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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 333-53211
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HARD ROCK HOTEL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0306263
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4455 PARADISE ROAD
LAS VEGAS, NEVADA 89109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 693-5000
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SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE EXCHANGE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10K. X
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The voting common stock of the registrant is not publicly traded. All
of the voting stock is held by an affiliate of the registrant.
The number of shares outstanding of the registrant's voting and
non-voting common stock, no par value, was 76,023 as of January 31, 1999.
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ITEM 1. BUSINESS
OVERVIEW
Hard Rock Hotel, Inc. (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, modeled after the highly successful Hard
Rock Cafe restaurant chain, is decorated with an extensive collection of rare
rock memorabilia and has 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, President, and Secretary, and the "Hard Rock" name has grown to become
widely recognized throughout the world.
The Resort currently consists of:
- an eleven-story hotel tower (the "Hotel") with 339 guest rooms
(including 28 deluxe suites),
- a 29,000 square-foot casino (the "Casino"),
- a 3,600 square-foot retail shop (the "Retail Store"),
- a nightclub and live music concert hall with a capacity of 1,400
persons ("the Joint"),
- an outdoor swimming pool area with a tropical theme (the "Beach
Club"),
- two restaurants,
- three cocktail lounges and
- an exercise facility (the "Athletic Club").
To capitalize on the strong popularity of the Resort, the Company is
undertaking an expansion (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. See
"-The Expansion."
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 uses the Hard Rock theme, vibrant atmosphere and personalized
service to differentiate the facility from the substantially larger "mega
resorts" approximately one mile west on Las Vegas Boulevard (the "Strip"). Key
elements of the Company's strategy include the following:
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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 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,
Marilyn Manson, The Wallflowers, Sheryl Crow and Jewel. Management believes that
the Joint has 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 reinforce the
Resort's marquee image and unique position in the Las Vegas marketplace.
GAMING MIX TARGETED TO CUSTOMER BASE. The Casino currently includes 704
slot machines, 60 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 and by promoting the
interaction between table game dealers and customers. The Company also features
the latest slot machines, some of which reflect the Company's rock music theme,
as well as more traditional machines.
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 should result 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. Mr. 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.
LOCATION
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
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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:
- a high concentration of popular Las Vegas restaurants and
nightclubs,
- the Las Vegas Convention Center,
- the Thomas & Mack Center at the University of Nevada Las Vegas,
Las Vegas' primary sporting and special events arena and
- a number of non-gaming hotels, which have an aggregate of more
than 1,000 guest rooms.
THE RESORT
The Resort currently consists of the Hotel, the Casino, the Retail
Store, two restaurants, The Joint, the Beach Club, three cocktail lounges and
the Athletic Club.
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 following table illustrates certain historical information relating
to the Hotel since its construction in 1995:
<TABLE>
<CAPTION>
1995 1996 1997 1998
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<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 $97.34
Revenue per average room............................... $82.34 $91.14 $96.36 $97.34
</TABLE>
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(1) Includes rooms provided on a complimentary basis
THE CASINO. The innovative, distinctive style of the 29,000 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
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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 60 table games including Blackjack, Craps, Roulette,
Caribbean Stud Poker, Baccarat, Mini-Baccarat and Pai-Gow Poker, 704 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 special events, the Company sets up
table games in The Joint and outdoor table games in the Beach Club area.
RETAIL. The Resort's retail operations consist of the Retail Store, a
3,600 square-foot retail shop, located at the Resort, and sales through its
Internet web site. 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, Marilyn Manson 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 has been operating The Joint
under the name "The Orbit Lounge" as an after hours (12:30 a.m. to 4:00 a.m.)
nightclub on Friday and Saturday nights.
THE BEACH CLUB. 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), three
bars in the Casino (the Las Vegas Lounge, Sports Deluxe 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
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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 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 1997 and
1998 was 100%, 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 320 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.
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- 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 completion 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 in the process of adding approximately 60 slot machines and
11 table games, of which 11 slot machines and 5 table games
have already been installed in a new higher limit gaming area.
Management intends to attract higher income gaming patrons
through the 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 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 expansion of the Retail Store to 3,600
square feet was completed in October 1998. The redesigned and
reconfigured store allows the Company to display a wider
variety of merchandise bearing the "Hard Rock Hotel" and "HRH"
logos in a comfortable shopping atmosphere.
- PARKING FACILITY. The Company has constructed a six-story
parking facility with a 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
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parking facility, which is designed to allow for the future
addition of 450 additional parking spaces, was completed on
schedule in August 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 also 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 been able to
host 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.
The Expansion has been planned in three separate phases. Phase I
consisted of the construction of the parking facility, which began in February
1998 and was completed in August of 1998 at a cost of approximately $8.0
million. Phase II involves the development of the new nightclub and warehouse
facility and the expansion of the Retail Store at a cost of approximately $13.0
million. The Company has completed the expansion of the Retail Store and is in
the process of constructing the new nightclub and warehouse facility. 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 $76.0 million. The Company originally established a total
construction budget for the Expansion of $87.0 million (of which $30.8 million
has been expended as of November 30, 1998), including construction contingency,
design costs, and capitalized construction period interest. Management now
expects the Expansion to cost $97.0 million. Construction is expected to be
completed in the second quarter of 1999. See "Risk Factors--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 contains
approximately 350,000 names. The Resort is aggressively marketed not only
through domestic and international public relations activities, direct mail,
print, radio and television advertising, but also through special arrangements
with various members of the entertainment industry. For example, for the past
three years the 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
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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. 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
Organization plc ("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 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 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 Company's outstanding
9 1/4% Senior Subordinated Notes due 2005 (the "Notes") or the Company's current
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
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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 rose 6.3% in 1997, the number of visitors to Las Vegas rose
only 2.8%. Despite this disparity, hotel occupancy rates exceeded on average
91.6% for the years 1994 to 1998. 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 17,000 additional hotel rooms
will be opened in Las Vegas, including the 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 will 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 1994 through 1998, as reported by the LVCVA.
LAS VEGAS MARKET STATISTICS
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Visitor Volume (in thousands)....................... 28,214 29,002 29,637 30,465 30,605
Clark County Gaming Revenues (in millions).......... $5,431 $5,718 $5,784 $6,152 $6,347
Hotel/Motel Rooms................................... 88,560 90,046 99,072 105,347 109,365
Airport Passenger Traffic (in thousands)............ 26,850 28,027 30,460 30,306 30,227
Convention Attendance (in thousands)................ 2,684 2,925 3,306 3,519 3,302
</TABLE>
COMPETITION
The Resort, 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 25 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, Bellagio 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. Furthermore,
additional hotel casinos, containing a significant number of hotel rooms, are
expected to open in Las Vegas within the next two years. Two major hotel
casinos, Mandalay
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Bay and The Venetian, are expected to open in the next quarter. 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 affect the Company's financial
condition and results of operations.
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 has
opened at least one "Hard Rock" hotel and intends to open several hotel and
hotel/casinos using the "Hard Rock" name in jurisdictions both inside and
outside the Morton Territory.
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, river boat 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. Recently,
California enacted The Tribal Government Gaming and Economic Self-Sufficiency
Act of 1998 (the "Tribal Act"). The Tribal Act provides a mechanism for
federally recognized Native American tribes to conduct certain types of gaming
on their land. If the Tribal Act is interpreted to allow a full range of casino
type gaming, or if it lifts restrictions currently imposed on tribal gaming, it
could cause a material adverse effect on the Company. Continued proliferation of
gaming activities could significantly and adversely affect the Company's
business and prospects. See "Risk Factors-Recently Enacted and 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 by $3.7 million (24%)
during fiscal year 1998 relative to fiscal year 1997, and there can be no
assurance that retail departmental income will not continue to decrease.
EMPLOYEES
As of November 30, 1998, the Company had approximately 864 full-time
employees and 179 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, however, various unions have been aggressively soliciting
new members in Las Vegas. The Company cannot assure that one or more unions will
not approach the Company's employees. The Company considers its relations with
its employees to be good and has never experienced an organized work stoppage,
strike or labor dispute.
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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 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 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. The Company has
received, subject to certain conditions, all additional approvals, registrations
and regulation waivers that 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
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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 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 Nevada Act provides that each person who acquires, directly or
indirectly, beneficial ownership of any debt security in a publicly registered
corporation which is registered with the Nevada Commission (a "Registered
Corporation") may be required to be found suitable if the Nevada Commission has
reason to believe that the acquisition of such debt security would otherwise be
inconsistent with the declared policy of the State of Nevada. In addition, the
beneficial owners of the Class A and Class B common stock of the Company are
prohibited from selling, assigning, transferring, pledging or otherwise
disposing of such stock without the prior approval of the Nevada Commission.
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.
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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.
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 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 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 and
received, subject to certain conditions, approval as a Registered Corporation
based upon its debt offering as well as a waiver of certain regulations of the
Nevada Commission that prohibit a public offering by a corporation holding a
Nevada gaming license. Such approval 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 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 prior approval process relating to the transaction.
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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 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.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons (each a
"Licensee"), 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 ongoing expenses of
investigation by 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.
RISK FACTORS
The Company is subject to the following risks:
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
November 30, 1998, the Company's total debt was
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$130.7 million. The Company expects to incur additional indebtedness under the
Company's current credit facility to fund the Expansion. The consequences of the
Company's leverage include, but are not limited to, the following:
- upon full use of the Company's current 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,
- 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
- the Company will be susceptible to adverse changes in the
economy and the Las Vegas gaming market.
Furthermore, the Company's current debt imposes 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 this
debt 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 satisfy any 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. The Company cannot assure that it
would be successful in implementing any of these alternatives, if necessary.
Also, Nevada law contains certain restrictions on the ability of companies
engaged in the gaming business to undertake certain financing transactions.
These restrictions, which are described in "Business-Regulation and Licensing"
and "-Government Regulation" could cause delays in obtaining necessary capital.
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DEPENDENCE ON THE CREDIT FACILITY
The Company is dependent on the availability of its credit facility to
fund construction of the Expansion. If the Company defaults on its indebtedness,
either by failing to make required payments or by breaching a covenant, the
lenders under the credit facility could elect to:
- declare all borrowings to be due and payable, together with
accrued and unpaid interest and
- terminate their commitments.
If the lenders for any reason require early repayment of the funds
borrowed pursuant to the credit facility, or fail to provide funds pursuant to
the credit facility, the Company may not be able to complete the Expansion.
Obligations under the credit facility are secured by liens on
substantially all assets of the Company. Upon an event of default and
acceleration under the credit facility the lenders may exercise the right to
control the operation of the Resort. That right is subject to prior approval by
the Nevada Gaming Authorities of their application to acquire control of the
Resort.
Borrowings under the credit facility 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 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 cannot assure that the Expansion will be completed by then
or any other time. Likewise, the Company cannot predict the final amount which
the Company will spend to complete the Expansion. 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.
These estimates and projected completion dates may continue to 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 may change. Any change in
the construction plans for the Expansion may result in some or all of the
Expansion not being completed or being completed in a manner substantially
different from that described herein. Changes in design and construction plans
may require additional funds beyond those provided by the sale of the Notes and
the credit facility. The Company cannot assure that it would be able to obtain
additional funds under terms that would be favorable to the Company.
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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 these problems could give rise to delays or cost overruns or
otherwise have a material adverse effect on the Expansion and the Company.
Additionally, the Expansion will require many permits, licenses and
approvals, certain of which 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. The Company cannot assure that these conditions
will not adversely affect the Company or that all required regulatory approvals
will be obtained.
The Company has planned construction activities related to the
Expansion to minimize disruption of the Resort's operations caused as a result
of the Expansion. Management believes, however, that the Expansion has caused
some level of disruption to the Resort's operations. The Company cannot assure
that construction noise and debris and the temporary closing of certain
facilities will not disrupt the Resort's operations in the future. Moreover,
unexpected delays in construction for any reason could exacerbate or magnify any
disruptions. As a result, the Company cannot assure that the construction of the
Expansion will not have an adverse effect on the Company.
COMPETITION; RISK OF OVERCAPACITY; 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. See
"Business-Competition."
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 in Las Vegas rose by 6.3%, the number of visitors rose only
2.8%. Hotel casinos under construction will also directly compete with the
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Company's operations and together with other projects are expected to add
approximately 17,000 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 two
years and management cannot estimate the effect on the Company of these
developments.
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 cannot assure 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 "Business -Competition"
and "-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, river boat
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. See "Business-Competition." Continued proliferation of gaming
activities could significantly and adversely affect the Company. See "-Recently
Enacted and 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 $3.7 million
(24.0%) during fiscal year 1998 relative to fiscal year 1997, and the Company
cannot assure 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 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 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 large
extent on the Company's ability to successfully execute the Expansion and
generate cash flow sufficient for its working capital needs.
RELIANCE ON KEY PERSONNEL
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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 Mr. Morton or Mr.
Selesner were to leave the Company, the Company might not be able to find a
suitable replacement. 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, the Company cannot
assure that he will do so in the future.
The shareholders, officers, directors and key employees of the Company,
including Mr. Morton and Mr. Selesner, are required to 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 any such application for any cause that they deem reasonable. In the event
the Nevada Gaming Authorities were to find any such person unsuitable for
licensing or unsuitable to continue having a relationship with the Company, the
Company would be required to sever all relationships with such person. Mr.
Selesner is currently in the process of being licensed. The Company cannot
assure that any such person will be able to obtain or maintain any requisite
license or finding of suitability by the Nevada Gaming Authorities.
CONTROL BY PRINCIPAL SHAREHOLDER
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. Thus, Mr. Morton controls the election of the Board of Directors of the
Company and can 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 Casino
Resorts ("Harveys") owned 40% of the Company and managed the Resort pursuant to
a management agreement. For that period 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. These responsibilities were transferred to the Company in October 1997
as a result of the buyout of Harveys' interest in the Company and the concurrent
termination of the management agreement with Harveys (the "Buyout"). The Company
has independently operated the Resort for only a little over one year. The
continued success of the Company's operations will depend on the Company's
successful management and implementation of its own systems.
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RISKS ASSOCIATED WITH HISTORICAL NET LOSSES
Although the Company maintained 100% occupancy of the Hotel for the
fiscal years ended November 30, 1997 and 1998, the Company has recorded net
losses for both fiscal years 1997 and 1998. The net loss for the fiscal year
ended November 30, 1998 of $3.7 million is largely attributable to the
write-off of loan fees of $3.5 million associated with the termination of the
Company's old credit facility and a $1.5 million write-off of legal fees
associated with the Rank lawsuit. Management believes that the Company will
not incur significant additional legal fees in connection with the Rank
lawsuit. See "Legal Proceedings." 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. The Company cannot assure that it 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.
COMPLETION GUARANTY
Pursuant to the Completion Guaranty, Mr. 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 obligate Mr. Morton, in any way to pay any principal, premium
or interest on the Company's debt. The Company cannot assure that if
construction and development costs of the Expansion exceed the amount of funds
available to the Company for the Expansion, including amounts available under
the Completion Guaranty, Mr. Morton will provide any additional funds or 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 "Certain
Transactions-Completion Guaranty."
GOVERNMENT REGULATION
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The gaming operations and the ownership of securities of the Company
are subject to extensive regulation by 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.
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 or fine each person or entity or both up to $250,000 for each
violation. 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 Company'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.
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.
RISKS RELATED TO MARKET DATA
The Company has included in this report market data and information
with respect to the performance of other gaming entities that the Company
believes to be reasonably accurate. The Company has not independently verified
this data and information, which is 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.
Readers should not place undue reliance on this information as the Company
cannot assure that it is accurate in all material respects.
ENVIRONMENTAL RISKS AND REGULATION
The Company has engaged in real estate development projects and has
owned and operated several parcels of real estate. As a result, the Company is
subject to various federal, state and local laws and regulations that make it
liable for the costs of cleaning up, and other costs relating to, releases of
hazardous substances on its property or at property to which the Company has
sent solid or hazardous wastes. The types of activities that can lead to
environmental liability include discharges to air and water, and handling and
disposal of solid and hazardous waste. Environmental laws and regulations may
impose liability regardless of whether the owner or operator caused or even knew
of the contamination, and in some cases, one's liability could exceed the value
of the property itself. The presence of hazardous substances, or the failure to
properly remediate any resulting contamination, may inhibit the Company's
ability to sell, lease or operate the property or to borrow using the property
as collateral. The Company does not have environmental liability insurance to
cover such events. Although there can be no
22
<PAGE>
assurance, the Company is not aware of any condition at any of its current or
past properties that would have a material adverse effect on the Company.
RECENTLY ENACTED AND 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. California, pursuant to a ballot
initiative vote, also enacted The Tribal Act. The Tribal Act provides a
mechanism for federally recognized Native American tribes to conduct certain
types of gaming on their land. Due to the recent enactment of the Gambling
Control Act and the Tribal Act, the Company cannot predict the effect they may
have on the Company's operations. If the Tribal Act is interpreted to allow a
full range of casino type gaming, or if it lifts restrictions currently imposed
on tribal gaming, it could have a material adverse effect on the Company.
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.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1998, Hard Rock Cafe International (USA) Inc. (f/k/a Rank
Licensing, Inc.) (The "Plaintiff"), a subsidiary of Rank, filed an amended
complaint in the United States District Court for the Southern District of New
York against Mr. 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") on, 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
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<PAGE>
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.
Revenues from sales of merchandise over the Internet for fiscal year 1998
were less than $100,000. Through November 30, 1998 the Company has incurred
$1.5 million in legal fees in defense of this suit which have been charged to
general and administrative expenses on the Company's Statement of Operations.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's common
stock.
As of January 31, 1999, there were 11 holders of record of the
Company's common stock.
The Company has never paid any cash dividends on its common stock and
does not anticipate paying any cash dividends in the foreseeable future. The
Company's current debt limits the payment of dividends. The Company currently
intends to retain future earnings to help fund the development and growth of its
business.
On March 23, 1998, the Company consummated an offering of
$120,000,000 aggregate principal amount of the Notes (the "Offering"),
pursuant to exemptions from, or transactions not subject to, the registration
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), and applicable state securities laws. The net proceeds of the Offering
were $115.9 million (the "Net Proceeds"). The Offering was underwritten by a
syndicate managed by Bear Stearns & Co. Inc. Following the Offering, the
Company effected an exchange offer, registered under the Securities Act,
pursuant to which the Series A 9 1/4% Senior Subordinated Notes due 2005 were
exchanged for Series B 9 1/4% Senior Subordinated Notes due 2005 with
substantially the same terms and conditions as the Series A 9 1/4% Senior
Subordinated Notes due 2005.
The Company used most of the Net Proceeds to repay amounts
outstanding under a $120,000,000 credit agreement entered into by the Company
with a consortium of banks in September of 1997. The Company used the
remainder of the Net Proceeds, along with borrowings under the Company's
current credit facility and cash flow from operations, to fund the Expansion.
24
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical income statement data of the Company set
forth below for fiscal years 1996, 1997 and 1998 and the selected historical
balance sheet data set forth below at November 30, 1997 and 1998 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 fiscal years 1994 and 1995 and the selected historical balance sheet data
set forth below at November 30, 1994, 1995 and 1996 have been derived from
the Company's audited Financial Statements not included herein. The Company
commenced operations on March 9, 1995, and therefore, fiscal years 1994 and
1995 are not directly comparable to fiscal years 1996, 1997 and 1998. 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>
YEARS ENDED NOVEMBER 30,
------------------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
--------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Casino........................................ $ -- $ 26,262 $ 36,560 $ 35,395 $ 36,070
Lodging....................................... -- 7,845 12,257 12,919 12,988
Food and beverage............................. -- 10,061 15,003 16,704 18,972
Retail........................................ -- 13,984 17,336 15,404 11,715
Other income.................................. -- 1,290 1,901 2,076 2,109
Less complementaries.......................... -- (3,704) (5,768) (5,450) (6,189)
--------- -------- -------- -------- --------
Net revenues.................................. -- 55,738 77,289 77,048 75,665
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
COSTS AND EXPENSES:
Casino........................................ -- 12,399 18,158 17,921 18,640
Lodging....................................... -- 3,071 4,112 4,149 3,953
Food and beverage............................. -- 6,877 10,118 10,360 11,405
Retail........................................ -- 6,325 7,869 7,102 5,503
Other......................................... -- 821 949 943 952
Marketing..................................... -- 4,686 2,975 3,174 4,252
General and administrative.................... -- 10,647 14,922 15,140 14,607
Depreciation and amortization................. -- 3,870 5,523 5,503 5,747
Pre-opening expenses.......................... -- 4,942 -- -- --
Charge for termination of Management
Agreement............................... -- -- -- 24,715 --
--------- --------- --------- --------- ---------
Total costs and expenses...................... -- 53,638 64,626 89,007 65,059
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS.................... -- 2,100 12,663 (11,959) 10,606
Interest income (expense), net................ 42 (4,930) (5,617) (5,585) (10,766)
Other expenses, net........................... (487) (8) (54) (32) --
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary loss ....... (445) (2,838) 6,992 (17,576) (160)
Income tax provision (benefit)................ 6 (857) 2,525 (1,168) --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss....... (451) (1,981) 4,467 (16,408) (160)
Extraordinary loss............................ -- -- -- (1,081) (3,496)
--------- --------- --------- --------- ---------
Net income (loss)................................ $ (451) $ (1,981) $ 4,467 $ (17,489) $ (3,656)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share...................... $ (4.32) $ (15.98) $ 35.25 $ (143.84) $ (48.09)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation............. 104,480 123,965 126,705 121,586 76,023
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures(2)....................... 44,860 39,118 4,006 2,557 39,802
25
<PAGE>
Depreciation and amortization................. -- 3,870 5,523 5,503 5,747
Ratio of earnings to fixed charges(3)......... -- -- 2.2x -- --
<CAPTION>
AT NOVEMBER 30,
---------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $1,059 $ 3,634 $ 5,958 $ 4,214 $ 4,568
Total assets........................ 56,570 99,855 109,044 109,556 145,122
Total debt.......................... 28,141 65,405 64,315 106,013 130,699
Shareholders' equity (deficit)(4)... 18,275 26,295 30,762 (7,936) (11,592)
</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 1994 and 1995
are not directly comparable to fiscal years 1996, 1997 and 1998.
(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, 1997 and 1998 resulted in coverage
deficiencies of $1.2 million, $4.1 million, $17.6 million and $1.0
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).
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
ANNUAL REPORT ON FORM 10-K.
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 1998, 44.1% 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.
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. Although the Company attempted to minimize
disruption, management believes net revenues and operating income for fiscal
year 1998 were negatively impacted resulting in lower results than the
Company achieved in fiscal year 1997. Fiscal year 1998 operating results also
included the extraordinary loss resulting from the write-off of $3.5 million
in unamortized loan fees and financing costs in connection with the
retirement of the Company's old 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
YEAR ENDED NOVEMBER 30, 1998 COMPARED TO YEAR ENDED NOVEMBER 30, 1997
NET REVENUES AND OPERATING INCOME. Net revenues decreased 1.8% for the year
ended November 30, 1998 to $75.7 million compared to $77.0 million for the
corresponding period of the prior year. Operating income decreased 6.7% for
the year ended November 30, 1998 to $12.1 million (excluding $1.5 million in
legal fees for the Rank lawsuit) compared to $13.2 million (excluding the
charge of $24.7 million for the termination of the Management Agreement and
other non-recurring financing fees of $0.4 million) for the corresponding
period of the prior year. The decrease in revenues is primarily attributable
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<PAGE>
to a 24% decrease in retail revenue partially offset by food and beverage
revenues (up 13.6%) and table games revenue (up 6.6%). Operating income
decreased primarily as a result of the decreased retail revenues and increased
marketing and entertainment expenses of approximately $1.1 million associated
with hosting the Rolling Stones Event, partially offset by the elimination of
management fees paid to Harveys.
CASINO. Casino revenues increased by 1.9% for the year ended November 30, 1998
to $36.1 million compared to $35.4 million for the corresponding period of the
prior year. The increase is primarily due to increased table game play (up 6.6%
to $21.7 million compared to $20.3 million for the corresponding period of the
prior year) resulting from strong play on weekends. Net slot machine revenue
decreased 3.3% for the year ended November 30, 1998 to $14.0 million compared to
$14.4 for the corresponding period of the prior year. Casino departmental income
remained relatively flat for the year ended November 30, 1998 at $17.4 million
from $17.5 million, primarily as a result of the increased revenues offset by
increased complimentary expenses. Casino departmental income as a percentage of
casino revenues decreased to 48.3% in 1998 from 49.4% in 1997, primarily as a
result of increased complimentary costs.
LODGING. Lodging revenues increased 0.5% for the year ended November 30, 1998 to
$13.0 million from $12.9 million for the corresponding period of the prior year.
The ADR for the year ended November 30, 1998 was $97.34, up 1.0% from $96.36 for
the year ended November 30, 1997. Hotel occupancy remained at 100%. Lodging
departmental income increased 3.0% for the year ended November 30, 1998 to $9.0
million from $8.8 million. Lodging departmental income as a percentage of
lodging revenues increased to 69.6% in 1998 from 67.9% in 1997.
FOOD AND BEVERAGE. Food and beverage revenue increased 13.6% for the year ended
November 30, 1998 to $19.0 million from $16.7 million for the corresponding
period of the prior year. The increase was related to a $612,000 increase in the
banquet food and beverage revenues, a $825,000 increase in revenues from the
Joint bar and a $680,000 increase in Center Bar/Las Vegas Lounge revenues. Food
and beverage departmental income increased 16.2% for the year ended November 30,
1998 to $7.6 million from $6.3 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
39.9% in 1998 from 38.0% in 1997, primarily as a result of the incremental
revenue.
RETAIL. Retail revenues decreased 24.0% for the year ended November 30, 1998 to
$11.7 million, from $15.4 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 25.2% for the year ended November 30, 1998 to $6.2 million from $8.3
million, as a result of the decreased revenues. Retail departmental income as a
percentage of retail revenues decreased slightly to 53.0% in 1998 from 53.9% in
1997 as a result of managing retail expenses to the reduction in revenues.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses increased 3.0% for the year ended November 30, 1998 to $18.9 million
from $18.3 million for the corresponding period of the prior year. The increase
is attributable to the costs associated with hosting The Rolling Stones Event of
approximately $1.1 million, the incurrence of $1.5 million in legal fees related
to the Rank
28
<PAGE>
lawsuit, offset by the elimination of management fees paid to Harveys of
approximately $2.8 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
to $5.7 million for the year ended November 30, 1998 from $5.5 million for the
corresponding period of the prior year.
NET INTEREST EXPENSE. Net interest expense increased 92.8% for the year ended
November 30, 1998 to $10.8 million from $5.6 million for the corresponding
period of the prior year. The increase is attributable to the financing of the
Buyout.
INCOME TAXES. No income tax benefit was recorded as a result of establishing a
valuation allowance due to the Company's accumulated losses as of November 30,
1998.
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 Company's old credit facility.
NET INCOME. As a result of the factors described above, the Company recorded a
net loss for the year ended November 30, 1998 of $3.7 million compared to net
loss of $17.5 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 agreement with
Harveys 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
29
<PAGE>
$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 with Harveys in connection with the
Buyout. Including the one-time charge 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.
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.
INCOME TAXES. The income tax benefit for fiscal year 1997 was 6.7% of pre-tax
loss as a result of establishing a valuation allowance due to the Company's
accumulated losses as of November 30, 1997.
30
<PAGE>
EXTRAORDINARY LOSS. In connection with entering into the Company's old 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 credit facility
from which the Company had previously borrowed.
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 with Harveys and the extraordinary loss noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources
have been cash flow from operations and borrowings under various credit
agreements. At November 30, 1998, the Company had $4.6 million of cash and
cash equivalents.
During fiscal year 1998, the Company generated cash flows from
operating activities of approximately $9.1 million and from net financing
activities of approximately $19.2 million. The primary uses of funds in fiscal
year 1998 were expansion and maintenance capital expenditures of $27.9 million.
On March 23, 1998, the Company completed the Offering of $120 million
aggregate principal amount of the Notes; of this amount $105.6 million was used
to repay the Company's then existing credit facility and approximately $4.1
million was used to pay fees associated with the Offering. The Company repaid
all borrowings outstanding and terminated that credit facility with net proceeds
from the Offering. Concurrent with the closing of the Offering, the Company
entered into the Company's $67.0 million current credit facility, from which the
Company had drawn $10.5 million at November 30, 1998.
Interest on the Notes is 9.25% per annum, and is payable on each
April 1 and October 1, commencing October 1, 1998. The Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness, including all borrowings under the
New Credit Facility. The Notes are subject to redemption at the option of the
Company, in whole or in part, at any time on or after April 1, 2002, at a
premium to the face amount ($120 million) which decreases on each subsequent
anniversary date, plus accrued interest to the date of redemption. The Notes
contain covenants restricting or limiting the ability of the Company to,
among other things, pay dividends, incur additional indebtedness, issue
certain preferred stock and enter into transactions with affiliates.
The New Credit Facility provides the Company with $67 million of
senior secured reducing revolving borrowings. Interest on the New Credit
Facility 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 8.625% at November 30, 1998), or
the Base Rate, defined as the higher of the Federal Funds Rate plus .5%, or
the reference rate, as defined, plus an applicable margin (not to exceed
2.25%). The Company chose the LIBOR Index for all borrowings outstanding at
November 30, 1998. These margins are dependent upon the Company's debt to
EBITDA ratio, as defined. Interest accrued on the Base Rate borrowings is due
monthly, up to the maturity date, while interest on LIBOR borrowings is due
quarterly up to the maturity date.
The amount available under the New Credit Facility will begin
reducing to: $58.3 million as of the last day of fiscal year 2000; $45.3
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. Additionally, the Company may be
required, upon certain circumstances, to make prepayments on the New Credit
Facility each year beginning in April 2000.
The New Credit Facility contains certain covenants 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, issuing dividends on stock, and entering into
transactions with affiliates. Peter Morton has entered into a make-well
agreement (as defined) pursuant to which he is required to contribute certain
amounts to the Company in the event certain financial covenants are not met.
The New Credit Facility is secured by substantially all of the Company's
property at the Las Vegas site.
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 with Harveys, 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 Company's old credit facility, and concurrent
with this transaction, refinanced existing indebtedness totaling $59.3 million.
Subsequent to the Buyout, Harveys has no continuing interest in the Company.
The Company currently expects the cost for the Expansion will be
approximately $97 million. Management anticipates funding future capital
expenditures for the Expansion and its operating liquidity needs from the funds
available under the Company's $67.0 million current credit facility, operating
cash flow and, if necessary, funds available pursuant to the Completion
Guarantee. Construction of the Expansion is expected to be completed by the
second quarter of 1999. Approximately $66.2 million of capital expenditures
related to the Expansion are 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
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<PAGE>
under the Company's current 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.
Mr. 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 "Business--Risk Factors--Completion Guaranty" and
"Completion Guaranty."
YEAR 2000 ISSUES
The "Year 2000 Issue" is the result of computer systems being designed
to use two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that are date sensitive may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations, including
among other things a temporary inability to process transactions.
STATE OF READINESS
As part of the Buyout, in October 1997, the Company was required to or
did replace most of its hardware and software including the three most critical
systems:
- the property management system which is used in the hotel to
check guests in and out,
- the casino system which is used to control and account for
table games, slots and the casino cage and
- the back office systems used for accounting, payroll and
inventory control.
During this process, management ensured all the purchased hardware and
software related to these systems will not suffer Year 2000 Issue related
malfunctions.
The Company plans to verify that its remaining information technology
systems and other relevant systems will function properly during and after the
year 2000 by;
- identifying all systems or equipment potentially impacted by
the year 2000,
- testing/certifying those systems' ability to operate in a
post-1999 environment and
- determining whether the Company will reprogram or replace
systems or equipment that may malfunction due to the Year 2000
Issue.
The Company has inventoried substantially all of its information
technology systems and other relevant systems. The results of this process
indicate that the year 2000 should not materially affect the Company's
information technology systems and other relevant systems. The remaining steps
in the Company's plan for year 2000 include testing selected systems/equipment
and remediating and certifying
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<PAGE>
systems that will be adversely affected by the Year 2000. Completion of these
tasks is expected by mid-1999. Management believes that the cost of its Year
2000 identification, testing and remediation will not have a material impact on
the Company's financial statements.
The Company is in the process of mailing letters to its significant
vendors and service providers to determine the extent the year 2000 will have on
their ability to continue to supply the Company with goods and services. Based
on the goods (primarily food, beverage and retail items) purchased by the
Company, the Company does not expect Year 2000 to have a material impact on its
vendors. Completion of verifying vendor readiness is expected by mid-1999.
RISK AND CONTINGENCY PLAN
Management believes it has an effective program in place to resolve the
Year 2000 Issue in a timely manner. As noted above, the Company has not
completed all necessary phases of its plans for Year 2000. The most likely worst
case scenarios would include failure of a computer system or equipment resulting
in termination of or diminished service to customers. If the Company's vendors
or suppliers of the Company's necessary power, gas, water, and
telecommunications services fail, the Company will be unable to provide certain
services to its customers. In addition, disruptions in the economy generally
resulting from the Year 2000 Issue could materially and adversely affect the
Company.
The Company maintains contingency plans in its normal course of
business designed to be deployed in the event of various potential business
interruptions. These generally include manual workarounds and adjusting
staffing. The Company currently has no contingency plans in place should it fail
to complete all phases of its program for addressing the Year 2000 Issue. The
Company plans to evaluate the status of its program for addressing the Year 2000
Issue in mid-1999 and to determine at that time whether a more concrete
contingency plan is necessary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page F-1.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
33
<PAGE>
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age 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........................ 51 Chairman of the Board, Chief Executive Officer,
President and Secretary
Gary R. Selesner....................... 45 Senior Vice President of Operations and General
Manager
Bruce R. Dall.......................... 35 Chief Financial Officer and Treasurer
William R. Stephens.................... 50 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
of the Company since December 1997. From October 1997 to December 1997, Mr. Dall
was employed by the Company as
34
<PAGE>
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, 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.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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.
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 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------------- ---------------------------------
NAME AND OTHER ANNUAL RESTRICTED STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) COMPENSATION (1)
- ------------------ ---- ------ ----- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Peter A. Morton..................... 1998 $ -- $ -- $1,510,260(2) $ -- $ --
Chairman of the Board, Chief 1997 $ -- $ -- $1,556,433(2) $ -- $ --
Executive Officer, President and
Secretary
Gary R. Selesner.................... 1998 254,137 109,200 -- -- 7,688
Senior Vice President of 1997 211,923 93,000 -- 951,250(3) 4,144
Operations and General Manager
William R. Stephens................. 1998 124,759 50,344 -- -- 7,719
Vice President of 1997 110,365 36,650 -- -- 4,640
Casino Operations
Christine R. Belcastro.............. 1998 118,893 36,579 -- -- 5,348
Executive Director of Hotel 1997 93,750 25,460 -- -- 4,369
Operations
Adam P. Titus....................... 1998 160,000 50,000 -- -- --
Executive Director of 1997 14,321 -- -- -- --
Construction
</TABLE>
- ------------------------------
(1) All Other Compensation consists of contributions made by the Company to
the Hard Rock 401(k) Plan, on behalf of Mr. Selesner in the amount of
$5,000, Ms. Belcastro in the amount of $3,971 and Mr. Stephens in the
amount of $4,800. In addition, All Other Compensation consists of
insurance premiums on term life insurance and medical reimbursements
paid by the Company in the amount of $2,688 for Mr. Selesner, $2,919
for Mr. Stephens, and $1,377 for Ms. Belcastro.
(2) 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.
(3) 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."
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<PAGE>
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 Supervisory 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 Company's debt. 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 Agreement), the non-defaulting party may
terminate the Supervisory 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 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
37
<PAGE>
$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.
Mr. Titus has entered into an employment agreement, dated October 24,
1997, which has a term of three years. Pursuant to the agreement, Mr. Titus will
serve as Vice President-Construction of the Company. The Company will pay Mr.
Titus a base salary of $160,000 per year and an annual bonus in an amount not
less than $50,000. If Mr. Titus is terminated by the Company without Cause (as
defined in the agreement) then he will be entitled to receive his compensation
and benefits for the remainder of the term of the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1998. Messrs.
Morton and Selesner each participated in the determination of officers'
compensation during 1998.
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.
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
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<PAGE>
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 Securities and Exchange 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.
ITEM 12. 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 Report
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>
NAME AND ADDRESS OF OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------- ------ ------- ------ -------
CLASS A CLASS B
(VOTING) (NON-VOTING)
-------- ------------
COMMON STOCK OWNED (1)
----------------------
<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)................................ - - 306 *
Christine R. Belcastro.............................. - - - -
William R. Stephens................................. - - - -
Adam P. Titus....................................... - - - -
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>
39
<PAGE>
- --------------------------------------
* 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 306 shares of the
Company's non-voting Common Stock. See "Management--Employment
Agreements."
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<PAGE>
ITEM 13. 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 Company's current credit facility.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Mr. 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 Supervisory 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 year 1998 were approximately
$1.5 million.
Entities controlled by Mr. 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 been, 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
$894,000 for fiscal year 1998.
COMPLETION GUARANTY
Pursuant to the Completion Guaranty, Mr. 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
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<PAGE>
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 any indebtedness of the Company. Under certain of its debt
agreements, the Company is prohibited from implementing 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 governing the Notes. See
"Business--Risk Factors--Completion Guaranty" and "--Reliance on Key Personnel,
Control by Principal Shareholder."
For certain additional disclosure regarding affiliate transactions see
footnote __ to the Company's Financial Statements.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Financial Statements; see Index to Financial Statements on
Page F-1.
(b) Reports on Form 8-K filed during the last quarter of fiscal
1998; none
(c) The following Exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
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.
42
<PAGE>
*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.
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.
*10.8 Amendment No.1 to Trademark Sublicense Agreement, dated as of
March 23, 1998, between the Company and Peter A. Morton.
43
<PAGE>
*10.9 Construction Contract, dated February 17, 1998, between the
Company and KLAI:JUBA.
*10.10 Management Agreement, as amended as of September 16, 1993,
between the Company and Harvey's Wagon Wheel, Inc.
10.11 Construction Contract, dated June 24, 1998, between the
Company and HOWA Construction, Inc.
10.12 Construction Contract, dated September 22, 1998, between the
Company and M.J. Dean Construction, Inc.
10.13 Employment Agreement, dated October 24, 1997, between the
Company and Adam Titus.
12. RATIO OF EARNINGS TO FIXED CHARGES.
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for the Company.
24. POWERS OF ATTORNEY.
24.1 Power of Attorney (included in signature page).
27. FINANCIAL DATA SCHEDULE.
27.1 Financial Data Schedule for the year ended November 30, 1998.
</TABLE>
* Incorporated by reference to designated exhibit to the Company's
Registration Statement on Form S-4, filed with the Securities and Exchange
Commission on May 21, 1998 (File No. 333- 53211).
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document includes various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Sections
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. Statements
containing expressions such as "believes," "anticipates" or "expects" used in
the Company's press releases and periodic reports on Forms 10-K and 10-Q filed
with the Securities and Exchange Commission are intended to identify
forward-looking statements. All forward-looking statements involve risks and
uncertainties. Although the Company believes its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurances
44
<PAGE>
that actual results will not materially differ from expected results. The
Company cautions that these and similar statements included in this report and
in previously filed periodic reports, including reports filed on Forms 10-K and
10-Q, are further qualified by important factors that could cause actual results
to differ materially from those in the forward-looking statements. Such factors
include, without limitation, the following: increased competition in existing
markets or the opening of new gaming jurisdictions; a decline in the public
acceptance of gaming; the limitation, conditioning or suspension of any of the
Company's gaming licenses; increases in or new taxes imposed on gaming revenues
or gaming devices; a finding of unsuitability by regulatory authorities with
respect to the Company's officers, directors or key employees; loss or
retirement of key executives; significant increases in fuel or transportation
prices; adverse economic conditions in the Company's key markets; severe and
unusual weather in the Company's key markets; adverse results of significant
litigation matters. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date thereof. The Company
undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof. See "Business--Risk Factors."
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, as amended, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized this ___ day of February, 1999.
HARD ROCK HOTEL, INC.
By: PETER A. MORTON
--------------------------------
Peter A. Morton
CHAIRMAN, PRESIDENT,
CHIEF EXECUTIVE OFFICER
AND SECRETARY
We, the undersigned officers and directors of Hard Rock Hotel, Inc.,
hereby severally constitute Bruce R. Dall and Brian Ogaz and each of them
singly, our true and lawful attorneys with full power to them, and each of them
singly, to sign for us and in our names in the capacities indicated below, any
and all amendments to this Annual Report on Form 10-K, and generally do all such
things in our name and behalf in such capacities to enable Hard Rock Hotel, Inc.
to comply with the applicable provisions of the Securities Exchange Act of 1934,
and all requirements of the Securities and Exchange Commission, and we hereby
ratify and confirm our signatures as they may be signed by our said attorneys,
or either of them, to any and all such amendments.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
PETER A. MORTON Chairman, Chief
- ----------------------------- Executive Officer, February 22, 1999
Peter A. Morton President and Secretary
BRUCE R. DALL Chief Financial Officer,
- ----------------------------- Treasurer (Principal February 26, 1999
Bruce R. Dall Accounting Officer)
GILBERT B. FRIESEN Director February 24, 1999
- -----------------------------
Gilbert B. Friesen
Director _____________, 1999
- -----------------------------
Stephen A. Marks
46
<PAGE>
HARD ROCK HOTEL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................F-2
Balance Sheets at November 30, 1997 and 1998.........................F-3
Statements of Operations for the years ended November 30,
1996, 1997 and 1998..................................................F-4
Statements of Shareholders' Equity (Deficit) for the years
ended November 30, 1996, 1997 and 1998...............................F-5
Statements of Cash Flows for the years ended November 30,
1996, 1997 and 1998..................................................F-6
Notes to Financial Statements........................................F-7
Schedule II -- Valuation and Qualifying Accounts.....................S-1
</TABLE>
F-1
<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, 1997 and 1998, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended November 30, 1998. 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, 1997 and 1998, and the result of its operations and its cash flows
for each of the three years in the period ended November 30, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Reno, Nevada
January 8, 1999
F-2
<PAGE>
Hard Rock Hotel, Inc.
Balance Sheets
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------------------
1997 1998
---------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,214,081 $ 4,567,535
Accounts receivable, net of allowance for doubtful
accounts of $200,000 in 1997 and 1998 2,966,562 3,274,644
Income tax refund receivable 2,443,041 194,237
Inventories 1,065,873 1,208,126
Prepaid and other current assets 835,071 1,480,469
Deferred income taxes 733,650 764,740
---------------------------------------
Total current assets 12,258,278 11,489,751
Property and equipment, net, at cost 89,768,576 123,884,994
Other assets 4,634,505 7,018,798
Deferred income taxes 2,894,386 2,728,603
---------------------------------------
Total assets $109,555,745 $145,122,146
---------------------------------------
---------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $2,892,768 $2,738,194
Construction related payables - 13,000,218
Accrued expenses 4,855,935 4,473,594
Accrued interest payable 77,167 1,984,543
Current obligations under capital leases 108,325 105,861
Long-term debt due within one year 6,000,000 -
---------------------------------------
Total current liabilities 13,934,195 22,302,410
Deferred income taxes 3,628,036 3,493,343
Obligations under capital leases 204,490 93,452
Long-term debt due after one year 99,700,000 130,500,000
Commitments and contingencies (NOTE 8)
Redeemable common stock, no par value (NOTE 11) 25,000 325,000
Shareholders' deficit:
Common stock, Class A voting, no par value:
Authorized shares - 40,000
Issued and outstanding shares - 12,000 in 1997 and 1998 - -
Common stock, Class B non-voting, no par value:
Authorized shares - 160,000
Issued and outstanding shares - 64,023 in 1997 and 1998 - -
Paid-in capital 7,508,250 7,508,250
Accumulated deficit (15,444,226) (19,100,309)
---------------------------------------
Total shareholders' deficit (7,935,976) (11,592,059)
---------------------------------------
Total liabilities and shareholders' deficit $109,555,745 $145,122,146
---------------------------------------
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Hard Rock Hotel, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------------
1996 1997 1998
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Casino $ 36,560,422 $ 35,394,705 $ 36,070,304
Lodging 12,256,687 12,919,081 12,988,375
Food and beverage 15,003,133 16,704,645 18,972,558
Retail 17,336,352 15,404,467 11,714,519
Other income 1,901,256 2,075,603 2,108,646
------------------------------------------------
83,057,850 82,498,501 81,854,402
Less complementaries (5,768,697) (5,450,065) (6,189,032)
------------------------------------------------
Net revenues 77,289,153 77,048,436 75,665,370
Costs and expenses:
Casino 18,158,298 17,920,669 18,640,241
Lodging 4,111,646 4,148,942 3,952,576
Food and beverage 10,117,756 10,360,347 11,405,193
Retail 7,869,189 7,102,229 5,503,343
Other 949,352 942,920 951,845
Marketing 2,974,547 3,173,822 4,251,989
General and administrative 14,922,228 15,140,052 14,607,166
Depreciation and amortization 5,523,149 5,503,071 5,747,114
Charge for termination of Management
Agreement (NOTE 5) -- 24,715,000 --
------------------------------------------------
Total costs and expenses 64,626,165 89,007,052 65,059,467
------------------------------------------------
Income (loss) from operations 12,662,988 (11,958,616) 10,605,903
Interest and other:
Interest expense, net (5,616,600) (5,585,280) (10,766,209)
Other expenses, net (54,612) (31,763) --
------------------------------------------------
(5,671,212) (5,617,043) (10,766,209)
------------------------------------------------
Income (loss) before extraordinary loss and
provision (benefit) for income taxes 6,991,776 (17,575,659) (160,306)
Provision (benefit) for income taxes 2,525,000 (1,168,000)
------------------------------------------------
Income (loss) before extraordinary loss 4,466,776 (16,407,659) (160,306)
Extraordinary loss - early extinguishment of debt
(NOTE 3) -- (1,081,350) (3,495,777)
------------------------------------------------
Net income (loss) $ 4,466,776 $(17,489,009) $ (3,656,083)
------------------------------------------------
------------------------------------------------
Net income (loss) per common share $ 35.25 $ (143.84) $ (48.09)
------------------------------------------------
Shares used in per share calculation 126,705 121,586 76,023
------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Hard Rock Hotel, Inc.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Class A common Class B common
stock stock
------------------------ ------------------------
Shares Amount Shares Amount
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balances at November 30, 1995 20,000 $ -- 106,705 $ --
Net income -- -- -- --
-----------------------------------------------------
Balances at November 30, 1996 20,000 -- 106,705 --
Net loss -- -- --
Charge to paid-in capital - Buyout
Agreement (NOTE 5) (8,000) -- (42,682) --
-----------------------------------------------------
Balances at November 30, 1997 12,000 -- 64,023 --
-----------------------------------------------------
-----------------------------------------------------
Net loss -- -- -- --
-----------------------------------------------------
BALANCES AT NOVEMBER 30, 1998 12,000 $ -- 64,023 $ --
-----------------------------------------------------
-----------------------------------------------------
<CAPTION>
Retained Total
Paid-in earnings Shareholders'
capital (deficit) equity (deficit)
---------------------------------------------------
<S> <C> <C> <C>
Balances at November 30, 1995 $ 28,717,250 $ (2,421,993) $ 26,295,257
Net income -- 4,466,776 4,466,776
---------------------------------------------------
Balances at November 30, 1996 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) (21,209,000) -- (21,209,000)
---------------------------------------------------
Balances at November 30, 1997 7,508,250 (15,444,226) (7,935,976)
---------------------------------------------------
---------------------------------------------------
Net loss -- (3,656,083) (3,656,083)
---------------------------------------------------
BALANCES AT NOVEMBER 30, 1998 $ 7,508,250 $(19,100,309) $(11,592,059)
---------------------------------------------------
---------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Hard Rock Hotel, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------------
-----------------------------------------------
1996 1997 1998
-------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $4,466,776 $(17,489,009) $(3,656,083)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 5,523,149 5,503,071 5,747,114
Amortization of loan fees and organization costs 447,702 370,762 676,047
Issuance of common stock as compensation - 25,000 300,000
Early extinguishment of debt - 1,081,350 3,495,777
Gain on sale of property and equipment - (35,834) -
Deferred income taxes 889,047 263,041 -
Changes in operating assets and liabilities:
Accounts receivable (1,024,528) (294,151) (308,082)
Income tax refund receivable - (2,443,041) 2,248,804
Inventories 12,767 (37,193) (142,253)
Prepaid and other current assets (9,847) (24,019) (645,398)
Accounts payable (1,384) 934,029 (154,574)
Accrued expenses (830,622) (54,740) (382,341)
Interest payable (113,564) 19,189 1,907,376
Income taxes payable 588,213 (869,401) -
-------------------------------------------------------
Net cash provided by (used in) operating activities 9,947,709 (13,050,946) 9,086,387
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,005,685) (2,556,657) (39,802,207)
Construction related payables - - 13,000,218
Decrease (increase) in other assets 473,168 57,652 (1,099,450)
Proceeds from sale of property and equipment - 346,951 -
-------------------------------------------------------
Net cash used in investing activities (3,532,517) (2,152,054) (27,901,439)
Cash flows from financing activities
Charges to paid-in capital related to buyout agreement - (21,209,000) -
Incurrence of loan fees on new debt - (3,675,972) (5,517,992)
Proceeds from issuance of debt 500,000 105,700,000 131,500,000
Payment of obligations on property to be developed - (6,854,201) -
Principal payments on long-term debt (4,500,000) (60,400,000) (106,700,000)
Payments on capital lease obligations (90,502) (102,030) (113,502)
-------------------------------------------------------
Net cash provided by (used in) financing activities (4,090,502) 13,458,797 19,168,506
Net increase (decrease) in cash and cash equivalents 2,324,690 (1,744,203) 353,454
Cash and cash equivalents at beginning of year 3,633,594 5,958,284 4,214,081
-------------------------------------------------------
Cash and cash equivalents at end of year $5,958,284 $4,214,081 $4,567,535
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
November 30, 1996, 1997 and 1998
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, 1996, 1997 and 1998, the
Company paid interest of approximately $5,358,000, $5,230,000, and $7,753,000
(net of $793,000 capitalized), respectively, and income taxes of approximately
$1,050,000, $2,025,000, and $0, respectively.
During the year ended November 30, 1996, the Company entered into non-cash
investing activities whereby they purchased property for future expansion 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.
F-7
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
PRE-OPENING COSTS AND EXPENSES
Pre-opening costs incurred during 1998 in connection with the expansion of the
Company's facility have been capitalized and will be charged to expense when the
expansion is complete, which is expected in the second fiscal quarter of 1999.
At November 30, 1998, capitalized pre-opening costs aggregated $843,000 and are
included in other assets on the accompanying balance sheets.
INVENTORIES
Inventories are stated at the lower of cost (determined using the first-in,
first-out method), or market.
DEPRECIATION AND AMORTIZATION
Buildings and improvements, equipment, furniture and fixtures, and memorabilia
are recorded at cost and are depreciated using 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 pre-opening) for the
years ended November 30, 1996, 1997, and 1998 amounted to approximately
$758,000, $788,000, and $772,000, 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.
F-8
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CASINO REVENUES AND COMPLEMENTARIES
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 complementaries provided to
customers without charge. The estimated costs of providing such complementaries
have been classified as casino operating expenses through interdepartmental
allocations as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------------
1996 1997 1998
-------------------------------------------------
<S> <C> <C> <C>
Food and beverage $2,593,171 $2,415,203 $1,987,233
Lodging 819,497 838,617 1,120,747
Other 195,930 122,371 134,364
-------------------------------------------------
Total costs allocated to casino operating costs $3,608,598 $3,376,191 $3,242,344
-------------------------------------------------
-------------------------------------------------
</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 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.
F-9
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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.
The following table summarizes the Company's earnings per common share before
and after extraordinary items:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------------------
1996 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before extraordinary item $35.25 $(134.95) $(2.11)
Extraordinary loss - (8.89) (45.98)
--------------------------------------------------------
Net income (loss) per common share $35.25 $(143.84) $(48.09)
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
For the years ending November 30, 1997 and 1998, the 768 shares of the Company's
Class B common stock which will be issued to an employee (Note 11) were not
included in the calculation of earnings per share because the effect of adding
these securities would have been anti-dilutive.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the 1998 presentation.
F-10
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------------------
1997 1998
----------------------------------------
<S> <C> <C>
Retail merchandise $675,005 $829,608
Restaurants and bars 243,193 247,906
Operating supplies 147,675 130,612
----------------------------------------
$1,065,873 $1,208,126
----------------------------------------
----------------------------------------
</TABLE>
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------------------
1997 1998
-------------------- -------------------
<S> <C> <C>
Unamortized loan fees and financing costs on the Notes (Note 6),
net of accumulated amortization of $531,893 in 1998 $ - $4,986,099
Unamortized loan fees and financing costs on the Old Credit
Facility (Note 6), net of accumulated amortization of $36,039 in
1997 3,639,933 -
Organization costs, net of accumulated amortization of $135,315 in
1997 and $196,639 in 1998 156,008 196,579
Prepaid gaming taxes 367,404 370,228
China, glassware, utensils, linens, and other supplies 471,160 395,242
Other long-term assets, including pre-opening costs of
approximately $843,000 in 1998 1,070,650
-------------------- -------------------
$4,634,505 $7,018,798
-------------------- -------------------
-------------------- -------------------
</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.
3. OTHER ASSETS (CONTINUED)
F-11
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
In connection with the execution of the Notes, the Company's Old Credit Facility
(as defined herein) was paid in its entirety in March 1998 (Note 6). In
connection with this early retirement, the Company wrote- off approximately
$3,496,000 in unamortized loan fee costs in 1998, which amounts were recorded as
an extraordinary loss in the accompanying statements of operations for the year
ended November 30, 1998.
In connection with the execution of the Old Credit Facility, the Company paid
off debt under a previous credit facility in its entirety in October 1997 (Note
6). 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,
---------------------------------------
1997 1998
---------------------- -------------------
<S> <C> <C>
Land $21,015,060 $ 21,015,060
Buildings and improvements 65,593,316 73,314,982
Equipment, furniture and fixtures 14,202,857 16,454,737
Memorabilia 2,200,608 2,363,955
Construction in progress 1,256,112 30,921,426
---------------------- -------------------
104,267,953 144,070,160
Less accumulated depreciation and amortization (14,499,377) (20,185,166)
---------------------- -------------------
$89,768,576 $123,884,994
---------------------- -------------------
---------------------- -------------------
</TABLE>
Construction in progress relates primarily to the expansion of the facility at
November 30, 1998.
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
F-12
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
5. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
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 complementaries for each fiscal year. In
addition, Harveys was entitled to an incentive fee of up to two percent of
annual gross revenues, net of complementaries, upon exceeding certain return on
investment targets as defined in the Management Agreement. Total management fees
expenses for these services amounted to approximately $3,075,000, $2,776,000,
and $0 for the years ended November 30, 1996, 1997, and 1998, respectively.
Total incentive fees expenses for these services amounted to approximately
$239,000, $65,000, and $0 for the years ended November 30, 1996, 1997 and 1998,
respectively. These expenses are included in general and administrative expenses
in the accompanying statements of operations.
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 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
complementaries for each fiscal year. Total supervisory fee expenses for these
services for the years ended November 30, 1996, 1997 and 1998 amounted to
approximately $1,537,000, $1,556,000, and $1,510,000, respectively. These
expenses are included in general and administrative expenses in the accompanying
statements of operations. The unpaid amounts at November 30, 1997 and 1998
($140,000 and $116,000, respectively), are included in accrued expenses in the
accompanying balance sheets.
In connection with its management of the resort, Harveys provided all employees
for the Company through one of its subsidiaries, Harveys L.V. Management
Company, Inc. (LVMC). The LVMC employees' compensation, including benefits, were
paid directly by the Company. Harveys also provided
F-13
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
5. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
certain administrative functions to the Company, including corporate information
systems, internal audit, and group medical claims administration, and charged
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 $324,000, $367,000, and $0 for the
years ended November 30, 1996, 1997 and 1998, respectively. The Company had
received advances from Harveys for use in the payment of various costs and
expenses. These advances were repaid on a periodic basis. Amounts owing to
Harveys related to these advances and costs at November 30, 1997 and 1998,
included in accrued expenses on the accompanying balance sheets, aggregated
approximately $470,000 and $63,000, 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 $225,000, $281,000 and
$894,000 for the years ended November 30, 1996, 1997 and 1998, respectively, and
are included in the accompanying statements of operations. Additionally, at
November 30, 1998, the Company has expended approximately $146,000 related to
pre-opening costs to these entities, which amounts are included in other assets
on the accompanying balance sheets.
A former director of the Company 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 approximately
$41,000, $628,000, and $0 for such investment banking services for fiscal years
1996, 1997 and 1998, respectively.
6. 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 Old Credit Facility,
including accrued interest (see below). Concurrent with the execution of the
Notes, 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. At
November 30, 1998, the Company had outstanding borrowings of $120,000,000 under
the Notes and $10,500,000 under the New Credit Facility.
Interest on the Notes is payable on each April 1 and October 1, commencing
October 1, 1998. The Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness,
including all borrowings under the New Credit Facility. The Notes are subject to
redemption at the option of the Company, in whole or in part, at any time on or
after April 1, 2002, at a premium to the face amount ($120 million) which
decreases on each subsequent anniversary date,
F-14
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
plus accrued interest to the date of redemption. The Notes contain covenants
restricting or limiting the ability of the Company to, among other things, pay
dividends, incur additional indebtedness, issue certain preferred stock and
enter into transactions with affiliates.
The New Credit Facility provides the Company with $67 million of senior secured
reducing revolving borrowings. Interest on the New Credit Facility 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 8.625% at November 30, 1998), or the Base Rate, defined as the
higher of the Federal Funds Rate plus .5%, or the reference rate, as defined,
plus an applicable margin (not to exceed 2.25%). The Company chose the LIBOR
Index for all borrowings outstanding at November 30, 1998. These margins are
dependent upon the Company's debt to EBITDA ratio, as defined. Interest accrued
on the Base Rate borrowings is due monthly, up to the maturity date, while
interest on LIBOR borrowings is due quarterly up to the maturity date.
The amount available under the New Credit Facility will begin reducing to: $58.3
million as of the last day of fiscal year 2000; $45.3 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. Additionally, the Company may be required, upon certain circumstances, to
make prepayments on the New Credit Facility each year beginning in April 2000.
The New Credit Facility contains certain covenants 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, issuing dividends on stock, and entering into transactions with
affiliates. Peter Morton has entered into a make-well agreement (as defined)
pursuant to which he is required to contribute certain amounts to the Company in
the event certain financial covenants are not met. The New Credit Facility is
secured by substantially all of the Company's property at the Las Vegas site.
In September 1997, the Company entered into a $120,000,000 credit agreement (the
"Old Credit Facility") with a consortium of banks for the purpose of financing
the Buyout Agreement (Note 5) and retire existing debt (see below). The Old
Credit Facility consisted 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 accrued on all individual borrowings at an interest rate
determined at the option of the Company, at either the LIBOR Index plus an
applicable margin (aggregating 9.188% at November 30, 1997), or the Alternate
Base Rate, defined as the higher of the Federal Funds Rate plus .5%, or the
prime rate, plus an applicable margin (aggregating 11% at November 30, 1997).
These margins were dependent upon the Company's total debt to EBITDA ratio, as
defined.
F-15
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
At November 30, 1997, the Company had outstanding borrowings under the Old
Credit Facility in the amount of $105,700,000. These borrowings were made on the
promissory notes in the amount of $100,000,000 and 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 a previous credit facility, and pay principal and interest
($3,612,000) relating to other outstanding debt of the Company.
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 certain debt to EBITDA ratios and debt service coverage
ratios, as defined. The Old Credit Facility also imposed certain limitations on
capital expenditures, investments, payment of dividends, and incurrence of
additional indebtedness.
In connection with the execution of the Notes, the Old Credit Facility was
canceled and all outstanding principal and interest were paid in their entirety
in March 1998.
7. 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,
-----------------------------------------------------
1996 1997 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current $1,635,953 $(905,000) $ -
Deferred 889,047 (263,000) -
------------------ ------------------ -----------------
$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:
F-16
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------
1996 1997 1998
------------------------------------
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory rate 34.0% (34.0%) (34.0%)
Nondeductible meals and entertainment 2.5 .8 4.2
Valuation allowance - 26.9 29.5
Other, net (.4) - .3
------------------------------------
36.1% (6.3%) -
------------------------------------
------------------------------------
</TABLE>
The significant components of the deferred income tax assets and liabilities
included in the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------------
1997 1998
-------------------- ---------------
<S> <C> <C>
Deferred income tax assets:
Preopening costs, net of amortization $831,000 $462,000
Accrued expenses 631,000 550,000
Net operating loss carryforwards 6,922,000 8,496,000
Alternative minimum tax credit carryforwards 475,000 183,000
-------------------- -------------
8,859,000 9,691,000
Less: valuation allowance (5,011,000) (6,091,000)
-------------------- -------------
Total deferred income tax assets 3,848,000 3,600,000
Deferred income tax liabilities:
Depreciation and amortization 3,469,000 3,493,000
Prepaid expenses 220,000 107,000
Other 159,000 -
-------------------- -------------
Total deferred income tax liabilities 3,848,000 3,600,000
-------------------- -------------
Net deferred income tax asset $ - $ -
-------------------- -------------
-------------------- -------------
</TABLE>
A valuation allowance has been established due to the Company's accumulated
losses as of November 30, 1998. The Company has an operating loss carryforward
of approximately $25 million to reduce future taxable income, which will expire
between 2012 and 2018.
F-17
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
EXPANSION
As part of the expansion of the Company's facility, the Company has signed
contracts aggregating approximately $50 million at November 30, 1998. The total
estimated cost of the expansion project is approximately $87 million, of which
approximately $38.7 million had been expended as of November 30, 1998. Peter
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.
LEGAL PROCEEDINGS
A complaint has been filed in the United States District Court against the
Company and Peter 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 Peter Morton and the Company to assign the name to the
plaintiff. Trial of this matter has concluded, and the Company is awaiting a
verdict. Management of the Company believes that this lawsuit is without merit
and believes that the outcome of this litigation will not have a material
adverse effect on the Company.
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.
LEASES
The Company leases certain equipment under leases classified as either capital
or operating leases.
F-18
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
8. 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, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 120,533
2000 97,955
-------------------
Minimum lease payments 218,488
Less amount representing interest (19,175)
-------------------
Present value of minimum lease payments 199,313
Less amount due within one year (105,861)
-------------------
Amount due after one year $ 93,452
-------------------
-------------------
</TABLE>
OPERATING LEASES
The Company leases equipment under operating leases expiring through 2004.
Future minimum rental payments under these operating leases by fiscal year of
the Company are as follows:
<TABLE>
<S> <C>
1999 $280,000
2000 244,000
2001 58,000
2002 58,000
2003 58,000
Thereafter 5,000
----------------------
$703,000
----------------------
----------------------
</TABLE>
Total rental expense was approximately $325,000, $297,000, and $282,000 during
the years ended November 30, 1996, 1997 and 1998, respectively, and is included
in general and administrative expenses in the accompanying statements of
operations.
F-19
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SELF-INSURANCE
Prior to the Buyout, the Company was 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 carried stop loss insurance for claims exceeding $125,000 per individual.
The Group was 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 reimbursed Harveys for all claims costs incurred. The Company
has subsequently adopted their own plans of self-insurance for workers'
compensation and medical coverage claims, up to an annual stop loss of $300,000
and $75,000, respectively, per claim. The Company maintains a $2.5 million
letter of credit required by the State of Nevada for its self insurance workers'
compensation program. Management has established reserves they consider adequate
to cover estimated future payments on claims incurred by the Company through
November 30, 1998.
During 1998, the Company also adopted their own plan of partial self-insurance
for general liability claims, up to an annual stop loss of $25,000 per claim.
9. 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 Directors of the Company on an annual
basis. During the years ended November 30, 1996, 1997 and 1998, the Company
recorded approximately $336,000, $494,000 and $445,000, 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, 1996, 1997 and 1998, the Company recorded
approximately $191,000, $356,000 and $516,000, respectively, for its portion of
plan contributions, which are included in the accompanying statement of
operations.
F-20
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (NOTE 6)
The carrying amounts of the Company's borrowings under the Old Credit Facility
and the New Credit Facility approximate their fair value at November 30, 1997
and 1998, respectively. The fair value of the Notes, which are publicly traded,
approximated their carrying value at November 30, 1998.
11. ISSUANCE OF COMMON STOCK AS COMPENSATION
In October 1997, the Company 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
service period of five years. During the years ended November 30, 1997 and 1998,
the Company recorded $25,000 and $300,000 in expense related to this agreement,
which has been included in general and administrative expenses on the
accompanying statements of operations.
F-21
<PAGE>
Hard Rock Hotel, Inc., L.P.
Schedule II - Valuation and Qualifying Accounts
Years ended November 30, 1998, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
Additions Deductions
Balance at Charged to Write-offs,
beginning of Costs and net of Balance at
Description Period Expenses Collections End of Period
- ----------------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts: $ 200 $ 117 $ (117) $ 200
Year ended November 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts: $ 350 $ 102 $ (252) $ 200
Year ended November 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts: $ 155 $ 195 $ -- $ 350
</TABLE>
S-1
<PAGE>
THE AMERICAN INSTITUTE OF ARCHITECTS
[LOGO]
- ------------------------------------------------------------------------------
AIA DOCUMENT A101
STANDARD FORM OF AGREEMENT BETWEEN
OWNER AND CONTRACTOR
WHERE THE BASIS OF PAYMENT IS A
STIPULATED SUM
1987 EDITION
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH
AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION.
THE 1987 EDITION OF AIA DOCUMENT A201, GENERAL CONDITIONS OF THE CONTRACT FOR
CONSTRUCTION, IS ADOPTED IN THIS DOCUMENT BY REFERENCE. DO NOT USE WITH OTHER
GENERAL CONDITIONS UNLESS THIS DOCUMENT IS MODIFIED.
This document has been approved and endorsed by The Associated General
Contractors of America.
- -------------------------------------------------------------------------------
AGREEMENT
made as of the Twenty-Fourth day of June in the year of Nineteen Hundred and
Ninety-Eight.
BETWEEN the Owner: Hard Rock Hotel, Inc.
(NAME AND ADDRESS) 4455 Paradise Road
Las Vegas, Nevada 89109
and the Contractor: HOWA Construction, Inc.
(NAME AND ADDRESS) 663 West 100 South
Salt Lake City, Utah 84104
Hard Rock Hotel, Inc.
The Project is: Harmon Street Addition and Remodel
(NAME AND LOCATION) Retail Addition and Remodel
4455 Paradise Road
Las Vegas, Nevada 89109
The Architect is: Klai Juba Architects
(NAME AND ADDRESS) 4444 West Russell Road Suite J
Las Vegas, Nevada 89118
The Owner and Contractor agree as set forth below.
- -------------------------------------------------------------------------------
Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977,
-C-1987 by The American Institute of Architects, 1735 New York Avenue,
N.W., Washington, D.C. 20006. Reproduction of the material herein or
substantial quotation of its provisions without written permission of the
AIA violates the copyright laws of the United States and will be subject to
legal prosecution.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 * OWNER-CONTRACTOR AGREEMENT * TWELFTH EDITION *
AIA-REGISTERED TRADEMARK- * -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 1
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
ARTICLE 1
THE CONTRACT DOCUMENTS
The Contract Documents consist of this Agreement, Conditions of the Contract
(General, Supplementary and other Conditions), Drawings, Specifications, addenda
issued prior to execution of this Agreement, other documents listed in this
Agreement and Modifications issued after execution of this Agreement; these form
the Contract, and are as fully a part of the Contract as if attached to this
Agreement or repeated herein. The Contract represents the entire and integrated
agreement between the two parties hereto and supersedes prior negotiations,
representations or agreements, either written or oral. An enumeration of the
Contract Documents, other than Modifications, appears in Article 9.
ARTICLE 2
THE WORK OF THIS CONTRACT
The Contractor shall execute the entire Work described in the Contract
Documents, except to the extent specifically indicated in the Contract
Documents to be the responsibility of others.
ARTICLE 3
DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
3.1 The date of commencement is the date from which the Contract Time of
Paragraph 3.2 is measured, and shall be the date of this Agreement, as first
written above, unless a different date is stated below or provision is made for
the date to be fixed in a notice to proceed issued by the Owner.
(INSERT THE DATE OF COMMENCEMENT, IF IT DIFFERS FROM THE DATE OF THE AGREEMENT
OR, IF APPLICABLE, STATE THAT THE DATE WILL BE FIXED IN A NOTICE TO PROCEED.)
June 8, 1998
3.2 The Contractor shall achieve Substantial Completion of the entire Work not
later than
(INSERT THE CALENDAR DATE OR NUMBER OF CALENDAR DAYS AFTER THE DATE OF
COMMENCEMENT. ALSO INSERT ANY REQUIREMENTS FOR EARLIER SUBSTANTIAL COMPLETION
OF CERTAIN PORTIONS OF THE WORK, IF NOT STATED ELSEWHERE IN THE CONTRACT
DOCUMENTS.)
150 Calendar days from June 8, 1998 or November 8, 1998.
, subject to adjustments of this Contract Time as provided in the Contract
Documents.
(INSERT PROVISIONS, IF ANY, FOR LIQUIDATED DAMAGES RELATING TO FAILURE TO
COMPLETE ON TIME.)
Liquidated damages shall be per Article 7 of the special terms and conditions of
the contract, $10,000.00 per day for each calendar day.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 * OWNER-CONTRACTOR AGREEMENT * TWELFTH EDITION *
AIA-REGISTERED TRADEMARK- * -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 2
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
ARTICLE 4
CONTRACT SUM
4.1 The Owner shall pay the Contractor in current funds for the Contractor's
performance of the Contract the Contract Sum of
Nine Million Five Hundred Thousand and No/100 -------------------------- Dollars
($9,500,000.00), subject to additions and deductions as provided in the Contract
Documents.
4.2 The Contract Sum is based upon the following alternates, if any, which are
described in the Contract Documents and are hereby accepted by the Owner:
(STATE THE NUMBERS OR OTHER IDENTIFICATION OF ACCEPTED ALTERNATES. IF DECISIONS
OR OTHER ALTERNATES ARE TO BE MADE BY THE OWNER SUBSEQUENT TO THE EXECUTION OF
THIS AGREEMENT, ATTACH A SCHEDULE OF SUCH OTHER ALTERNATES SHOWING THE AMOUNT
FOR EACH AND THE DATE UNTIL WHICH THAT AMOUNT IS VALID.)
The contract value includes the deletion of the Owner allowance, pool service
bar area, including all equipment, and the deletion of the horizontal grease
duct at the EDR servery as noted by General Note #2.
4.3 Unit prices, if any, are as follows:
Removal of caliche in trenches - $150.00 per C.Y. Notice shall be given to the
Owner within 2 calendar days if any caliche is encountered with estimates of its
volume and impact.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 * OWNER-CONTRACTOR AGREEMENT * TWELFTH EDITION *
AIA-REGISTERED TRADEMARK- * -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 3
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
ARTICLE 5
PROGRESS PAYMENTS
5.1 Based upon Applications for Payment submitted to the Architect by the
Contractor and Certificates for Payment issued by the Architect, the Owner shall
make progress payments on account of the Contract Sum to the Contractor as
provided below and elsewhere in the Contract Documents.
5.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:
The period covered by each Application for Payment shall be one calendar month
ending the 25th day of the month.
5.3 Provided an Application for Payment is received by the Owner not later than
the first (1st) day of a month, the Owner shall make payment to the Contractor
not later than the thirtieth (30th) day of the same month. If an Application
for Payment is received by the Owner after the application date fixed above,
payment shall be made by the Owner not later than thirty (30) days after the
Owner receives the Application for Payment.
5.4 Each Application for Payment shall be based upon the schedule of values
submitted by the Contractor in accordance with the Contract Documents. The
schedule of values shall allocate the entire Contract Sum among the various
portions of the Work and be prepared in such form and supported by such data
to substantiate its accuracy as the Architect may require. This schedule,
unless objected to by the Owner, shall be used as a basis for reviewing the
Contractor's Applications for Payment.
5.5 Applications for Payment shall indicate the percentage of completion of
each portion of the Work as of the end of the period covered by the Application
for Payment.
5.6 Subject to the provisions of the Contract Documents, the amount of each
progress payment shall be computed as follows:
5.6.1. Take that portion of the Contract Sum properly allocable to completed
Work as determined by multiplying the percentage completion of each portion of
the Work by the share of the total Contract Sum allocated to that portion of the
Work in the schedule of values, less retainage of ten (10%). Pending final
determination of cost to the Owner of changes in the Work, amounts not in the
dispute may be included as provided in Subparagraph 7.3.7 of the General
Conditions only if the Contract Sum has been adjusted by Change Order;
5.6.2 Add that portion of the Contract Sum properly allocable to materials
and equipment delivered and suitably stored at the site for subsequent
incorporation in the completed construction (or, if approved in advance by the
Owner, suitably stored off the site at a location agreed upon in writing), less
retainage of ten percent (10%);
5.6.3 Subtract the aggregate of previous payments made by the Owner; and
5.6.4 Subtract amounts, if any, for which the Owner has withheld or
nullified a Certificate for Payment as provided in Paragraph 9.5 of the General
Conditions.
5.7.1 Add, upon Substantial Completion of the Work, a sum sufficient to
increase the total payments to one hundred percent (100%) of the Contract Sum,
less such amounts as the Owner shall determine for incomplete Work and unsettled
claims; and
5.8 Reduction or limitation of retainage, if any, shall be as follows:
(IF IT IS INTENDED, PRIOR TO SUBSTANTIAL COMPLETION OF THE ENTIRE WORK, TO
REDUCE OR LIMIT THE RETAINAGE RESULTING FROM THE PERCENTAGES INSERTED IN
SUBPARAGRAPHS 5.6.1 AND 5.6.2 ABOVE, AND THIS IS NOT EXPLAINED ELSEWHERE IN THE
CONTRACT DOCUMENTS, INSERT HERE PROVISIONS FOR SUCH REDUCTION OR LIMITATION.)
5.7.2. If final completion is extended beyond the date contemplated in this
contract for reasons defined in an executed Change Order or comparable document,
the Contractor shall be entitled to additional amounts payable in accordance
with Subparagraph 9.10.3 of the General Conditions. Such additional amounts
shall be included as a part of the applicable Change Order or comparable
document.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER-CONTRACTOR AGREEMENT - TWELFTH EDITION -
AIA-REGISTERED TRADEMARK- - -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 4
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
ARTICLE 6
FINAL PAYMENT
Final payment, constituting the entire unpaid balance of the Contract Sum,
shall be made by the Owner to the Contractor when (1) the Contract has been
fully performed by the Contractor except for the Contractor's responsibility
to correct nonconforming Work as provided in Subparagraph 12.2.2 of the
General Conditions and to satisfy other requirements, if any, which
necessarily survive final payment; and (2) a final Certificate for Payment
has been issued by the Architect; such final payment shall be made by the
Owner not more than 30 days after the issuance of the Architect's final
Certificate for Payment, or as follows:
ARTICLE 7
MISCELLANEOUS PROVISIONS
7.1 Where reference is made in this Agreement to a provision of the General
Conditions or another Contract Document, the reference refers to that provision
as amended or supplemented by other provisions of the Contract Documents.
7.2 Payments due and unpaid under the Contract shall bear interest from the
date payment is due at the rate stated below, or in the absence thereof, at the
legal rate prevailing from time to time at the place where the Project is
located.
(INSERT RATE OF INTEREST AGREED UPON, IF ANY.)
1 - 1/2% per month/18%.
(USURY LAWS AND REQUIREMENTS UNDER THE FEDERAL TRUTH IN LENDING ACT, SIMILAR
STATE AND LOCAL CONSUMER CREDIT LAWS AND OTHER REGULATIONS AT THE OWNER'S AND
CONTRACTOR'S PRINCIPAL PLACES OF BUSINESS, THE LOCATION OF THE PROJECT AND
ELSEWHERE MAY AFFECT THE VALIDITY OF THIS PROVISION. LEGAL ADVICE SHOULD BE
OBTAINED WITH RESPECT TO DELETIONS OR MODIFICATIONS, AND ALSO REGARDING
REQUIREMENTS SUCH AS WRITTEN DISCLOSURES OR WAIVERS.)
7.3 Other provisions:
On all change orders, field directives, the markup will be as follows:
5% Overhead
5% Profit
For deleted scope of work there will be a 5% fee credit.
ARTICLE 8
TERMINATION OR SUSPENSION
8.1 The Contract may be terminated by the Owner or the Contractor as provided
in Article 14 of the General Conditions.
8.2 The Work may be suspended by the Owner as provided in Article 14 of the
General Conditions.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER-CONTRACTOR AGREEMENT - TWELFTH EDITION -
AIA-REGISTERED TRADEMARK- - -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 5
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
ARTICLE 9
ENUMERATION OF CONTRACT DOCUMENTS
9.1 The Contract Documents, except for Modifications issued after execution of
this Agreement, are enumerated as follows:
9.1.1 The Agreement is this executed Standard Form of Agreement Between
Owner and Contractor, AIA Document A101, 1987 Edition.
9.1.2 The General Conditions are the General Conditions of the Contract for
Construction, AIA Document A201, 1987 Edition.
9.1.3 The Supplementary and other Conditions of the Contract are those
contained in the Project Manual dated , and are as
follows:
DOCUMENT TITLE PAGES
See attached drawing register.
9.1.4 The Specifications are those contained in the Project Manual dated as
in Subparagraph 9.1.3, and are as follows:
(EITHER LIST THE SPECIFICATIONS HERE OR REFER TO AN EXHIBIT ATTACHED TO THIS
AGREEMENT.)
SECTION TITLE PAGES
Retail Addition and Remodel dated April 13, 1998
Bidding Requirements
Conditions of the Contract
Division 1 through 3 inclusive
Division 5 through 11 inclusive
Division 14 through 16 inclusive
Harmon Street Addition and Remodel dated April 13, 1998
Bidding Requirements
Conditions of the Contract
Division 1 through 3 inclusive
Division 5 through 11 inclusive
Division 14 through 16 inclusive
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 * OWNER-CONTRACTOR AGREEMENT * TWELFTH EDITION *
AIA-REGISTERED TRADEMARK- * -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 6
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
9.1.5 The Drawings are as follows, and are dated
unless a different date is shown below:
(EITHER LIST THE DRAWINGS HERE OR REFER TO AN EXHIBIT ATTACHED TO THIS
AGREEMENT.)
NUMBER TITLE DATE
See attached drawing register.
9.1.6 The addenda, if any, are as follows:
NUMBER DATE PAGES
See attached drawing register.
Portions of addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated in this
Article 9.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 * OWNER-CONTRACTOR AGREEMENT * TWELFTH EDITION *
AIA-REGISTERED TRADEMARK- * -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 7
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
9.1.7 Other documents, if any, forming part of the Contract Documents are as
follows:
(LIST HERE ANY ADDITIONAL DOCUMENTS WHICH ARE INTENDED TO FORM PART OF THE
CONTRACT DOCUMENTS. THE GENERAL CONDITIONS PROVIDE THAT BIDDING REQUIREMENTS
SUCH AS ADVERTISEMENT OR INVITATION TO BID, INSTRUCTIONS TO BIDDERS, SAMPLE
FORMS AND THE CONTRACTOR'S BID ARE NOT PART OF THE CONTRACT DOCUMENTS UNLESS
ENUMERATED IN THIS AGREEMENT. THEY SHOULD BE LISTED HERE ONLY IF INTENDED TO BE
PART OF THE CONTRACT DOCUMENTS.)
None
This Agreement is entered into as of the day and year first written above and is
executed in at least three original copies of which one is to be delivered to
the Contractor, one to the Architect for use in the administration of the
Contract, and the remainder to the Owner.
/s/ [Illegible]
OWNER HARD ROCK HOTEL, INC. CONTRACTOR HOWA CONSTRUCTION, INC.
/s/ Adam Titus /s/ Richard J. Howa
- ------------------------------ ------------------------------------
(SIGNATURE) (SIGNATURE)
Adam Titus, V.P. CONST Richard J. Howa, President
- ------------------------------ ------------------------------------
(PRINTED NAME AND TITLE) (PRINTED NAME AND TITLE)
AIA CAUTION: YOU SHOULD SIGN AN ORIGINAL AIA DOCUMENT WHICH HAS THIS CAUTION
PRINTED IN RED. AN ORIGINAL ASSURES THAT CHANGES WILL NOT BE OBSCURED AS
MAY OCCUR WHEN DOCUMENTS ARE REPRODUCED.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 * OWNER-CONTRACTOR AGREEMENT * TWELFTH EDITION *
AIA-REGISTERED TRADEMARK- * -C-1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735
NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 8
WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO
LEGAL PROSECUTION.
<PAGE>
1997 EDITION
AIA DOCUMENT A101-1997
Standard Form of Agreement Between Owner and Contractor where the basis of
payment is a STIPULATED SUM
AGREEMENT made as of the 22nd day of September in the year
(IN WORDS, INDICATE DAY, MONTH AND YEAR)
BETWEEN the Owner: Hard Rock Hotel, Inc
(NAME, ADDRESS AND OTHER INFORMATION) 4455 Paradise Road
Las Vegas, Nevada 89109
and the Contractor: M.J. Dean Construction, Inc.
(NAME, ADDRESS AND OTHER INFORMATION) 5541 South Cameron
Las Vegas, Nevada 89118
The Project is: Hard Rock Hotel Tower/Pool Expansion
(NAME AND LOCATION) 4455 Paradise Road
Las Vegas, Nevada 89109
The Architect is: Klai::Juba Architects
(NAME, ADDRESS AND OTHER INFORMATION) 4444 West Russell Road
Suite J
Las Vegas, Nevada 89118
This document has important legal consequences. Consultation with an attorney is
encouraged with respect to its completion or modification.
AIA Document A201-1997, General Conditions of the Contract for Construction, is
adopted in this document by reference. Do not use with other general conditions
unless this document is modified.
This document has been approved and endorsed by The Associated General
Contractors of America.
The Owner and Contractor agree as follows.
[STAMP]
- --------------------------------------------------------------------------------
1
<PAGE>
ARTICLE 1 THE CONTRACT DOCUMENTS
The Contract Documents consist of this Agreement, Conditions of the
Contract (General, Supplementary and other Conditions), Drawings,
Specifications, Addenda issued prior to execution of this Agreement, other
documents listed in this Agreement and Modifications issued after execution
of this Agreement; these form the Contract, and are as fully a part of the
Contract as if attached to this Agreement or repeated herein. The Contract
represents the entire and integrated agreement between the parties hereto
and supersedes prior negotiations, representations or agreements, either
written or oral. An enumeration of the Contract Documents, other than
Modifications, appears in Article 8.
ARTICLE 2 THE WORK OF THIS CONTRACT
The Contractor shall fully execute the Work described in the Contract
Documents, except to the extent specifically indicated in the Contract
Documents to be the responsibility of others.
ARTICLE 3 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
3.1 The date of commencement of the Work shall be the date of this
Agreement unless a different date is stated below or provision is made for
the date to be fixed in a notice to proceed issued by the Owner.
(INSERT THE DATE OF COMMENCEMENT IF IT DIFFERS FROM THE DATE OF THIS
AGREEMENT OR, IF APPLICABLE, STATE THAT THE DATE WILL BE FIXED IN A NOTICE
TO PROCEED.)
If, prior to the commencement of the Work, the Owner requires time to file
mortgages, mechanic's liens and other security interests, the Owner's time
requirement shall be as follows:
3.2 The Contract Time shall be measured from the date of commencement.
September 1, 1998
3.3 The Contractor shall achieve Substantial Completion of the entire Work
not later than 209 days from the date of commencement, or as follows:
(INSERT NUMBER OF CALENDAR DAYS. ALTERNATIVELY, A CALENDAR DATE MAY BE USED
WHEN COORDINATED WITH THE DATE OF COMMENCEMENT. UNLESS STATED ELSEWHERE IN
THE CONTRACT DOCUMENTS, INSERT ANY REQUIREMENTS FOR EARLIER SUBSTANTIAL
COMPLETION OF CERTAIN PORTIONS OF THE WORK.)
, subject to adjustments of this Contract Time as provided in the Contract
Documents.(INSERT PROVISIONS, IF ANY, FOR LIQUIDATED DAMAGES RELATING TO
FAILURE TO COMPLETE ON TIME OR FOR BONUS PAYMENTS FOR EARLY COMPLETION OF
THE WORK.) Liquidated damages shall be set at $25,000.00/day per
Section 7: Instructions to Bidders, SpecialTerms and Conditions. The
contractor shall not be assessed with liquidated damages nor the cost for
engineering inspection during any delay in the completion of the work
caused by acts of God, the public enemy, fire, floods, epidemics,
quarantine restrictions, strikes, freight embargoes, or due to such
causes, provided that the Contractor shall withinfive (5) days from the
beginning of such delay notify the Owner in writing of the causes of delay.
[STAMP]
- --------------------------------------------------------------------------------
2
<PAGE>
ARTICLE 4 CONTRACT SUM
4.1 The Owner shall pay the Contractor the Contract Sum in current funds
for the Contractor's performance of the Contract. The Contract Sum shall be
Thirty-Nine Million Nine Hundred Fifty-Five Thousand Six Hundred Two
Dollars ($39,955,602.00) subject to additions and deductions as provided in
the Contract Documents.
4.2 The Contract Sum is based upon the following alternates, if any, which
are described in the Contract Documents and are hereby accepted by the
Owner:
(STATE THE NUMBERS OR OTHER IDENTIFICATION OF ACCEPTED ALTERNATES. IF
DECISIONS ON OTHER ALTERNATES ARE TO BE MADE BY THE OWNER SUBSEQUENT TO THE
EXECUTION OF THIS AGREEMENT, ATTACH A SCHEDULE OF SUCH OTHER ALTERNATES
SHOWING THE AMOUNT FOR EACH AND THE DATE WHEN THAT AMOUNT EXPIRES.)
See attached Exhibit #1 Dated 9/9/98
4.3 Unit prices, if any, are as follows:
ARTICLE 5 PAYMENTS
5.1 PROGRESS PAYMENTS
5.1.1 Based upon Applications for Payment submitted to the Owner by the
Contractor and Certificates for Payment issued by the Owner shall make
progress payments on account of the Contract Sum to the Contractor as
provided below and elsewhere in the Contract Documents.
5.1.2 The period covered by each Application for Payment shall be one
calendar month ending on the last day of the month, or as follows: The
period covered by each Application for Payment shall be one (1) calendar
month ending the 25th day of the month
5.1.3 Provided that an Application for Payment is received by the
Architect not later than the 25th day of a month, the Owner shall make
payment to the Contractor not later than the 30th day of the following
month. If an Application for Payment is received by the Architect after the
application date fixed above, payment shall be made by the Owner not later
than 30 days after the owner receives the Application for Payment.
5.1.4 Each Application for Payment shall be based on the most recent
schedule of values submitted by the Contractor in accordance with the
Contract Documents. The schedule of values shall allocate the entire
Contract Sum among the various portions of the Work. The schedule of values
shall be prepared in such form and supported by such data to substantiate
its accuracy as the Architect may require. This schedule, unless objected
to by the owner, shall be used as a basis for reviewing the Contractor's
Applications for Payment.
[STAMP]
- --------------------------------------------------------------------------------
3
<PAGE>
5.1.5 Applications for Payment shall indicate the percentage of
completion of each portion of the Work as of the end of the period covered
by the Application for Payment.
5.1.6 Subject to other provisions of the Contract Documents, the amount
of each progress payment shall be computed as follows:
.1 Take that portion of the Contract Sum properly allocable to
completed Work as determined by multiplying the percentage completion
of each portion of the Work by the share of the Contract Sum allocated
to that portion of the Work in the schedule of values, less retainage
of 10% percent (10%). Pending final determination of cost to the Owner
of changes in the Work, amounts not in dispute shall be included as
provided in Subparagraph 7.3.8 of AIA Document A201-1997;
.2 Add that portion of the Contract Sum properly allocable to
materials and equipment delivered and suitably stored at the site for
subsequent incorporation in the completed construction (or, if
approved in advance by the Owner, suitably stored off the site at a
location agreed upon in writing), less retainage of Ten percent (10%);
.3 Subtract the aggregate of previous payments made by the Owner;
and
.4 Subtract amounts, if any, for which the Owner has withheld or
nullified a Certificate for Payment as provided in Paragraph 9.5 of
AIA Document A201-1997.
5.1.7 The progress payment amount determined in accordance with
Subparagraph 5.1.6 shall be further modified under the following
circumstances:
.1 Add, upon Substantial Completion of the Work, a sum sufficient to
increase the total payments to the full amount of the Contract Sum,
less such amounts as the Architect shall determine for incomplete
Work, retainage applicable to such work and unsettled claims; and
(SUBPARAGRAPH 9.8.5 OF AIA DOCUMENT A201-1997 REQUIRES RELEASE OF
APPLICABLE RETAINAGE UPON SUBSTANTIAL COMPLETION OF WORK WITH CONSENT
OF SURETY, IF ANY.)
.2 Add, if final completion of the Work is thereafter materially
delayed through no fault of the Contractor, any additional amounts
payable in accordance with Subparagraph 9.10.3 of AIA Document
A201-1997.
5.1.8 Reduction or limitation of retainage, if any, shall be as
follows:
(IF IT IS INTENDED, PRIOR TO SUBSTANTIAL COMPLETION OF THE ENTIRE WORK, TO
REDUCE OR LIMIT THE RETAINAGE RESULTING FROM THE PERCENTAGES INSERTED IN
CLAUSES 5.1.6.1 AND 5.1.6.2 ABOVE, AND THIS IS NOT EXPLAINED ELSEWHERE IN
THE CONTRACT DOCUMENTS, INSERT HERE PROVISIONS FOR SUCH REDUCTION OR
LIMITATION.)
5.1.9 Except with the Owner's prior approval, the Contractor shall not
make advance payments to suppliers for materials or equipment which have
not been delivered and stored at the site.
5.2 FINAL PAYMENT
5.2.1 Final payment, constituting the entire unpaid balance of the
Contract Sum, shall be made by the Owner to the Contractor when:
.1 the Contractor has fully performed the Contract except for the
Contractor's responsibility to correct Work as provided in
Subparagraph 12.2.2 of AIA Document A201-1997, and to satisfy
other requirements, if any, which extend beyond final payment;
and
.2 a final Certificate for Payment has been issued by the Contractor
[STAMP]
- --------------------------------------------------------------------------------
4
<PAGE>
5.2.2 The Owner's final payment to the Contractor shall be made no
later than 60 days after the issuance of the Architect's final Certificate
for Payment, or as follows: Temporary Certificate of Occupancy from Clark
County is issued and the owner is able to occupy and use the facility for
its designed use.
ARTICLE 6 TERMINATION OR SUSPENSION
6.1 The Contract may be terminated by the Owner or the Contractor as
provided in Article 14 of AIA Document A201-1997.
6.2 The Work may be suspended by the Owner as provided in Article 14
of AIA Document A201-1997.
ARTICLE 7 MISCELLANEOUS PROVISIONS
7.1 Where reference is made in this Agreement to a provision of AIA
Document A201-1997 or another Contract Document, the reference refers to
that provision as amended or supplemented by other provisions of the
Contract Documents.
7.2 Payments due and unpaid under the Contract shall bear interest
from the date payment is due at the rate stated below, or in the absence
thereof, at the legal rate prevailing from time to time at the place where
the Project is located.
(INSERT RATE OF INTEREST AGREED UPON, IF ANY.)
(USURY LAWS AND REQUIREMENTS UNDER THE FEDERAL TRUTH IN LENDING ACT,
SIMILAR STATE AND LOCAL CONSUMER CREDIT LAWS AND OTHER REGULATIONS AT THE
OWNER'S AND CONTRACTOR'S PRINCIPAL PLACES OF BUSINESS, THE LOCATION OF THE
PROJECT AND ELSEWHERE MAY AFFECT THE VALIDITY OF THIS PROVISION. LEGAL
ADVICE SHOULD BE OBTAINED WITH RESPECT TO DELETIONS OR MODIFICATIONS, AND
ALSO REGARDING REQUIREMENTS SUCH AS WRITTEN DISCLOSURES OR WAIVERS.)
7.3 The Owner's representative is: Adam Titus
(NAME, ADDRESS AND OTHER INFORMATION) Hard Rock Hotel, Inc.
4455 Paradise Road
Las Vegas, Nevada 89109
7.4 The Contractor's Representative is: William Moore
(NAME, ADDRESS AND OTHER INFORMATION) M.J. Dean Construction, Inc.
5541 South Cameron
Las Vegas, Nevada 89118
7.5 Neither the Owner's nor the Contractor's representative shall be
changed without ten days' written notice to the other party.
7.6 Other provisions:
[STAMP]
- --------------------------------------------------------------------------------
5
<PAGE>
ARTICLE 8 ENUMERATION OF CONTRACT DOCUMENTS
8.1 The Contract Documents, except for Modifications issued after
execution of this Agreement, are enumerated as follows:
8.1.1 The Agreement is this executed 1997 edition of the Standard Form
of Agreement Between Owner and Contractor, AIA Document A101-1997.
8.1.2 The General Conditions are the 1997 edition of the General
Conditions of the Contract for Construction, AIA Document A201-1997.
8.1.3 The Supplementary and other Conditions of the Contract are those
contained in the Project Manual dated ________________, and are as follows:
Document Title Pages
See Attached Exhibit #2 Dated 9/9/98
8.1.4 The Specifications are those contained in the Project Manual
dated as in Subparagraph 8.1.3, and are as follows:
(EITHER LIST THE SPECIFICATIONS HERE OR REFER TO AN EXHIBIT ATTACHED TO
THIS AGREEMENT.)
Section Title Pages
See Attached Exhibit #2 Dated 9/9/98
8.1.5 The Drawings are as follows, and are dated _______________ unless
a different date is shown below:
(EITHER LIST THE DRAWINGS HERE OR REFER TO AN EXHIBIT ATTACHED TO THIS
AGREEMENT.)
Number Title Date
See Attached Exhibit #2 Dated 9/9/98
[STAMP]
- --------------------------------------------------------------------------------
6
<PAGE>
8.1.6 The Addenda, if any, are as follows:
Number Date Pages
See Attached Exhibit #2 dated 9/9/98
Portions of Addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated in
this Article 8.
8.1.7 Other documents, if any, forming part of the Contract Documents
are as follows:
(LIST HERE ANY ADDITIONAL DOCUMENTS THAT ARE INTENDED TO FORM PART OF THE
CONTRACT DOCUMENTS. AIA DOCUMENT A201-1997 PROVIDES THAT BIDDING
REQUIREMENTS SUCH AS ADVERTISEMENT OR INVITATION TO BID, INSTRUCTIONS TO
BIDDERS, SAMPLE FORMS AND THE CONTRACTOR'S BID ARE NOT PART OF THE CONTRACT
DOCUMENTS UNLESS ENUMERATED IN THIS AGREEMENT. THEY SHOULD BE LISTED HERE
ONLY IF INTENDED TO BE PART OF THE CONTRACT DOCUMENTS.)
None
This Agreement is entered into as of the day and year first written above and is
executed in at least three original copies, of which one is to be delivered to
the Contractor, one to the Architect for use in the administration of the
Contract, and the remainder to the Owner.
/s/ Adam Titus /s/ Michael J. Dean
- ----------------------------------- ------------------------------------
OWNER (Signature) CONTRACTOR (Signature)
15 FEB 99 Michael J. Dean, Pres.
- ----------------------------------- ------------------------------------
(Printed name and Title) (Printed name and Title)
V.P Construction
CAUTION: YOU SHOULD SIGN AN ORIGINAL AIA DOCUMENT OR A LICENSED REPRODUCTION.
ORIGINALS CONTAIN THE AIA LOGO PRINTED IN RED; LICENSED REPRODUCTIONS ARE THOSE
PRODUCED IN ACCORDANCE WITH THE INSTRUCTIONS TO THIS DOCUMENT.
[STAMP]
- --------------------------------------------------------------------------------
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement"), is made and entered into this 24th day
of October, 1997, by and between Hard Rock Hotel, Inc., a Nevada corporation
("Hard Rock"), and Adam Titus ("Employee").
WITNESSETH:
WHEREAS, Hard Rock desires to secure the benefits of Employee's background,
knowledge, experience, ability, expertise and industry to promote and maintain
Hard Rock's stability, growth, viability and profitability; and
WHEREAS, Hard Rock desires to engage the services of Employee who is
desirous of being employed by Hard Rock under the terms and conditions as herein
set out; and
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements herein contained, together with other good and valuable consideration
the receipt of which is hereby acknowledged, the parties hereto do hereby agree
as follows:
1. DEFINITIONS
1.1. "Employee" shall at all times mean Adam Titus.
1.2. "Hard Rock" shall at all times mean Hard Rock Hotel, Inc., a Nevada
corporation, and its Successor in Interest together with its subsidiaries.
1.3. "Successor in Interest" shall mean any entity which is the successor
or assign of Hard Rock, at law or at equity, and shall include without
limitation, any entity into which Hard Rock is merged or consolidated, and any
entity to which all or substantially all of the assets or businesses of Hard
Rock is transferred.
2. NATURE OF EMPLOYMENT AND DUTIES OF EMPLOYEE
2.1. Effective November 10, 1997 (the "Effective Date"), Employee shall be
employed by Hard Rock in the capacity of Vice President - Construction or such
other position as determined by the Chief Executive Officer of Hard Rock with
the understanding that Employee's title shall be befitting a senior executive
and shall be responsible for the overall supervision, direction and control of
Hard Rock's expansion and construction activities. He shall do and perform all
services, acts, or things necessary or advisable to assist in the management and
conduct of the business of Hard Rock, subject always to the policies as set
forth by the Board of Directors of Hard Rock (the "Board").
2.2. Employee has reviewed and concurs with his responsibilities and duties
as set forth in Section 2.1 above.
1
<PAGE>
2.3. Employee shall devote his entire productive time, ability and
attention to the business of Hard Rock during the term of this Agreement.
Employee shall not, directly or indirectly, render any service of a business,
commercial or professional nature, to any other person or organization, whether
for compensation or otherwise, without the prior written consent of the
President/CEO of Hard Rock except that Employee shall not be precluded from
involvement in charitable or civic activities or his personal financial
investments provided the same do not interfere with his time or attention to the
business of Hard Rock.
2.4. Employee agrees that to the best of his ability and experience he will
at all times conscientiously perform all of the duties and obligations expressly
required of him.
2.5. Employee shall have an appropriately furnished office in a location
designated by Hard Rock in Las Vegas, Nevada, where he will be based. Hard Rock
may require, and Employee expressly acknowledges such potential requirement,
Employee to travel frequently to varied unspecified locations throughout the
United States and the world as may be needed to carry out the tasks assigned to
him pursuant to this Agreement. Should any of this travel be for extended
periods of time, Hard Rock shall compensate Employee for the costs of temporary
relocation to and from these areas and will provide Employee and his family with
appropriate accommodations as well as a suitable vehicle including the
maintenance costs thereof.
3. TERM OF EMPLOYMENT
Hard Rock shall employ Employee, and Employee hereby agrees to be employed
by Hard Rock from and after the Effective Date for a period of three (3) years;
PROVIDED, HOWEVER, that this Agreement may be terminated earlier as hereinafter
provided.
4. TERMINATION OF EMPLOYMENT WITHOUT CAUSE
4.1. Employee may be terminated at any time by the Board on ninety (90)
days' prior written notice to Employee specifying grounds for termination and,
if they are not those as provided in Section 5.1 herein, then Employee shall
continue to be paid all compensation and shall receive all benefits to which he
is entitled to hereunder through the balance of the term hereof as provided for
in Article 3 above.
4.2. Employee may, at Employee's sole option and right, terminate this
Agreement at any time after the completion of the initial expansion phase of the
Hard Rock Hotel located at 4455 Paradise Road, Las Vegas, Nevada, by giving Hard
Rock ninety (90) days' prior written notice and Hard Rock shall be under no
obligation to Employee except to pay him compensation for such services as may
have been performed up to the effective date of such termination. For the
purposes of this Section 4.2, "completion of the initial phase" shall mean the
date upon which a Certificate of Occupancy is issued by Clark County, Nevada.
2
<PAGE>
4.3. If during the term hereof Employee shall die or become disabled, he
shall be entitled to death and/or disability benefits that may be due Employee
under any other benefit plans in effect from time to time.
5. TERMINATION OF EMPLOYMENT FOR CAUSE
5.1. Hard Rock may at any time, at its election, exercise by written notice
to Employee stating with specificity the reason for the termination,
terminate this Agreement and the employment term because of Employee's:
(a) gross negligence or willful malfeasance in the performance of his
duties under this Agreement;
(b) failure to obtain or retain any permits, licenses, or approvals
which may be required by any state or local authorities in order
to permit the Employee to continue his employment as contemplated
by this Agreement.
(c) conviction of a crime involving moral turpitude; or
(d) dishonesty with respect to Hard Rock including breach of duty to
Hard Rock involving Employee's personal gain or profit.
Upon the occurrence of any of the above, at Hard Rock's sole option,
Employee's employment shall immediately cease and terminate and Hard Rock shall
be under no obligation to Employee except to pay him for such services as may
have been performed up to the date of such termination.
6. COMPENSATION OF EMPLOYEE
6.1. Employee shall receive an annual salary of One Hundred Sixty Thousand
Dollars ($160,000), payable in at least monthly installments, less all
applicable federal, state and local taxes, Social Security and any other
government mandated deductions.
6.2. Employee shall be eligible to receive an annual bonus to be determined
by the Board payable within thirty (30) days after the end of Hard Rock's fiscal
year during the term of this Agreement; PROVIDED, HOWEVER, that Employee's bonus
for Hard Rock's 1997 fiscal year shall not be less than Fifty Thousand Dollars
($50,000) and shall be paid in the first quarter of 1998. Hard Rock shall afford
Employees an opportunity to earn annual bonuses in an amount comparable to the
amount that Employee could have received pursuant to the bonus program of
Harveys Casino Resorts ("Harveys") in effect as of the date of this Agreement.
6.3. Employee shall be entitled to participate in certain stock option
plans that Hard Rock provides to its comparable senior executives to the extent
such plans are established by Hard Rock which the parties hereto anticipate will
be similar to those
3
<PAGE>
established by Harveys but in no event shall Employee's ability to participate
in Hard Rock's stock option plans, when established, to be less than that level
of participation currently enjoyed by Employee pursuant to the Harveys stock
option plan as of the date of this Agreement.
6.4. Employee shall be entitled to participate in Hard Rock's group
insurance, hospitalization and health and benefit plans as well as all other
benefit plans that Hard Rock provides to its comparable senior executives to
the extent such plans are established by Hard Rock which the parties hereto
anticipate will be similar to those established by Harveys but in no event
shall Employee's ability to participate in such group insurance
hospitalization and health and benefit plans, when established, be less than
that level of participation currently enjoyed by Employee pursuant to the
Harveys group insurance, hospitalization and health and benefit plans as of
the date of this Agreement.
6.5. Employee shall be entitled to spend two (2) weeks per year attending
advanced engineering or construction courses at his sole cost and expense,
provided that such two (2) week absence does not interfere with his duties
pursuant to this Agreement. Such two (2) week absence shall not be deemed
vacation nor shall it cause a reduction in compensation.
6.6. During the term of this Agreement, Employee shall, when established by
Hard Rock, be allowed to participate in a 401(k) plan and Hard Rock shall match
fifty percent (50%) of Employee's contributions as provided in such a plan.
6.7. Employee shall be entitled to vacation and holiday pay that Hard Rock
provides to its comparable senior executives. In no event, however, shall the
vacation time afforded to Employee under such policy be less than two (2) weeks
per annum.
7. COVENANTS OF EMPLOYEE
During the term of this Agreement and thereafter, Employee shall hold in
a fiduciary capacity for the benefit of Hard Rock all secret or confidential
information, knowledge or data relating to Hard Rock or its affiliates, and
their respective businesses, which shall not be public knowledge (other than
information which becomes public as a result of acts of Employee or his
representatives in violation of this Agreement), including, without
limitation, customer/client lists, matters subject to litigation, and
technology or financial information of Hard Rock or its subsidiaries, without
the prior written consent of Hard Rock. In addition, during the term of this
Agreement and for a two (2) year period thereafter, Employee shall not,
directly or indirectly, solicit or contact any employee of Hard Rock or any
affiliate of Hard Rock, with a view to inducing or encouraging such employee
to leave the employ of Hard Rock or its affiliates, for the purpose of being
employed by Employee, an employer affiliated with Employee or any competitor
of Hard Rock or any affiliate thereof. Employee acknowledges that the
provisions of this Article 7 are reasonable and necessary for the protection
of Hard Rock and that Hard Rock will be irrevocably damaged if such
provisions are not specifically enforced. Accordingly, Employee agree that,
in addition to any other relief to which
4
<PAGE>
Hard Rock may be entitled in the form of actual or punitive damages, Hard Rock
shall be entitled to seek and obtain injunctive relief from a court of competent
jurisdiction (without posting a bond therefor) for the purpose of restraining
Employee from any actual or threatened breach of such provisions.
8. MISCELLANEOUS
8.1. If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs, and necessary disbursements in addition to
any other relief to which he may be entitled.
8.2. This Agreement shall be construed and governed by the laws of the
State of Nevada, and any action between the parties shall be maintained only
within the applicable state or federal court located in Clark County, Nevada.
8.3. This Agreement, and all of the terms and conditions hereof, shall bind
Hard Rock and its successors and assigns and shall bind Employee and his heirs,
executors and administrators. No transfer or assignment of this Agreement shall
release Hard Rock from any obligation to Employee hereunder.
8.4. Notices to or for the respective parties shall be given in writing and
delivered in person or mailed by certified or registered mail, addressed to the
respective party at the address as set out below, or at such other address as
either party may elect to provide in advance in writing, to the other party:
Employee: Adam Titus
2252 Pine Forest Court
Las Vegas, Nevada 89134
with a copy to: John J. Brannelly, Ltd.
302 East Carson Avenue
Suite 808
Las Vegas, Nevada 89101
Attn: John J. Brannelly, Esq.
Hard Rock: Hard Rock Hotel, Inc.
510 North Robertson Boulevard
Los Angeles, California 90048
Attn: Peter A. Morton
with a copy to: Gordon & Silver, Ltd.
3800 Howard Hughes Parkway
14th Floor
Las Vegas, Nevada 89109
Attn: James S. Mace, Esq.
5
<PAGE>
8.5. If any provisions of this Agreement is held by the aforesaid court to
be invalid, illegal, or unenforceable by reason of any rule of law or public
policy, all other provisions of this Agreement shall nevertheless remain in
effect. No provision of this Agreement shall be deemed dependent on any other
provision unless so expressed herein.
8.6. Nothing contained in this Agreement shall be construed to require the
commencement of any act contrary to law, and when there is any conflict between
any provision of this Agreement and any statue, law, ordinance, or regulation,
contrary to which the parties hereto have no legal right to contract, then the
latter shall prevail; but in such an event, the provisions of this Agreement so
affected shall be curtailed and limited only to the extent necessary to bring it
within the legal requirements.
8.7. The several rights and remedies provided for in this Agreement shall
be construed as being cumulative, and no one of them shall be deemed to be
exclusive of the others or of any right or remedy allowed by law. No waiver by
Hard Rock or Employee of any failure by Employee or Hard Rock, respectively, to
keep or perform any provision of this Agreement shall be deemed to be a waiver
of any proceeding or succeeding breach of the same or other provision.
8.8. This Agreement supersedes any and all other agreements, either oral or
in writing, between the parties hereto with respect to the employment of the
Employee by Hard Rock, contains all of the covenants, conditions and agreements
between the parties with respect to such employment. Each party to this
Agreement acknowledges that no representations, inducements, promises or other
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein, and that no other agreement,
statement or promise not contained in this Agreement shall be valid or binding.
Any addendum to or modification of this Agreement shall be effective only if it
is in writing and signed by the parties to be charged.
[Remainder of this page intentionally left blank]
6
<PAGE>
Intending to be legally bound, the parties hereto have executed this
Agreement as of the date above first written.
EMPLOYEE: HARD ROCK:
/s/ Adam Titus Hard Rock Hotel Inc., a Nevada corporation
- ----------------------------
Adam Titus
By: /s/ Peter A. Morton
-------------------------------------
Peter A. Morton, President
7
<PAGE>
EXHIBIT 12.1
HARD ROCK HOTEL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
May 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRE-TAX EARNINGS (LOSS) (160) (17,576) 6,992 (2,838)
FIXED CHARGES 11,665 5,658 5,711 6,309
LESS: CAPITALIZED INTEREST
INCLUDED IN FIXED CHARGES (793) -- -- (1,212)
TOTAL EARNINGS AVAILABLE
TO COVER FIXED CHARGES 10,712 (11,918) 12,703 2,259
INTEREST EXPENSE 10,093 5,212 5,196 4,731
CAPITALIZED INTEREST 793 -- -- 1,212
INTEREST ELEMENTS OF RENTALS 103 108 115 69
LOAN FEE AMORTIZATION 676 338 399 297
TOTAL FIXED CHARGES 11,665 5,658 5,710 6,309
RATIO OF EARNINGS TO FIXED CHARGES -- -- 2.2 --
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 4,568
<SECURITIES> 0
<RECEIVABLES> 3,669
<ALLOWANCES> (200)
<INVENTORY> 1,208
<CURRENT-ASSETS> 11,490
<PP&E> 144,070
<DEPRECIATION> 20,185
<TOTAL-ASSETS> 145,122
<CURRENT-LIABILITIES> 22,302
<BONDS> 130,593
0
0
<COMMON> 0
<OTHER-SE> (11,592)
<TOTAL-LIABILITY-AND-EQUITY> 145,122
<SALES> 0
<TOTAL-REVENUES> 75,665
<CGS> 0
<TOTAL-COSTS> 65,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,766
<INCOME-PRETAX> (160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (160)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,496)
<CHANGES> 0
<NET-INCOME> (3,656)
<EPS-PRIMARY> (48.09)
<EPS-DILUTED> (48.09)
</TABLE>
