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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, 1999
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, 2000.
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ITEM 1. BUSINESS
OVERVIEW
Hard Rock Hotel, Inc. 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, 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.
During the fiscal year ended November 30, 1999, we completed the
expansion of the facilities on our property. The Resort, as expanded,
currently consists of:
- an eleven-story hotel tower with 657 guest rooms
(including 63 suites),
- a 30,000 square-foot casino,
- a 3,600 square-foot retail store,
- an 11,500 square-foot nightclub, called "Baby's,"
with a capacity of 800 persons,
- a 6,000 square-foot banquet facility with a capacity of 390
persons,
- a live music concert hall, called "The Joint," with a capacity
of 2,050 persons,
- a beach club including an outdoor swimming pool area with a
tropical theme,
- six restaurants,
- four cocktail lounges and
- an 8,000 square-foot spa/salon/fitness center, called
the "Rock Spa."
BUSINESS STRATEGY
Our 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. We successfully use the
Hard Rock theme, vibrant atmosphere and personalized service to differentiate
the facility from the substantially larger "mega resorts" approximately one
mile west on the Las Vegas Strip. Key elements of our strategy include the
following:
UNIQUE TARGET CLIENTELE. We have successfully differentiated the
Resort 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. We believe 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 Santana, Billy Joel, Sting, Tom Petty, Alanis
Morissette, The Cranberries, No Doubt, Black Crows, Steve Winwood, and John Lee
Hooker. We believe that the Joint has become a favorite venue for
musicians and guests due to its relatively small capacity and intimate
atmosphere.
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The Resort has also hosted special events such as segments of, and
the post awards party for, Major League Baseballs Players Choice Awards, VH-1's
Fairway To Heaven, a celebrity golf tournament, and The King of the Beach
Invitational, a pro volleyball tournament. We believe 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
654 slot machines, 76 table games and a 1,200 square-foot race and sports
book. Our target gaming customer has a higher propensity to play table games
and we strive 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 Casino also
features the latest slot machines, some of which reflect the Resort's rock
music theme, as well as more traditional machines.
SIGNIFICANT REVENUE FROM NON-GAMING OPERATIONS. We derive a majority
of our revenues from non-gaming operations. Our Hotel, Beach Club, retail,
food and beverage, and other operations allow us to market the Resort as a
full-service destination resort. Our diversified revenue base allows us to be
less dependent on the Casino as a source of revenues and profits, which we
believe should result in less volatility in our earnings.
UNSURPASSED CUSTOMER SERVICE. One of the cornerstones of our
business strategy is to provide our customers with an extraordinary level of
personal service. Our management trains our 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. We have agreements with major hotels and casinos and retail
establishments pursuant to which shuttle services are provided between such
locations and the Resort. The Resort's location is particularly attractive due
to its proximity to:
- 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, Baby's Nightclub, the Banquet Facility, The Joint, the Beach Club, six
restaurants, four cocktail lounges, and the Rock Spa.
THE HOTEL. The Hotel's eleven-story tower houses 657 spacious hotel
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rooms, including 594 guest rooms and 63 suites. The guest rooms and deluxe
suites average approximately 500 square feet in size, which is larger than the
size of the 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 for the last three fiscal years:
<TABLE>
<CAPTION>
1997 1998 1999
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<S> <C> <C> <C>
Number of guest rooms.................................. 339 339 657
Average occupancy rate................................. 100% 100% 94.5%
Average daily rate (1)................................. $96.36 $97.34 $97.41
</TABLE>
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(1) Includes rooms provided on a complimentary basis
THE CASINO. The innovative, distinctive style of the 30,000 square-foot
circular Casino is a major attraction for both Las Vegas visitors and local
residents. The Casino is designed with an innovative circular layout around the
elevated Center Bar, which allows the Casino's patrons to see and be seen from
nearly every area of the Casino. Rock music is played continuously to provide
the Casino with an energetic and entertaining, club-like atmosphere. In
addition, the Casino promotes a friendly, intimate atmosphere by encouraging its
employees to smile at and interact with Casino players. Dealers, for example,
are encouraged to "High Five" winning players.
The Casino houses 76 table games including Blackjack, Craps, Roulette,
Caribbean Stud Poker, Baccarat, Mini-Baccarat and Pai-Gow Poker, 654 slot and
video poker machines, some of which feature guitar-neck-shaped levers and
motorcycle seat-shaped stools, an approximate 1,200 square-foot race and sports
book as well as the 2,000 square-foot Center Bar. The Casino also offers patrons
other attractions, such as cutting edge slot technology, proprietary slot
graphics and distinctive slot signage.
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 our
Internet web site. Visitors may purchase shirts, hats, pins, golf bags,
children's clothing, stationary, 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. Our 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. Our 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.
BABY'S. Baby's is an approximately 11,500 square-foot facility,
with an 800 person capacity, featuring three rooms on two levels, including a
sunken dance floor, three bars and state-of-the-art lighting and sound
equipment. We fly popular and innovative DJs in from all around the country
to provide the proper entertainment to attract our target clientele.
BANQUET FACILITY. Our new 6,000 square-foot conference center and
entertainment area has capacity for 390 persons. The state-of-the-art facility
can accommodate one large event/group and has the capability of being separated
into
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three distinct 2,000 square-foot areas. Located adjacent to the Beach Club
area, this unique space allows us to capitalize on opportunities to host events
that we previously turned away for the lack of a large enough space.
THE JOINT. As a live music venue with capacity for 2,050 persons,
The Joint successfully draws audiences from Las Vegas visitors and from the
local Las Vegas population. We believe that as a result of hosting concerts
by famous musicians such as Santana, Billy Joel, Sting, Tom Petty, Alanis
Morissette, The Cranberries, No Doubt, Black Crows, Steve Winwood, and John
Lee Hooker, The Joint has become a premier 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.
THE BEACH CLUB. Prior to our expansion, the Beach Club featured 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 included two beaches with white sand
imported from Monterey, California, rock outcroppings and two whirlpools.
Now, along with an enlarged 300-foot long pool with similar amenities, and a
running stream, we have added to the Beach Club such attractions as swim-up
blackjack, 18 bar top slot machines, a Beach Club bar and grill, 35 new
Tahitian-style private cabanas have been added to supplement the original 18,
and a removable dance floor which extends from one of the new beach areas,
providing the perfect party space amid thousands of tons of imported sand.
The private cabanas 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 six restaurants (AJ's Steakhouse, The
Counter, Pink Taco, Mortoni's, Mr. Lucky's, and Nobu), four bars in the
Casino (the Las Vegas Lounge, Sports Deluxe, Center Bar, and 10/7 Bar), three
bars in The Joint, a bar at the Beach Club and catering service for corporate
events, conventions, banquets and parties. AJ's Steakhouse, with seating
capacity for approximately 100 persons, is reminiscent of classic steakhouses
that reigned in 60's Las Vegas, with an open kitchen, and serves prime
Chicago Stockyard beef. The Counter, with seating capacity of approximately
20 persons, is an all-counter seating coffee shop offering guests a breakfast
and lunch menu fresh off the grill. Pink Taco, with seating capacity of
approximately 150 persons, is a hip authentic Mexican eatery with seasonal
outside dining. Mortoni's, an elegant restaurant with seating capacity for
approximately 110 persons, serves upscale Italian cuisine. Mr. Lucky's, a
24-hour restaurant with seating capacity for approximately 200 persons,
specializes in high-quality, moderately priced American cuisine. Nobu, with
seating capacity of approximately 120 persons, is a ground breaking temple of
Japanese cuisine with Latin American influences created by Master Chef Nobu
Matsuhisa and owned and operated independently of the Resort.
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 frequently reach their service capacity on
weekends, holidays and when special events and concerts are 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 ROCK SPA. Our new state-of-the-art health club and spa facilities
feature amenities such as treadmills, stair-masters, stationary bicycles, CYBEX
machines, a variety of free-weights, steam rooms, showers, massage, facial and
other personal services. We believe the Rock Spa is 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, ESPN, HBO, VH1, Red Bull, Coors Brewing Co., MCI Worldcom, and Sprint PCS.
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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 Banquet facility, or outdoors, around the swimming pool at the Beach Club.
The Resort has also hosted corporate events, conventions and banquets falling in
the 100 to 3,000 person range by catering parties, when possible, around the
existing pool at the Beach Club.
MARKETING
Our marketing efforts are targeted at both the visitor market (tourists
and business travelers) as well as local patrons. Our marketing department uses
both traditional and innovative marketing strategies to promote
the "Hard Rock Hotel" and "Hard Rock Casino" trademarks. We employ targeted
marketing programs through use of our database, which contains
approximately 636,000 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 we have 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 Major
League Baseballs Players Choice Awards, VH-1's Fairway to Heaven Celebrity Golf
Tournament, and the King of the Beach Pro Volleyball Tournament. These types of
events are held at the Resort because its stylish and distinctive atmosphere is
consistent with the theme of the events. The events, in turn, reinforce the
Resort's image as a destination resort among its target clientele. The concerts
in The Joint by popular artists, some of which have been televised, are another
form of promotional activity that reinforces the Resort's image.
The Casino marketing staff has developed the Back Stage Pass program
for visitors to the Casino. The Back Stage Pass is a casino player tracking
card. The program, which is available to all Casino visitors, tracks each
patron's gaming record, and based on the level of gaming activity, members may
become eligible for discount or complimentary services, invitations to special
events and merchandise at the Resort. Every visitor who joins the Back Stage
Pass program receives a Six-Pac of coupons redeemable at the Resort. The coupons
are redeemable for certain items available at the Resort such as a complimentary
shot glass or a reduced weekday room rate.
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. Upon the sale of Mr. Morton's interest in the Hard
Rock Cafes to Rank, in June 1996, Mr. Morton and Rank entered into a trademark
licensing agreement pursuant to which Rank granted to Mr. Morton an exclusive,
perpetual, royalty-free license (subject to certain termination provisions
designed to protect the quality of the trademarks) to use the "Hard Rock Hotel"
and "Hard Rock Casino" trademarks in connection with hotel casinos and casinos
in the "Morton Territory" 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. Mr. Morton has sublicensed to us 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 we shall have any outstanding
indebtedness pursuant to our outstanding 9 1/4% Senior Subordinated Notes due
2005 or our current credit facility.
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LAS VEGAS MARKET
Las Vegas is one of the fastest growing and largest entertainment
markets in the United States. For fiscal year 1999, gaming revenues in Clark
County reached a new 12-month record of $7.2 billion. The number of visitors
traveling to Las Vegas has increased at a steady and significant rate, from
17.2 million visitors in 1988 to a record 33.8 million in 1999, representing
a compound annual growth rate of --%. Aggregate expenditures by Las Vegas
visitors increased at a compound annual growth rate of --% from $10.0 billion
in 1988 to $-- billion in 1999. The number of hotel and motel rooms in Las
Vegas increased by approximately 78.5% from 67,391 in 1989 to 120,294 in
1999. We believe that the addition of quality themed hotel casinos and
resorts during calendar year 1999, including the Venetian, Paris and Mandalay
Bay, will continue to increase visitor traffic to Las Vegas and we will
benefit in particular due to our unique niche and proximity to the Strip.
The following table sets forth certain statistical information for the
Las Vegas market for the years 1995 through 1999, as reported by the Las
Vegas Convention and Visitor Authority.
LAS VEGAS MARKET STATISTICS
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
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<S> <C> <C> <C> <C> <C>
Visitor Volume (in thousands)....................... 29,002 29,637 30,465 30,605 33,809
Clark County Gaming Revenues (in millions).......... $5,718 $5,784 $6,152 $6,347 7,209
Hotel/Motel Rooms................................... 90,046 99,072 105,347 109,365 120,294
Airport Passenger Traffic (in thousands)............ 28,027 30,460 30,306 30,227 33,669
Convention Attendance (in thousands)................ 2,925 3,306 3,519 3,302 3,773
</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 28 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, Mandalay Bay, Paris, The Venetian,
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 our 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 us and market to the same target demographic group
as we do. Furthermore, additional hotel casinos, containing a significant
number of hotel rooms, are expected to open in Las Vegas within the next two
years. There can be no assurance that the Las Vegas market will continue to
grow or that hotel casino resorts will continue to be popular, and a decline
or leveling off of the growth or popularity of such facilities would
adversely affect our financial condition and results of operations.
We will also face competition from competing "Hard Rock" hotels and
hotel casinos that may be established in jurisdictions other than Las Vegas. We
have 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. We have been informed
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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 Resort 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. In
1998, California enacted The Tribal Government Gaming and Economic
Self-Sufficiency Act (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 our business and
results of operations. Continued proliferation of gaming activities could
significantly and adversely affect our business and prospects. See "Risk
Factors-Recently Enacted and Possible Legislation."
EMPLOYEES
As of November 30, 1999, we had approximately 1,191 full-time
employees and 278 on-call employees who are employed on an as-needed basis. None
of our employees are members of unions; however, various unions have been
aggressively soliciting new members in Las Vegas. We cannot assure that one or
more unions will not approach our employees. We consider our relations with our
employees to be good and have never experienced an organized work stoppage,
strike or labor dispute.
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
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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 were required for the issuance of up to $120,000,000 aggregate
principal amount of 9 1/4% Senior Subordinated Notes due 2005.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company in order to
determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Company must file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation in which the burden
of proving one's suitability is always on the applicant. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability for license, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Company would have to sever all relationships
with such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company is required to submit detailed financial and operating
reports to the Nevada Commission. Substantially all material loans, leases,
sales of securities and similar financing transactions by the Company must be
reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company,
the gaming licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company and the person involved could be subject to substantial
fines for each separate violation of the Nevada Act at the discretion of the
Nevada Commission. Further, a supervisor could be appointed by the Nevada
Commission to operate the Company's gaming properties 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.
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Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company, the Company
(i) pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, (iii) pays remuneration
in any form to that person for services rendered or otherwise, or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally, pursuant to the
Clark County Code, the CCLGLB has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
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
10
<PAGE>
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.
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.
The Company has established, and will be required to maintain, a
Gaming Compliance Program for the purpose of, at a minimum, performing due
diligence, determining the suitability of relationships with other entities and
individuals and to review and ensure compliance by the Company, its subsidiaries
and any affiliated entities, with the Act and Regulations and the laws and
regulations of any other jurisdiction in which the Company, its subsidiaries or
affiliates operate. The Gaming Compliance Program, any amendments there to, and
the members, one such member which shall be independent, shall be
administratively reviewed and approved by the Chairman of the Nevada Board. The
Company shall amend the compliance program, or any element thereof, and perform
such duties as may be assigned by the Chairman of the Nevada Board or his
designee, related to review of activities relevant to the continuing
qualification of the Company.
RISK FACTORS
We are subject to the following risks:
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OUR SIGNIFICANT LEVERAGE WILL SEVERELY RESTRICT OUR FINANCING OPTIONS AND WILL
RESULT IN HIGH INTEREST PAYMENTS
We are highly leveraged. We recorded net losses the last three years.
As of November 30, 1999, our total debt was $179.0 million. We have $3 million
of additional indebtedness available under our current credit facility. The
consequences of our leverage include, but are not limited to, the following:
- upon full use of our current credit facility, interest
payments will be approximately $17 million per year, which
will require a substantial portion of our expected annual
cash from operations,
- our ability to obtain additional financing in the future
for working capital, capital expenditures, development
financing or other purposes may be limited and
- We will be susceptible to adverse changes in the economy
and the Las Vegas gaming market.
Furthermore, our current debt imposes certain operating and
financial restrictions on us. Such restrictions limit, among other things,
our ability to incur additional indebtedness, create liens on our assets,
sell assets or engage in mergers or consolidations, make investments, pay
dividends or engage in intracorporate transactions. Our failure to comply
with numerous restrictive covenants contained in our debt agreements may
result in a default, which, if not cured or waived, could have a material
adverse effect on our business and results of operations.
OUR FAILURE TO GENERATE SUFFICIENT REVENUE TO REPAY DEBT WOULD RESULT IN OUR
REQUIREMENT OF ADDITIONAL FUNDING WHICH WE MAY NOT BE ABLE TO ARRANGE
We will be dependent to a significant extent upon the successful
operation of the Resort for coverage of our debt service. Our future operating
performance is itself dependent on a number of factors, many of which are
outside of our control, including prevailing economic conditions and financial,
business, regulatory and other factors. There can be no assurance that our
future cash flows will be sufficient to meet all of our obligations and
commitments.
If we are unable to generate sufficient cash from our future operations
to satisfy any debt service requirements, or to pay our debts as they mature, we
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. We cannot assure that we 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.
OUR FAILURE TO SATISFY OUR OBLIGATIONS UNDER OUR CREDIT FACILITY COULD RESULT IN
THE LOSS OF SUBSTANTIALLY ALL OF OUR ASSETS
We are dependent on the availability of our credit facility to fund our
continued operations. If we default on our 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, we may not be able to repay that indebtedness or continue
to operate.
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Our obligations under the credit facility are secured by liens on
substantially all of our assets. 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 our
interest payment obligations and could adversely effect our business and results
of operations. For more information, see "Quantitative and Qualitative
Disclosures About Market Risk."
WE ARE SUBJECT TO INTENSE LOCAL COMPETITION THAT COULD HINDER OUR ABILITY TO
OPERATE PROFITABLY
Our success is dependent upon the success of the Resort and its
continuing ability to attract visitors and operate profitably. However, our
operations are subject to significant business, economic, regulatory and
competitive uncertainties and contingencies, many of which are beyond our
control.
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. See
"Business-Competition."
WE ALSO FACE COMPETITION FROM GAMBLING VENUES LOCATED IN OTHER PARTS OF THE
COUNTRY AND POTENTIALLY FROM OTHER "HARD ROCK" ENTERPRISES
We will also face competition from competing "Hard Rock" hotels and
casinos that may be established in jurisdictions other than Las Vegas. We 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 us. See "Business -Competition" and "-Risks Associated with
Shared Use of the 'Hard Rock' Brand Names."
To a lesser extent, we compete 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. We also compete 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 our business and results
of operations. See "-Recently Enacted and Possible Legislation."
Many of our competitors in the hotel casino industry are emphasizing or
are expected to emphasize their non-gaming businesses, including retail sales.
Consequently, we have recently experienced (and expect to continue to
experience) increased competition in the retail sales market in Las Vegas.
WE DEPEND UPON ONE KEY MARKET AND HAVE A LIMITED BASE OF OPERATIONS WHICH MAY
RESULT IN FLUCTUATIONS IN OUR OPERATING RESULTS AND INABILITY TO GENERATE
SUFFICIENT CASH FLOW TO FUND OUR WORKING CAPITAL NEEDS
All of our revenues are generated from the Resort. Our 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 our business and results of operations. 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 our business and
results of operations. Furthermore, due to our single location, we are 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 our operating results to fluctuate significantly
and adversely affect us. Due to the single location, poor operating results at
the Resort would materially affect our total profitability. Future growth in
revenues
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and profits will depend to a large extent on our ability to successfully
generate cash flow from our single location sufficient for our working
capital needs.
WE RELY ON KEY PERSONNEL, THE LOSS OF THE SERVICES OF WHICH WOULD MATERIALLY AND
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Our ability to operate successfully and competitively is dependent,
in part, upon the continued services of certain of our employees,
particularly Peter A. Morton, Chairman of the Board, Chief Executive Officer,
President and Secretary. In the event that Mr. Morton were to leave us, we
might not be able to find a suitable replacement. We believe that the loss of
services by Mr. Morton could have a material adverse effect on us. We do not
maintain key man life insurance for any officer or director, including Mr.
Morton. 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 our business and operations,
we cannot assure that he will do so in the future.
Our shareholders, officers, directors and key employees, including Mr.
Morton, 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 application for any
cause that they deem reasonable. In the event the Nevada Gaming Authorities were
to find any person unsuitable for licensing or unsuitable to continue having a
relationship with us, we would be required to sever all relationships with such
person. We 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.
WE ARE CONTROLLED ENTIRELY BY MR. MORTON
Mr. Morton beneficially owns over 90% of our outstanding common
stock, including 100% of our outstanding voting common stock. Thus, Mr.
Morton controls the election of our Board of Directors and can approve or
disapprove any other matters submitted to the stockholders.
LACK OF SIGNIFICANT OPERATING HISTORY WITH CURRENT MANAGEMENT
We have independently operated the Resort for only a little over two
years. During the past year, we have replaced the persons who served as our
Senior Vice President and General Manager, our Vice President of Casino
Operations, and our Chief Financial Officer with new people. Our continued
success will depend on the successful management by these new officers of our
operations. We cannot assure that our new officers will be able to
successfully manage our operations effectively.
OUR OPERATIONS HAVE HISTORICALLY RESULTED IN NET LOSSES
We have recorded net losses for fiscal years 1999, 1998 and 1997.
The net loss for the fiscal year ended November 30, 1999 of $12.2 million is
largely attributable to write-off of $5.0 million in pre-opening expenses and
decreased revenues resulting from disruption caused by construction of the
Expansion. 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 our old credit facility and a $1.5 million
write-off of legal fees associated with the Rank lawsuit. See "Legal
Proceedings." The net loss for the fiscal year ended November 30, 1997 of
$17.5 million is largely attributable to the $24.7 million non-recurring
charge we paid in connection with the termination of the management agreement
with Harveys Casino Resorts. We cannot assure that we will not post a net
loss in the future.
USE OF THE "HARD ROCK" BRAND NAMES BY ENTITIES OTHER THAN US COULD DAMAGE OUR
BUSINESS AND HURT OUR RESULTS OF OPERATIONS
We benefit 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.
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In addition, although we have 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 our business and
results of operations will not be adversely affected by the management of the
"Hard Rock" brand name.
GOVERNMENT REGULATION
The gaming operations and the ownership of our securities 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 us.
Although we currently hold 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 our gaming licenses were revoked for any reason, the Nevada Gaming
Authorities could require the closing of our gaming operations, which would
result in a material adverse effect on our business. We and certain of our
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 us requires
the prior approval of the Nevada Commission, if the securities or the proceeds
from the sale thereof are intended to be used by us 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.
WE CANNOT ASSURE THAT THE MARKET DATA INCLUDED IN THIS REPORT IS ACCURATE
We have included in this report market data and information with
respect to the performance of other gaming entities that we believe to be
reasonably accurate. We have 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 we cannot assure
that it is accurate in all material respects.
WE ARE SUBJECT TO ENVIRONMENTAL RISKS AND REGULATION WHICH COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS
We have engaged in real estate development projects and have owned and
operated several parcels of real estate. As a result, we are subject to various
federal, state and local laws and regulations that make us liable for the costs
of cleaning up, and other costs relating to, releases of hazardous substances on
our property or at property to which we have 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 our ability to sell, lease or operate the
property or to borrow using the property as collateral. We do not have
environmental liability insurance to cover such events.
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Although there can be no assurance, we are not aware of any condition at any
of our current or past properties that would have a material adverse effect
on our business or results of operations.
RECENTLY ENACTED AND POSSIBLE LEGISLATION GOVERNING GAMBLING ACTIVITIES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
During 1998, California 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. Also during 1998, California,
pursuant to a ballot initiative vote, 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, we cannot predict the effect they may
have on our 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 materially and adversely affect our business and results of
operations. Additionally, the California Senate is currently deliberating an
amendment to the California constitution that would allow the establishment and
operation of casinos on Native American lands. We believe that the expansion of
casino gaming on Native American lands, or otherwise, in California could
materially and adversely affect our business and results of operations.
In June of 1999, the National Gambling Impact and Policy Commission
issued a report to Congress concerning all matters relating to the economic
and social impact of gaming in the United States. The report included
recommendations for legislation and administrative actions. Some of the
recommendations, including in particular the recommendation for a complete
ban of gambling on collegiate and amateur athletic events, if enacted into
law, could adversely affect the gaming industry and materially and adversely
effect our business and results of operations.
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 our business and results of operations.
ITEM 2. PROPERTIES
We own approximately 16.7 acres of land in Las Vegas where the Resort
is located.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1998, Hard Rock Cafe International (USA) Inc. (f/k/a Rank
Licensing, Inc.), a subsidiary of Rank International plc, filed an amended
complaint in the United States District Court for the Southern District of
New York against Peter A. Morton and our company. Rank's subsidiary contended
that the reservation and use by Mr. Morton and our company of the internet
domain names "hardrock.com" and "hardrockhotel.com", and the use of certain
marks and logos in, and in connection with merchandise offered on, Internet
websites operated under those domain names, violated terms of certain
agreements with Mr. Morton and Federal and state trademark and unfair
competition laws. Rank's subsidiary sought an injunction against the use of
the domain names and logos by Mr. Morton and our company, an order requiring
Mr. Morton and our company to assign the domain names to Rank's subsidiary,
and over $100 million in damages. During the course of litigation, Mr. Morton
and our company transferred the domain name "hardrock.com" to Rank's
subsidiary. On June 1, 1999, the court issued a ruling that we owed no money
damages, that we can continue to use the domain name "hardrockhotel.com" and
the logos in connection with merchandising within designated territories. We
then sought to have the territorial limitation removed for certain product
sales over the Internet. On February 3, 2000, the court issued a new order,
pursuant to which, subject to certain limitations, we can use the domain name
"hardrockhotel.com" and the logos in connection with merchandising our
properly identified products on the Internet without any territorial
limitations. Through November 30, 1999, we have incurred approximately $1.5
million, and $0.2 million in legal fees in defense of this suit, which was
charged to general and administrative expenses on the Statement of Operations
during fiscal year 1998 and 1999, respectively.
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On August 27, 1999, we, along with Lily Pond Investments,
Inc. filed a Complaint for Declaratory Judgment against Gary Selesner in the
Eighth Judicial District of Clark County, Nevada, Case No. A407499, based on the
termination of Gary Selesner's employment. On September 16, 1999, Gary Selesner
filed an Answer and Counterclaim seeking damages in excess of $10,000 alleging
breach of contract and breach of implied covenant of good faith and fair
dealing. Discovery in this matter is proceeding.
Additionally, we are a defendant in various lawsuits relating
to routine matters incidental to our business. Management does not believe that
the outcome of any such litigation, in the aggregate, will have a material
adverse effect on our business or results of operations.
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 1999.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock.
As of January 31, 2000, there were 11 holders of record of our common
stock.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. Our outstanding
preferred stock and current debt limit our payment of dividends. We currently
intend to retain future earnings to help fund the development and growth of our
business.
On March 23, 1998, we consummated an offering of $120,000,000 aggregate
principal amount of the Notes, pursuant to exemptions from, or transactions not
subject to, the registration requirements of the Securities Act of 1933, as
amended, and applicable state securities laws. The net proceeds of the offering
were $115.9 million. The offering was underwritten by a syndicate managed by
Bear Stearns & Co. Inc. Following the offering, we 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.
We used most of the net proceeds to repay amounts outstanding under
a $120,000,000 credit agreement that we entered into with a consortium of
banks in September of 1997. We used the remainder of the net proceeds, along
with borrowings under our current credit facility and cash flow from
operations, to fund our expansion of the Resort.
On August 31, October 1, October 29 and November 2, 1999 we issued
and sold $2.5 million, $5.5 million, $2.0 million and $18.0 million,
respectively, aggregate liquidations preference of our 9 1/4% Series A
Cumulative Preferred Stock to Mr. Morton, pursuant to exemptions from, or
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. The net proceeds from these sales
of preferred stock were an aggregate of $28.0 million. These sales were not
underwritten.
We used the net proceeds from these sales of preferred stock to pay
for construction related payables, to reduce amounts outstanding under our
current credit facility and for general corporate expenditures.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected historical income statement data set forth below for
fiscal years 1997, 1998 and 1999 and the selected historical balance sheet
data set forth below at November 30, 1998 and 1999 have been derived from our
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Financial Statements, which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere herein. Our selected
historical income statement data set forth below for fiscal years 1995 and
1996 and the selected historical balance sheet data set forth below at
November 30, 1995, 1996 and 1997 have been derived from our audited Financial
Statements not included herein. We commenced operations on March 9, 1995, and
therefore, fiscal year 1995 is not directly comparable to fiscal years 1996,
1997, 1998 and 1999. 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,
------------------------------------------------------------
1995(1) 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Casino........................................ $ 26,262 $ 36,560 $ 35,395 $ 36,070 $ 37,155
Lodging....................................... 7,845 12,257 12,919 12,988 18,860
Food and beverage............................. 10,061 15,003 16,704 18,972 24,488
Retail........................................ 13,984 17,336 15,404 11,715 11,492
Other income.................................. 1,290 1,901 2,076 2,109 4,284
Less complementaries.......................... (3,704) (5,768) (5,450) (6,189) (7,872)
-------- -------- -------- -------- ---------
Net revenues.................................. 55,738 77,289 77,048 75,665 88,407
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------------------------------------------
1995(1) 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(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 21,999
Lodging....................................... 3,071 4,112 4,149 3,953 5,360
Food and beverage............................. 6,877 10,118 10,360 11,405 15,428
Retail........................................ 6,325 7,869 7,102 5,503 5,232
Other......................................... 821 949 943 952 2,121
Marketing..................................... 4,686 2,975 3,174 4,252 4,408
General and administrative.................... 10,647 14,922 15,140 14,607 15,821
Depreciation and amortization................. 3,870 5,523 5,503 5,747 10,527
Pre-opening expenses.......................... 4,942 -- -- -- 5,038
Charge for termination of Management
Agreement............................... -- -- 24,715 -- --
--------- --------- --------- --------- ---------
Total costs and expenses...................... 53,638 64,626 89,007 65,059 85,934
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS.................... 2,100 12,663 (11,959) 10,606 --
Interest income (expense), net................ (4,930) (5,617) (5,585) (10,766) (14,679)
Other expenses, net........................... (8) (54) (32) -- (28)
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary loss ....... (2,838) 6,992 (17,576) (160) (12,234)
Income tax provision (benefit)................ (857) 2,525 (1,168) -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss....... (1,981) 4,467 (16,408) (160) (12,234)
Extraordinary loss............................ -- -- (1,081) (3,496) --
--------- --------- --------- --------- ---------
Net income (loss)................................ $ (1,981) $ 4,467 $ (17,489) $ (3,656) $(12,234)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share...................... $ (15.98) $ 35.25 $ (143.84) $ (48.09) $(160.92)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation............. 123,965 126,705 121,586 76,023 76,023
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures(2)....................... 39,118 4,006 2,557 39,802 36,328
Depreciation and amortization................. 3,870 5,523 5,503 5,747 10,527
Ratio of earnings to fixed charges(3)......... -- 2.2x -- -- --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AT NOVEMBER 30,
---------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 3,634 $ 5,958 $ 4,214 $ 4,568 $2,040
Total assets........................ 99,855 109,044 109,556 142,394 199,912
Total debt.......................... 65,405 64,315 106,013 130,699 179,093
Shareholders' equity (deficit)(4)... 26,295 30,762 (7,936) (11,592) (24,123)
</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 year 1995 is not directly
comparable to fiscal years 1996, 1997, 1998 and 1999.
(2) Capital expenditures for fiscal years 1995 and 1996 exclude $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 1995, 1997, 1998 and 1999 resulted in coverage
deficiencies of $4.1 million, $17.6 million, $1.0 million and
$14.5 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).
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OUR 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, OUR FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K.
OVERVIEW
Our sole business is the operation of the Resort, which commenced
operations on March 9, 1995. Prior to the Resort's opening, we recorded no
operating revenue or income.
During fiscal year 1999, 38.6% of the Resort's revenues were derived
from gaming operations, 25.4% from food and beverage, 19.6% from lodging, and
16.3% from retail and other sales. Our business strategy is to provide our
guests with an energetic and exciting gaming and entertainment environment
with the services and amenities of a luxury, boutique hotel.
We completed construction related to our expansion of the Resort in
May 1999. The Expansion included the addition of 318 additional rooms, 4 new
restaurants, 6,000 square-feet of ballroom/banquet facilities, new retail
space, an 8,000 square foot spa/salon/fitness center and significantly
enlarged the swimming pool area adding, among other things, swim-up
blackjack. Although we attempted to minimize disruption, management believes
net revenues and operating income for fiscal year 1999 were negatively
impacted by construction activities related to the Expansion. Also during
fiscal year 1999, we increased our revolving credit line from $67 million to
$77 million, and later reduced it to $62 million. We also sold, for $28
million, $28 million aggregate liquidation preference of our 9 1/4% Series A
Cumulative Preferred Stock to Peter A. Morton, the Company's Chairman, Chief
Executive Officer, President, and Secretary. Proceeds of the preferred stock
sale were used to reduce the credit facility and pay construction contractors
and for other operating costs.
We have not, as of February 15, 2000, encountered any adverse
effects on our operations related to the "Year 2000" computer date change.
RESULTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO YEAR ENDED NOVEMBER 30, 1998
NET REVENUES AND OPERATING INCOME. Net revenues increased 16.8% for the year
ended November 30, 1999 to $88.4 million compared to $75.7 million for the
corresponding period of the prior year. Operating income decreased 37.9% for
the year ended November 30, 1999 to $7.5 million (excluding $5.0 million in
pre-opening expenses related to the Expansion) compared to $12.1 million
(excluding $1.5 million in legal fees related to the Rank lawsuit) for the
corresponding period of the prior year. The increase in revenues is primarily
attributable to a 45.2% increase in lodging revenue and a 29.1% increase in
food and beverage revenue, each as a result of the Expansion. Operating
income decreased primarily as a result of decreased table games hold
percentage, increased casino, general and administrative expenses and
increased depreciation expense resulting from the Expansion.
CASINO. Casino revenues increased by 3.0% for the year ended November 30,
1999 to $37.2 million compared to $36.1 million for the corresponding period
of the prior year. The increase is primarily due to increased table game
revenue (up 6.5% to $23.1 million compared to $21.7 million for the
corresponding period of the prior year). Table game drop increased by 38.0%
to $185.5 million compared to $134.4 million for the corresponding period of
the prior year. Table games revenue did not increase proportionately to table
games drop primarily as a result of lower hold percentage of 12.5% compared
to 16.6% in the corresponding period of the prior year.
20
<PAGE>
We have historically reported hold percentage using the gross method, while
casinos on the Strip report hold percentage using the net method (which
reduces the table game drop by marker repayments made in the gaming pit
area). For the purpose of comparison to properties on the Strip, our net hold
percentage for the year ended November 30, 1999 was 14.2%. Net slot machine
revenue decreased 4.3% for the year ended November 30, 1999 to $13.4 million
compared to $14.0 for the corresponding period of the prior year. Management
believes slot revenues decreased as a result of the opening of new casinos in
Las Vegas coupled with the construction disruption associated with the
Expansion during the first half of the year and lack of amenities (primarily
restaurants) prior to the completion of the Expansion. After the expanded
facilities opened, slot revenue and coin in improved compared to the
corresponding period in the prior year. Casino departmental income decreased
12.6% for the year ended November 30, 1999 to $15.2 million from $17.4
million, primarily as a result of the decreased table games hold percentage.
Casino departmental income as a percentage of casino revenues decreased to
40.8% in 1999 from 48.3% in 1998, also primarily as a result of decreased
table games hold percentage.
LODGING. Lodging revenues increased 45.2% for the year ended November 30,
1999 to $18.9 million from $13.0 million for the corresponding period of the
prior year. The increase is primarily attributed to revenue generated from
the additional 318 hotel rooms placed in service in May 1999. The ADR for the
year ended November 30, 1999 was $97.41 compared to $97.34 for the year ended
November 30, 1998. Hotel occupancy decreased to 94.5% in 1999 from 100% in
1998. Lodging departmental income increased 49.4% for the year ended November
30, 1999 to $13.5 million from $9.0 million primarily as a result of the
availability of additional rooms. Lodging departmental income as a percentage
of lodging revenues increased to 71.6% in 1999 from 69.6% in 1998.
FOOD AND BEVERAGE. Food and beverage revenue increased 29.1% for the year ended
November 30, 1999 to $24.5 million from $19.0 million for the corresponding
period of the prior year. The increase was related to revenues from the new
restaurants and the nightclub added as part of the Expansion. Food and beverage
departmental income increased 19.7% for the year ended November 30, 1999 to $9.1
million from $7.6 million for the corresponding period of the prior year,
primarily as a result of the additional outlets. Food and beverage departmental
income as a percentage of food and beverage revenues decreased to 37.0% in 1999
from 39.9% in 1998, primarily as a result of increased costs associated with
operating the new restaurants.
RETAIL. Retail revenues decreased 1.7% for the year ended November 30, 1999 to
$11.5 million, from $11.7 million for the corresponding period of the prior
year. We believe the decrease is primarily attributable to a diluted
retail market from increased retail competition coupled with construction
disruption associated with the Expansion during the first half of the year.
Retail departmental income increased 1.6% for the year ended November 30, 1999
to $6.3 million from $6.2 million. Retail departmental income as a percentage of
retail revenues increased to 54.5% in 1999 from 53.0% in 1998.
OTHER INCOME. Other income increased 104.8%, for the year ended November 30,
1999 to $4.3 million from $2.1 million for the corresponding period of the prior
year. The increase is partially due to the opening of the new facilities,
including the Rock Spa and a cigar shop, which had combined revenues for the
year ended November 30, 1999 of $1.2 million. Revenues for the Sundry Store
increased to $1.7 million from $1.0 million for the corresponding period of the
prior year. Additionally, we recorded $0.7 million revenue for chip float
compared to $0.4 million for the corresponding period of the prior year,
representing commemorative chips in public circulation management believes will
never be redeemed.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses increased 7.2% for the year ended November 30, 1999 to $20.2 million
from $18.9 million for the corresponding period of the prior year. The increase
is attributable to the costs associated with maintaining a larger facility.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
to $10.5 million for the year ended November 30, 1999 from $5.7 million for the
corresponding period of the prior year, primarily due to the increased capital
expenditures associated with the Expansion.
21
<PAGE>
PRE-OPENING EXPENSE. We recorded a pre-opening expense associated with the
Expansion of $5.0 million during the year ended November 30, 1999.
NET INTEREST EXPENSE. Net interest expense increased 36.3% for the year ended
November 30, 1999 to $14.7 million from $10.8 million for the corresponding
period of the prior year. The increase is attributable to the increase in
borrowings associated with the Expansion.
INCOME TAXES. No income tax benefit was recorded as a result of establishing a
valuation allowance due to our accumulated losses as of November 30, 1999.
NET INCOME. As a result of the factors described above, we recorded a net loss
for the year ended November 30, 1999 of $12.2 million compared to a net loss of
$3.7 million for the corresponding period of the prior year.
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 with
Harveys Casino Resorts 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 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 in concert at The
Joint, 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
22
<PAGE>
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 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 our accumulated losses as of November 30, 1998.
EXTRAORDINARY LOSS. In connection with securing expansion financing on March 23,
1998, we wrote off $3.5 million in unamortized loan fee costs associated with
the retirement of our old credit facility.
NET INCOME. As a result of the factors described above, we 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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the twelve months ended November 30, 1999, our principal source of
funds was net financing activities of approximately $76.4 million. The $76.4
million consists of $28 million proceeds from the sale of the Preferred Stock
and net borrowings of 48.5 million under our current credit facility. The
primary use of funds during the twelve months ended November 30, 1999 was the
payment of expansion and maintenance capital expenditures of $78.4 million. Cash
used in operating activities for the twelve months ended November 30, 1999 was
$0.5 million, compared to cash provided from operations of $9.1 million for the
corresponding period of the prior year. The net cash used in operating
activities for the current year is primarily due to a net loss of $12.2 million
partially offset by depreciation and amortization of $11.5 million and other
various changes in operating asset and liability accounts. The net loss of $12.2
million includes pre-opening expenses of $5.0 million, without which we would
have generated $4.5 million from operations. As of November 30, 1999, we had
cash and cash equivalents of $2.0 million. We believe that our current cash
balances, funds available ($3.0 million) under the $62 million credit facility,
and cash flow from operations will be sufficient to meet our anticipated needs
for working capital and capital expenditures through the next twelve months. We
may, however, need to raise additional funds prior to the expiration of that
period. Our ability to raise additional funds is limited by restrictions on
our financing activities under our current credit facility and the Notes. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all.
We sold (from August 31, 1999 to November 2, 1999) 28,000 shares of
our 9 1/4% Series A Cumulative Preferred Stock (liquidation preference of
$1000 per share) to Peter A. Morton, our President and majority shareholder,
for $28 million. In connection therewith, we obtained certain waivers from
the lenders under our current credit facility to, among other things, permit
us to use the proceeds from such sale to make certain payments in connection
with the Expansion. The Preferred Stock pays dividends cumulatively from the
date of issue out of funds legally available for that purpose in cash in
arrears on November 30 and May 31 of each year and commenced on November 30,
1999. Any amounts not paid in cash cumulate and are compounded semi-annually
at a rate of 9 1/4% per year until paid. The Preferred Stock matures 91 days
following the earlier of either April 1, 2005, or the repayment of the Notes.
The Preferred Stock is redeemable subject to certain conditions, including
the repayment of the Notes and our current credit facility. The proceeds from
the sale of the Preferred Stock were used to pay construction related
payables, to reduce amounts outstanding under our current credit facility,
and for general corporate expenditures. At November 30, 1999, dividends
accumulated on the Series A Preferred Stock were $296,771.
On March 23, 1998, we completed the offering of $120 million
aggregate principal amount of 9 1/4% Senior Subordinated Notes, due 2005. We
used $105.6 million of the proceeds to repay and terminate our then existing
credit facility and approximately $4.1 million to pay fees associated with
the offering. Interest on the Notes is 9 1/4% per annum, and is payable on
each April 1 and October 1. The Notes are our general unsecured obligations,
subordinated in right of payment to all existing and future senior
indebtedness, including all borrowings under the current credit facility. The
Notes are subject to redemption at our option, 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 our ability to, among other things, pay dividends, incur
additional indebtedness, issue certain preferred stock and enter into
transactions with affiliates.
Concurrently with our issuance of the Notes, we entered into our
current credit facility which at the time provided us with $67 million of senior
secured reducing revolving borrowings. The credit facility was increased to $77
million during the second quarter of 1999, and subsequently reduced with some of
the proceeds from the sale of the Preferred Stock, to $62 million on November 4,
1999. Interest on the credit facility accrues on all individual borrowings at an
interest rate determined at our option, at either the LIBOR Index plus an
applicable margin (not to exceed 3.5% and aggregating 9.5% at November 30,
1999), or the Base Rate, defined as the higher of the Federal Funds Rate plus
0.5%, or the reference rate, as
24
<PAGE>
defined, plus an applicable margin (not to exceed 2.25%). We chose the LIBOR
Index for all borrowings outstanding at November 30, 1999. These margins are
dependent upon our 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 our credit facility (as adjusted) will
diminish to $47.0 million as of the last day of fiscal year 2001; $32.0 million
as of the last day of fiscal year 2002; $16.9 million as of the last day of
fiscal year 2003; and will expire on March 23, 2004. Additionally, we may be
required, upon certain circumstances, to make prepayments on the credit facility
each year beginning in April 2000.
The credit facility contains certain covenants including, among other
things, financial covenants, limitations on our ability to dispose of capital
stock, enter into mergers and certain acquisitions, incur liens or indebtedness,
issue dividends on stock, and enter into transactions with affiliates. Mr.
Morton has entered into a make-well agreement (as defined) pursuant to which he
is required to contribute certain amounts to us in the event certain financial
covenants are not met. The credit facility is secured by substantially all of
our property at the Las Vegas site.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes
in short-term LIBOR interest rates. We do not have any foreign exchange or other
significant market risk. We did not have any derivative financial instruments at
November 30, 1999.
Our exposure to market risk for changes in interest rates relates
primarily to our current credit facility. In accordance with the credit
facility, we enter into variable rate debt obligations to support general
corporate purposes, including capital expenditures and working capital needs. We
continuously evaluate our level of variable rate debt with respect to total
debt and other factors, including assessment of the current and future economic
environment.
We had $59.0 million in variable rate debt outstanding at November
30, 1999. Based upon this year-end variable rate debt level, a hypothetical 10%
adverse change in interest rates would increase interest expense by
approximately $0.6 million on an annual basis, and likewise decrease our
earnings and cash flows. We cannot predict market fluctuations in interest rates
and their impact on our variable rate debt, nor can there be any assurance
that fixed rate long-term debt will be available to us at favorable rates, if at
all. Consequently, future results may differ materially from the estimated
adverse changes discussed above.
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.
25
<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 ours:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter A. Morton........................ 51 Chairman of the Board, Chief
Executive Officer, President and Secretary
Jonathan Swain ....................... 34 Senior Vice President of
Operations and General Manager
Tjeerd R. Brink........................ 36 Vice President, Chief Financial
Officer and Treasurer
Rick B. Richards....................... 39 Vice President of Casino Operations
Christine R. Belcastro................. 50 Vice President of Hotel Operations
Gilbert B. Friesen..................... 60 Director
Stephen A. Marks....................... 51 Director
</TABLE>
PETER A. MORTON. Mr. Morton has been our Chairman of the Board,
Chief Executive Officer and President since our formation and Secretary 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 Morton's 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 Morton's
Bar and Grill, London, England (1975). Mr. Morton sits on the Board of
Trustees of the Natural Resources Defense Council.
JONATHAN SWAIN. Mr. Swain has been our Senior Vice President of
Operations and General Manager since August 1999. Mr. Swain was
previously employed by Aztar Corporation from 1995 to 1999, most recently as
President of the Tropicana Hotel and Casino in Las Vegas. From 1993 to 1995, Mr.
Swain served as Vice President of Marketing for Trump Taj Mahal in New Jersey.
TJEERD R. BRINK. Mr. Brink has been our Vice President, Chief
Financial Officer and Treasurer since July 1999. Mr. Brink held the same
position for The Fremont Street Experience, LLC from 1997 to 1999. Prior to
1997, he worked for five years for Bennett Industries, LLC (the private
holding company for William G. Bennett, former majority owner of Circus
Circus Enterprises Inc., now called Mandalay Resort Group), three years for
Caesars Palace and two years for Arthur Andersen, LLP.
RICK B. RICHARDS. Mr. Richards has been our Vice President of
Casino Operations since May 1999. Mr. Richards was a Branch Manager for
Hilton National Marketing from 1997 to 1999, and Vice President and Assistant
General Manager of Players Island in Lake Charles, Louisiana from 1996 to
1997. From 1981 to 1997, Mr. Richards served in various casino management
positions for Station Casinos, Inc., Bally's Las Vegas, Caesars Palace, and
Boyd Gaming.
CHRISTINE R. BELCASTRO. Ms. Belcastro has been our Vice President
of Hotel Operations 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
26
<PAGE>
Operations for the Resort. From 1992 to 1994, she was Director of Hotel
Operations at the Palace Station in Las Vegas. From 1991 to 1992, Ms.
Belcastro served as Director of Hotel Operations at the Sands Hotel.
GILBERT B. FRIESEN. Mr. Friesen has been a Director 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 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.
ITEM 11. EXECUTIVE COMPENSATION
Our directors 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 we paid to our Chief
Executive Officer and the four other most highly compensated executive
officers (the "Named Executive Officers") for fiscal year 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
--------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL RESTRICTED ALL OTHER
COMPENSATION STOCK AWARD(S) COMPENSATION(1)
- --------------------------- ------- ------ ---------- -------------- -------------- ----------------
Peter A. Morton 1999 $ - $ - $1,751,677 (2) $ - $ -
Chairman of the Board, 1998 - - 1,510,260 (2) - -
Chief Executive Officer, 1997 - - 1,556,433 (2) - -
President and Secretary
Jonathan Swain 1999 70,000 - - - 576
Senior Vice President of 1998 - - - - -
Operations and General Manager 1997 - - - - -
Rick Richards 1999 69,711 - - - 1,364
Vice President of 1998 - - - - -
Casino Operations 1997 - - - - -
Christine R. Belcastro 1999 118,331 28,789 8,231
Vice President of 1998 118,893 36,579 - - 5,348
Hotel Operations 1997 93,750 25,460 - - 4,369
Tjeerd R. Brink 1999 35,961 - - - 791
Vice President of 1998 - - - - -
Finance, Chief Financial Officer 1997 - - - - -
and Treasurer
Gary R. Selesner 1999 223,677 90,000 - - 13,210
Former Senior Vice President of 1998 254,137 109,200 - - 7,688
Operations and General Manager 1997 211,923 93,000 - -(3) 4,144
Adam P. Titus 1999 300,477 50,000 - - 4,975
Former Executive Director 1998 160,000 50,000 - - -
of Construction 1997 14,321 - - - -
</TABLE>
- ------------------------------
(1) All Other Compensation consists of contributions made by us to the
Hand Rock 401(k) Plan, on behalf of Ms. Belcastro in the amount of
$4,845, Mr. Selesner in the amount of $3,831 and Mr. Titus in the
amount of $3,299. In addition, All Other Compensation consists of
insurance premiums on term life insurance and medical reimbursements
paid by us in the amount of $576 for Mr. Swain, $1,364 for Mr.
Richards, $3,386 for Ms. Belcastro, $791 for Mr. Brink, $9,379 for
Mr. Selesner and $1,676 for Mr. Titus.
(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) In October 1997, Mr. Selesner entered into an agreement with us,
whereby he would have, under certain circumstances, received 768
shares of our Class B common stock. 20% of his shares would vest
each year for the following three years, with the remaining 40%
vesting in the year 2001, provided that he did not resign or have
his employment terminated for cause during this vesting period.
During fiscal year 1999, Mr. Selesner's employment with us ceased.
We have determined that no shares vested under this agreement. For
more information, see the section "Legal Proceedings."
EMPLOYMENT AGREEMENTS
Mr. Morton has entered into an amended and restated supervisory
agreement with us, 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 us in
exchange for 2.0% of our annual gross revenues (as defined therein), which
excludes the value of any complimentary goods or services. Such payments will
be subordinated to our debt. We will reimburse Mr. Morton for all costs and
expenses incurred by him in connection with services provided to us. In the
event either we are 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. Swain has entered into an employment agreement, dated August 17,
1999 (the "Swain Employment Agreement"), which has a term of three years. Mr.
Swain will serve as our Senior Vice President and General Manager. We will
pay Mr. Swain a base salary of $260,000 per year and an annual bonus
determined by our Board of Directors. If Mr. Swain is terminated without
Cause(as
27
<PAGE>
defined in the Swain Employment Agreement), Mr. Swain will receive a
termination fee in an amount equal to (i)one hundred percent(100%) if such
termination occurs within twelve months of the Commencement Date of this
Swain Employment Agreement or (ii) fifty percent (50%) if such termination
occurs thereafter, of the remainder of the Base Salary which would otherwise
be due Mr. Swain pursuant to the Swain Employment Agreement but for such
termination, to be paid in the manner and at the rate Mr. Swain had received
immediately prior to such termination pursuant to Section 3.1 of the Swain
Employment Agreement and we shall have no further obligation to Mr. Swain
under the Swain Employment Agreement.
Mr. Richards has entered into an employment agreement, dated August
17, 1999, 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. Richards will serve as Vice President of Gaming Operations of the
Company. We will pay to Mr. Richards a base salary of $125,000 per year and
an annual bonus to be determined by our Board of Directors. If Mr. Richards
is terminated by us without Cause (as defined in the agreement), we will pay
Mr. Richards the lesser of $62,500 or the remainder of the base salary which
would otherwise be due under the agreement.
During the fiscal year 1999, Messrs. Titus and Selesner ended their
respective employment relationships with us. We entered into a severance
agreement with Mr. Titus on October 1, 1999, whereby he agreed to release us
from our obligations under his employment agreement in exchange for a payment
of $150,000. Mr. Selesner's employment with us ceased in August 1999. No
agreements have been reached in connection with the cessation of Mr.
Selesner's employment. For additional information, see the section "Legal
Proceedings."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee during 1999. Messrs. Morton
and Swain each participated in the determination of officers' compensation
during 1999.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY
Chapter 78 of the Nevada Revised Statutes (the "NRS"), Article SIXTH
of our Articles of Incorporation and Article VII of our Bylaws contain
provisions for indemnification of our directors and officers. The Bylaws
require us 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, our best interests, 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. Our Bylaws provide that our Board of Directors
may cause us 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 we would have the power to indemnify such
person.
In addition, we have, with the approval of the stockholders, entered
into an Indemnification Agreement with each of our directors. These
agreements will require us 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 us or any other
party, that such director in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or other by reason of (or arising in part out
of) any event or occurrence related to the fact that such director is or was
our director, officer, employee, agent or fiduciary, or is or was serving at
our request 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
us pursuant to the foregoing provisions, we have 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.
We have included in our 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
28
<PAGE>
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 our common and preferred 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 NUMBER PERCENT
- ------------------------- ------ ------- ------ ------- ------ -------
CLASS A CLASS B CLASS A
(VOTING) (NON-VOTING)
-------- ------------ -------
COMMON STOCK OWNED (1) PREFERRED STOCK OWNED(1)
---------------------- ------------------------
<S> <C> <C> <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% 28,000 100.0%
Jonathan Swain.......................... - - - - - -
Tjeerd R. Brink......................... - - - - - -
Rick B. Richards........................ - - - - - -
Christine R. Belcastro.................. - - - - - -
Gary R. Selesner........................ - - - - - -
Adam P. Titus........................... - - - - - -
Gilbert B. Friesen...................... - - 250 * - -
Stephen A. Marks........................ - - 1,000 1.5% - -
All directors and officers as a group
(7 persons)............................. 12,000 100.0% 60,737 94.4% 28,000 100.0%
</TABLE>
- --------------------------------------
* Less than one percent
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares as of a given date which such
person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security
which such person or persons has the right to acquire within 60 days
after such date is deemed to be outstanding, but is not deemed to be
outstanding for the purpose of computing the percentage of ownership of
any other person. The address for each of the stockholders in this
table is 4455 Paradise Road, Las Vegas, Nevada 89109.
(2) As the majority stockholder of Lily Pond, Mr. Morton controls the
voting and disposition of all of our voting securities.
29
<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 us.
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 us in which we 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
we shall have any outstanding indebtedness pursuant to the Notes or our current
credit facility.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
We have entered into the Supervisory Agreement with Mr. Morton
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 us in exchange for 2.0% of our annual
gross revenues (as defined therein), which excludes the value of any
complimentary goods or services. We will reimburse Mr. Morton for all costs
and expenses incurred by him in connection with services he provides to us.
In the event either we are 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 1999 were approximately $1.7 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
$1.1 million for fiscal year 1999.
SALE OF PREFERRED STOCK TO MR. MORTON
On August 31, October 1, October 29, and November 2, 1999, we
issued and sold for $2.5 million, $5.5 million, $2.0 million and $18.0
million, respectively, a like aggregate liquidation preference of our 9 1/4%
Series A Cumulative Preferred Stock ("Series A Preferred") to Mr. Morton, our
President, Chairman of our Board of Directors and majority shareholder. The
Series A Preferred pays dividends cumulatively from the date of issue out of
funds legally available for that purpose in cash in arrears on November 30
and May 31 of each year commencing November 30, 1999. Any amounts not paid in
cash cumulate and are compounded semi-annually at a rate of 9 1/4% per year
until paid. The Series A Preferred matures 91 days following the earlier of
either April 1, 2005, or the repayment of the Notes. For more information,
see "Management's Discussion and Analysis of Our Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
COMPLETION GUARANTY
Pursuant to the Completion Guaranty, Mr. Morton guaranteed, subject
to certain conditions and limitations, payment of construction and development
costs in excess of $100.0 million, up to a maximum of $23.0 million. Under
certain of our debt agreements, we were prohibited from implementing a
discretionary change that would cause budgeted construction and development
costs to exceed $87.0 million,
30
<PAGE>
unless Mr. Morton increased the maximum amount available under the Completion
Guaranty, in the amount of such budgeted excess. On or about April 8, 1999,
Mr. Morton agreed to an increase in the budgeted construction and development
cost to $100.0 million, and the increased obligation to a maximum amount of
$23.0 million. We have completed construction of our Expansion for
approximately $100.0 million.
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 Certificate of Amendment of Second Amended and Restated Articles of Incorporation.
**3.3 Certificate of Designation of 9 1/4% Series A Cumulative Preferred Stock, no par value per share.
*3.4 Second Amended and Restated By-Laws of the Company
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
*4.1 Indenture, dated as of March 23, 1998, between the Company,
and First Trust National Association, as Trustee, relating to
the Notes.
*4.2 Form of 9 1/4% Senior Subordinated Notes due 2005 (included
in Exhibit 4.1).
*4.3 Form of 9 1/4% Series B Senior Subordinated Note due 2005 (included in Exhibit
4.1).
*4.4 Registration Rights Agreement, dated as of March 23, 1998, by
and among the Company, Bear Stearns Co. Inc., BancAmerica
Robertson Stephens and Donaldson, Lufkin & Jenrette
Securities Corporation.
*4.5 Completion Guaranty, dated as of March 23, 1998, by and among
Peter A. Morton, Bank of America National Trust and Savings
Association, and First Trust National Association.
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
31
<PAGE>
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 Amendment to No.1 to Loan Agreement.
****10.3 Amendment to No.2 to Loan Agreement.
*10.4 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.
*10.5 Amended and Restated Supervisory Agreement, dated as of
October 21, 1997, between the Company and Peter A. Morton.
*10.6 Employment Agreement, dated October 8, 1997, between the
Company and Gary R. Selesner.
*10.7 Amended and Restated Letter Agreement, dated as of March 4,
1998, between the Company, Lily Pond Investments, Inc. and
Gary R. Selesner.
*10.8 Trademark Sublicense Agreement, dated October 24, 1997, between the Company
and Peter A. Morton.
*10.9 Amendment No.1 to Trademark Sublicense Agreement, dated as of
March 23, 1998, between the Company and Peter A. Morton.
**10.10 Subscription Agreement for 2,500 shares of 9 1/4% Series A
Cumulative Preferred Stock of Hard Rock Hotel, Inc., dated
August 31, 1999, between Peter Morton and the Company.
**10.11 Subscription Agreement for 5,500 shares of 9 1/4% Series A
Cumulative Preferred Stock of Hard Rock Hotel, Inc., dated
October 1, 1999, between Peter Morton and the Company.
**10.12 Employment Agreement, dated August 17, 1999, between the Company and Jonathan Swain.
**10.13 Employment Agreement, dated August 17, 1999, between the Company and Rick Richards.
10.14 Waiver Agreement, dated November 4, 1999, between the Company and the lenders party to
the Loan Agreement, Bank of America National Trust and Savings Association, as Agent,
and Bear, Stearns & Co., Inc. as Co-Agent.
10.15 Subscription Agreement for 2,000 shares of 9 1/4% Series A
Cumulative Preferred Stock of Hard Rock Hotel, Inc., dated
October 29, 1999, between Peter Morton and the Company.
10.16 Subscription Agreement for 18,000 shares of 9 1/4% Series A
Cumulative Preferred Stock of Hard Rock Hotel, Inc., dated
November 2, 1999, between Peter Morton and the Company.
12. RATIO OF EARNINGS TO FIXED CHARGES.
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for the Company.
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>
32
<PAGE>
* Incorporated by reference to designated exhibit to our
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on May 21, 1998 (File No. 333- 53211).
** Incorporated by reference to designated exhibit to our Report on Form
10-Q, filed with the Securities and Exchange Commission for the quarter
ended August 31, 1999 (File No. 333-53211).
*** Incorporated by reference to designated exhibit to our Report on Form
10-Q, filed with the Securities and Exchange Commission for the quarter
ended May 31, 1998 (File No. 333-53211).
**** Incorporated by reference to designated exhibit to our Report on Form
10-Q filed with the Securities and Exchange Commission for the quarter
ended May 31, 1999 (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 our 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 we believe our expectations are based upon reasonable
assumptions within the bounds of our knowledge of our business and operations,
there can be no assurances that actual results will not materially differ from
expected results. We caution 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 our 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 our officers, directors or key
employees; loss or retirement of key executives; significant increases in fuel
or transportation prices; adverse economic conditions in the our key
markets; severe and unusual weather in the our key markets; and 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. We undertake 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."
33
<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, 2000.
HARD ROCK HOTEL, INC.
By:
--------------------------------
Peter A. Morton
CHAIRMAN, PRESIDENT,
CHIEF EXECUTIVE OFFICER
AND SECRETARY
We, the undersigned officers and directors of Hard Rock Hotel, Inc.,
hereby severally constitute Tjeerd R. Brink 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.
Chairman, Chief
- ----------------------------- Executive Officer, February , 2000
Peter A. Morton President and Secretary --
Chief Financial Officer,
- ----------------------------- Treasurer (Principal February , 2000
Tjeerd R. Brink Accounting Officer) --
Director February , 2000
- ----------------------------- --
Gilbert B. Friesen
Director February , 2000
- ----------------------------- --
Stephen A. Marks
34
<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, 1998 and 1999.........................F-3
Statements of Operations for the years ended November 30,
1997, 1998 and 1999..................................................F-4
Statements of Shareholders' Equity (Deficit) for the years ended
November 30, 1997, 1998 and 1999.....................................F-5
Statements of Cash Flows for the years ended November 30,
1997, 1998 and 1999..................................................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, 1998 and 1999, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended November 30, 1999. 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 1999, in conformity
with accounting principles generally accepted in the United States.
Ernst & Young LLP
Reno, Nevada
January 21, 2000
F-2
<PAGE>
Hard Rock Hotel, Inc.
Balance Sheets
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------------
1998 1999
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,567,535 $ 2,039,571
Accounts receivable, net of allowance for doubtful accounts of
$200,000 in 1998 and $449,000 in 1999 3,274,644 6,369,744
Income tax refund receivable 194,237 86,686
Inventories 1,208,126 1,579,934
Prepaid and other current assets 1,480,469 1,512,710
Deferred income taxes 764,740 791,876
------------------- ------------------
Total current assets 11,489,751 12,380,521
Property and equipment, net, at cost 123,884,994 181,961,281
Other assets 7,018,798 5,570,507
------------------- ------------------
Total assets $ 142,393,543 $ 199,912,309
=================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,738,194 $ 3,460,902
Construction related payables 13,000,218 2,744,714
Accrued expenses 4,473,594 7,043,811
Accrued interest payable 1,984,543 2,603,481
Current obligations under capital leases 105,861 93,456
------------------- ------------------
Total current liabilities 22,302,410 15,946,364
Deferred income taxes 764,740 791,876
Obligations under capital leases 93,452 -
Long-term debt due after one year 130,500,000 179,000,000
Commitments and contingencies (NOTE 8)
Redeemable commmon stock (NOTE 8) 325,000 -
Redeemable preferred stock, 9 1/4 Series A Cumulative, no par value:
Authorized shares - 40,000
Issued and outstanding shares - 28,000 in 1999 - 28,296,771
Shareholders' deficit:
Common stock, Class A voting, no par value:
Authorized shares - 40,000
Issued and outstanding shares - 12,000 in 1998 and 1999 - -
Common stock, Class B non-voting, no par value:
Authorized shares - 160,000
Issued and outstanding shares - 64,023 in 1998 and 1999 - -
Paid-in capital 7,508,250 7,508,250
Accumulated deficit (19,100,309) (31,630,952)
------------------- ------------------
Total shareholders' deficit (11,592,059) (24,122,702)
=================== ==================
Total liabilities and shareholders' deficit $ 142,393,543 $ 199,912,309
=================== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Hard Rock Hotel, Inc.
Statements of Operations
<TABLE>
<CAPTION> YEARS ENDED NOVEMBER 30,
------------------------------------------------
1997 1998 1999
-------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Casino $35,394,705 $36,070,304 $37,154,791
Lodging 12,919,081 12,988,375 18,860,025
Food and beverage 16,704,645 18,972,558 24,488,109
Retail 15,404,467 11,714,519 11,492,458
Other income 2,075,603 2,108,646 4,283,769
-------------- ---------------- ----------------
82,498,501 81,854,402 96,279,152
Less complimentaries (5,450,065) (6,189,032) (7,872,049)
-------------- ---------------- ----------------
Net revenues 77,048,436 75,665,370 88,407,103
Costs and expenses:
Casino 17,920,669 18,640,241 21,998,809
Lodging 4,148,942 3,952,576 5,360,175
Food and beverage 10,360,347 11,405,193 15,427,968
Retail 7,102,229 5,503,343 5,232,328
Other 942,920 951,845 2,120,814
Marketing 3,173,822 4,251,989 4,408,109
General and administrative 15,140,052 14,607,166 15,821,293
Depreciation and amortization 5,503,071 5,747,114 10,527,006
Charge for termination of Management
Agreement (NOTE 5) 24,715,000 - -
Pre-opening expenses - - 5,038,095
-------------- ---------------- ----------------
Total costs and expenses 89,007,052 65,059,467 85,934,597
-------------- ---------------- ----------------
Income (loss) from operations (11,958,616) 10,605,903 2,472,506
Interest and other:
Interest expense, net (5,585,280) (10,766,209) (14,678,824)
Other expenses, net (31,763) - (27,554)
-------------- ---------------- ----------------
(5,617,043) (10,766,209) (14,706,378)
-------------- ---------------- ----------------
Loss before extraordinary loss
and income tax benefit (17,575,659) (160,306) (12,233,872)
Income tax benefit 1,168,000 - -
-------------- ---------------- ----------------
Loss before extraordinary loss (16,407,659) (160,306) (12,233,872)
Extraordinary loss - early extinguishment of debt (NOTE 3) (1,081,350) (3,495,777) -
-------------- ---------------- ----------------
Net loss $(17,489,009) $(3,656,083) $(12,233,872)
============== ================ ================
Net loss per common share $ (143.84) $ (48.09) $ (160.92)
============== ================ ================
Shares used in per share calculation $ 121,586 $ 76,023 $ 76,023
============== ================ ================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Hard Rock Hotel, Inc.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Class A common stock Class B common stock Retained Total
---------------------- ---------------------- Paid-in earnings shareholders'
Shares Amount Shares Amount capital (deficit) equity (deficit)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at November 30, 1996 20,000 $ - 106,705 $ - $28,717,250 $ 2,044,783 $ 30,762,033
Net loss - - - - - (17,489,009) (17,489,009)
Charge to paid-in capital - Buyout
Agreement (NOTE 5) (8,000) - (42,682) - (21,209,000) - (21,209,000)
----------------------------------------------------------------------------------------------
Balances at November 30, 1997 12,000 - 64,023 - 7,508,250 (15,444,226) (7,935,976)
Net loss - - - - - (3,656,083) (3,656,083)
----------------------------------------------------------------------------------------------
Balances at November 30, 1998 12,000 - 64,023 - 7,508,250 (19,100,309) (11,592,059)
ACCRUED DIVIDENDS ON REDEEMABLE - - - - - (296,771) (296,771)
PREFERRED STOCK
NET LOSS - - - - - (12,233,872) (12,233,872)
----------------------------------------------------------------------------------------------
BALANCES AT NOVEMBER 30, 1999 12,000 $ - 64,023 $ - $ 7,508,250 $(31,630,952) $(24,122,702)
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Hard Rock Hotel, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------------------
1997 1998 1999
------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(17,489,009) $(3,656,083) $(12,233,872)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 5,503,071 5,747,114 10,527,006
Amortization of loan fees 370,762 676,047 974,393
Compensation accrual for common stock to be 25,000 300,000 (325,000)
issued
Early extinguishment of debt 1,081,350 3,495,777 -
Gain on sale of property and equipment (35,834) - -
Deferred income taxes 263,041 - -
Changes in operating assets and liabilities:
Accounts receivable (294,151) (308,082) (3,095,100)
Income tax refund receivable (2,443,041) 2,248,804 107,551
Inventories (37,193) (142,253) (371,808)
Prepaid and other current assets (24,019) (645,398) (32,241)
Accounts payable 934,029 (154,574) 722,708
Accrued expenses (54,740) (382,341) 2,570,217
Interest payable 19,189 1,907,376 618,938
Income taxes payable (869,401) - -
------------------------------------------------
Net cash provided by (used in) operating activities (13,050,946) 9,086,387 (537,208)
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,556,657) (39,802,207) (68,274,893)
Construction related payables - 13,000,218 (10,255,504)
Decrease (increase) in other assets 57,652 (1,099,450) 145,498
Proceeds from sale of property and equipment 346,951 - -
------------------------------------------------
Net cash used in investing activities (2,152,054) (27,901,439) (78,384,899)
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 105,700,000 131,500,000 66,500,000
Proceeds from issuance of preferred stock - - 28,000,000
Payment of obligations on property to be developed (6,854,201) - -
Principal payments on long-term debt (60,400,000) (106,700,000) (18,000,000)
Payments on capital lease obligations (102,030) (113,502) (105,857)
------------------------------------------------
Net cash provided by financing activities 13,458,797 19,168,506 76,394,143
------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,744,203) 353,454 (2,527,964)
Cash and cash equivalents at beginning of year 5,958,284 4,214,081 4,567,535
------------------------------------------------
Cash and cash equivalents at end of year $ 4,214,081 $ 4,567,535 $ 2,039,571
================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements
November 30, 1997, 1998 and 1999
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 principally 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, 1997, 1998 and 1999, the
Company paid interest of approximately $5,230,000, $7,753,000 (net of $793,000
capitalized) and $13,093,000 (net of $2,264,000 capitalized), respectively, and
income taxes of approximately $2,025,000, $0 and $0, respectively.
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 were capitalized, and during 1999 these costs were charged to
expense when the expansion was completed in May 1999. At November 30, 1998,
capitalized pre-opening costs aggregated $843,000 and were 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, 1997, 1998, and 1999 amounted to approximately
$788,000, $772,000 and $1,041,000, 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 COMPLIMENTARIES
In accordance with industry practice, the Company recognizes as casino revenues
the net win from gaming activities, which is the difference between gaming wins
and losses. Revenues in the accompanying statements of operations exclude the
retail value of rooms, food and beverage, and other complimentaries provided to
customers without charge. The estimated costs of providing such complimentaries
have been classified as casino operating expenses through interdepartmental
allocations as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------------------
1997 1998 1999
-------------------------------------------------
<S> <C> <C> <C>
Food and beverage $ 2,415,203 $ 1,987,233 $ 2,352,310
Lodging 838,617 1,120,747 1,539,918
Other 122,371 134,364 214,982
-------------------------------------------------
Total costs allocated to casino operating costs $ 3,376,191 $ 3,242,344 $ 4,107,210
=================================================
</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,
-----------------------------------------------------
1997 1998 1999
----------------- ---------------- ------------------
<S> <C> <C> <C>
Income (loss) before extraordinary item $ (134.95) $ (2.11) $(160.92)
Extraordinary loss (8.89) (45.98) -
----------------- ---------------- ------------------
Net income (loss) per common share $ (143.84) $ (48.09) $(160.92)
================= ================ ==================
</TABLE>
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the 1999 presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------------
1998 1999
------------------- ------------------
<S> <C> <C>
Retail merchandise $ 829,608 $ 799,901
Restaurants and bars 247,906 605,067
Operating supplies 130,612 174,966
------------------- ------------------
$ 1,208,126 $ 1,579,934
=================== ==================
</TABLE>
F-10
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------------
1998 1999
------------------- ------------------
<S> <C> <C>
Unamortized loan fees and financing costs on the
Notes and New Credit Facility (Note 6), net of
accumulated amortization of $531,893 in 1998 and $4,986,099 $4,119,703
$1,506,286 in 1999
Organization costs, net of accumulated amortization
of $196,639 in 1998 and $286,846 in 1999 196,579 115,998
Prepaid gaming taxes 370,228 338,770
China, glassware, utensils, linens, and other supplies 395,242 996,036
Other long-term assets, including pre-opening costs of
approximately $843,000 in 1998 1,070,650 -
------------------- ------------------
$7,018,798 $5,570,507
=================== ==================
</TABLE>
Loan fees and other financing costs are being amortized over the life of the
respective loans. Organization costs are being amortized over a period of five
years. Base stocks of china, glassware, utensils and linens are being amortized
using the straight-line method over three years to 25% of original cost, with
replacements expensed at the time of purchase.
In connection with the execution of the Notes, the Company's existing credit
facility 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 existing credit facility, the Company
paid off debt under a previous credit facility in its entirety in October 1997.
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.
F-11
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------------
1998 1999
------------------- ------------------
<S> <C> <C>
Land $ 21,015,060 $ 21,015,060
Buildings and improvements 73,314,982 160,360,136
Equipment, furniture and fixtures 16,454,737 28,117,070
Memorabilia 2,363,955 2,906,286
Construction in progress 30,921,426 -
------------------- ------------------
144,070,160 212,398,552
Less accumulated depreciation and amortization (20,185,166) (30,437,271)
------------------- ------------------
$ 123,884,994 $ 181,961,281
=================== ==================
</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 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.
F-12
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
5. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
The twenty-five year Management Agreement with Harveys provided for the
procurement of certain management services related to the design, construction,
maintenance, and continued management of the Company. As part of this agreement,
the Company paid Harveys a base management fee equal to four percent of annual
gross revenues, as defined, net of complimentaries for each fiscal year. In
addition, Harveys was entitled to an incentive fee of up to two percent of
annual gross revenues, net of complimentaries, upon exceeding certain return on
investment targets as defined in the Management Agreement. Total management fees
expenses for these services amounted to approximately $2,776,000, $0 and $0 for
the years ended November 30, 1997, 1998, and 1999, respectively. Total incentive
fees expenses for these services amounted to approximately $65,000, $0 and $0
for the years ended November 30, 1997, 1998 and 1999, 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
complimentaries for each fiscal year. Total supervisory fee expenses for these
services for the years ended November 30, 1997, 1998 and 1999 amounted to
approximately $1,556,000, $1,510,000 and $1,752,000, respectively. These
expenses are included in general and administrative expenses in the accompanying
statements of operations. The unpaid amounts at November 30, 1998 and 1999
($116,000 and $983,000, respectively), are included in accrued expenses in the
accompanying balance sheets.
F-13
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
5. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
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 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 $367,000, $0 and $0 for the years ended November 30, 1997, 1998
and 1999, 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, 1998 and 1999, included in accrued expenses on the accompanying
balance sheets, aggregated approximately $63,000 and $0, 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 $281,000, $894,000 and
$1,134,000 for the years ended November 30, 1997, 1998 and 1999, respectively,
and are included in the accompanying statements of operations. Additionally, the
Company expended approximately $146,000 and $389,000 during fiscal 1998 and 1999
respectively, related to pre-opening costs incurred in connection with the
expansion of the Company's facility. These amounts are included with pre-opening
expenses on the accompanying statement of operations for the year ended November
30, 1999.
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
$628,000, $0 and $0 for such investment banking services for fiscal years 1997,
1998 and 1999, respectively.
F-14
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
6. LONG-TERM DEBT
In March 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 an existing credit facility,
including accrued interest. Concurrent with the execution of the Notes, the
Company secured a senior securred reducing revolving line of credit of $67
million under a new credit facility (the "New Credit Facility") through a group
of banks. In March 1999, the New Credit Facility was amended to increase the
line of credit to $77 million and, in November 1999, the Company executed an
agreement (the "Waiver Agreement") whereby the amount available under the New
Credit Facility was reduced to $62 million. The Waiver Agreement required the
Company to use a portion of the Preferred Stock Issuance (Note 11) to pay down
amounts outstanding under the New Credit Facility. In addition, certain
financial covenants which the Company was not in compliance with were waived and
modified.
The amount available under the New Credit Facility will begin reducing to: $47.0
million as of the last day of fiscal year 2001; $32 million as of the last day
of fiscal year 2002; $16.9 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.
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 9.125% at November
30, 1999), 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, 1999. These margins are dependent upon the Company's debt to
EBITDA ratio, as defined.
F-15
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
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.
Interest on the Notes is payable on each April 1 and October 1. 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.
At November 30, 1999, the Company had outstanding borrowings of $120,000,000
under the Notes and $59,000,000 under the New Credit Facility.
7. INCOME TAXES
The income tax benefit presented in the accompanying statements of operations
consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------------------
1997 1998 1999
----------------- ---------------- -----------------
<S> <C> <C> <C>
Current $ 905,000 $ - -
Deferred 263,000 - -
----------------- ---------------- -----------------
$ 1,168,000 $ - -
================= ================ =================
</TABLE>
The difference between the Company's income tax benefit as presented in the
accompanying statements of operations and income tax benefit computed at the
federal statutory rate is comprised of the items shown in the following table as
a percentage of 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,
----------------------------------------------------
1997 1998 1999
----------------- ---------------- -----------------
<S> <C> <C> <C>
Income tax benefit at
the statutory rate 34.0% 34.0% 34.0%
Nondeductible meals and entertainment (.8) (4.2) (.1)
Valuation allowance (26.9) (29.5) (34.2)
Other, net - (.3) .3
----------------- ---------------- -----------------
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,
--------------------------------------
1998 1999
------------------- ------------------
<S> <C> <C>
Deferred income tax assets:
Preopening costs, net of amortization $ 462,000 $ 92,000
Accrued expenses 550,000 817,000
Net operating loss carryforwards 8,496,000 11,888,000
Tax credit carryforwards 183,000 421,000
------------------- ------------------
9,691,000 13,218,000
Less: valuation allowance (6,091,000) (10,613,000)
------------------- ------------------
Total deferred income tax assets 3,600,000 2,605,000
Deferred income tax liabilities:
Depreciation and amortization 3,493,000 2,605,000
Prepaid expenses 107,000 -
Other - -
------------------- ------------------
Total deferred income tax liabilities 3,600,000 2,605,000
------------------- ------------------
Net deferred income tax asset $ - -
=================== ==================
</TABLE>
F-17
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
A valuation allowance has been established due to the Company's accumulated
losses as of November 30, 1999. The Company has an operating loss carryforward
of approximately $35 million to reduce future taxable income, which will expire
between 2012 and 2019.
8. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
In October 1997, the Company and an employee of the Company entered into an
employment agreement. In a separate agreement entered into at that time, the
employee was to receive 768 shares of the Company's Class B common stock from
the Company, 20% of which would vest in October of each year until 2001, at
which point the remaining 40% would vest, provided the vesting period did not
end upon the resignation or termination for cause, as defined. The Company,
under certain circumstances and upon written demand from the employee, would be
required to purchase the vested shares of the employee for a price of $1,953 per
share. The aggregate redemption amount ($1,500,000) was being recorded as
compensation expense over the service period of five years. During the year
ended November 30, 1999, the employee was terminated for cause and the Company
has determined no shares vested under the separate agreement and no further
liability exists relative to the separate agreement. Both agreements are the
subject of dispute between the Company and the former employee as of November
30, 1999. The Company believes adequate provision has been made in the
accompanying financial statements for any settlement that may occur.
The Company is also a defendant in various other lawsuits relating to routine
matters incidental to its business.
Management does not believe that the outcome of any of the above described
litigation, in the aggregate, will have a material adverse effect on the
Company's financial position or results of operations.
F-18
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
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>
<CAPTION>
<S> <C>
2000 $ 117,000
2001 111,000
2002 67,000
2003 64,000
Thereafter 5,000
------------------
$ 364,000
==================
</TABLE>
Total rental expense was approximately $297,000, $282,000 and $408,000 during
the years ended November 30, 1997, 1998 and 1999, respectively, and is included
in general and administrative expenses in the accompanying statements of
operations.
SELF-INSURANCE
The Company is self-insured for workers' compensation claims, up to an annual
stop loss of $200,000 per claim. The Company maintains a $2.5 million surety
bond 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, 1999.
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.
F-19
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
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, 1997, 1998 and 1999, the Company
recorded approximately $494,000, $445,000 and $314,000, 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, 1997, 1998 and 1999, the Company recorded
approximately $356,000, $516,000 and $481,000, respectively, for its portion of
plan contributions, which are included in the accompanying statement of
operations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (NOTE 6)
The carrying amount of the Company's borrowings under the New Credit Facility
approximates the fair value at November 30, 1998 and 1999, respectively. The
fair value of the Notes, which are publicly traded, approximated their carrying
value at November 30, 1998, and approximated $87 million at November 30, 1999.
11. SALE OF PREFERRED STOCK
During the fourth fiscal quarter of 1999, the Company completed the sale of
28,000 shares of 9 1/4% Series A Cumulative Preferred Stock (the "Preferred
Stock") for proceeds of $28 million. The Preferred Stock was sold to Peter
Morton at its stated subscription price of $1,000 per share. The Preferred Stock
matures 91 days following the earlier of either April 1, 2005, or the repayment
of the Notes (Note 6), together with all accrued and unpaid dividends. The
Company may redeem the Preferred Stock in certain cases, pursuant to gaming
laws. The Preferred Stock does not contain any conversion rights. The holders of
Preferred Stock, as a class, may vote on certain matters adversely affecting the
Preferred Stock, including without limitation, the creation and/or issuance of
any capital stock ranking senior to the Preferred Stock.
F-20
<PAGE>
Hard Rock Hotel, Inc.
Notes to Financial Statements (continued)
11. SALE OF PREFERRED STOCK (CONTINUED)
Dividends on the Preferred Stock are cumulative from the date of original
issuance out of funds legally available for that purpose in cash in arrears on
November 30 and May 31 of each year commencing on November 30, 1999, whether or
not declared. Any amounts not paid in cash cumulate and are compounded
semi-annually at the rate of 9 1/4% per annum until paid. The resulting
liability at November 30, 1999 of approximately $297,000 has been accrued in the
accompanying balance sheet.
In the event of a liquidation of the Company, the holders of the Preferred Stock
will be entitled to be paid the subscription price of all outstanding shares,
plus any accrued and unpaid dividends, before any payments are made to the
holders of common stock.
F-21
<PAGE>
Hard Rock Hotel, Inc., L.P.
Schedule II - Valuation and Qualifying Accounts
Years ended November 30, 1999, 1998 and 1997
(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, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts: $ 200 $ 392 $ (143) $ 449
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
</TABLE>
S-1
<PAGE>
EXHIBIT 10.14
WAIVER AGREEMENT
This Waiver Agreement dated as of November 4, 1999 executed with
reference to the Loan Agreement dated as of March 23, 1998, as amended, among
Hard Rock Hotel, Inc., a Nevada corporation ("Borrower"), the Lenders
referred to therein and Bank of America National Trust and Savings
Association (now known as Bank of America, N.A.), as Administrative Agent
with reference to the following facts:
A. Borrower has failed to be in compliance with its obligations under
the Fixed Charge Coverage covenant set forth in Section 6.13 as of the
last day of its Fiscal Quarters ended May 31, 1999 and August 31, 1999,
and with the Senior Leverage covenant set forth in Section 6.12 of the
Loan Agreement as of the last day of its Fiscal Quarter Ended August 31,
1999.
B. Borrower anticipates that it will not be in compliance with such
convenants as of the last day of its Fiscal Quarter ending November 30,
1999.
C. During the period beginning on August 31, 1999, Peter A. Morton has
purchased $8,000,000 in preferred stock of Borrower. Peter A. Morton has
also agreed to purchase (or cause an entity to be designated by Peter A.
Morton to purchase) for cash additional preferred stock of Borrower
(with identical rights and preferences) prior to December 31, 1999, in
the amount of $20,000,000 (for a total of $28,000,000).
D. Borrower has agreed to use the proceeds of issuance of such
additional preferred stock, concurrently with the issuance thereof, to
(i) pay all remaining construction payables associated with the Proposed
Expansion, and (ii) repay and reduce the outstanding Obligations by an
amount not less than $18,000,000. Concurrently therewith, Borrower
shall reduce the Commitment by not less than $15,000,000.
1. DEFINITIONS. Capitalized terms used herein are used with the
meanings set forth for those terms in the Loan Agreement.
2. ADDITIONAL PREFERRED STOCK; COMMITMENT REDUCTIONS. (a) Borrower has
heretofore issued preferred stock in the aggregate amount of $8,000,000 in a
form delivered to the Administrative Agent and its counsel.
(b) Borrower covenants and agrees that it shall issue, not later than
December 31, 1999, an additional $20,000,000 of preferred stock to Peter A.
Morton (or an entity to be designated by Peter A. Morton) in exchange for
cash and with identical rights and preferences EXCEPT THAT such additional
preferred stock may provide for a coupon in the amount of twelve percent
(12%) or such higher rate as may be acceptable to the Administrative Agent.
(c) Borrower hereby agrees that concurrently with the issuance to Peter
A. Morton or his designee of the final $20,000,000 of preferred stock
referred to above, it shall (i) pay all remaining construction payables
associated with the Proposed Expansion, and (ii) repay the outstanding
Obligations by the amount of the net cash proceeds of such issuance (but not
less than $18,000,000). Borrower agrees that, concurrently with the making
of such payment, the Commitment shall be automatically reduced by $15,000,000.
-1-
<PAGE>
(d) Provided that the Commitment is so reduced by an amount which is not
less than $15,000,000 on or prior to December 31, 1999, the Lenders hereby
agree that the mandatory reductions to the Commitment of $2,475,000 each
required by Section 2.6 of the Loan Agreement to occur on February 29, 2000,
May 31, 2000, August 31, 2000 and November 30, 2000 shall be waived.
3. REPRESENTATIONS. Borrower represents and warrants to the Lenders
that:
(a) No Default or Event of Default has occurred and remains
continuing which is not cured by this Waiver Agreement;
(b) Before giving effect to the purchases of preferred stock
described in Section 2 of this Amendment, the Senior Leverage Ratio as
of August 31, 1999 is not greater than 4.85:1.00 and the Fixed Charge
Coverage Ratio as of the same date is not less than 0.60:1.00.
4. AUGMENTATION OF ANNUALIZED EBITDA AND WAIVER. Subject to the
accuracy of the representation set forth in Section 3(b) hereof, the Lenders
hereby waive any failure of the Borrower to be in compliance with Sections
6.12 and 6.13 of the Loan Agreement as of the Fiscal Quarters ended May 31,
1999 and August 31, 1999. The Lenders hereby agree that the $8,000,000
amount of the preferred stock heretofore issued by Borrower shall be added to
Annualized EBITDA of Borrower in determining the numerator of the Senior
Leverage Ratio and the Fixed Charge Coverage Ratio for the Fiscal Quarter
ending November 30, 1999 and the three immediately following Fiscal Quarters.
No portion of the additional $20,000,000 in preferred stock proposed to be
issued by Borrower shall be so added.
5. SENIOR LEVERAGE RATIO AS OF NOVEMBER 30, 1999. The Lenders hereby
waive the requirement of Section 6.12 that the Senior Leverage Ratio not be
in excess of 2.35:1.00 as of November 30, 1999, provided that the Senior
Leverage Ratio as of that date is not in excess of 3.00:1.00.
6. FIXED CHARGE COVERAGE RATIO AS OF NOVEMBER 30, 1999. The Lenders
hereby waive the requirement of Section 6.13 that the Fixed Charge Coverage
Ratio be not less than 1.15:1.00 as of November 30, 1999, provided that the
Fixed Charge Coverage Ratio as of that date is not less than 1.05:1.00.
7. MAINTENANCE CAPITAL EXPENDITURES. The Lenders hereby waive the
failure of Borrower to comply with Section 6.14(b)'s limitation on the amount
of Maintenance Capital Expenditures which may be made by Borrower during any
Fiscal Year with respect to the Fiscal Year ending November 30, 1999 only,
and provided that such Maintenance Capital Expenditures do not exceed
$7,500,000 during such Fiscal Year.
8. ACKNOWLEDGMENT REGARDING RELEASE OF MAKE-WELL AGREEMENT. It is
acknowledged and agreed that, in determining whether the "Release Date"
referred to in the Make-Well agreement has occurred, no portion of the
proceeds of preferred stock issued by Borrower shall be deemed to increase
Annualized EBITDA.
9. CONDITIONS PRECEDENT. As conditions precedent to the effectiveness
hereof, the Administrative Agent shall have received:
-2-
<PAGE>
(a) Written consents hereto executed by each of the Lenders; and
(b) a written consent and reaffirmation executed by Peter A. Morton
in the form of Exhibit A hereto, pursuant to which he shall confirm his
agreement to purchase Acceptable Preferred Stock as aforesaid.
6. CONFIRMATION. In all other respects, the Loan Agreement and the
other Loan Documents are hereby confirmed.
IN WITNESS WHEREOF, the parties hereto have executed this Waiver
Agreement as of the date first written above by their duly authorized
representatives.
HARD ROCK HOTEL, INC.
By: /s/ Peter Morton
----------------------------------
Title: President
--------------------------------
BANK OF AMERICA, N.A.,
as Administrative Agent
By: /s/ Janice Hammond
----------------------------------
Janice Hammond, Vice President
-3-
<PAGE>
CONSENT OF LENDER
The undersigned Lender is a party to the Loan Agreement dated as of
March 23, 1998, as amended, among Hard Rock Hotel, Inc., a Nevada corporation
("Borrower"), the Lenders referred to therein and Bank of America National
Trust and Savings Association (now known as Bank of America, N.A.), as
Administrative Agent, and hereby consents to the execution and delivery of
a proposed Waiver Agreement, substantially in the form of a draft provided to
the undersigned.
BANK OF AMERICA, N.A.
- ---------------------------
[Name of Lender]
By: ILLEGIBLE
------------------------
Title: Managing Director
--------------------
-4-
<PAGE>
CONSENT OF LENDER
The undersigned Lender is a party to the Loan Agreement dated as of
March 23, 1998, as amended, among Hard Rock Hotel, Inc., a Nevada corporation
("Borrower"), the Lenders referred to therein and Bank of America National
Trust and Savings Association (now known as Bank of America, N.A.), as
Administrative Agent, and hereby consents to the execution and delivery of
a proposed Waiver Agreement, substantially in the form of a draft provided to
the undersigned.
BANK OF SCOTLAND
- ----------------------------
[Name of Lender]
By: /s/ Annie Glynn
-------------------------
Title: Annie Glynn, Senior Vice President
----------------------------------
-5-
<PAGE>
CONSENT OF LENDER
The undersigned Lender is a party to the Loan Agreement dated as of
March 23, 1998, as amended, among Hard Rock Hotel, Inc., a Nevada corporation
("Borrower"), the Lenders referred to therein and Bank of America National
Trust and Savings Association (now known as Bank of America, N.A.), as
Administrative Agent, and hereby consents to the execution and delivery of
a proposed Waiver Agreement, substantially in the form of a draft provided to
the undersigned.
Imperial Bank
- ----------------------------
[Name of Lender]
By: /s/ Steven K. Johnson
-------------------------
Title: SVP - Imperial Bank
---------------------
-6-
<PAGE>
CONSENT OF LENDER
The undersigned Lender is a party to the Loan Agreement dated as of
March 23, 1998, as amended, among Hard Rock Hotel, Inc., a Nevada corporation
("Borrower"), the Lenders referred to therein and Bank of America National
Trust and Savings Association (now known as Bank of America, N.A.), as
Administrative Agent, and hereby consents to the execution and delivery of
a proposed Waiver Agreement, substantially in the form of a draft provided to
the undersigned.
PNC Bank, National Association
/s/ Denise D. Killen
- ------------------------------
Denise D. Killen
Vice President
-7-
<PAGE>
CONSENT OF LENDER
The undersigned Lender is a party to the Loan Agreement dated as of
March 23, 1998, as amended, among Hard Rock Hotel, Inc., a Nevada corporation
("Borrower"), the Lenders referred to therein and Bank of America National
Trust and Savings Association (now known as Bank of America, N.A.), as
Administrative Agent, and hereby consents to the execution and delivery of
a proposed Waiver Agreement, substantially in the form of a draft provided to
the undersigned.
Wells Fargo Bank N.A.
- ----------------------------
[Name of Lender]
By: ILLEGIBLE
-------------------------
Title: Relationship Manager
---------------------
-8-
<PAGE>
Exhibit A
CONSENT OF PETER A. MORTON
This consent is delivered with reference to the Loan agreement dated as
of March 23, 1998, as amended, among Hard Rock Hotel, Inc., a Nevada
corporation ("Borrower"), the Lenders referred to therein and Bank of America
National Trust and Savings Association (now known as Bank of America, N.A.),
as Administrative Agent. The undersigned hereby consents to the execution,
delivery and performance of a proposed Waiver Agreement dated as of August
31, 1999, substantially in the form delivered to the undersigned as a draft.
The undersigned further confirms for the benefit of the Lenders that (a) he
has agreed to make an additional purchase of $20,000,000 in Acceptable
Preferred Stock (as described in the Waiver Agreement) on or before December
31, 1999, and (b) giving effect to the Amendment, the Completion Guaranty and
the Make Well Agreement referred to in the Loan Agreement remain in full
force and effect.
It is acknowledged and agreed that, in determining whether the "Release
Date" referred to in the Make-Well Agreement has occurred, no portion of the
proceeds of Acceptable Preferred Stock shall be deemed to increase Annualized
EBITDA.
/s/ Peter A. Morton
------------------------------
Peter A. Morton
-9-
<PAGE>
EXHIBIT 10.15
SUBSCRIPTION AGREEMENT FOR SHARES
OF 91/4% SERIES A CUMULATIVE
PREFERRED STOCK OF HARD ROCK HOTEL, INC.
This Subscription Agreement is made by and between Hard Rock Hotel,
Inc., a Nevada corporation (the "Company") and Peter Morton, an individual
("Mr. Morton"), who is subscribing hereby for shares of the Company's 91/4%
Series A Cumulative Preferred Stock (the "Shares").
In consideration of the Company's agreement to sell the Shares to Mr.
Morton upon the terms and conditions set forth herein, Mr. Morton agrees and
represents as follows:
A. SUBSCRIPTION
1. Mr. Morton hereby subscribes to purchase 2,000 Shares at $1,000 per
Share. Simultaneously with the execution of this Subscription Agreement, Mr.
Morton is paying and delivering to the Company $2,000,000 in the form of a
check or wire transfer (the "Payment") payable to Hard Rock Hotel, Inc.
2. The closing of the purchase and sale of the Shares (the "Closing")
shall occur on October 29, 1999.
3. At the Closing, against delivery of the Payment by Mr. Morton, the
Company shall deliver to Mr. Morton a certificate representing the Shares
registered in such name as Mr. Morton may request.
B. REPRESENTATIONS AND WARRANTIES
Mr. Morton hereby represents and warrants to, and agrees with the
Company as follows:
(a) The Shares are being purchased for Mr. Morton's own account, for
investment purposes only, and not for the account of any other person or
entity, and not with a view to distribution, assignment, or resale to
others or to fractionalization in whole or in part and that the offering
and sale of the Shares is intended to be exempt from registration under the
Securities Act of 1933 (the "Act") by virtue of Section 4(2) of the Act.
<PAGE>
(b) The person executing this Subscription Agreement on behalf
of Mr. Morton has been duly authorized and is duly qualified (A) to execute
and deliver this Subscription Agreement and all other instruments executed
and delivered on behalf of Mr. Morton in connection with the purchase of
the Shares and (B) to purchase and hold Shares.
C. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with Mr. Morton
as follows:
1. CORPORATE FORM. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada
and has all requisite corporate power and authority to own or lease and
operate its properties and to carry on its business as now conducted.
2. CORPORATE AUTHORITY. The Company has all requisite corporate power
and authority to enter into and perform all of its obligations under this
Agreement and to issue the Shares and to carry out the transactions
contemplated hereby.
3. ACTION AUTHORIZED. The Company has taken all actions necessary to
authorize it to enter into and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby. This Agreement has
been duly executed and delivered by the Company and constitutes a legal,
valid and binding obligation of the Company, enforceable in accordance with
its terms. The Shares, when issued and delivered in accordance with the terms
hereof, will be duly and validly issued, fully paid and nonassessable.
4. REQUIRED FILINGS AND APPROVALS. Neither the nature of the Company
or of its business or properties, nor any circumstance in connection with the
offer, issuance, sale or delivery of the Shares as contemplated hereby, is
such as to require a consent, approval or authorization of, or filing,
registration or qualification with, any governmental authority on the part of
the Company as a condition to the execution and delivery of this Agreement or
the offer, issuance, sale or delivery of the Shares at the Closing, other
than the filings, registrations or qualifications under (i) Regulation D
under the Act and (ii) the state securities laws or "blue sky" laws of any
state of the United States of America that may be required to be made or
obtained, all of which the Company will comply with prior to the date of the
Closing.
5. NO CONFLICTS. None of the execution, delivery or performance of
this Agreement by the Company will conflict with the Second Amended and
Restated Articles of Incorporation, as amended or the Second Amended and
Restated By-laws of the Company or result in any
2
<PAGE>
breach of, or constitute a default under any material contract, agreement or
instrument to which the Company is a party or by which it or any of its
assets is bound.
D. MISCELLANEOUS
1. All pronouns and any variations thereof used herein shall be deemed
to refer to the masculine, feminine, singular, or plural as the identity of
the person or persons may require.
2. Neither this Subscription Agreement nor any provisions hereof shall
be waived, modified, changed, discharged, terminated, revoked, or cancelled
except by an instrument in writing signed by the party against whom any
change, discharge, or termination is sought.
3. Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed to:
the Company at 4455 Paradise Road, Las Vegas, NV 89109 or Mr. Morton at 510
North Robertson Boulevard, Los Angeles, CA 90048.
4. Failure of the Company to exercise any right or remedy under this
Subscription Agreement or any other agreement between the Company and Mr.
Morton, or otherwise, or delay by the Company in exercising such right or
remedy, will not operate as a waiver thereof. No waiver by the Company will
be effective unless and until it is in writing and signed by the Company.
5. This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Nevada,
as such laws are applied by Nevada courts to agreements entered into and to
be performed in Nevada and shall be binding upon Mr. Morton, Mr. Morton's
legal representatives, successors and assigns and shall inure to the benefit
of the Company and its successors and assigns.
6. In the event that any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule
of law. Any provision hereof which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other
provision hereof.
7. This Subscription Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof and supersede
any and all prior or contemporaneous representations, warranties, agreements
and understandings in connection therewith. Except as otherwise provided in
this Article D, this agreement may be amended only by a writing executed by
all parties hereto.
3
<PAGE>
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION THEREFROM IS
AVAILABLE.
4
<PAGE>
IN WITNESS WHEREOF, the Company and Peter Morton have executed this Agreement
as of the date first above written.
HARD ROCK HOTEL, INC.
By: /s/ Peter Morton
---------------------------------
Peter Morton
Title: Chairman of the Board,
Chief Executive Officer,
President and Secretary
Number of shares of the PETER MORTON, AN INDIVIDUAL
Preferred Stock of the Company
subscribed for by Peter Morton:
By: /s/ Peter Morton
---------------------------------
Peter Morton
2,000
- ------------------------------
Shares
Method of Payment for
the Stock by Purchaser:
$2,000,000 by wire transfer of funds or certified or bank cashier's check.
5
<PAGE>
EXHIBIT 10.16
SUBSCRIPTION AGREEMENT FOR SHARES
OF 9 1/4% SERIES A CUMULATIVE
PREFERRED STOCK OF HARD ROCK HOTEL, INC.
This Subscription Agreement is made by and between Hard Rock Hotel, Inc., a
Nevada corporation (the "Company") and Peter Morton, an individual ("Mr.
Morton"), who is subscribing hereby for shares of the Company's 9 1/4% Series A
Cumulative Preferred Stock (the "Shares").
In consideration of the Company's agreement to sell the Shares to Mr.
Morton upon the terms and conditions set forth herein, Mr. Morton agrees and
represents as follows:
A. SUBSCRIPTION
1. Mr. Morton hereby subscribes to purchase 18,000 Shares at $1,000 per
Share. Simultaneously with the execution of this Subscription Agreement, Mr.
Morton is paying and delivering to the Company $18,000,000, in the form of a
check or wire transfer (the "Payment") payable to Hard Rock Hotel, Inc.
2. The closing of the purchase and sale of the Shares (the "Closing")
shall occur on November 2, 1999.
3. At the Closing, against delivery of the Payment by Mr. Morton, the
Company shall deliver to Mr. Morton a certificate representing the Shares
registered in such name as Mr. Morton may request.
B. REPRESENTATIONS AND WARRANTIES
Mr. Morton hereby represents and warrants to, and agrees with the
Company as follows:
(a) The Shares are being purchased for Mr. Morton's own account, for
investment purposes only, and not for the account of any other person or
entity, and not with a view to distribution, assignment, or resale to
others or to fractionalization in whole or in part and that the offering
and sale of the Shares is intended to be exempt from registration under the
Securities Act of 1933 (the "Act") by virtue of Section 4(2) of the Act.
<PAGE>
(b) The person executing this Subscription Agreement on behalf of Mr.
Morton has been duly authorized and is duly qualified (A) to execute and
deliver this Subscription Agreement and all other instruments executed and
delivered on behalf of Mr. Morton in connection with the purchase of the
Shares and (B) to purchase and hold Shares.
C. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with Mr. Morton as
follows:
1. CORPORATE FORM. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada and has all
requisite corporate power and authority to own or lease and operate its
properties and to carry on its business as now conducted.
2. CORPORATE AUTHORITY. The Company has all requisite corporate power
and authority to enter into and perform all of its obligations under this
Agreement and to issue the Shares and to carry out the transactions contemplated
hereby.
3. ACTION AUTHORIZED. The Company has taken all actions necessary to
authorize it to enter into and perform its obligations under this Agreement and
to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by the Company and constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its terms.
The Shares, when issued and delivered in accordance with the terms hereof, will
be duly and validly issued, fully paid and nonassessable.
4. REQUIRED FILINGS AND APPROVALS. Neither the nature of the Company or
of its business or properties, nor any circumstance in connection with the
offer, issuance, sale or delivery of the Shares as contemplated hereby, is such
as to require a consent, approval or authorization of, or filing, registration
or qualification with, any governmental authority on the part of the Company as
a condition to the execution and delivery of this Agreement or the offer,
issuance, sale or delivery of the Shares at the Closing, other than the filings,
registrations or qualifications under (i) Regulation D under the Act and (ii)
the state securities laws or "blue sky" laws of any state of the United States
of America that may be required to be made or obtained, all of which the Company
will comply with prior to the date of the Closing.
5. NO CONFLICTS. None of the execution, delivery or performance of this
Agreement by the Company will conflict with the Second Amended and Restated
Articles of Incorporation, as amended or the Second Amended and Restated By-laws
of the Company or result in any
2
<PAGE>
breach of, or constitute a default under any material contract, agreement or
instrument to which the Company is a party or by which it or any of its
assets is bound.
D. MISCELLANEOUS
1. All pronouns and any variations thereof used herein shall be deemed to
refer to the masculine, feminine, singular, or plural as the identity of the
person or persons may require.
2. Neither this Subscription Agreement nor any provisions hereof shall be
waived, modified, changed, discharged, terminated, revoked, or cancelled except
by an instrument in writing signed by the party against whom any change,
discharge, or termination is sought.
3. Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered mail, return receipt requested, addressed to: the Company
at 4455 Paradise Road, Las Vegas, NV 89109 or Mr. Morton at 510 North Robertson
Boulevard, Los Angeles, CA 90048.
4. Failure of the Company to exercise any right or remedy under this
Subscription Agreement or any other agreement between the Company and Mr.
Morton, or otherwise, or delay by the Company in exercising such right or
remedy, will not operate as a waiver thereof. No waiver by the Company will be
effective unless and until it is in writing and signed by the Company.
5. This Subscription Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of Nevada, as such laws
are applied by Nevada courts to agreements entered into and to be performed in
Nevada and shall be binding upon Mr. Morton, Mr. Morton's legal representatives,
successors and assigns and shall inure to the benefit of the Company and its
successors and assigns.
6. In the event that any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof which may prove invalid or unenforceable under any
law shall not affect the validity or enforceability of any other provision
hereof.
7. This Subscription Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof and supersede any and
all prior or contemporaneous representations, warranties, agreements and
understandings in connection therewith. Except as otherwise provided in this
Article D, this agreement may be amended only by a writing executed by all
parties hereto.
3
<PAGE>
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION THEREFROM IS
AVAILABLE.
4
<PAGE>
IN WITNESS WHEREOF, the Company and Peter Morton have executed this Agreement as
of the date first above written.
HARD ROCK HOTEL, INC.
By: /s/ Peter Morton
-------------------------
Peter Morton
Title: Chairman of the Board,
Chief Executive Officer,
President and Secretary
Number of shares of the PETER MORTON, AN INDIVIDUAL
Preferred Stock of the Company
subscribed for by Peter Morton:
By: /s/ Peter Morton
-------------------------
Peter Morton
18,000
- -----------------------------
Shares
Method of Payment for
the Stock by Purchaser:
$18,000,000 by wire transfer of funds or certified or bank cashier's check.
5
<PAGE>
EXHIBIT 12.1
HARD ROCK HOTEL, INC.
COMPUTATION OF RATION OF EARNINGS TO FIXED CHARGES
May 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRE-TAX EARNINGS (LOSS) (12,234) (160) (17,576) 6,992 (2,838)
FIXED CHARGES 16,950 11,665 5,658 5,711 6,309
LESS: CAPITALIZED INTEREST
INCLUDED IN FIXED CHARGES (2,264) (793) -- -- (1,212)
TOTAL EARNINGS AVAILABLE
TO COVER FIXED CHARGES 2,452 10,712 (11,918) 12,703 2,259
INTEREST EXPENSE 13,686 10,093 5,212 5,196 4,731
CAPITALIZED INTEREST 2,264 793 -- -- 1,212
INTEREST ELEMENTS OF RENTALS 26 103 108 115 69
LOAN FEE AMORTIZATION 974 676 338 399 297
TOTAL FIXED CHARGES 16,950 11,665 5,658 5,710 6,309
RATIO OF EARNINGS TO FIXED CHARGES -- -- -- 2.2 --
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 2,040
<SECURITIES> 0
<RECEIVABLES> 6,906
<ALLOWANCES> (449)
<INVENTORY> 1,580
<CURRENT-ASSETS> 12,381
<PP&E> 212,398
<DEPRECIATION> 30,437
<TOTAL-ASSETS> 199,912
<CURRENT-LIABILITIES> 15,946
<BONDS> 179,000
0
28,297
<COMMON> 0
<OTHER-SE> (24,123)
<TOTAL-LIABILITY-AND-EQUITY> 199,912
<SALES> 0
<TOTAL-REVENUES> 88,407
<CGS> 0
<TOTAL-COSTS> 85,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,706
<INCOME-PRETAX> (12,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,234)
<EPS-BASIC> (161.92)
<EPS-DILUTED> (161.92)
</TABLE>
