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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
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
Hard Rock Hotel, Inc.
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(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
incorporation or organization) Identification No.)
4455 Paradise Road, Las Vegas NV 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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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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock outstanding by class as of November 13, 2000
Class of Common Stock Shares
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Class A Common Stock 12,000
Class B Common Stock 64,023
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HARD ROCK HOTEL, INC.
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Condensed Balance Sheets as of September 30, 2000 (unaudited)and November 30,
1999.......................................................................3
Condensed Statements of Operations for the three-months and nine-months ended
September 30, 2000 and 1999 (unaudited)....................................4
Condensed Statements of Cash Flows for the nine-months ended
September 30, 2000 and 1999 (unaudited)....................................5
Notes to Condensed Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................15
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits..................................................................16
(b) Reports on Form 8-K.......................................................17
</TABLE>
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
HARD ROCK HOTEL, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
September
30, November
2000 30,
(unaudited) 1999
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 8,647 $ 2,039
Accounts receivable, net of allowance for doubtful accounts..................... 5,112 6,370
Income tax refund receivable.................................................... - 87
Inventories..................................................................... 1,076 1,580
Prepaid expenses and other current assets....................................... 996 1,513
Deferred income taxes........................................................... 792 792
--------------- ---------------
Total current assets.......................................................... 16,623 12,381
--------------- ---------------
Property and equipment, net of accumulated depreciation and amortization...........
175,632 181,961
Other assets....................................................................... 4,775 5,570
--------------- ---------------
TOTAL ASSETS....................................................................... $ 197,030 $ 199,912
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................... $ 2,180 $ 3,461
Construction related payables.................................................. 700 2,745
Accrued expenses............................................................... 9,141 7,044
Interest payable............................................................... 5,872 2,603
Current portion of long-term debt.............................................. 500 -
Current obligations under capital leases....................................... 17 93
--------------- ---------------
Total current liabilities................................................... 18,410 15,946
--------------- ---------------
Deferred income taxes.......................................................... 792 792
Long-term debt................................................................. 156,000 179,000
--------------- ---------------
Total long-term liabilities................................................. 156,792 179,792
--------------- ---------------
Total liabilities....................................................... 175,202 195,738
--------------- ---------------
Commitments and contingencies
Preferred stock, 9 1/4 Series A Cumulative, no par value, redeemable, 40,000
shares authorized, 28,000 shares issued and outstanding........................ 30,529 28,297
--------------- ---------------
Preferred stock, 9 1/4 Series B Cumulative, no par value, redeemable, one share
authorized, issued and outstanding............................................. 20,617 -
--------------- ---------------
Shareholders' deficit:
Common stock, Class A voting, no par value, 40,000 shares authorized, 12,000
shares issued and outstanding.................................................. - -
Common stock, Class B non-voting, no par value, 160,000 shares authorized, 64,023
shares issued and outstanding.................................................. - -
Paid-in capital .................................................................. 7,508 7,508
Accumulated deficit............................................................... (36,826) (31,631)
--------------- ---------------
Total shareholders' deficit.................................................... (29,318) (24,123)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT....................................... $ 197,030 $ 199,912
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED STATEMENTS.
3
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HARD ROCK HOTEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Casino.................................................. $ 12,115 $ 8,646 $ 42,206 $ 26,670
Lodging 6,696 5,886 20,341 13,875
Food and beverage....................................... 10,017 7,703 27,207 17,927
Retail.................................................. 2,320 2,756 7,303 8,615
Other income............................................ 1,407 1,236 4,342 3,490
------------ ------------ ------------ ------------
Gross revenues...................................... 32,555 26,227 101,399 70,577
Less: promotional allowances...................... (2,952) (2,321) (8,406) (5,756)
------------ ------------ ------------ ------------
Net revenues........................................ 29,603 23,906 92,993 64,821
------------ ------------ ------------ ------------
Costs and expenses:
Casino.................................................. 6,916 5,955 21,923 16,041
Lodging................................................. 1,863 1,587 5,522 3,879
Food and beverage....................................... 5,223 4,728 14,953 11,504
Retail.................................................. 1,138 1,263 3,327 3,972
Other................................................... 943 809 2,426 1,600
Marketing............................................... 1,397 1,925 3,512 2,987
General and administrative.............................. 5,973 4,420 17,149 11,378
Depreciation and amortization........................... 3,069 3,390 9,055 7,127
Pre-opening............................................. - 454 - 5,038
------------ ------------ ------------ ------------
Total costs and expenses............................ 26,522 24,531 77,867 63,526
------------ ------------ ------------ ------------
Income (loss) from operations................................ 3,081 (625) 15,126 1,295
Other (expense):
Interest expense, net................................... (4,130) (4,621) (12,874) (10,610)
------------ ------------ ------------ ------------
Income (loss) before income tax (provision) benefit.......... (1,049) (5,246) 2,252 (9,315)
Income tax (provision) benefit............................... - 1,414 (104) 2,880
------------ ------------ ------------ ------------
NET INCOME (LOSS)............................................ (1,049) (3,832) 2,148 (6,435)
Preferred stock dividends.................................... (1,158) - (2,631) -
------------ ------------ ------------ ------------
(Loss) applicable to common shareholders..................... $ (2,207) $ (3,832) $ (483) $ (6,435)
============ ============ ============ ============
BASIC AND DILUTED NET (LOSS) PER SHARE:
Applicable to common shareholders....................... $ (29.03) $ (50.41) $ (6.35) $ (84.65)
=========== ========== ========== ==========
Weighted average number of common shares outstanding............. 76,023 76,023 76,023 76,023
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED STATEMENTS.
4
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HARD ROCK HOTEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental schedule)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 2,148 $ (6,435)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....................... 9,055 7,127
Amortization of loan fees........................... 630 490
Deferred income taxes............................... - (3,277)
Changes in operating assets and
liabilities:
Accounts receivable............................ (666) (1,274)
Inventories.................................... 628 (66)
Prepaid expenses and other
current assets............................... 334 (250)
Accounts payable............................... (2,468) 2,805
Accrued expenses............................... 1,753 2,868
Interest payable............................... 2,543 3,350
------------ ------------
Net cash provided by(used in) operating activities........... 13,957 5,338
------------ ------------
Cash flow from investing activities:
Purchases of property and equipment..................... (2,860) (59,881)
Construction related payables........................... 700 -
Decrease (increase) in other assets..................... (15) (577)
------------ ------------
Net cash provided by (used in) investing activities.......... (2,175) (60,458)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock............... 20,000 -
Proceeds from issuance long-term debt................... - 63,500
Principal payments on long-term debt.................... (25,500) -
Payments on capital lease obligations................... (74) (83)
------------ ------------
Net cash provided by (used in) financing activities.......... (5,574) 63,417
------------ ------------
Net increase (decrease) in cash and cash
equivalents............................................. 6,208 8,297
Cash and cash equivalents, beginning of
period.................................................. 2,439 (4,691)
------------ ------------
Cash and cash equivalents, end of period..................... $ 8,647 $ 3,606
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest (net of amount
capitalized of $2,007 in the nine months ended
September 30, 1999)..................................... $ 9,701 $ 6,630
------------ ------------
Cash paid (received) during the period for income taxes...... $ (156) $ 400
------------ ------------
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The value of the 9 1/4% Series A Cumulative Preferred Stock
increased by approximately $2,014,000 in unpaid accrued dividends for the
nine-month period ended September 30, 2000. The value of the 9 1/4% Series B
Cumulative Preferred Stock increased by approximately $617,000 in unpaid
accrued dividends for the nine-month period ended September 30, 2000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED STATEMENTS.
5
<PAGE>
HARD ROCK HOTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis Of Presentation
The accompanying unaudited financial statements of Hard Rock Hotel, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and
other information have been condensed or omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q and they do not
include all information required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Operating results for the three-month and
nine-month periods ended September 30, 2000 are not necessarily indicative of
future financial results or the results that may be expected for the year
ending December 31, 2000. The unaudited interim financial statements
contained herein should be read in conjunction with the audited financial
statements and footnotes for the fiscal year ended November 30, 1999. In
February 2000, the Company changed its financial reporting year-end to
December 31 of each year. Previously, the fiscal year ended on November 30.
The Company has made certain financial statement reclassifications for the
three-month and nine-month periods ended September 30, 1999 in order to
classify amounts in a manner consistent with the three-month and nine-month
periods ended September 30, 2000, respectively.
2. Long-Term Debt
At September 30, 2000, the Company had $120.0 million outstanding in
Senior Subordinated Notes due 2005 and $36.5 million outstanding on its $42.0
million revolving credit facility through a group of banks.
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 credit facility. The Notes are subject to redemption at
the option of the Company, in whole or in part, at any time on or after April
1, 2002, at a premium to the face amount ($120 million) which decreases on
each subsequent anniversary date, plus accrued interest to the date of
redemption. The Notes contain covenants restricting or limiting the ability
of the Company to, among other things, pay dividends, incur additional
indebtedness, issue certain preferred stock and enter into transactions with
affiliates.
The Credit Facility.
Effective August 4, 2000, the Company entered into an amendment with
regard to its revolving credit facility whereby, among other things: (i) the
commitment amount available under the credit facility was reduced to $42.0
million; (ii) the commitment will further begin reducing by $2.0 million on the
last day of each fiscal quarter commencing with the fiscal quarter ending
March 31, 2001; (iii) the commitment will also reduce, beginning September
30, 2001 and on each succeeding September 30, by 50% of excess cash flow, as
defined, for the then most recently completed fiscal year; and, (iv) Peter
Morton has been released from a make-well agreement, as defined. The
reduction provisions in (ii) and (iii) above shall terminate the date upon
which the commitment available under the credit facility is reduced to $25.0
million. The credit facility expires on March 23, 2004.
The 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. The credit facility is secured by substantially
all of the Company's property at the Las Vegas site. Interest on the 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%), 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 September 30, 2000. These margins are
dependent upon the Company's debt to EBITDA ratio, as defined. Interest
accrued on the Base Rate
6
<PAGE>
borrowings is due monthly, up to the maturity date, while interest on LIBOR
borrowings is due quarterly up to the maturity date.
3. Legal Proceedings
On August 27, 1999, Hark Rock Hotel, Inc. and 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 alleging breach of
contract and breach of implied covenant of good faith and fair dealing.
Discovery in this matter is proceeding.
The Company is also involved with various legal matters related to its
business and has provided certain reserves based on estimates related to
those situations where management believes an unfavorable outcome is probable.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with, and is qualified
in its entirety by, the Company's financial statements, including the notes
thereto, and the other financial information appearing elsewhere herein and
by the audited financial statements and footnotes for the year ended November
30, 1999, which appear in our Annual Report on Form 10-K filed with the SEC
on February 28, 2000.
OVERVIEW
Hard Rock Hotel, Inc.'s (the "Company") sole business is the operation
of the Hard Rock Hotel and Casino in Las Vegas, Nevada, which commenced
operations on March 9, 1995.
During the month of May 1999, the Company completed construction of its
expansion of the resort (the "Expansion"). The Expansion included 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 a significantly enlarged swimming pool area featuring, among other
things, swim-up blackjack. Results of operations for periods prior to the
completion of the Expansion may not be comparable to results of operations
for periods after we completed the Expansion.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding our business strategies and
expectations concerning future operations, margins, profitability, liquidity,
capital expenditures and capital resources, are based on current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to
the Company and its management are intended to identify forward-looking
statements. Although management believes that the expectations in such
forward-looking statements are reasonable, it can give no assurance that any
forward looking statements will prove to be correct and actual results may
differ materially. Among the factors that could cause actual results to
differ materially are the following: competition in Las Vegas, government
regulation related to the gaming industry, uncertainty of casino customer
spending and vacationing in casino resorts in Las Vegas, occupancy rates and
average room rates in Las Vegas, the popularity of Las Vegas as a convention
and trade show destination, the completion of infrastructure improvements in
Las Vegas, and general economic and business conditions that may affect
levels of disposable income and pricing of hotel rooms, and other factors
described at various times in the Company's reports filed with the Securities
and Exchange Commission. The Company wishes to caution readers not to place
undue reliance on any forward-looking statements, which statements are made
pursuant to the Private Litigation Reform Act of 1995. The forward-looking
statements contained in this quarterly report on Form 10-Q speak only as of
the date that we have filed the report. We expressly disclaim any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statement contained in this report, including to reflect any change in our
expectations with regard to that forward-looking statement or any change in
events, conditions or circumstances on which that forward-looking statement
is based. For more information regarding risks inherent in an investment in
the Company, see the section "Business - Risk Factors" in our annual Report
on Form 10-K filed with the SEC on February 28, 2000.
8
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
NET REVENUES. Net revenues increased 24% for the three-month period
ended September 30, 2000 to $29.6 million compared to $23.9 million for the
corresponding period of the prior year. The increase in revenues is
primarily attributable to a $3.5 million or 41% increase in casino revenue, a
$2.3 million or 30% increase in food and beverage revenue and a $0.8 million
or 14% increase in lodging revenue. These increases were partially offset by
a decrease in retail revenues and an increase in promotional allowances for
items furnished to customers on a complimentary basis.
CASINO REVENUES. The $3.5 million increase in casino revenues was
primarily due to a $3.3 million or 67% increase in table games revenue and a
$0.3 million or 10% increase in slot machine revenues. The increase in table
games revenues was due to increases in both table games drop and hold
percentage. Table games drop increased 28% or $14.0 million to $63.5 million
from $49.5 million. The average number of table games in operation increased
slightly to 76 from 74. Table games hold percentage increased 2.9 percentage
points to 12.7% from 9.75%. The result of these changes in drop, hold
percent and average number of table games in operation was an increase in
average win per table game per day to $1,157 from $710, an increase of $447
or 63%. Slot machine revenues increased due to an increase in handle offset
partially by a minor decrease in win percentage. Slot machine handle
increased $8.7 million or 11% to $84.4 million from $75.7 million. Slot
machine win percentage remained approximately constant decreasing 0.1
percentage point to 4.7% from 4.8%. The Company decreased the average number
of slot machines in operation by 5 or 1% to 686 from 691 between comparative
periods. The net result of these changes in slot machine handle, win
percentage and average number of slot machines in operation was an increase
in average win per slot machine per day to $63 from $57, an increase of $6 or
11%. We believe the increases in table games drop and slot machine handle
were primarily due to more effective marketing programs.
LODGING REVENUES. The $0.8 million increase in lodging revenues was
primarily due to an increase in the average daily room rate to $106 from $95,
an increase of $11 or 12%, and an increase in occupancy to 96% from 95%.
FOOD AND BEVERAGE REVENUES. The $2.3 million increase in food and
beverage revenues was primarily due to increases in revenues from the newer
facilities including the Baby's night club, banquets, the beach club and the
Pink Taco in addition to an increase in room service.
RETAIL REVENUES. Retail revenues decreased to $2.3 million from $2.8
million, a decrease of $0.5 million or 18%. We believe the decrease in
retail revenues is due in part to a general market decline in the themed
restaurant merchandise segment and the addition of other retail operations in
Las Vegas.
OTHER INCOME. Other income increased to $1.4 million from $1.2 million,
an increase of $0.2 million or 17%. The increase in other income was
primarily due to increases in convenience service commissions, Rock Spa and
beach club rentals.
PROMOTIONAL ALLOWANCES. Promotional allowances increased to $3.0
million from $2.3 million, an increase of $0.7 million or 30%. The increase
is due to increases in casino customers and volume of play. As a percentage
of casino revenues, however, promotional allowances decreased 3 percentage
points, to 24% from 27%, as a result of focusing promotional offerings on
premium customers.
CASINO EXPENSES. Casino expenses as a percentage of casino revenues
decreased to 57% from 69%, a decrease of 12 percentage points. The relative
percentage decrease was due in part to an increase in table games hold
percentage. Variable casino expenses tend to be more closely related to
volume, which increased 28% for table games, as opposed to revenues, which
increased 67% for table games due to the volume increase and hold percentage
increase. The relative percentage decrease in casino expenses was also due
to decreases in labor costs and the cost of rooms and food and beverage
furnished to customers on a complimentary basis in relation to casino
revenues offset partially by cash incentives to slot machine customers which
began being offered in January 2000 pursuant to changes in the slot club
program.
LODGING EXPENSES. Lodging expenses, prior to reclassifying the cost of
complimentaries, remained constant as a percentage of lodging revenues at 35%
for both comparative periods.
FOOD AND BEVERAGE COSTS AND EXPENSES. Food and beverage costs and
expenses in relation to food and beverage revenues, prior to reclassifying
the cost of complimentaries, decreased to 62% from 70%, a decrease of 8
percentage points. The decrease is primarily due to decreases in
administrative, Pink Taco restaurant and banquet labor costs in relation to
food revenues and higher beach club labor efficiencies compared with other
outlets offset partially by increases in room service labor costs incurred in
relation to food revenues.
RETAIL COSTS AND EXPENSES. Retail costs and expenses in relation to
retail revenues, prior to reclassifying the cost of complimentaries,
increased to 53% from 48%, an increase of 5 percentage points. The increase
is due primarily to increases in labor costs in relation to retail revenues.
9
<PAGE>
OTHER COSTS AND EXPENSES. Other costs and expenses in relation to other
income, prior to reclassifying the cost of complimentaries, increased to 67%
from 65%, an increase of 2 percentage points.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses in relation to gross revenues decreased to 23% from
24%, a decrease of 1 percentage point. The relative decrease is primarily
due to reductions in advertising expenses and other costs increasing at a
lower rate than gross revenues offset partially by providing certain reserves
related to various claims and legal matters.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased to $3.1 million from $3.4 million, a decrease of 9% primarily due
to certain equipment with a 5 year depreciable life which became fully
depreciated during the three-month period ended June 30, 2000.
PRE-OPENING EXPENSE. The Company recorded pre-opening expense of $0.5
million for the three months ended September 30, 1999 associated with the
opening of the Expansion during the second quarter of 1999.
NET INTEREST EXPENSE. Net interest expense decreased to $4.1 million
from $4.6 million, a decrease of $0.5 million or 11%. The decrease is
primarily due to the decrease in borrowings under the credit facility, as a
result of using the $20.0 million in proceeds from the issuance of the 9 1/4%
Series B Cumulative Preferred Stock to reduce the balance, offset partially
by in increase in interest rates charged on the credit facility.
LOSS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the factors
described above, the Company decreased loss applicable to common shareholders
from $3.8 million to $2.2 million, an improvement of $1.6 million. The net
positive changes noted in the preceding paragraphs were offset partially by a
$1.4 million reduction in income tax benefit which was recognized in the
prior year period related to operating losses and a $1.2 million increase in
dividends related to the 9 1/4% Series A Cumulative Preferred Stock and 9
1/4% Series B Cumulative Preferred Stock issued between the comparative
periods.
10
<PAGE>
Nine Months Ended September 30, 2000 and 1999
NET REVENUES. Net revenues increased 43% for the nine-month period
ended September 30, 2000 to $93.0 million compared to $64.8 million for the
corresponding period of the prior year. The increase in revenues is primarily
attributable to a $15.5 million or 58% increase in casino revenue, a $9.3
million or 52% increase in food and beverage revenue, a $6.5 million or 47%
increase in lodging revenue and a $0.8 million or 23% increase in other
income. These increases were partially offset by a $1.3 million or 15%
decrease in retail revenues and a $2.6 million or 45% increase in promotional
allowances related to items furnished to customers on a complimentary basis.
CASINO REVENUES. The $15.5 million increase in casino revenues was
primarily due to a $12.1 million or 75% increase in table game revenues and a
$3.2 million or 32% increase in slot machine revenues. The increase in table
games revenues was due to increases in both table games drop and hold
percentage. Table games drop increased 37% to $181.5 million from $132.1
million. Average drop per table per day increased 23% despite a 12% increase
in the average number of table games in operation to 76 from 68. Table games
hold percentage increased 3.4 percentage points to 15.6% from 12.2%. The
result of these changes in drop, hold percentage and average number of table
games in operation was an increase in average win per table game per day to
$1,358 from $970, an increase of $388 or 40%. Slot machine revenues increased
due to an increase in handle offset partially by a decrease in win
percentage. Slot machine handle increased 40% to $291.0 million from $208.4
million. Slot machine win percentage decreased 0.3 percentage points to 4.6%
from 4.9%. The Company decreased the average number of slot machines in
operation to 674 from 715, a decrease of 41 or 6% between comparative
periods. The net result of these changes in slot machine handle, win percent
and average number of slot machines in operation was an increase in average
win per slot machine per day to $72 from $52, an increase of $20 or 38%. We
believe the increases in table games drop and slot machine handle were
primarily due to having a full nine months of operations following the
Expansion and more effective marketing programs.
LODGING REVENUES. The $6.5 million increase in lodging revenues was
primarily due to an increase in average daily rooms available as a result of
the Expansion which was completed in May 1999, an increase in the average
daily room rate to $108 from $97, an increase of $11 or 11%, and an increase
in occupancy to 96% from 94%.
FOOD AND BEVERAGE REVENUES. The $9.3 million increase in food and
beverage revenues was primarily due to revenues from the new restaurants, an
increased number of hotel rooms served by room service, the 6,000 square feet
of ballroom/banquet facilities and the night club which opened in conjunction
with the Expansion.
RETAIL REVENUES. We believe the $1.3 million decrease in retail
revenues was due in part to a general market decline in the themed restaurant
merchandise segment and the addition of other retail operations in Las Vegas.
11
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OTHER INCOME. Other income increased to $4.3 million from $3.5
million, an increase of $0.8 million or 23%. The increase is due to the
Expansion including, the Rock Spa, sundries, convenience service commissions
and Beach Club operations.
PROMOTIONAL ALLOWANCES. Promotional allowances increased to $8.4
million from $5.8 million, an increase of $2.6 million or 45%. The increase
is due to increases in casino customers and volume of play in addition to a
greater array of available amenities as a result of the Expansion. As a
percentage of casino revenues, however, promotional allowances decreased 2
percentage points, to 20% from 22%, as a result of focusing promotional
offerings on premium customers.
CASINO EXPENSES. Casino expenses as a percentage of casino revenues
decreased to 52% from 60%, a decrease of 8 percentage points. The relative
percentage decrease was due in part to an increase in table games hold
percentage. Variable casino expenses tend to be more closely related to
volume, which increased 37% for table games, as opposed to revenues, which
increase 75% for table games due to the volume increase and hold percentage
increase. The relative percentage decrease in casino expenses was also due to
decreases in labor costs and the cost of rooms and food and beverage
furnished to customers on a complimentary basis in relation to casino
revenues offset partially by cash incentives to slot machine customers which
began being offered in January 2000 pursuant to changes in the slot club
program.
LODGING EXPENSES. Lodging expenses, prior to reclassifying the cost
of complimentaries, decreased as a percentage of lodging revenues to 34% from
36%, a decrease of 2 percentage points. The decrease is due primarily to
decreases in administrative, telephone operator and concierge labor costs in
relation to lodging revenues.
FOOD AND BEVERAGE COSTS AND EXPENSES. Food and beverage costs and
expenses in relation to food and beverage revenues, prior to reclassifying
the cost of complimentaries, decreased to 65% from 74%, a decrease of 9
percentage points. The decrease is primarily due to decreases in
administrative, Pink Taco restaurant and banquet labor costs in relation to
food revenues and higher beach club labor efficiencies compared with other
outlets offset partially by increases in room service labor costs incurred in
relation to food revenues.
RETAIL COSTS AND EXPENSES. Retail costs and expenses in relation to
retail revenues, prior to reclassifying the cost of complimentaries,
increased to 51% from 47%, an increase of 4 percentage points. The increase
is due primarily to increases in labor costs incurred in relation to retail
revenues.
OTHER COSTS AND EXPENSES. Other costs and expenses in relation to
other income, prior to reclassifying the cost of complimentaries, increased
to 56% from 46%, an increase of 10 percentage points. The increase is
primarily due to a decrease in chip float revenue for which there is no
significant direct expense and relative labor percentages at certain new
facilities being higher than relative labor percentages in other operating
departments.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses in relation to gross revenues remained constant
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at 20%. The effects of providing certain reserves related to various claims
and legal matters were offset by fixed costs related to the Expansion
increasing at a lower rate than gross revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to $9.1 million from $7.1 million, an increase of 28% primarily due
to the increased capital expenditures associated with the Expansion offset
partially by a decrease in depreciable assets related to certain equipment
with a 5 year depreciable life which became fully depreciated during the
three-month period ended June 30, 2000.
PRE-OPENING EXPENSE. During the nine-month period ended September
30, 1999, the Company recorded $5.0 million of pre-opening expense related to
the opening of the Expansion during the second quarter of 1999.
NET INTEREST EXPENSE. Net interest expense increased to $12.9
million from $10.6 million, an increase of $2.3 million or 22%. The increase
is primarily due to the increase in borrowings associated with the Expansion
offset partially by a decrease in borrowings under the credit facility as a
result of using the $20.0 million in proceeds from the issuance of the 9 1/4%
Series B Cumulative Preferred Stock. Net interest expense also increased due
to an increase in the interest rate charged on the credit facility.
INCOME APPLICABLE TO COMMON SHAREHOLDERS. As a result of the factors
described above, the Company recognized net loss applicable to common
shareholders of $0.5 million compared to a net loss applicable to common
shareholders of $6.4 million in the prior year period, an improvement of $5.9
million. The net increases noted in the preceding paragraphs were offset
partially by $2.6 million of dividends declared on the 9 1/4% Series A
Cumulative Preferred Stock and the 9 1/4% Series B Cumulative Preferred Stock
issued between the comparative periods and the absence in the nine-month
period ended September 30, 2000 of a $2.9 million income tax benefit
recognized in the nine-month period ended September 30, 1999 related to
operating losses.
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LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, the Company's principal
sources of funds were cash on-hand at December 31, 1999, cash provided by
operating activities of $14.0 million and proceeds from the issuance of $20.0
million of 9 1/4% Series B Cumulative Preferred Stock (the additional
preferred share sold pays dividends and matures in a manner consistent with
the Company's existing outstanding shares of 9 1/4% Series A Cumulative
Preferred Stock). The cash provided by operating activities includes net
income before non-cash expenses of $11.8 million and $2.2 million of cash
flow due to changes in operating assets and liabilities. The primary uses of
funds were capital expenditures of $2.9 million and a $25.5 million reduction
in the outstanding borrowings under the Company's credit facility. As a
result, as of September 30, 2000 the Company had cash and cash equivalents of
$8.6 million.
The Company has commenced an $8.0 million remodeling project of the 339
rooms in its original hotel tower. The project is expected to be completed
in two phases with the first phase to be completed during November and
December 2000 and the second phase currently scheduled to be completed during
June and July 2001. As of September 30, 2000, approximately $0.8 million of
cash deposits had been made.
The Company believes that its current cash balances and cash flow from
operations and other sources of cash including the amounts available
under the Company's $42.0 million credit facility will be sufficient to
provide operating and investing liquidity during the next 12 months.
The commitment under the Company's $42.0 million credit facility will
begin reducing by $2.0 million the last day of each fiscal quarter commencing
with the fiscal quarter ending March 31, 2001 and will also reduce, beginning
September 30, 2001 and on each succeeding September 30, by 50% of excess cash
flow, as defined, for the then most recently completed fiscal year.
The Company's $42.0 million 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.
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Item 3. 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 September 30, 2000.
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 $36.5 million and $59.0 million in variable rate debt outstanding
at September 30, 2000 and November 30, 1999, respectively. Based upon the
variable rate debt level at September 30, 2000, a hypothetical 10% adverse
change in interest rates (approximately a 1 percentage point increase in the
effective interest rate) would increase interest expense by approximately
$0.4 million on an annual basis, and likewise decrease our net 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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
On August 27, 1999, Hark Rock Hotel, Inc. and 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
alleging breach of contract and breach of implied covenant of
good faith and fair dealing. Discovery in this matter is
proceeding.
The Company is also involved with various legal matters
related to its business and has provided certain reserves
based on estimates related to those situations where
management believes an unfavorable outcome is probable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
*3.1 Second Amended and Restated Articles 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 Certificate of Designation of 9 1/4% Series B
Cumulative Preferred Stock, no par value per share.
*3.5 Second Amended and Restated By-Laws of the Company.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES.
10. MATERIAL CONTRACTS.
10.1 Employment Agreement, dated November 8, 2000,
between the Company and James D. Bowen.
10.2 Form of Employment Agreement, dated November 2000,
between the Company and Rick Richards.
27. FINANCIAL DATA SCHEDULE.
27.1 Financial Data Schedule for the nine-month periods
ended September 30, 2000 and 1999.
</TABLE>
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<TABLE>
<S> <C>
99. ADDITIONAL EXHIBITS.
***99.1 Assignment Agreement, dated as of August 4,
2000, entered into with reference to the
Loan Agreement, dated as of March 23, 1998,
by and among the Company, as Borrower, the
Lenders party thereto and Bank of America,
N.A., as Agent.
</TABLE>
* Incorporated by reference to designated exhibit to the Company's
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on May 21, 1998 (File No. 333-53211).
** 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 June 30, 2000 (File No. 333-53211).
(b) Reports on Form 8-K
None.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document includes various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Sections
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. Statements
containing expressions such as "believes," "anticipates" or "expects" used in
the Company's press releases and periodic reports on Forms 10-K and 10-Q filed
with the Securities and Exchange Commission are intended to identify
forward-looking statements. All forward-looking statements involve risks and
uncertainties. Although the Company believes its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurances.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HARD ROCK HOTEL, INC.
Date: November 13, 2000 By: /s/ RICK RICHARDS
------------------------------------
Rick Richards
DULY AUTHORIZED OFFICER
/s/ JAMES D. BOWEN
------------------------------------
James D. Bowen
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
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