**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**ý****QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended:June 30, 2003**

 

**OR**

 

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

 

**For the transition periodfrom           to           **

 

**Commission file number 333-53211**

 

**Hard RockHotel, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                                                         |   | **88-0306263**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **4455  Paradise Road, Las Vegas NV**                                              |   | **89109**                             |
| (Address of principal  executive offices)                                          |   | (Zip Code)                            |
|                                                                               |   |                                  |
| Registrant’s telephone  number, including area code:  **(702) 693-5000** |

 

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes oNo ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate thenumber 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 ofAugust 14, 2003

 

| **Class of  Common Stock** |   | **Shares** |
|----------------------------|--------|------------|
| Class A Common Stock       |   | 12,000     |
| Class B Common Stock       |   | 64,023     |

 

 

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HARD ROCK HOTEL, INC.

 

INDEX

 
| Part I  | FINANCIAL INFORMATION |
|---------|-----------------------|
|    |                  |   |   |
|    | Item 1.               | Financial Statements (unaudited) |
|    |                  |   |   |
|    |                  |   | Condensed Balance  Sheets as of June 30, 2003 and December 31, 2002 |
|    |                  |   |   |
|    |                  |   | Condensed  Statements of Operations for the three-month and six-month periods ended  June 30, 2003 and 2002 |
|    |                  |   |   |
|    |                  |   | Condensed  Statements of Cash Flows for the six-month periods ended June 30, 2003  and 2002 |
|    |                  |   |   |
|    |                  |   | Notes to  Condensed Financial Statements |
|    |                  |   |   |
|    | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|    |                  |   |   |
|    | Item 3.               | Quantitative and Qualitative Disclosures about  Market Risk |
|    |                  |   |   |
|    | Item  4.              |   | Controls  and Procedures |
|    |                  |   |   |
| PART II | OTHER INFORMATION     |
|    |                  |   |   |
|    | Item 6.               | Exhibits and Reports  on Form 8-K |
|    |                  |   |   |
|    |                  |   | (a)   Exhibits |
|    |                  |   |   |
|    |                  |   | (b)  Reports  on Form 8-K |

 

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Part I                    FINANCIALINFORMATION

Item 1.                                                     FinancialStatements

 

HARD ROCK HOTEL, INC.

CONDENSED BALANCE SHEETS (unaudited)

(in thousands, except share amounts)

 
|                                                                                                                                                 |   | **June 30,****2003** |    | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|-----------------------------|--------|
| ASSETS                                                                                                                                               |   |                      |    |                        |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| Current assets:                                                                                                                                      |   |                      |    |                        |   |
| Cash and cash equivalents                                                                                                                            |   | $                         | 12,003  |                        | $      | 9,139 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,892 and $1,951 as of June 30, 2003 and December 31,  2002, respectively |   | 6,919                     |    | 10,035                      |   |
| Inventories                                                                                                                                          |   | 1,562                     |    | 1,736                       |   |
| Prepaid expenses and other current assets                                                                                                            |   | 2,075                     |    | 1,855                       |   |
| Related party receivable                                                                                                                             |   | 145                       |    | 116                         |   |
| Total current assets                                                                                                                                 |   | 22,704                    |    | 22,881                      |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| Property and equipment, net of accumulated  depreciation and amortization                                                                            |   | 163,109                   |    | 165,073                     |   |
| Deferred income taxes                                                                                                                                |   | 967                       |    | 817                         |   |
| Other assets                                                                                                                                         |   | 3,710                     |    | 1,815                       |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| TOTAL ASSETS                                                                                                                                         |   | $                         | 190,490 |                        | $      | 190,586 |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| Current liabilities:                                                                                                                                 |   |                      |    |                        |   |
| Accounts payable                                                                                                                                     |   | $                         | 3,817   |                        | $      | 3,564 |   |
| Construction related payables                                                                                                                        |   | 1,235                     |    | 179                         |   |
| Related party payable                                                                                                                                |   | 191                       |    | 92                          |   |
| Accrued expenses                                                                                                                                     |   | 13,377                    |    | 14,733                      |   |
| Interest payable                                                                                                                                     |   | 1,502                     |    | 2,910                       |   |
| Current portion of long-term debt                                                                                                                    |   | —                    |    | 1,084                       |   |
| Total current liabilities                                                                                                                            |   | 20,122                    |    | 22,562                      |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| Deferred income taxes                                                                                                                                |   | 696                       |    | 696                         |   |
| Qualified subordinated notes to related  parties                                                                                                     |   | 50,037                    |    | —                      |   |
| Long-term debt                                                                                                                                       |   | 160,000                   |    | 143,289                     |   |
| Total long-term liabilities                                                                                                                          |   | 210,733                   |    | 143,985                     |   |
| Total liabilities                                                                                                                                    |   | 230,855                   |    | 166,547                     |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| 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           |   | —                    |    | 37,411                      |   |
| Preferred stock, 9 1⁄4% Series B Cumulative,  no par value, redeemable, one share authorized, issued and outstanding                              |   | —                    |    | 25,280                      |   |
| Total preferred stock                                                                                                                                |   | —                    |    | 62,691                      |   |
|                                                                                                                                                 |   |                      |    |                        |   |
| Shareholders’ deficiency:                                                                                                                       |   |                      |    |                        |   |
| 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                                                                                                                                  |   | (47,873                   | )       | (46,160                     | )      |
| Total shareholders’ deficiency                                                                                                                  |   | (40,365                   | )       | (38,652                     | )      |
|                                                                                                                                                 |   |                      |    |                        |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’  DEFICIENCY                                                                                                 |   | $                         | 190,490 |                        | $      | 190,586 |   |

 

*The accompanying notes are anintegral part of these unaudited condensed financial statements*

 

3

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 
|                                                  |   | **Three  months Ended  June 30** |       | **Six months  Ended   June 30** |       |
|-------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|------------|
|                                                  |   | **2003**                              |       | **2002**                             |       | **2003** |   | **2002** |   |
| Revenue:                                              |   |                                  |       |                                 |       |   |   |   |   |
| Casino                                                |   | $                                     | 13,798     |                                 | $          | 13,753 |   | $ | 28,047 |   | $ | 27,146 |   |
| Lodging                                               |   | 7,737                                 |       | 7,209                                |       | 15,096 |   | 13,822 |   |
| Food and beverage                                     |   | 12,161                                |       | 11,658                               |       | 23,398 |   | 21,618 |   |
| Retail                                                |   | 2,211                                 |       | 2,384                                |       | 4,236 |   | 4,625 |   |
| Other income                                          |   | 1,985                                 |       | 1,964                                |       | 3,687 |   | 3,616 |   |
| Gross revenues                                        |   | 37,892                                |       | 36,968                               |       | 74,464 |   | 70,827 |   |
| Less:   promotional allowances                   |   | (2,915                                | )          | (2,820                               | )          | (5,605 | ) | (5,363 | ) |
| Net revenues                                          |   | 34,977                                |       | 34,148                               |       | 68,859 |   | 65,464 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Costs and expenses:                                   |   |                                  |       |                                 |       |   |   |   |   |
| Casino                                                |   | 8,011                                 |       | 8,452                                |       | 16,749 |   | 16,264 |   |
| Lodging                                               |   | 1,846                                 |       | 1,783                                |       | 3,784 |   | 3,517 |   |
| Food and beverage                                     |   | 6,272                                 |       | 5,557                                |       | 12,102 |   | 10,587 |   |
| Retail                                                |   | 946                                   |       | 989                                  |       | 1,861 |   | 1,998 |   |
| Other                                                 |   | 1,003                                 |       | 1,047                                |       | 1,881 |   | 1,918 |   |
| Marketing                                             |   | 2,156                                 |       | 1,658                                |       | 3,237 |   | 3,597 |   |
| Related party expenses                                |   | 1,126                                 |       | 888                                  |       | 2,205 |   | 1,778 |   |
| General and administrative                            |   | 4,682                                 |       | 4,058                                |       | 9,398 |   | 8,191 |   |
| Depreciation and amortization                         |   | 2,887                                 |       | 2,744                                |       | 5,776 |   | 5,657 |   |
| Pre-opening                                           |   | 11                                    |       | —                               |       | 23 |   | — |   |
| Total costs and expenses                              |   | 28,940                                |       | 27,176                               |       | 57,016 |   | 53,507 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Income from operations                                |   | 6,037                                 |       | 6,972                                |       | 11,843 |   | 11,957 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Other income (expense):                               |   |                                  |       |                                 |       |   |   |   |   |
| Interest income                                       |   | 9                                     |       | 14                                   |       | 15 |   | 26 |   |
| Interest expense                                      |   | (3,769                                | )          | (3,299                               | )          | (7,034 | ) | (6,686 | ) |
| Loss on early extinguishments of debt                 |   | (4,258                                | )          | —                               |       | (4,258 | ) | — |   |
| Other, net                                            |   | 3                                     |       | 44                                   |       | (33 | ) | (44 | ) |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Income (loss) before provision for income  taxes      |   | (1,978                                | )          | 3,731                                |       | 533 |   | 5,253 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Income tax provision (benefit)                        |   | —                                |       | —                               |       | (100 | ) | — |   |
| NET INCOME (LOSS)                                     |   | (1,978                                | )          | 3,731                                |       | 633 |   | 5,253 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Preferred stock dividends                             |   | (946                                  | )          | (1,337                               | )          | (2,346 | ) | (2,643 | ) |
| Income (loss) applicable to common  shareholders      |   | $                                     | (2,924     | )                                    | $          | 2,394 |   | $ | (1,713 | ) | $ | 2,610 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| BASIC AND DILUTED NET INCOME (LOSS) PER  SHARE:       |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Applicable to common shareholders                     |   | $                                     | (38.46     | )                                    | $          | 31.49 |   | $ | (22.53 | ) | $ | 34.33 |   |
|                                                  |   |                                  |       |                                 |       |   |   |   |   |
| Weighted average number of common shares  outstanding |   | 76,023                                |       | 76,023                               |       | 76,023 |   | 76,023 |   |

 

*The accompanying notes are anintegral part of these unaudited condensed financial statements.*

 

4

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, except supplemental schedule)

(unaudited)

 
|                                                                                         |   | **Six  Months Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                         |   | **2003**                                  |   | **2002** |   |
| Cash flows from operating activities:                                                        |   |                                      |   |   |   |
| Net income                                                                                   |   | $                                         | 633    |   | $ | 5,253 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                                      |   |   |   |
| Depreciation and amortization                                                                |   | 5,776                                     |   | 5,657 |   |
| Provision for losses on accounts receivable                                                  |   | 45                                        |   | (21 | ) |
| Amortization of loan fees                                                                    |   | 342                                       |   | 369 |   |
| Loss on sales of property and equipment                                                      |   | 33                                        |   | 44 |   |
| Loss on early extinguishment of debt                                                         |   | 4,258                                     |   | — |   |
| Changes in operating assets and  liabilities:                                                |   |                                      |   |   |   |
| Accounts receivable                                                                          |   | 3,071                                     |   | (579 | ) |
| Inventories                                                                                  |   | 174                                       |   | 177 |   |
| Prepaid expenses and other current assets                                                    |   | (220                                      | )      | (208 | ) |
| Related party receivable                                                                     |   | (29                                       | )      | — |   |
| Increase in deferred income taxes                                                            |   | (150                                      | )      | — |   |
| Accounts payable                                                                             |   | 253                                       |   | 380 |   |
| Related party payable                                                                        |   | 99                                        |   | (6 | ) |
| Accrued expenses                                                                             |   | (1,356                                    | )      | (331 | ) |
| Interest payable                                                                             |   | (1,408                                    | )      | (21 | ) |
| Net cash provided by operating activities                                                    |   | 11,521                                    |   | 10,714 |   |
|                                                                                         |   |                                      |   |   |   |
| Cash flows used in investing activities:                                                     |   |                                      |   |   |   |
| Purchases of property and equipment                                                          |   | (3,845                                    | )      | (1,725 | ) |
| Proceeds from sales of property and equipment                                                |   | —                                    |   | 52 |   |
| Construction payables                                                                        |   | 1,056                                     |   | (2,024 | ) |
| Decrease in other assets                                                                     |   | (1                                        | )      | (168 | ) |
| Net cash used in investing activities                                                        |   | (2,790                                    | )      | (3,865 | ) |
|                                                                                         |   |                                      |   |   |   |
| Cash flows used in financing activities:                                                     |   |                                      |   |   |   |
| Net proceeds from borrowings                                                                 |   | 156,983                                   |   | — |   |
| Other debt issuance costs                                                                    |   | (437                                      | )      | — |   |
| Payment of accrued dividends on preferred  stock                                             |   | (15,000                                   | )      | — |   |
| Principal payments on long-term debt                                                         |   | (144,373                                  | )      | (6,289 | ) |
| Premium on early retirement of long-term  debt                                               |   | (3,040                                    | )      | — |   |
| Net cash used in financing activities                                                        |   | (5,867                                    | )      | (6,289 | ) |
|                                                                                         |   |                                      |   |   |   |
| Net increase in cash and cash equivalents                                                    |   | 2,864                                     |   | 560 |   |
| Cash and cash equivalents, beginning of  period                                              |   | 9,139                                     |   | 8,591 |   |
| Cash and cash equivalents, end of period                                                     |   | $                                         | 12,003 |   | $ | 9,151 |   |
|                                                                                         |   |                                      |   |   |   |
| Supplemental disclosures of cash flow  information:                                          |   |                                      |   |   |   |
| Cash paid during the period for interest                                                     |   | $                                         | 8,100  |   | $ | 6,313 |   |
| Cash paid during the period for income  taxes, net                                           |   | $                                         | 75     |   | $ | — |   |

 

*Theaccompanying notes are an integral part of these unaudited condensed financialstatements*

 

5

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Supplemental Schedule of Non-CashInvesting and Financing Activities:

 

In conjunction with the issuance of $140,000,000 of Second Lien Notesand a $40,000,000 Senior Secured Credit Facility (of which the $20,000,000Revolving Credit Facility portion was not drawn upon as of June 30, 2003)during May 2003, issuance costs of $2,450,000 and $567,000, respectively,were withheld from the proceeds, therefrom.

 

During May 2003, the Company issued $50,037,000 of QualifiedSubordinated Notes to related parties and redeemed and retired the 9 1/4%Series A Cumulative Preferred Stock and the 9 1/4% Series B CumulativePreferred Stock.

 

The value of the 9 1/4% Series A Cumulative Preferred Stock increasedby approximately $1,577,000 in unpaid accrued dividends for the six-monthperiod ended June 30, 2002.

 

The value of the 9 1/4% Series B Cumulative Preferred Stock increasedby approximately $1,066,000 in unpaid accrued dividends for the six-monthperiods ended June 30, 2002.

 

The Company purchased $1,110,000 of equipment in exchange for indebtednessfor the six-month period ended June 30, 2002.

 

6

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1.                                       BASISOF PRESENTATION

 

Hard Rock Hotel, Inc. (the “Company”), a Nevada corporationincorporated on August 30, 1993, operates a hotel-casino in Las Vegas,Nevada (the “Resort”).  Lily PondInvestments, Inc. (“Lily Pond”), a Nevada corporation controlled and majorityowned by Peter Morton, owns all of the voting shares and 93% of the non-votingshares of the Company.  Mr. Morton hasgranted a sublicense to the Company, pursuant to which the Company holds theexclusive right to use the “Hard Rock Hotel” trademark for the Company’soperations in Las Vegas.  Thesefinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed oromitted from the interim financial statements presented in this Quarterly Reporton Form 10-Q and they do not include all information required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the amountsof revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Operating results for the three-month andsix-month periods ended June 30, 2003 are not necessarily indicative offuture financial results or the results that may be expected for the yearending December 31, 2003.  Theunaudited interim financial statements contained herein should be read inconjunction with the audited financial statements and footnotes for the yearended December 31, 2002.  TheCompany has made certain financial statement reclassifications for the 2002financial statements in order to classify amounts in a manner consistent withthe 2003 financial statements which have had no effect upon net income.

 

2.                                       LONG-TERMDEBT

 

In May 2003,the Company obtained funding of approximately $137.6 million in net proceedsfrom the offering of $140.0 million aggregate principal amount of its 8.875%Second Lien Notes due 2013 (the “2013 Notes”) and paid additional costs ofapproximately $0.4 million in conjunction with this issuance in cash.  Concurrent with the execution of the 2013Notes, the Company secured a $40 million Senior Secured Credit Facility (the“Facility”) through a group of banks at a cost of approximately $0.6 millionwhich was withheld from the net proceeds. The Facility consists of a $20 million, five-year senior secured termloan (the “Term Loan”) and a $20 million senior secured revolving creditfacility (the “Revolving Credit Facility”). As of June 30, 2003, the Company had $140.0 million outstanding in2013 Notes, $20.0 million outstanding on its Term Loan and had no balanceoutstanding on the Revolving Credit Facility. The 2013 Notes are contractually subordinated in right of payment to allindebtedness incurred pursuant to the Facility and the liens and security interestssecuring the obligations of the Company under the 2013 Notes are contractuallysubordinated to the liens securing the obligations of the Company under theFacility.

 

The net proceedsfrom the issuance of the 2013 Notes together with the borrowings under theFacility and cash on hand, were used to redeem and repurchase the Company’s$120.0 million 9.25% Senior Subordinated Notes due in 2005, repay the entire$18.0 million balance outstanding on its $30.0 million senior revolving creditfacility, repay $1.3 million of purchase money indebtedness, to pay a $15.0million of the accrued dividends on the Company’s preferred stock, to pay costsand expenses related to the foregoing, to finance working capital and toprovide liquidity to fund general and corporate purposes.  A loss on early extinguishment of debt of$4.2 million related to a $3.0 million premium paid to the holders ofthe Company's 9.25% Notes which were tendered or called during the three monthsended June 30, 2003 and due to a $1.2 million write-off of unamortizeddeferred debt issuance costs related to the tendered and called notes.

 

Junior Subordinated Notes

 

The Companyexchanged all of its outstanding preferred stock and the remaining accrued andunpaid dividends thereon for an aggregate principal amount of juniorsubordinated notes equal to approximately $50.1 million (the “JuniorNotes”).  Upon issuance of the JuniorNotes, the Company’s preferred stock ceased to remain outstanding.  Interest on the Junior Notes is payable oneach January 15 and July 15, commencing on January 15, 2004, and may be paid incash or in kind at the Company’s option, provided that interest will be paid inkind if a payment of such interest in cash would cause a default under the 2013Notes or the Facility.  The Junior Notesrequire that any semi-annual interest payment in cash be equal to the lesser of(x) 50% of the amount of interest accrued on the Junior Notes since the mostrecent interest payment date and (y) the amount of interest that the Company ispermitted to pay in cash without causing a default under the 2013 Notes or theFacility.  For interest payments payablein cash, interest accrues at a rate per annum equal to 9.875%, and for interestpayments payable in kind, interest accrues at a rate per annum equal to10.50%.  The Junior Notes arecontractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.  The JuniorNotes mature on January 15, 2014 but are subject to redemption at the option ofthe Company, in whole or in part, at any time on or after January 15, 2009, ata premium to the principal amount thereof that decreases on each subsequentanniversary date, plus accrued interest to the date of redemption.  The Junior Notes contain covenantsrestricting the Company’s ability to, among other things, sell or otherwisedispose of its assets, pay dividends, incur additional indebtedness, makeacquisitions or merge or consolidate with another entity and enter intotransactions with affiliates.

 

2013 Notes

 

Interest on the2013 Notes is payable on each June 1 and December 1 beginningDecember 1, 2003.  The 2013 Notesare secured by a security interest in substantially all of the Company’sexisting and future assets, other than licenses may not be pledged underapplicable law.  The security interestis junior to the security interest in the assets securing our obligation underour Facility and except for permitted secured purchase money indebtedness.  The 2013 Notes are subject to redemption atthe option of the Company, in whole or in part, at any time on or afterJune 1, 2008, at a premium to the face amount ($140 million) thatdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The 2013 Notescontain covenants restricting or limiting the ability of the Company to, amongother things, pay dividends, create liens or other encumbrances, incuradditional indebtedness, issue certain preferred stock, sell or otherwisedispose of a portion of its assets, make acquisitions or merge or consolidatewith another entity and enter into transactions with affiliates.  The Company was in compliance with thesecovenants as of June 30, 2003.

 

7

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# Facility

 

The Facility contains certain covenants including, among other things,financial covenants, limitations on the Company from disposing of capitalstock, entering into mergers and certain acquisitions, incurring liens orindebtedness, issuing dividends on stock, and entering into transactions withaffiliates.  The Company is in compliancewith these covenants as of June 30, 2003. The Facility is secured by substantially all of the Company’s propertyat the Las Vegas site.  Interest on theFacility accrues on all individual borrowings at an interest rate determined atthe option of the Company, at either the LIBOR Index plus an applicable margin(not to exceed 3.5% (applicable margin was 3.50% at June 30, 2003) andaggregating  4.4% at June 30,2003), or the Base Rate, defined as the higher of the Federal Funds Rate plus0.5%, or the reference rate, as defined, plus an applicable margin (not toexceed 2.25%).  The Company chose theLIBOR Index for all of its borrowings outstanding at June 30, 2003.  These margins are dependent upon theCompany’s total debt to EBITDA ratio, as defined.  Interest accrued on the Base Rate borrowings is due monthly, upto the maturity date, while interest on LIBOR borrowings is due quarterly up tothe maturity date.

 

3.                                       LEGAL AND REGULATORY PROCEEDINGS

 

The Company is a defendant in various lawsuits relating to routinematters incidental to its business.

 

Management provides an accrual for estimated losses that may occur anddoes not believe that the outcome of any pending claims or litigation, in theaggregate, will have a material adverse effect on the Company’s financialposition, results of operations or liquidity beyond the amounts recorded in theaccompanying balance sheet as of June 30, 2003.

 

 

8

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4.                                       RECENTACCOUNTING PRONOUNCEMENTS

 

In April 2003, the FASB issued SFAS No. 149, “Amendment toStatement 133 on Derivative Instruments and Hedging Activities.”  SFAS No.149 amends and clarifies accounting for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities under SFAS No. 133.  SFAS No.149 is applied prospectively and is effective for contracts entered into ormodified after June 30, 2003, except for SFAS No. 133 implementationissues that have been effective for fiscal quarters that began prior toJune 15, 2003 and certain provisions relating to forward purchases andsales on securities that do not yet exist. The Company has not determined the effect, if any, that SFAS No. 149will have on its financial statements.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.  SFAS No. 150 establishes standards for how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  SFAS No.150 is effective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  We will adoptthe standard on July 1, 2003.  TheCompany has completed its evaluation of SFAS 150 and has determined that thereis no material effect on its financial statements as of June 30, 2003 andanticipates implementing it on July 1, 2003.

 

5.                                       CONSTRUCTIONCOMMITMENT

 

During April 2003, the Company entered into a $1.3 millionconditional sale agreement, payable on or before October 1, 2003, for themanufacture and installation of four full color live video LED sign systems,$0.4 million of which has been paid to date.

 

6.                                       SUBSEQUENTEVENTS

 

DuringAugust 2003, the Company entered into various agreements to combine ten ofits existing hotel rooms into a “mega-suite” of approximately 4,500 square feetwith 3 bedrooms, 4 bathrooms, a dining room, a kitchen, a spa room, a billiardroom and a professional style bowling alley for approximately $2.5 million.

 

DuringAugust 2003, the Company entered into an agreement to expand its parkinggarage facility by 380 spaces for approximately $4.0 million.

 

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Item2.                                                     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

The following discussionshould be read in conjunction with, and is qualified in its entirety by, theCompany’s financial statements, including the notes thereto, and the otherfinancial information appearing elsewhere herein and by the auditedfinancial statements and footnotes for the year ended December 31, 2002,which may be obtained upon request from the Company.

 

SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS

 

This document includes various “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Sections21E of the Securities Exchange Act of 1934, as amended, which represent theCompany’s expectations or beliefs concerning future events.  Statements containing expressions such as“believes,” “anticipates” or “expects” used in our press releases and periodicreports on Forms 10-K and 10-Q filed with the Securities and ExchangeCommission are intended to identify forward-looking statements.  All forward-looking statements involve risksand uncertainties. Although we believe our expectations are based uponreasonable assumptions within the bounds of our knowledge of our business andoperations, there can be no assurances that actual results will not materiallydiffer from expected results. We caution that these and similar statementsincluded in this report and in previously filed periodic reports, includingreports filed on Forms 10-K and 10-Q, are further qualified by importantfactors that could cause actual results to differ materially from those in theforward-looking statements.  Suchfactors include, without limitation, the following:  increased competition in existing markets or the opening of newgaming jurisdictions; a decline in the public acceptance of gaming; thelimitation, conditioning or suspension of any of our gaming licenses; increasesin or new taxes imposed on gaming revenues or gaming devices; a finding ofunsuitability by regulatory authorities with respect to our officers, directorsor key employees; loss or retirement of key executives; significant increasesin fuel or transportation prices; adverse economic conditions in our keymarkets; severe and unusual weather in our key markets; and adverse results ofsignificant litigation matters.  Readers are cautioned not to placeundue reliance on forward-looking statements, which speak only as of the datethereof.  We expressly disclaimany obligation or undertaking to disseminate any updates or revisions to anyforward-looking statement contained in this report, including to reflect anychange in our expectations with regard to that forward-looking statement or anychange in events, conditions or circumstances on which that forward-lookingstatement is based.  For moreinformation regarding risks inherent in an investment in the Company, see thesection “Business — Risk Factors” in our annual report on Form 10-K filed withthe SEC on March 31, 2003.

 

OVERVIEW

 

Our sole business is the operation of the Resort.

 

RESULTS OFOPERATIONS

 

Three Months EndedJune 30, 2003 and 2002

 

NETREVENUES.  Net revenues increased 2% forthe three-month period ended June 30, 2003 to $35.0 million compared to$34.1 million for the three-month period ended June 30, 2002.  The $0.9 million increase in net revenues isprimarily attributable to a $0.5 million or 7% increase in hotel revenues, a$0.5 million or 4% increase in food and beverage revenues and a $0.1 million orless than 1% combined increase in casino and other revenues.  These increases were partially offset by a$0.2 million or 7% decrease in retail revenues and a $0.1 million or 3%increase in promotional allowances related to items furnished to customers on acomplimentary basis.

 

CASINO REVENUES.  The less than$0.1 million increase in casino revenues was primarily due to a $1.1 million or33% increase in slot machine revenues and a $0.2 million or 257% increasein race and sports book revenues.  Theseincreases were partially offset by a $1.3 million or 12% decrease in tablegames revenues.  The increase in slotmachine revenues was due to an increase in slot machine handle and holdpercentage.  Slot machine handleincreased $5.6 million or 6% to $94.2 million from $88.6 million.  Slot machine hold percentage increased 0.9percentage points to 4.5% from 3.6%. The average number of slot machines in operation decreased to 559 from566, a decrease of 7 machines or 1%. The net result of these changes in handle, hold percentage and averagenumber of slot machines in operation was an increase in win per slot machineper day to $82 from $62, an increase of $20 or 32%.  The increase in race and sports book revenues was due to anincrease in race and sports handle and hold percentage.  Race and sports book handle increased $0.9million or 32% to $3.8 million from $2.9 million.  Race and sports hold percentage increased 5.5 percentage pointsto 9.5% from 4.0%.  The decrease intable games revenues was due to a decrease in table games drop and holdpercentage.  Table games drop decreased$5.1 million or 6% to $73.4 million from $78.5 million.  Table games hold percentage decreased 0.7percentage points to 12.6% from 13.3%. The average number of table games in operations decreased to 91 from 93,a decrease of 2 games or 2%.  The netresult of these changes in drop, hold percentage and average number of tablegames in operation was a decrease in win per table game per day to $1,112 from$1,236, a decrease of $124 or 10%.  Wehave historically reported table

 

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games hold percentage using thegross method, while casinos on the Strip report hold percentage using the netmethod (which reduces the table game drop by marker repayments made in thegaming pit area).  For the purpose ofcomparison to properties on the Strip, our net hold percentage for thethree-month period ended June 30, 2003 was 14.6% compared to 16.0% for thethree-month period ended June 30, 2002.

 

LODGING REVENUES.  The $0.5million increase in lodging revenues to $7.7 million from $7.2 million wasprimarily due to an increase in average daily rate (“ADR”) to $129 from $118and a $0.1 million increase in miscellaneous sales.  These increases were offset partially by a $0.1 million decreasein telephone sales due to the increasing use of cellular telephones, a trendthat we expect to continue.  Theoccupancy percentage decreased 1% to 97% from 98% between periods.

 

FOOD AND BEVERAGE REVENUES.  The$0.5 million increase in food and beverage revenues was due to beveragerevenues increasing approximately $0.6 million offset partially by foodrevenues decreasing by approximately $0.1 million.  The increases in beverage revenues were primarily from theopening of Simon bar of $0.3 million, a $0.3 million increase in Baby’snightclub revenues, a $0.2 million increase in Beach Club beverage revenues,and a $0.1 million increase in the Center Bar. These increases were offset partially by a $0.1 million decrease fromthe closing of Mortoni’s bar, a $0.1 million decrease in each of the Joint barand Banquet beverage and a combined $0.1 million decrease in Room Service, AJ’sand Mr. Lucky’s beverage revenues.  Foodrevenues decreased due to a $0.8 million decrease in Banquet food and a $0.2million decrease from the closing of Mortoni’s restaurant.  These decreases were offset partially by a$0.6 million increase from the opening of Simon Kitchen and $0.1 millionincreases in each of Pink Taco, Mr. Lucky’s and Room Service foodrevenues.  Mortoni’s restaurant and barwas closed permanently during July 2002, and was replaced by Simon Kitchenand Bar which opened during October 2002.

 

RETAIL REVENUES.  Retailrevenues decreased $0.2 million.  Webelieve the $0.2 million decrease in retail revenues was due in part tocontinued general market decline in the themed restaurant merchandise segment,the addition of other retail operations in Las Vegas and a reduction in foreigntourists.

 

OTHER INCOME.  Other incomeincreased less than $0.1 million due to various changes in other operationseach of which was less than $0.1 million.

 

PROMOTIONAL ALLOWANCES.  The$0.1 million increase in promotional allowances was due to primarily to a $0.1million increase in marketing and general and administrative roomcomplimentaries offered to customers as a result of increased customerpromotions and construction disruption.

 

CASINO EXPENSES.  Casino expensesdecreased $0.5 million or 5% to $8.0million from $8.5 million.  The decreasewas primarily due to a $0.4 million decrease in casino marketing and playerdevelopment costs, a $0.3 million decrease in gaming taxes related primarily tothe timing of collections of casino receivables, a $0.2 million decrease in baddebt expenses related to potentially uncollectible credit extended to casinocustomers and a $0.1 million decrease in supplies and repairs.  These decreases were offset partially by a$0.4 million increase in casino and marketing labor and related expenses and a$0.1 million increase in the cost of complimentaries related to items furnishedto customers on a complimentary basis. The Company’s provision and allowance for doubtful accounts are based onestimates by management of the collectability of the receivable balances ateach period end.  Management’s estimatesconsider, among other factors, the age of the receivables, the type or sourceof the receivables and the results of collection efforts to date, especiallywith regard to significant accounts. The outstanding amount of casino markers and checks deposited andreturned by the bank unpaid increased to $1.8 million from $1.5 million betweenperiod ends.  Casino expenses as apercentage of casino revenues decreased to 58% from 61%, a decrease of 3percentage points between comparative periods due to the items described above.

 

LODGING EXPENSES. Lodging expenses in relation to lodging revenues,prior to reclassifying the cost of complimentaries to casino expense, decreasedto 30% from 31% in the prior year period due to a higher ADR and loweroccupancy percentage while total operating expenses increased approximately$0.1 million primarily related to labor and related expenses, repairs and soft-goodsexpenditures.

 

FOOD AND BEVERAGE COSTS AND EXPENSES. Food and beverage costs and expenses in relation to food and beveragerevenues, prior to reclassifying the cost of complimentaries to casino expense,increased to 60% from 56% in the prior year period due to significant fixedbanquet department costs in relation to a $0.9 million or 48% decrease inbanquet revenues between periods.

 

RETAIL COSTS AND EXPENSES. Retail costs and expenses in relation to retail revenues, prior toreclassifying the cost of complimentaries to casino expense, remained constantat approximately 47%.

 

OTHER COSTS AND EXPENSES.  Othercosts and expenses in relation to other income decreased to 51% from 53%, adecrease of 2 percentage points.  Thedecrease is primarily due to the recognition of income from increased cabanarental rates and income from the Chevrolet Rock and Roll mobile tour for whichthere are no related expenses.

 

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MARKETING, GENERAL AND ADMINISTRATIVE. General and administrative expenses in relation to gross revenuesincreased to 12% from 11%, an increase of 1 percentage point.  The increase was primarily due to payrolland related expenses including management incentives increasing to 6.9% ofgross revenues from 6.4% of gross revenues, repairs and maintenance increasingto 0.9% of gross revenues from 0.5% of gross revenues and related partyexpenses for corporate overhead and supervisory fees increasing to 3.0% ofgross revenues from 2.4% of gross revenues. Marketing expenses in relation to gross revenues increased to 6%from 4%, an increase of 2 percentage points. The $0.5 million increase in marketing expenses was primarily due to a $0.9 million increase in expense betweenthe comparative quarters related to special events such as the Howard Sternlive broadcast, which occurred during the first quarter of 2002 and the cost ofwhich increased during 2003 and a $0.1 million increase in radio advertisingexpense.  These increases were offsetpartially by a $0.4 million decrease in entertainment expense and a $0.1million decrease in national advertising expense between comparative periods.

 

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased to $2.9 million from$2.7 million between comparative periods due primarily to the addition of SimonKitchen and Bar which opened during October 2002.

 

INTEREST EXPENSE.  Interestexpense increased to $3.8 million from $3.3 million, an increase of $0.5million or 15%.  The increase isprimarily due to the increase in outstanding borrowings, including debt issuedto pay $15.0 million of accrued dividends on the Company’s preferred stock andinterest on the $50.0 million of qualified subordinated debt issued in exchangefor the Company's outstanding preferred stock and remaining accrued dividendsduring May 2003.

 

LOSS ON EARLY EXTINGUISHMENT OF DEBT. Loss on early extinguishment of debt is related to the $3.0 millionpremium paid to the holders of the Company’s 9 1/4% Senior Subordinated Notes due2005 (the “Notes”), which were tendered or called during the second quarter of2003, and due to a $1.2 million write-off of unamortized deferred debt issuancecosts related to the tendered and called Notes.

 

INCOME TAXES.  The Company didnot have income tax expense during the second quarter of 2003 or 2002 due tobeing able to offset 100% of alternative minimum taxable (“AMT”) income withAMT net operating loss carryforwards (“NOL”) from previous periods.

 

INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS.  Loss applicable to common shareholders was$2.9 million compared to income applicable to common shareholders of $2.4million during the prior year three-month period. The decrease in net resultsfor common shareholders was due to the factors described above, offsetpartially by a $0.4 million decrease in preferred stock dividends.  Preferred dividends declared decreased dueto a $15 million payment of accrued dividends and the replacement of thepreferred stock and remaining accrued dividends with qualified subordinateddebt during May 2003.

 

Six Months EndedJune 30, 2003 and 2002

 

NET REVENUES.  Net revenuesincreased 5% for the six-month period ended June 30, 2003 to $68.9 millioncompared to $65.5 million for the six-month period ended June 30, 2002.  The $3.4 million increase in net revenues isprimarily attributable to a $1.8 million or 8% increase in food and beveragerevenues, a $1.3 million or 9% increase in hotel revenues, a $0.9 million or 3%increase in casino revenues and a $0.1 million increase in other revenues.  These increases were partially offset by a$0.4 million or 8% decrease in retail revenues and a $0.2 million or 5%increase in promotional allowances related to items furnished to customers on acomplimentary basis.

 

CASINO REVENUES.  The $0.9million increase in casino revenues was primarily due to a $1.9 million or 29%increase in slot machine revenues and a $0.6 million or 209% increase in raceand sports book revenues.  Theseincreases were partially offset by a $1.6 million or 8% decrease in table gamesrevenues.  The increase in slot machinerevenues was due to an increase in slot machine handle and holdpercentage.  Slot machine handleincreased $15.4 million or 9% to $182.8 million from $167.4 million.  Slot machine hold percentage increased 0.7percentage points to 4.6% from 3.9%. The average number of slot machines in operation decreased to 559 from567, a decrease of 8 machines or 1%. The net result of these changes in handle, hold percentage and averagenumber of slot machines in operation was an increase in win per slot machineper day to $84 from $64, an increase of $20 or 31%.  The increase in race and sports book revenues was due to anincrease in race handle and race and sports hold percentages offset partiallyby a decrease in sports handle.  Racehandle increased $1.3 million or 268% to $1.8 million from $0.5 million.  Sports book handle decreased $0.1 million to$7.4 million from $7.5 million.  Raceand sports hold percentage increased 6.1 percentage points to 9.9% from3.8%.  The decrease in table gamesrevenues was due to a decrease in table games drop and hold percentage.  Table games drop decreased $2.2 million or1% to $148.4 million from $150.6 million. Table games hold percentage decreased 0.9 percentage points to 12.6%from 13.5%.  The average number of tablegames in operations remained constant at 91. The net result of these changes in drop, hold percentage and averagenumber of table games in operation was a decrease in win per table game per dayto $1,138 from $1,234, a decrease of $96 or 8%.  We have historically reported table games hold percentage usingthe gross method, while casinos on the Strip report hold percentage using thenet method (which reduces the table game drop by marker repayments made in thegaming pit area).  For the purpose ofcomparison to properties on the Strip, our net hold percentage for thesix-month period ended June 30, 2003 was 14.3% compared to 15.7% for thesix-month period ended June 30, 2002.

 

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LODGING REVENUES.  The $1.3million increase in lodging revenues to $15.1 million from $13.8 million wasprimarily due to an increase in average daily rate (“ADR”) to $129 from $116and a $0.2 million increase in miscellaneous sales.  These increases were offset partially by a $0.2 million decreasein telephone sales due to the increasing use of cellular telephones, a trendthat we expect to continue.  Theoccupancy percentage decreased 1% to 95% from 96% between periods.

 

FOOD AND BEVERAGE REVENUES.  The$1.8 million increase in food and beverage revenues was due to food revenuesincreasing approximately $0.8 million and beverage revenues increasing byapproximately $1.0 million.  DuringJuly 2002, Mortoni’s restaurant and bar was closed permanently and hasbeen replaced by Simon Kitchen and Bar which opened duringOctober 2002.  Simon Kitchen andBar food revenues were $1.2 million compared to $0.5 for Mortoni’s foodrevenues during the comparative periods. Food revenues also increased in every other operating department exceptbanquet food revenue, which decreased $0.6 million or 21%.  The increase in beverage revenues wasprimarily from the opening of Simon Kitchen and Bar beverage revenues of $0.6million compared to $0.2 million for Mortoni’s beverage revenues during thecomparative periods.  Beverage revenuesalso increased due to a $0.3 million increase in Baby’s nightclub revenues, a$0.3 million increase in Beach Club beverage revenues and a $0.1 millionincrease in the Las Vegas Lounge.  Theseincreases were offset partially by a combined $0.1 million decrease in RoomService, the Joint and Mr. Lucky’s beverage revenues.

 

RETAIL REVENUES.  We believe the$0.4 million decrease in retail revenues was due in part to continued generalmarket decline in the themed restaurant merchandise segment, the addition ofother retail operations in Las Vegas and a reduction in foreign tourists.

 

OTHER INCOME.  Other incomeincreased $0.1 million due to various changes in other operations, each ofwhich was less than $0.1 million and the largest of which was income from theChevrolet Rock and Roll mobile tour.

 

PROMOTIONAL ALLOWANCES.  The$0.2 million increase in promotional allowances was due to primarily to a $0.2million increase in casino, marketing and general and administrative roomcomplimentaries offered to customers as a result of increased customerpromotions and construction disruption.

 

CASINO EXPENSES.  Casinoexpenses increased $0.4 million or 3%to $16.7 million from $16.3 million. The increase was primarily due to a $0.7 million increase in casino andmarketing labor and related expenses, a $0.2 million increase in discounts toour players, a $0.1 million increase in gaming taxes and fees, a $0.1 millionincrease in bad debt expenses related to potentially uncollectible creditextended to casino customers, a $0.1 million increase in the cost ofcomplimentaries related to items furnished to customers on a complimentarybasis and a $0.1 million increase in advertising costs.  These increases were partially offset by a$0.5 million decrease in casino marketing and player development costs, a $0.2million decrease in repairs and maintenance and other expenses, a $0.1 milliondecrease in customer reimbursed travel and a $0.1 million decrease in ticketsto events off property.  The Company’sprovision and allowance for doubtful accounts are based on estimates bymanagement of the collectability of the receivable balances at each period end.  Management’s estimates consider, among otherfactors, the age of the receivables, the type or source of the receivables andthe results of collection efforts to date, especially with regard tosignificant accounts.  The outstandingamount of casino markers and checks deposited and returned by the bank unpaidincreased to $1.8 million from $1.5 million between period ends.  Casino expenses as a percentage of casinorevenues remained approximately constant between period ends at approximately60%.

 

LODGING EXPENSES. Lodging expenses in relation to lodging revenues,prior to reclassifying the cost of complimentaries to casino expense, remainedconstant at 31% due to a higher ADR while total operating expenses increasedapproximately $0.3 million primarily related to a $0.1 million increase inlabor and related expenses and a $0.2 million increase in repairs andsoft-goods expenditures.

 

FOOD AND BEVERAGE COSTS AND EXPENSES. Food and beverage costs and expenses in relation to food and beveragerevenues, prior to reclassifying the cost of complimentaries to casino expense,increased to 60% from 58% in the prior year period due to significant fixedbanquet department costs in relation to a $0.6 million or 17% decrease inbanquet revenues between periods and lower gross and net operating margins atSimon Kitchen and Bar than other outlets.

 

RETAIL COSTS AND EXPENSES. Retail costs and expenses in relation to retail revenues, prior toreclassifying the cost of complimentaries to casino expense, remained constantat approximately 48%.

 

OTHER COSTS AND EXPENSES.  Othercosts and expenses in relation to other income decreased to 51% from 53%, adecrease of 2 percentage points.  Thedecrease is primarily due to the recognition of income from increased cabanarental rates and income from the Chevrolet Rock and Roll mobile tour for whichthere are no related expenses.

 

MARKETING, GENERAL AND ADMINISTRATIVE. General and administrative expenses in relation to gross revenuesincreased to 13% from 12%, an increase of 1 percentage point.  The increase was primarily due to payrolland related expenses including management incentives increasing to 6.8% ofgross revenues from 6.4% of gross revenues, related party expenses for

 

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corporate overhead and supervisory feesincreasing to 3.0% of gross revenues from 2.5% of gross revenues and repairsand maintenance increasing to 0.8% of gross revenues from 0.5% of grossrevenues.  Marketingexpenses in relation to gross revenues decreased to 4% from 5%, a decrease of 1percentage point.  The $0.4 milliondecrease in marketing expenses was primarily due to $0.5 million decrease in national advertising expense, a $0.4 milliondecrease in entertainment expense, a $0.1 million decrease in each of magazineand billboard advertising and a $0.1 million decrease in payroll andrelated expenses.  These decreases were offset partially by a $0.6million increase in expense between the comparative quarters related to specialevents such as the Howard Stern live broadcast, which occurred during the firstquarter of 2002 and the cost of which increased during 2003 and a $0.2 millionincrease in radio advertising expense.

 

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased to $5.8 million from$5.7 million between comparative periods due primarily to the addition of SimonKitchen and Bar, which opened during October 2002.

 

INTEREST EXPENSE.  Interestexpense increased to $7.0 million from $6.7 million, an increase of $0.3million or 4%.  The increase isprimarily due to the increase in outstanding borrowings, including debt issuedto pay $15.0 million of accrued dividends on the Company’s preferred stock andinterest on the $50.0 million of qualified subordinated debt issued in exchangefor the Company's outstanding preferred stock and the remaining accrueddividends during May 2003.  Theseincreases were offset partially due to decreases, during the period prior tothe Company’s refinancing, in outstanding borrowings, effective interest rateon the Company’s prior credit facility and decreasing amortization of loanfees.

 

LOSS ON EARLY EXTINGUISHMENT OF DEBT. Loss on early extinguishment of debt is related to the $3.0 millionpremium paid to the holders of the Company’s 9 1/4% Senior Subordinated Notesdue 2005 (the “Notes”), which were tendered or called during the six-monthperiod ended June 30, 2003, and due to a $1.2 million write-off ofunamortized deferred debt issuance costs related to the tendered and calledNotes.

 

INCOME TAXES.  The Company hasrecorded a tax benefit of $0.1 million in the six-month period endedJune 30, 2003 due to an adjustment of its deferred tax assets.  The Company did not have income tax expenseduring 2002 due to being able to offset 100% of alternative minimum taxable(“AMT”) income with AMT net operating loss carryforwards (“NOL”) from previousperiods.  This is due to legislation passed in the Job Creation and WorkerAssistance Act of 2002 which increases the limit on AMT NOL deductions from 90percent to 100 percent for NOL’s generated or taken as carryforwards in the taxyear ending during 2002.

 

INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS.  Loss applicable to common shareholders was$1.7 million compared to income applicable to common shareholders of $2.6million during the prior year six-month period. The decrease in net results forcommon shareholders was due to the factors described above, offset partially bya $0.3 million decrease in preferred stock dividends.  Preferred dividends declared decreased due to a $15.0 millionpayment of accrued dividends and the exchange of the preferred stock andremaining accrued dividends with qualified subordinated debt duringMay 2003. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the six-monthperiod ended June 30, 2003 our principal sources of funds were cashon-hand at December 31, 2002, and cash provided by operating activities of$11.5 million.  Additionally, inMay 2003, the Company obtained funding of approximately $137.6 million innet proceeds from the offering of $140.0 million aggregate principal amount ofits 8.875% Second Lien Notes due in 2013 (the “2013 Notes”) and paid additionalcosts of approximately $0.4 in cash million in conjunction with thisissuance.  Concurrent with the issuanceof the 2013 Notes, the Company secured a $40 million Senior Secured CreditFacility (the “Facility”) through a group of banks at a cost of  approximately $0.6 million, which waswithheld from the proceeds therefrom. The Facility consists of a $20 million, five-year senior secured termloan (the “Term Loan”) and a $20 million senior secured revolving creditfacility (the “Revolving Credit Facility”). As of June 30, 2003, the Company had $140.0 million outstanding in2013 Notes, $20.0 million outstanding on its Term Loan and had no balanceoutstanding on the Revolving Credit Facility.The net proceeds from the issuance of the 2013Notes together with the borrowings under the Facility and cash on hand, wereused to redeem and repurchase the Company’s $120.0 million 9.25% SeniorSubordinated Notes due in 2005, repay the entire $18.0 million balanceoutstanding of its $30.0 million senior revolving credit facility, repay $1.3million of purchase money indebtedness, pay $15.0 million accrued dividends onthe Company’s preferred stock, pay costs and expenses related to the foregoing,finance working capital and  provideliquidity to fund general and corporate purposes.  In addition, the Revolving Credit Facility will provide theCompany with financial flexibility to pursue targeted growth capitalexpenditures.

 

Junior Subordinated Notes

 

 The Company exchanged all of itsoutstanding preferred stock and the remaining accrued and unpaid dividendsthereon for an aggregate principal amount of junior subordinated notes equal toapproximately $50.1 million (the “Junior Notes”).  Upon issuance of the Junior Notes, the Company’s preferred stockceased to remain outstanding.  Intereston the Junior Notes is payable on each January 15 and July 15, commencing onJanuary 15, 2004, and may be paid in cash or in kind at the Company’s option,provided that interest will be paid in kind if a payment of such interest incash would cause a default under the 2013 Notes or the Facility.  The Junior Notes require that anysemi-annual interest payment in cash be equal to the lesser of (x) 50% of theamount of interest accrued on the Junior Notes since the most recent interestpayment date and (y) the amount of interest that the Company is permitted topay in cash without causing a default under the 2013 Notes or the Facility.  For interest payments payable in cash,interest accrues at a rate per annum equal to 9.875%, and for interest paymentspayable in kind, interest accrues at a rate per annum equal to 10.50%.  The Junior Notes are contractuallysubordinated to the 2013 Notes and the Facility and any other senior debt ofthe Company.  The Junior Notes mature onJanuary 15, 2014 but are subject to redemption at the option of the Company, inwhole or in part, at any time on or after January 15, 2009, at a premium to theprincipal amount thereof that decreases on each subsequent anniversary date,plus accrued interest to the date of redemption.  The Junior Notes contain covenants restricting the Company’sability to, among other things, sell or otherwise dispose of its assets, paydividends, incur additional indebtedness, make acquisitions or merge orconsolidate with another entity and enter into transactions with affiliates.

 

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                The amount ofcash provided by operating activities primarily includes net income of $0.6million, depreciation and amortization of $5.8 million, provision for losses onaccounts receivable of less than $0.l million, amortization of loan fees of$0.3 million, loss on early extinguishments of debt of $4.3 million and netchanges in operating assets and liabilities of $0.4 million.  Other uses of funds were capitalexpenditures of $3.8 million.  Othersources of funds was an increase in construction payables of $1.1 million.  As a result, as of June 30, 2003, wehad cash and cash equivalents of $12.0 million.

 

On April 9, 2003, the Company entered into a $1.3 millionconditional sale agreement, payable on or before October 1, 2003, for thepurchase of four full color live video LED sign systems, $0.4 million of whichhas been paid to date.  DuringAugust 2003, the Company entered into various agreements to combine ten ofits existing hotel rooms into a “mega-suite” of approximately 4,500 square feetwith 3 bedrooms,  4  bathrooms, a dining room, a kitchen, a spa room,a billiard room and a professional style bowling alley for approximately $2.5million. During August 2003, the Company entered into an agreement toexpand its parking garage facility by 380 spaces for approximately $4.0million.

 

We believe that our current cash balances and cash flow from operationsand other sources of cash including the available borrowings under our $20.0million Revolving Credit Facility ($20.0 million as of June 30, 2003) willbe sufficient to provide operating and investing liquidity during the next 12months.  We may, however, need to raiseadditional funds prior to July 1, 2004. Our ability to raise additional funds is limited by restrictions on ourfinancing activities under our Facility and the 2013 Notes.  We cannot be certain that additionalfinancing will be available to us on favorable terms when required, if at all.

 

Interest on the2013 Notes is payable on each June 1 and December 1 beginningDecember 1, 2003.  The 2013 Notesare secured by a security interest in substantially all of the Company’sexisting and future assets, other than licenses that may not be pledged underapplicable law.  The security interestis junior to the security interest in the assets securing our obligation underour Facility and except for permitted secured purchase money indebtedness.  The 2013 Notes are subject to redemption atthe option of the Company, in whole or in part, at any time on or afterJune 1, 2008, at a premium to the face amount ($140 million) that decreaseson each subsequent anniversary date, plus accrued interest to the date ofredemption.  The 2013 Notes containcovenants restricting or limiting the ability of the Company to, among otherthings, pay dividends, create liens or other encumbrances, incur additionalindebtedness, issue certain preferred stock, sell or otherwise dispose of aportion of its assets, make acquisitions or merge or consolidate with anotherentity and enter into transactions with affiliates.  The Company is in compliance with these covenants as ofJune 30, 2003.

 

The Facility contains certain covenants including, among other things,financial covenants, limitations on the Company from disposing of capitalstock, entering into mergers and certain acquisitions, incurring liens orindebtedness, issuing dividends on stock, and entering into transactions withaffiliates.  The Company is incompliance with these covenants as of June 30, 2003.  The Facility is secured by substantially all of the Company’sproperty at the Las Vegas site. Interest on the Facility accrues on all individual borrowings at aninterest rate determined at the option of the Company, at either the LIBORIndex plus an applicable margin (not to exceed 3.5% (applicable margin was3.50% at June 30, 2003) and aggregating 4.4% at June 30, 2003), or theBase Rate, defined as the higher of the Federal Funds Rate plus 0.5%, or thereference rate, as defined, plus an applicable margin (not to exceed2.25%).  The Company chose the LIBORIndex for all of its borrowings outstanding at June 30, 2003.  These margins are dependent upon theCompany’s total debt to EBITDA ratio, as defined.  Interest accrued on the Base Rate borrowings is due monthly, upto the maturity date, while interest on LIBOR borrowings is due quarterly up tothe maturity date.

 

15

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Item 3.                                                     Quantitativeand Qualitative Disclosures About Market Risk

 

Market risks relating to our operations result primarily from changesin short-term LIBOR interest rates.  Wedo not have any foreign exchange or other significant market risk.  We did not have any derivative financialinstruments at June 30, 2003.

 

Our exposure to marketrisk for changes in interest rates relates primarily to our currentFacility.  In accordance with theFacility, we enter into variable rate debt obligations to support generalcorporate purposes, including capital expenditures and working capitalneeds.  We continuously evaluate ourlevel of variable rate debt with respect to total debt and other factors,including assessment of the current and future economic environment.

 

We had$20.0 million and $22.9 million in variable rate debt outstanding atJune 30, 2003 and December 31, 2002, respectively.  Based upon these variable rate debt levels,a hypothetical 10% adverse change in the effective interest rate (approximatelya 44 basis point increase) would increase interest expense by approximately$0.1 million on an annual basis, and likewise decrease our earnings and cashflows.  We cannot predict market fluctuationsin interest rates and their impact on our variable rate debt, nor can there beany assurance that fixed rate long-term debt will be available to us atfavorable rates, if at all. Consequently, future results may differ materially from the estimatedadverse changes discussed above.

 

As ofJune 30, 2003, there have been no material changes to the informationpreviously reported under Item 7 in the Company’s annual report on Form 10-Kfor the year ended December 31, 2002, except that on April 9, 2003,the Company entered into a $1.3 million conditional sale agreement, payable onor before October 1, 2003, for the purchase of four full color live videoLED sign systems.  DuringAugust 2003, the Company entered into various agreements to combine ten ofits existing hotel rooms into a “mega-suite” of approximately 4,500 square feetwith 3 bedrooms, 4 bathrooms, a dining room, a kitchen, a spa room, a billiardroom and a professional style bowling alley for approximately $2.5 million.During August 2003, the Company entered into an agreement to expand itsparking garage facility by 380 spaces for approximately $4.0 million.

 

Our ability to service our contractual obligations and commitments willbe dependent on our future performance, which will be affected by, among otherthings, prevailing economic conditions and financial, business and otherfactors, certain of which are beyond our control.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a)  Disclosure Controls andProcedures.  The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of June 30, 2003.  Based on such evaluation, such officers haveconcluded that, as of the end of such period, the Company’s disclosure controlsand procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act.

 

(b)  Internal Control OverFinancial Reporting.  There have notbeen any changes in the Company’s internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the fiscal quarter to which this report relates that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

 

 

16

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PART II                                                    OTHERINFORMATION

 

 

Item 6.                                                     Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                  |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                             |
| 3.1(1)              |   | Second  Amended and Restated Certificate of Incorporation of the Company.                                                                                                        |
|                |   |                                                                                                                                                                             |
| 3.2(2)              |   | Certificate  of Amendment of Second Amended and Restated Articles of Incorporation.                                                                                              |
|                |   |                                                                                                                                                                             |
| 3.3(1)              |   | Second  Amended and Restated By-Laws of the Company.                                                                                                                             |
|                |   |                                                                                                                                                                             |
| 4.1(6)              |   | Indenture,  dated as of May 30, 2003, by and between the Company and U.S. Bank National  Association, as trustee, relating to the 87/8% Second Lien Notes due 2013.              |
|                |   |                                                                                                                                                                             |
| 4.2(6)              |   | Form of  Global 87/8% Second Lien Notes due 2013 (included in Exhibit 4.1)                                                                                                       |
|                |   |                                                                                                                                                                             |
| 4.3(6)              |   | Registration  Rights Agreement, dated as of May 30, 2003, by and between the Company and  Banc of America Securities LLC, as representative of the Initial Purchasers.           |
|                |   |                                                                                                                                                                             |
| 4.4(6)              |   | Intercreditor  Agreement, dated as of May 30, 2003, among the Company, U.S. Bank, N.A. and  Bank of America, N.A.                                                                |
|                |   |                                                                                                                                                                             |
| 4.5(6)              |   | Form of  Junior Subordinated Notes.                                                                                                                                              |
|                |   |                                                                                                                                                                             |
| 10.1(6)             |   | Credit  Agreement, dated as of May 30, 2003, between the Company, Bank of America,  N.A. and the lenders referred to therein.                                                    |
|                |   |                                                                                                                                                                             |
| 10.2(6)             |   | Second Lien  Notes Security Agreement, dated as of May 30, 2003, between the Company and  U.S. Bank, N.A.                                                                        |
|                |   |                                                                                                                                                                             |
| 10.3(6)             |   | Second Lien  Notes Trademark Security Interest Assignment, dated as of May 30, 2003,  between the Company and U.S. Bank, N.A.                                                    |
|                |   |                                                                                                                                                                             |
| 10.4(6)             |   | Second Lien  Notes Copyright Security Interest Assignment, dated as of May 30, 2003,  between the Company and U.S. Bank, N.A.                                                    |
|                |   |                                                                                                                                                                             |
| 10.5(6)             |   | Exchange  Agreement, dated as of May 30, 2003, between the Company, Peter A. Morton and  Desert Rock, Inc.                                                                       |
|                |   |                                                                                                                                                                             |
| 10.6(1)             |   | Amended and  Restated Supervisory Agreement, dated as of October 21, 1997, between the  Company and Peter A. Morton.                                                             |
|                |   |                                                                                                                                                                             |
| 10.7(3)             |   | Employment  Agreement, dated November 8, 2000, between the Company and James D. Bowen.                                                                                           |
|                |   |                                                                                                                                                                             |
| 10.8(4)             |   | Amendment to  Employment Agreement, dated September 7, 2001, between the Company and James  D. Bowen.                                                                            |
|                |   |                                                                                                                                                                             |
| 10.9(5)             |   | Employment  Agreement, dated as of May 24, 2002, between the Company and Don Marrandino.                                                                                         |
|                |   |                                                                                                                                                                             |
| 10.10(1)            |   | Trademark  Sublicense Agreement, dated October 24, 1997, between the Company and Peter  A. Morton.                                                                               |
|                |   |                                                                                                                                                                             |
| 10.11(1)            |   | Amendment  No. 1 to Trademark Sublicense Agreement, dated as of March 23, 1998, between  the Company and Peter A. Morton.                                                        |
|                |   |                                                                                                                                                                             |
| 10.12(6)            |   | Amendment  No. 2 to Trademark Sublicense Agreement, dated as of May 30, 2003, between  the Company and Peter A. Morton.                                                          |
|                |   |                                                                                                                                                                             |
| 10.13(6)            |   | Security  Agreement, dated as of May 30, 2003, between the Company, Bank of America,  N.A. and the lenders referred to therein.                                                  |
|                |   |                                                                                                                                                                             |
| 10.14(6)            |   | Trademark  Security Interest Assignment, dated as of May 30, 2003, between the Company  and Bank of America, N.A.                                                                |
|                |   |                                                                                                                                                                             |
| 10.15(6)            |   | Copyright  Security Interest Assignment, dated as of May 30, 2003, between the Company  and Bank of America, N.A.                                                                |
|                |   |                                                                                                                                                                             |
| 10.16(6)            |   | Form of Hard  Rock Hotel, Inc. 1999 Performance Awards Plan                                                                                                                      |
|                |   |                                                                                                                                                                             |
| 10.17               |   | Employment  Agreement, dated June 19, 2003, between the Company and Kevin Kelley                                                                                            |
|                |   |                                                                                                                                                                             |
| 31.1                |   | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                             |
|                |   |                                                                                                                                                                             |
| 31.2                |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                             |
|                |   |                                                                                                                                                                             |
| 32.1                |   | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

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(1)                                  Incorporatedby 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).

 

(2)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended August 31, 1999 (FileNo. 333-53211).

 

(3)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended September 30, 2000(File No. 333-53211).

 

(4)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended September 30, 2001(File No. 333-53211).

 

(5)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended September 30, 2002(File No. 333-53211).

 

(6)                                  Incorporatedby reference to designated exhibit to our Registration Statement on Form S-4,filed with the Securities and Exchange Commission on July 8, 2003 (File No.333- 106863).

 

 

(b)                                 Reportson Form 8-K

 

Current Report on Form 8-K, dated April 22, 2003 (dateof earliest event reported), filed on April 29, 2003, for the purpose ofreporting under Item 12, Hard Rock Hotel’s results of operations for thequarter ended March 31, 2003.

 

Current Report on Form 8-K, dated August 14, 2003(date of earliest event reported), filed on August 14, 2003, for the purpose ofreporting under Item 12, Hard Rock Hotel’s results of operations for thequarter and six-month period ended June 30, 2003.

 

17

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                             | HARD ROCK HOTEL,  INC.                                     |
|----------------------------------|------------------------------------------------------------|
|                             |                                                       |
| Date:  August 14, 2003 | /s/ JAMES D.  BOWEN                                        |   |
|                             | James D. Bowen                                             |
|                             | CHIEF FINANCIAL  OFFICER                                   |
|                             | (PRINCIPAL  FINANCIAL OFFICER AND DULY AUTHORIZED OFFICER) |

 

18

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Exhibit Index

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                  |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                             |
| 3.1(1)              |   | Second  Amended and Restated Certificate of Incorporation of the Company.                                                                                                        |
|                |   |                                                                                                                                                                             |
| 3.2(2)              |   | Certificate  of Amendment of Second Amended and Restated Articles of Incorporation.                                                                                              |
|                |   |                                                                                                                                                                             |
| 3.3(1)              |   | Second  Amended and Restated By-Laws of the Company.                                                                                                                             |
|                |   |                                                                                                                                                                             |
| 4.1(6)              |   | Indenture,  dated as of May 30, 2003, by and between the Company and U.S. Bank National  Association, as trustee, relating to the 87/8% Second Lien Notes due 2013.              |
|                |   |                                                                                                                                                                             |
| 4.2(6)              |   | Form of  Global 87/8% Second Lien Notes due 2013 (included in Exhibit 4.1)                                                                                                       |
|                |   |                                                                                                                                                                             |
| 4.3(6)              |   | Registration  Rights Agreement, dated as of May 30, 2003, by and between the Company and  Banc of America Securities LLC, as representative of the Initial Purchasers.           |
|                |   |                                                                                                                                                                             |
| 4.4(6)              |   | Intercreditor  Agreement, dated as of May 30, 2003, among the Company, U.S. Bank, N.A. and  Bank of America, N.A.                                                                |
|                |   |                                                                                                                                                                             |
| 4.5(6)              |   | Form of  Junior Subordinated Notes.                                                                                                                                              |
|                |   |                                                                                                                                                                             |
| 10.1(6)             |   | Credit  Agreement, dated as of May 30, 2003, between the Company, Bank of America,  N.A. and the lenders referred to therein.                                                    |
|                |   |                                                                                                                                                                             |
| 10.2(6)             |   | Second Lien  Notes Security Agreement, dated as of May 30, 2003, between the Company and  U.S. Bank, N.A.                                                                        |
|                |   |                                                                                                                                                                             |
| 10.3(6)             |   | Second Lien  Notes Trademark Security Interest Assignment, dated as of May 30, 2003,  between the Company and U.S. Bank, N.A.                                                    |
|                |   |                                                                                                                                                                             |
| 10.4(6)             |   | Second Lien  Notes Copyright Security Interest Assignment, dated as of May 30, 2003,  between the Company and U.S. Bank, N.A.                                                    |
|                |   |                                                                                                                                                                             |
| 10.5(6)             |   | Exchange  Agreement, dated as of May 30, 2003, between the Company, Peter A. Morton and  Desert Rock, Inc.                                                                       |
|                |   |                                                                                                                                                                             |
| 10.6(1)             |   | Amended and  Restated Supervisory Agreement, dated as of October 21, 1997, between the  Company and Peter A. Morton.                                                             |
|                |   |                                                                                                                                                                             |
| 10.7(3)             |   | Employment  Agreement, dated November 8, 2000, between the Company and James D. Bowen.                                                                                           |
|                |   |                                                                                                                                                                             |
| 10.8(4)             |   | Amendment to  Employment Agreement, dated September 7, 2001, between the Company and James  D. Bowen.                                                                            |
|                |   |                                                                                                                                                                             |
| 10.9(5)             |   | Employment  Agreement, dated as of May 24, 2002, between the Company and Don Marrandino.                                                                                         |
|                |   |                                                                                                                                                                             |
| 10.10(1)            |   | Trademark  Sublicense Agreement, dated October 24, 1997, between the Company and Peter  A. Morton.                                                                               |
|                |   |                                                                                                                                                                             |
| 10.11(1)            |   | Amendment  No. 1 to Trademark Sublicense Agreement, dated as of March 23, 1998, between  the Company and Peter A. Morton.                                                        |
|                |   |                                                                                                                                                                             |
| 10.12(6)            |   | Amendment  No. 2 to Trademark Sublicense Agreement, dated as of May 30, 2003, between  the Company and Peter A. Morton.                                                          |
|                |   |                                                                                                                                                                             |
| 10.13(6)            |   | Security  Agreement, dated as of May 30, 2003, between the Company, Bank of America,  N.A. and the lenders referred to therein.                                                  |
|                |   |                                                                                                                                                                             |
| 10.14(6)            |   | Trademark  Security Interest Assignment, dated as of May 30, 2003, between the Company  and Bank of America, N.A.                                                                |
|                |   |                                                                                                                                                                             |
| 10.15(6)            |   | Copyright  Security Interest Assignment, dated as of May 30, 2003, between the Company  and Bank of America, N.A.                                                                |
|                |   |                                                                                                                                                                             |
| 10.16(6)            |   | Form of Hard  Rock Hotel, Inc. 1999 Performance Awards Plan                                                                                                                      |
|                |   |                                                                                                                                                                             |
| 10.17               |   | Employment  Agreement, dated June 19, 2003, between the Company and Kevin Kelley                                                                                                 |
|                |   |                                                                                                                                                                             |
| 31.1                |   | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                             |
|                |   |                                                                                                                                                                             |
| 31.2                |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                             |
|                |   |                                                                                                                                                                             |
| 32.1                |   | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

----

(1)                                  Incorporatedby 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).

 

(2)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended August 31, 1999 (FileNo. 333-53211).

 

(3)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended September 30, 2000(File No. 333-53211).

 

(4)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended September 30, 2001(File No. 333-53211).

 

(5)                                  Incorporatedby reference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended September 30, 2002(File No. 333-53211).

 

(6)                                  Incorporatedby reference to designated exhibit to our Registration Statement on Form S-4,filed with the Securities and Exchange Commission on July 8, 2003 (File No.333- 106863).

 

 

19

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