnified Parties under this Article VIII for any legal or
other expenses subsequently incurred by the Indemnified Party in connection
with the defense thereof other than reasonable costs of investigation;
PROVIDED that the Indemnified Party will have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel will be at the expense of such Indemnified
Party unless (i) the employment thereof has been specifically authorized by
the indemnifying parties, (ii) such Indemnified Party will have been advised
by counsel reasonably satisfactory to the indemnifying parties that there may
be one or more legal defenses available to it which are different from or
additional to those available to the indemnifying parties and in the
reasonable judgment of such counsel it is advisable for such Indemnified
Party to employ separate counsel, or (iii) the indemnifying parties have
failed to assume the defense of such action and employ counsel reasonably
satisfactory to the Indemnified Party, in which case, if such Indemnified
Party notifies the indemnifying parties in writing that it elects to employ
separate counsel at the expense of the indemnifying parties, such
indemnifying parties will not have the right to assume the defense of such
action on behalf of such Indemnified Party. The indemnifying parties will not
be liable for any settlement of any such action effected without their
written consent (which consent will not be unreasonably withheld), but if
settled with its written consent, the indemnifying parties will indemnify and
hold harmless any Indemnified Party from and against any loss or liability by
reason of such settlement in accordance with this Article VIII. The
indemnifying parties will not settle any action without the consent of the
Indemnified Party unless such settlement is for money damages only and
contains an unconditional release of the Indemnified Party.
Section 8.6 OTHER AGREEMENTS CONCERNING INDEMNITY. The
indemnities provided in this Article 8 shall survive the Closing.
Notwithstanding anything in the foregoing to the contrary, the amount of any
indemnity payable pursuant to this Article 8 by either Harveys and HLVMC, on
the one hand, or Lily Pond and the Company on the other, shall be reduced by
any tax benefit due the party claiming the loss.
ARTICLE IX
MISCELLANEOUS
Section 9.1 TERMINATION AND ABANDONMENT.
(a) GENERAL. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time, but not later
than the Closing Date:
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(i) by mutual consent of Lily Pond, the Company,
Harveys and HLVMC;
(ii) by Lily Pond or the Company if the Closing shall
not have occurred on or before six months from the date hereof, unless the
absence of such occurrence shall be due to the failure of the Company to
perform in all material respects its obligations under this Agreement
required to be performed by it at or prior to the Closing; or
(iii) by Harveys and HLVMC if the Closing shall not have
occurred on or before six months from the date hereof, unless the absence of
such occurrence shall be due to the failure of HLVMC or Harveys to perform in
all material respects its obligations under this Agreement required to be
performed by it at or prior to the Closing.
(b) PROCEDURE UPON TERMINATION. In the event of the
termination and abandonment of this Agreement, written notice thereof will
promptly be given to the other parties hereto and this Agreement will
terminate and the transactions contemplated hereby (except as provided in
Section 9.2) shall be abandoned without further action by any of the parties
hereto.
Section 9.2 FEES AND EXPENSES; TRANSFER TAXES. (a) If the
transactions contemplated hereby are consummated, each of the Company, Lily
Pond, Harveys and HLVMC will pay its own fees and expenses incident to the
negotiation, preparation and execution of this Agreement and the Transition
Services Agreement, including attorneys', accountants' and other advisors'
fees and the fees and expenses of any broker, finder or agent retained by
such party in connection with the transactions contemplated by the Agreement
and any expenses incurred by the Company in contemplation of the consummation
of the Management Buyout (the "FEES AND EXPENSES") . If the transactions
contemplated hereby are not consummated, Lily Pond will pay the Fees and
Expenses of Lily Pond and the Company, and Harveys and HLVMC will pay the
Fees and Expenses of Harveys and HLVMC; PROVIDED, if the transactions
contemplated hereby are not consummated as a result of action or inaction by
either Harveys or HLVMC of any provision contained in Article V, then Harveys
and HLVMC shall be jointly and severally liable for the Fees and Expenses
incurred by Lily Pond and the Company and if the transactions contemplated
hereby are not consummated as a result of action or inaction by Lily Pond of
any provision contained in Article V or, in the case of Section 5.7 only,
Morton, then Lily Pond shall be liable for the Fees and Expenses incurred by
Harveys, HLVMC and the Company.
(b) HLVMC shall pay, or cause to be paid, all recordation,
stock transfer or similar taxes or fees, deed, stamp or other taxes,
recording charges, fees, or other similar costs or expenses of any kind
required in connection with the effectuation of the transactions contemplated
by this Agreement, whether such tax or fee is imposed on HLVMC, Harveys or
the Company.
23
<PAGE>
Section 9.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
Representations and warranties of the parties contained in this Agreement or
in any Schedule hereto will survive the Closing until eighteen months after
the Closing Date except that the Representations and warranties contained in
Sections 3.1, 3.3, 3.10, 3.14, 4.1 and 4.2 shall survive the Closing until
the expiration of the longest statute of limitations applicable thereto,
including any extensions thereof. No action or proceeding may be brought or
litigation commenced with respect to any of the representations and
warranties which survive only until eighteen months after the Closing Date
unless written notice thereof, setting forth in reasonable detail the claimed
misrepresentation or breach of warranty, shall have been delivered to the
party alleged to have breached such representation or warranty prior to such
date and no action or proceeding may be brought or litigation commenced with
respect to the remaining Representations and warranties unless written notice
thereof, setting forth in reasonable detail the claimed misrepresentation or
warranty, shall have been delivered prior to the expiration of such statute
of limitations.
Section 9.4 COUNTERPARTS. This Agreement may be executed in
one or more counterparts, all of which will be considered one and the same
agreement, and will become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties.
Section 9.5 GOVERNING LAW. The laws of the State of [Nevada]
will govern the interpretation, validity and performance of the terms of this
Agreement.
Section 9.6 WAIVER OF JURY TRIAL. The Company, HLVMC and
Harveys hereby irrevocably and unconditionally waive trial by jury in any
legal action or proceeding relating to this Agreement or any other agreement
entered into in connection therewith and for any counterclaim with respect
thereto.
Section 9.7 NOTICES. All notices hereunder shall be in
writing and will be deemed to have been duly given if delivered by hand
(whether by overnight courier or otherwise) or sent by registered or
certified mail, return receipt requested, postage prepaid ,or sent by
telecopy to the party to whom it is directed. If mailed, such notice will be
deemed effective three days after mailing and shall be sent as follows:
(a) If to HLVMC to it at the following addresses:
Harveys L.V. Management Company, Inc.
P.O. Box 128
Lake Tahoe, NV 89449
Telecopy: (702) 588-0601;
24
<PAGE>
with a copy to:
Scarpello & Alling, Ltd.
276 Kingsbury Grade, Suite 2000
Stateline, Nevada 89449
Telecopy: (702) 588-4970
Attn: Ronald D. Alling, Esq.
Morgan, Lewis & Bockius LLP
801 S. Grand Avenue, 22nd Fl.
Los Angeles, California 90017
Telecopy: (213) 612-2554
Attn: Peter Wallace, Esq.
(b) If to Harveys, to it at the following address:
Harveys Casino Resorts
P.O. Box 128
Lake Tahoe, NV 89449
Telecopy: (702) 588-0601;
with a copy to:
Scarpello & AIling, Ltd.
276 Kingsbury Grade, Suite 2000
Stateline, Nevada 89449
Telecopy: (702) 588-4970
Attn: Ronald D. AIling, Esq.
Morgan, Lewis & Bockius LLP
801 S. Grand Avenue, 22nd Fl.
Los Angeles, California 90017
Telecopy: (213) 612-2554
Attn: Peter Wallace, Esq.
25
<PAGE>
(c) If to the Company or Lily Pond, at the following address:
510 North Robertson Boulevard
Los Angeles, CA 90048
Telecopy: (310) 652-8747
Attn: Chief Executive Officer
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Telecopy: (212) 455-2502
Attn: Gary I. Horowitz, Esq.
or at such other address as any such party shall have specified in writing to
the other parties hereto.
Section 9.8 SUCCESSORS AND ASSIGNS. This Agreement will be
binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, executors and legal representatives; PROVIDED
that no party hereto will assign its rights or delegate its obligations under
this Agreement without the express prior written consent of each other party
hereto. Notwithstanding the foregoing, the Company will have the right to
assign its rights and obligations hereunder to an Affiliate of the Company.
Section 9.9 HEADINGS; DEFINITIONS. The section and article
headings contained in this Agreement are inserted for convenience of
reference only and will not affect the meaning or interpretation of this
Agreement. All capitalized terms defined herein are equally applicable to
both the singular and plural forms of such terms.
Section 9.10 AMENDMENTS AND WAIVERS. This Agreement may not be
modified or amended except by an instrument or instruments in writing signed
by the party against whom enforcement of any such modification or amendment
is sought. Either Harveys and HLVMC or the Company and Lily Pond may, only by
an instrument in writing, waive compliance by such other party hereto with
any term or provision of this Agreement to be performed or complied with.
The waiver by any party hereto of a breach of any term or provision of this
Agreement will not operate or be construed as a waiver of any subsequent
breach or a waiver of any other provision of this Agreement.
Section 9.11 SEVERABILITY. If any provision of this Agreement
or the application thereof to any Person or circumstance is invalid or
unenforceable to any extent, the remainder of
26
<PAGE>
this Agreement and the application of such provision to other Persons or
circumstances will not be affected thereby and may be enforced to the
greatest extent permitted by law.
Section 9.12 INTEGRATION. This Agreement taken together with
the Transition Services Agreement constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and supersedes all
prior agreements and understandings pertaining thereto.
Section 9.13 JOINT AND SEVERAL. All covenants, representations
and warranties made by HLVMC or Harveys in this Agreement shall be deemed to
be joint and several covenants, representations and warranties of HLVMC and
Harveys.
Section 9.14 NO THIRD PARTY BENEFICIARIES. This Agreement
shall inure exclusively to the benefit of and be binding upon the parties
hereto and their respective successors, assigns, executors and legal
representatives. Nothing in this Agreement, express or implied, is intended
to confer on any Person other than the parties hereto or their respective
successors and assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
Section 9.15 COMMUNICATIONS.
(a) PUBLIC ANNOUNCEMENTS. Except for the joint press release
to be issued by the parties hereto on the date hereof, from the date hereof
until the Closing, each of Harveys, HLVMC, the Company, Lily Pond and Morton
will not, and will not permit any of its respective Affiliates or
representatives to, issue or cause the publication of any press release or
make any other public announcement with respect to the transactions
contemplated by this Agreement or the conduct of the business of the Hotel,
unless such announcement is required by law, in which case the disclosing
party will inform the other parties of such announcement as far in advance as
is practicable.
(b) EMPLOYEES. Without limiting the provisions of Section
4(c) (3) of the Management Agreement, from the date hereof through the
Closing, no party hereto will conduct meetings to discuss the transactions
contemplated by this Agreement with the employees at large or send written
communications to the employees at large with respect to the transactions
contemplated by this Agreement, without the approval of the other parties
hereto, which approval shall not be unreasonably withheld.
(c) INJUNCTIVE RELIEF. The parties acknowledge that there
may be no adequate remedy at law for a breach of this Section 9.15 and that
money damages may not be an adequate remedy for breach of such Section.
Therefore, the parties agree that each party hereto shall have the right, in
addition to any other rights it may have, to injunctive relief and specific
performance of this Section 9.15 in the event of any breach of such Section.
The remedy set forth in the preceding two sentences is cumulative and shall
in no way limit any other remedy any party hereto has at law, in equity or
pursuant hereto.
27
<PAGE>
(d) PERMITTED COMMUNICATION. Notwithstanding anything to the
contrary contained herein, Lily Pond and Morton and their respective
Affiliates shall not be bound by this Section 9.15 in connection with
obtaining gaming approvals.
28
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf
of each of the parties as of the date first above written.
HARD ROCK HOTEL, INC.
By: /s/ Peter Morton
-------------------------------
Title:
By: ________________________________
Title:
LILY POND INVESTMENTS, INC.
By: /s/ Peter Morton
-------------------------------
Title:
HARVEYS CASINO RESORTS
By: ________________________________
Title:
HARVEYS L.V. MANAGEMENT
COMPANY, INC.
By: ________________________________
Title:
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf
of each of the parties as of the date first above written.
HARD ROCK HOTEL, INC.
By: ________________________________
Title:
By: /s/ Thomas Yturbide
-------------------------------
Title: Secretary
LILY POND INVESTMENTS, INC.
By: ________________________________
Title:
HARVEYS CASINO RESORTS
By: /s/ Charles W. Scharer
-------------------------------
Title: President/CEO
HARVEYS L.V. MANAGEMENT
COMPANY, INC.
By: /s/ Charles W. Scharer
-------------------------------
Title: President
<PAGE>
I, PETER A. MORTON, agree to vote my shares in Lily Pond to cause Lily
Pond to take all reasonable actions required pursuant to the terms of this
Agreement to be taken by Lily Pond to consummate and make effective the
transactions contemplated by this Agreement.
By: /s/ Peter Morton
--------------------------------
PETER A. MORTON
<PAGE>
SCHEDULE I
Allocation of Purchase Price
Termination of Management Agreement $24,218,000
Purchase of Common Stock $20,782,000
-----------
Total $45,000,000
-----------
-----------
Methodology
Termination of Management Agreement
<PAGE>
SCHEDULE 3.7
CONTRACTS
None.
<PAGE>
SCHEDULE 3.8(c)
EMPLOYMENT CONTRACTS
Gary Selesner
<PAGE>
SCHEDULE 3.10(a)
EMPLOYEE BENEFIT PLANS
GENERAL
Medical Insurance
Dental Insurance
Vision Care
Medical Stop Loss Insurance
Life Insurance
Accidental Death & Dismemberment Insurance
Supplemental Life Insurance
Long Term Disability
401k Plan
Company Stock Purchase Plan
EXECUTIVE
Short Term Incentive Plan
Stock Option Plan
Long Term Incentive Plan (Gary Selesnar only)
<PAGE>
SCHEDULE 3.10(d)
CERTAIN PAYMENTS
As provided in Section 7.2(a) of the Stock Purchase and Management Buyout
Agreement, all Harveys stock options granted to Transferred Employees shall
become fully vested upon the Closing.
<PAGE>
SCHEDULE 3.11
INSURANCE
TYPE OF INSURANCE CARRIER
General Liability Insurance Company of the West
Automobile
Umbrella Liability AIG
Zurich
CIGNA
Fireman's Fund
Excess Workers Compensation National Union
Crime Aetna
Kidnap & Ransom Aetna
Fiduciary Liability Aetna
Professional/General Liability Scottsdale
Pool & Spa
Bond
Nevada Sales Tax Travelers/Aetna
Nevada Contractors Board Travelers/Aetna
Self Insurer's Workers Compensation St. Paul
<PAGE>
SCHEDULE 3.12
LITIGATION
None.
<PAGE>
SCHEDULE 3.13
TRANSACTIONS WITH AFFILIATES
Stockholders Agreement, dated as of August 30, 1993, by and among Hard Rock
Hotel, Inc., Harveys Casino Resorts (f/k/a Harveys Wagon Wheel, Inc.), and
Lily Pond, Inc., as amended to date.
<PAGE>
SCHEDULE 4.7
LITIGATION
None.
<PAGE>
SCHEDULE 6.3(h)
None.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 23, 1997, in Amendment No. 2 to the
Registration Statement (Form S-4 No. 333-53211) of Hard Rock Hotel, Inc. for the
registration of $120,000,000 of 9 1/4% Series B Senior Subordinated Notes Due
2005.
/s/ Ernst & Young LLP
Reno, Nevada
August 19, 1998
