**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For thequarterly period ended: September 30, 2003**

 

**OR**

 

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

 

**For thetransition periodfrom           to           **

 

**Commissionfile number 333-53211**

 

**Hard Rock Hotel, Inc.**

(Exact name of registrantas 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 check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ýNo o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes oNo ý

 

APPLICABLE ONLY TO CORPORATEISSUERS:

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock outstandingby class as of November 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 September 30, 2003 and December 31, 2002 |
|    |                  |   |
|    |                  | Condensed Statements  of Operations for the three-month and nine-month periods ended  September 30, 2003 and 2002 |
|    |                  |   |
|    |                  | Condensed Statements  of Cash Flows for the nine-month periods ended September 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                    FINANCIAL INFORMATION

Item 1.                                                     FinancialStatements

 

HARD ROCK HOTEL, INC.

CONDENSED BALANCE SHEETS (unaudited)

(in thousands, exceptshare amounts)

 
|                                                                                                                                                      |   | **September 30,****2003** |    | **December 31,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|-----------------------------|------------|
| ASSETS                                                                                                                                                    |   |                           |    |                        |       |
|                                                                                                                                                      |   |                           |    |                        |       |
| Current assets:                                                                                                                                           |   |                           |    |                        |       |
| Cash and cash equivalents                                                                                                                                 |   | $                              | 16,162  |                        | $          | 9,139 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,945 and $1,951 as of September 30, 2003 and  December 31, 2002, respectively |   | 6,131                          |    | 10,035                      |       |
| Inventories                                                                                                                                               |   | 1,526                          |    | 1,736                       |       |
| Prepaid expenses and other current assets                                                                                                                 |   | 1,826                          |    | 1,855                       |       |
| Related party receivable                                                                                                                                  |   | 388                            |    | 116                         |       |
| Total current assets                                                                                                                                      |   | 26,033                         |    | 22,881                      |       |
|                                                                                                                                                      |   |                           |    |                        |       |
| Property and equipment, net of accumulated  depreciation and amortization                                                                                 |   | 166,057                        |    | 165,073                     |       |
| Deferred income taxes                                                                                                                                     |   | 867                            |    | 817                         |       |
| Other assets                                                                                                                                              |   | 4,356                          |    | 1,815                       |       |
|                                                                                                                                                      |   |                           |    |                        |       |
| TOTAL ASSETS                                                                                                                                              |   | $                              | 197,313 |                        | $          | 190,586 |   |
|                                                                                                                                                      |   |                           |    |                        |       |
| Current liabilities:                                                                                                                                      |   |                           |    |                        |       |
| Accounts payable                                                                                                                                          |   | $                              | 3,434   |                        | $          | 3,564 |   |
| Construction related payables                                                                                                                             |   | 1,530                          |    | 179                         |       |
| Related party payable                                                                                                                                     |   | 244                            |    | 92                          |       |
| Accrued expenses                                                                                                                                          |   | 13,381                         |    | 14,733                      |       |
| Interest payable                                                                                                                                          |   | 6,166                          |    | 2,910                       |       |
| Current portion of long-term debt                                                                                                                         |   | 1,411                          |    | 1,084                       |       |
| Total current liabilities                                                                                                                                 |   | 26,166                         |    | 22,562                      |       |
|                                                                                                                                                      |   |                           |    |                        |       |
| Deferred income taxes                                                                                                                                     |   | 596                            |    | 696                         |       |
| Qualified subordinated notes to related  parties                                                                                                          |   | 50,037                         |    | —                      |       |
| Long-term debt                                                                                                                                            |   | 158,991                        |    | 143,289                     |       |
| 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 long-term liabilities                                                                                                                               |   | 209,624                        |    | 206,676                     |       |
| Total liabilities                                                                                                                                         |   | 235,790                        |    | 229,238                     |       |
|                                                                                                                                                      |   |                           |    |                        |       |
| Commitments and contingencies:                                                                                                                            |   |                           |    |                        |       |
|                                                                                                                                                      |   |                           |    |                        |       |
| 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                                                                                                                                       |   | (45,985                        | )       | (46,160                     | )          |
| Total shareholders’ deficiency                                                                                                                       |   | (38,477                        | )       | (38,652                     | )          |
|                                                                                                                                                      |   |                           |    |                        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’  DEFICIENCY                                                                                                      |   | $                              | 197,313 |                        | $          | 190,586 |   |

 

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

 

3

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HARD ROCK HOTEL, INC.

CONDENSEDSTATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 
|                                                  |   | **Three  months Ended  September 30,** |       | **Nine  months Ended  September 30,** |       |
|-------------------------------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
|                                                  |   | **2003**                                    |       | **2002**                                   |       | **2003** |   | **2002** |   |
| Revenue:                                              |   |                                        |       |                                       |       |   |   |   |   |
| Casino                                                |   | $                                           | 15,225     |                                       | $          | 15,217 |   | $ | 43,272 |   | $ | 42,363 |   |
| Lodging                                               |   | 8,015                                       |       | 6,833                                      |       | 23,111 |   | 20,655 |   |
| Food and beverage                                     |   | 12,406                                      |       | 10,212                                     |       | 35,804 |   | 31,830 |   |
| Retail                                                |   | 2,256                                       |       | 2,219                                      |       | 6,492 |   | 6,844 |   |
| Other income                                          |   | 2,123                                       |       | 1,987                                      |       | 5,810 |   | 5,603 |   |
| Gross revenues                                        |   | 40,025                                      |       | 36,468                                     |       | 114,489 |   | 107,295 |   |
| Less:   promotional allowances                   |   | (2,787                                      | )          | (2,736                                     | )          | (8,392 | ) | (8,099 | ) |
| Net revenues                                          |   | 37,238                                      |       | 33,732                                     |       | 106,097 |   | 99,196 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Costs and expenses:                                   |   |                                        |       |                                       |       |   |   |   |   |
| Casino                                                |   | 8,281                                       |       | 8,503                                      |       | 25,030 |   | 24,767 |   |
| Lodging                                               |   | 1,981                                       |       | 1,856                                      |       | 5,765 |   | 5,373 |   |
| Food and beverage                                     |   | 6,474                                       |       | 5,568                                      |       | 18,576 |   | 16,155 |   |
| Retail                                                |   | 958                                         |       | 925                                        |       | 2,819 |   | 2,923 |   |
| Other                                                 |   | 1,076                                       |       | 1,032                                      |       | 2,957 |   | 2,950 |   |
| Marketing                                             |   | 2,314                                       |       | 2,265                                      |       | 5,551 |   | 5,862 |   |
| Related party expenses                                |   | 1,071                                       |       | 1,001                                      |       | 3,276 |   | 2,779 |   |
| General and administrative                            |   | 5,293                                       |       | 4,539                                      |       | 14,691 |   | 12,730 |   |
| Depreciation and amortization                         |   | 2,990                                       |       | 2,826                                      |       | 8,766 |   | 8,483 |   |
| Pre-opening                                           |   | 37                                          |       | 100                                        |       | 60 |   | 100 |   |
| Total costs and expenses                              |   | 30,475                                      |       | 28,615                                     |       | 87,491 |   | 82,122 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Income from operations                                |   | 6,763                                       |       | 5,117                                      |       | 18,606 |   | 17,074 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Other income (expense):                               |   |                                        |       |                                       |       |   |   |   |   |
| Interest income                                       |   | 12                                          |       | 14                                         |       | 27 |   | 40 |   |
| Interest expense                                      |   | (4,940                                      | )          | (3,256                                     | )          | (11,974 | ) | (9,942 | ) |
| Loss on early extinguishments of debt                 |   | —                                      |       | —                                     |       | (4,258 | ) | — |   |
| Other, net                                            |   | 53                                          |       | 4                                          |       | 20 |   | (40 | ) |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Income before provision for income taxes              |   | 1,888                                       |       | 1,879                                      |       | 2,421 |   | 7,132 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Income tax (benefit) provision                        |   | —                                      |       | —                                     |       | (100 | ) | — |   |
| NET INCOME                                            |   | 1,888                                       |       | 1,879                                      |       | 2,521 |   | 7,132 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Preferred stock dividends                             |   | —                                      |       | (1,386                                     | )          | (2,346 | ) | (4,029 | ) |
| Income applicable to common shareholders              |   | $                                           | 1,888      |                                       | $          | 493 |   | $ | 175 |   | $ | 3,103 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| BASIC AND DILUTED NET INCOME PER SHARE:               |   |                                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Applicable to common shareholders                     |   | $                                           | 24.83      |                                       | $          | 6.48 |   | $ | 2.30 |   | $ | 40.82 |   |
|                                                  |   |                                        |       |                                       |       |   |   |   |   |
| Weighted average number of common shares  outstanding |   | 76,023                                      |       | 76,023                                     |       | 76,023 |   | 76,023 |   |

 

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

 

4

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, exceptsupplemental schedule)

(unaudited)

 
|                                                                                                                 |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                 |   | **2003**                                   |   | **2002** |   |
| Cash flows from operating activities:                                                                                |   |                                       |   |   |   |
| Net income                                                                                                           |   | $                                          | 2,521  |   | $ | 7,132 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                                   |   |                                       |   |   |   |
| Depreciation and amortization                                                                                        |   | 8,766                                      |   | 8,483 |   |
| Provision for losses on accounts receivable                                                                          |   | 223                                        |   | 217 |   |
| Amortization of loan fees                                                                                            |   | 462                                        |   | 553 |   |
| (Gain) loss on sales of property and  equipment                                                                      |   | (20                                        | )      | 40 |   |
| Loss on early extinguishment of debt                                                                                 |   | 4,258                                      |   | — |   |
| Changes in operating assets and  liabilities:                                                                        |   |                                       |   |   |   |
| Accounts receivable                                                                                                  |   | 3,681                                      |   | (29 | ) |
| Inventories                                                                                                          |   | 210                                        |   | 332 |   |
| Prepaid expenses and other current assets                                                                            |   | 29                                         |   | (964 | ) |
| Related party receivable                                                                                             |   | (272                                       | )      | — |   |
| Accounts payable                                                                                                     |   | (130                                       | )      | 765 |   |
| Related party payable                                                                                                |   | 152                                        |   | (1,465 | ) |
| Deferred income taxes                                                                                                |   | (150                                       | )      | — |   |
| Accrued expenses                                                                                                     |   | (1,352                                     | )      | (880 | ) |
| Interest payable                                                                                                     |   | 3,256                                      |   | 2,725 |   |
| Net cash provided by operating activities                                                                            |   | 21,634                                     |   | 16,909 |   |
|                                                                                                                 |   |                                       |   |   |   |
| Cash flows used in investing activities:                                                                             |   |                                       |   |   |   |
| Purchases of property and equipment                                                                                  |   | (9,765                                     | )      | (4,710 | ) |
| Proceeds from sales of property and equipment                                                                        |   | 35                                         |   | 56 |   |
| Construction payables                                                                                                |   | 1,351                                      |   | (992 | ) |
| Decrease (increase) in other assets                                                                                  |   | (13                                        | )      | 250 |   |
| Net cash used in investing activities                                                                                |   | (8,392                                     | )      | (5,396 | ) |
|                                                                                                                 |   |                                       |   |   |   |
| Cash flows used in financing activities:                                                                             |   |                                       |   |   |   |
| Net proceeds from borrowings                                                                                         |   | 157,385                                    |   | — |   |
| Other debt issuance costs                                                                                            |   | (1,191                                     | )      | — |   |
| Payment of accrued dividends on preferred  stock                                                                     |   | (15,000                                    | )      | — |   |
| Principal payments on long-term debt                                                                                 |   | (144,373                                   | )      | (9,595 | ) |
| Premium on early retirement of long-term  debt                                                                       |   | (3,040                                     | )      | — |   |
| Net cash used in investing activities                                                                                |   | (6,219                                     | )      | (9,595 | ) |
|                                                                                                                 |   |                                       |   |   |   |
| Net increase in cash and cash equivalents                                                                            |   | 7,023                                      |   | 1,918 |   |
| Cash and cash equivalents, beginning of  period                                                                      |   | 9,139                                      |   | 8,591 |   |
| Cash and cash equivalents, end of period                                                                             |   | $                                          | 16,162 |   | $ | 10,509 |   |
|                                                                                                                 |   |                                       |   |   |   |
| Supplemental disclosures of cash flow  information:                                                                  |   |                                       |   |   |   |
| Cash paid during the period for interest,  (net of amount capitalized of $36 in the period ended September 30, 2003) |   | $                                          | 8,256  |   | $ | 6,624 |   |
| Cash paid during the period for income  taxes, net                                                                   |   | $                                          | 100    |   | $ | — |   |

 

*The accompanying notes are an integral partof these unaudited condensed financial statements*

 

5

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Supplemental Schedule ofNon-Cash Investing and Financing Activities:

 

In conjunctionwith the issuance of $140,000,000 of Second Lien Notes and a $40,000,000 SeniorSecured Credit Facility (of which the $20,000,000 Revolving Credit Facilityportion was not drawn upon as of September 30, 2003) during May 2003,issuance costs of $2,450,000 and $567,000, respectively, were withheld from theproceeds, therefrom.

 

DuringMay 2003, the Company issued $50,037,000 of Qualified Subordinated Notesto related parties and redeemed and retired the 9 1/4% Series A CumulativePreferred Stock and the 9 1/4% Series B Cumulative Preferred Stock.

 

The value ofthe 9 1/4% Series A Cumulative Preferred Stock increased by approximately$2,404,000 in unpaid accrued dividends for the nine-month period endedSeptember 30, 2002.

 

The value ofthe 9 1/4% Series B Cumulative Preferred Stock increased by approximately$1,625,000 in unpaid accrued dividends for the nine-month periods endedSeptember 30, 2002.

 

The Companypurchased $402,000 and $1,349,000 of equipment in exchange for indebtedness forthe nine-month periods ended September 30, 2003 and 2002 respectively.

 

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 beencondensed or omitted from the interim financial statements presented in thisQuarterly Report on Form 10-Q and they do not include all information requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have beenincluded.  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.  Operating results for thethree-month and nine-month periods ended September 30, 2003 are notnecessarily indicative of future financial results or the results that may beexpected for the year ending December 31, 2003.  The unaudited interim financial statements contained hereinshould be read in conjunction with the audited financial statements andfootnotes for the year ended December 31, 2002.  The Company has made certain financial statementreclassifications for the 2002 financial statements in order to classifyamounts in a manner consistent with the 2003 financial statements which havehad 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 credit facility(the “Revolving Credit Facility”).  Asof September 30, 2003, the Company had $140.0 million outstanding in 2013Notes, $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 securityinterests securing the obligations of the Company under the 2013 Notes arecontractually subordinated to the liens securing the obligations of the Companyunder the Facility.

 

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 $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$4.3 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 $1.3 million write-off ofunamortized deferred debt issuance costs related to the tendered and callednotes.

 

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 $50.0 million (the “JuniorNotes”).  Upon issuance of the JuniorNotes, the Company’s preferred stock ceased to remain outstanding.

 

Junior Subordinated Notes

 

Interest on theJunior 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’soption, provided that interest will be paid in kind if a payment of suchinterest in cash would cause a default under the 2013 Notes or theFacility.  The Junior Notes require thatany semi-annual interest payment in cash be equal to the lesser of (x) 50% ofthe amount of interest accrued on the Junior Notes since the most recentinterest 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 theoption of the Company, in whole or in part, at any time on or afterJanuary 15, 2009, at a premium to the principal amount thereof thatdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The Junior Notescontain covenants restricting the Company’s ability to, among other things,sell or otherwise dispose of its assets, pay dividends, incur additionalindebtedness, make acquisitions or merge or consolidate with another entity andenter into transactions with affiliates.

 

7

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2013 Notes

 

Interest on the2013 Notes is payable on each June 1 and December 1 beginning December 1,2003.  The 2013 Notes are secured by asecurity interest in substantially all of the Company’s existing and futureassets, other than licenses which may not be pledged under applicable law.  The security interest is junior to thesecurity interest in the assets securing our obligation under our Facility andexcept 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 September 30, 2003.

 

# 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 incompliance with these covenants as of September 30, 2003.  The Facility is secured by substantially allof the Company’s property at the Las Vegas site.  Interest on the Facility accrues on all individual borrowings atan interest rate determined at the option of the Company, at either the LIBOR Indexplus an applicable margin (not to exceed 3.5% (applicable margin was 3.25% atSeptember 30, 2003) and aggregating 4.4% at September 30, 2003), orthe Base Rate, defined as the higher of the Federal Funds Rate plus 0.5%, orthe reference rate, as defined, plus an applicable margin (not to exceed2.25%).  The Company chose the LIBORIndex for all of its borrowings outstanding at September 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.  The Company was incompliance with these covenants as of September 30, 2003.

 

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 September 30, 2003.

 

4.                                       RECENTACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issuedInterpretation No. 46,**“Consolidationof Variable Interest Entities”.  This interpretation of AccountingResearch Bulletin No. 51,**“ConsolidatedFinancial Statements” addresses consolidation by business enterprises ofvariable interest entities, which have certain characteristics.  InOctober 2003, the FASB issued a FASB Staff Position regarding thisInterpretation to defer the effective date for applying the provisions of theInterpretation for interests held by public companies in variable interestentities or potential variable interest entities created before February 1,2003.  The Interpretation is now generally effective for financialstatements of interim or annual periods ending after December 15, 2003. We currently do not expect the adoption of this standard to have a materialimpact on our financial statements.

 

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 completed itsevaluation of SFAS 149 and has determined that there is no material effect onits financial statements as of September 30, 2003 as it does not engage inderivative activities.

 

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 September 30, 2003and implemented it on July 1, 2003.

 

5.                                       CONSTRUCTIONCOMMITMENT

 

OnApril 9, 2003, the Company entered into a $1.3 million conditional saleagreement for the purchase of four full color live video LED sign systems ofwhich approximately $1.0 million has been paid as of September 30, 2003.  During August 2003, the Company enteredinto an agreement to expand its parking garage facility by 380 spaces forapproximately $4.0 million of which approximately $1.2 million has been paid asof September 30, 2003.

 

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

 

The followingdiscussion should be read in conjunction with, and is qualified in its entiretyby, the Company’s financial statements, including the notes thereto, and theother financial information appearing elsewhere herein and by the AnnualReport to Shareholders on Form 10-K 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, andSections 21E of the Securities Exchange Act of 1934, as amended, whichrepresent the Company’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 to Shareholders onForm 10-K filed with the SEC on March 31, 2003.

 

OVERVIEW

 

Our sole business is the operation of the Hard Rock Hotel and Casino inLas Vegas, NV.

 

RESULTS OFOPERATIONS

 

Three Months EndedSeptember 30, 2003 and 2002

 

NETREVENUES.  Net revenues increased 10%for the three-month period ended September 30, 2003 to $37.2 millioncompared to $33.7 million for the three-month period ended September 30,2002.  The $3.5 million increase in netrevenues is primarily attributable to a $2.2 million or 21% increase in foodand beverage revenues, a $1.2 million or 17% increase in hotel revenues and a$0.2 million or 4% combined increase in retail and other revenues.  These increases were partially offset by a$0.1 million or 2% increase in promotional allowances related to itemsfurnished to customers on a complimentary basis.

 

CASINOREVENUES.  Casino revenues remainedconstant at $15.2 million.  Table gamesrevenues increased $0.3 million or 3% to $10.7 million and race and sportsrevenues increased $0.1 million or 33% to $0.3 million.  These increases were offset by a $0.4 millionor 8% decrease in slot revenues.  Theincrease in table games revenues was due to an increase in table games dropoffset partially by a decrease in hold percentage.  Table games drop increased $2.6 million or 4% to $77.1 millionfrom $74.5 million.  Table games holdpercentage decreased 0.1 percentage points to 13.8% from 13.9%.  The average number of table games inoperation decreased to 91 from 94, a decrease of 3 games or 3%.  The net result of these changes in drop,hold percentage and average number of table games in operation was an increasein win per table game per day to $1,274 from $1,197, an increase of $77 or7%.  We have historically reported tablegames hold percentage using the gross method, while casinos on the Strip reporthold percentage using the net method (which reduces the table game drop bymarker repayments made in the gaming pit area).  For the purpose of comparison to properties on the Strip, our nethold percentage for the three-month period ended September 30, 2003 was16.1% compared to 16.2% for the three-month period ended September 30,2002.  The increase in race and sportsbook revenues was due to an increase in race and sports handle and holdpercentage.  Race and sports book handleincreased $0.1 million or 2% to $4.5 million from $4.4 million.  Race and sports hold percentage increased1.4 percentage points to 6.2% from 4.8%. The decrease in slot machine revenues was due to a decrease in slot machinehandle offset partially by an increase in hold percentage.  Slot machine handle decreased $10.1 millionor 11% to $85.4 million from $95.5 million. Slot machine hold percentage increased 0.1 percentage points to 5.0%from 4.9%.  The average number of slotmachines in operation decreased to 558 from 563, a decrease of 5 machines or 

 

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1%.  The net result of these changes in handle, hold percentage andaverage number of slot machines in operation was a decrease in win per slotmachine per day to $84 from $90, a decrease of $6 or 7%.

 

LODGING REVENUES.  The $1.2million increase in lodging revenues to $8.0 million from $6.8 million wasprimarily due to an increase in average daily rate (“ADR”) to $133 from $113,an increase in occupancy percentage to 96.8% from 96.1% between periods and a$0.2 million increase in miscellaneous sales. These increases were offset partially by a less than $0.1 milliondecrease in telephone sales.

 

FOOD AND BEVERAGE REVENUES.  The$2.2 million increase in food and beverage revenues was due to food revenuesincreasing by approximately $1.0 million and beverage revenues increasingapproximately $1.2 million.  Foodrevenues increased due primarily to a $0.5 million increase from the opening ofSimon Kitchen and Bar, a $0.4 million increase in Banquet food, a $0.1 millionincrease in each of the Pink Taco and Room Service.  These increases were offset partially by a $0.1 million decreasein AJ’s restaurant.  AJ’s had been opendaily during the prior year quarter due to the permanent closing of Mortoni’srestaurant and bar during July 2002, and was replaced by Simon Kitchen andBar which opened during October 2002 at which time AJ’s returned to a 5day per week operating schedule. Beverage revenues increased due primarily to a $0.3 million increasefrom the opening of Simon Kitchen and Bar, a $0.3 million increase in BeachClub beverage revenues, a $0.2 million increase in each of the Las Vegas Loungeand Baby’s nightclub revenues and a $0.1 million increase in each of the Jointand Banquet beverage revenues.

 

RETAIL REVENUES.  Retailrevenues increased by less than $0.1 million to $2.3 million.

 

OTHER INCOME.  Other incomeincreased $0.1 million due to various changes in other operations each of whichwas less than $0.1 million.

 

PROMOTIONALALLOWANCES.  Promotional allowancesremained consistent as a percentage of casino revenues at 18% betweencomparative periods and decreased as a percentage of total gross revenues.

 

CASINO EXPENSES.  Casinoexpenses decreased $0.2 million or 3%to $8.3 million from $8.5 million. The decrease was primarily due to a $0.3 million decrease in discountson receivables, a $0.1 million decrease in travel reimbursements, a $0.1million decrease in fees paid to independent marketing representatives and a$0.1 million decrease in bad debt expenses related to potentially uncollectiblecredit extended to casino customers. These decreases were offset partially by a $0.3 million increase inlabor and related expenses.  Theprovision and allowance for doubtful accounts are based on estimates bymanagement of the collectability of the receivable balances at each periodend.  Management’s estimates consider,among other factors, the age of the receivables, the type or source of thereceivables and the results of collection efforts to date, especially withregard to significant accounts.  Theoutstanding amount of casino markers and checks deposited and returned by thebank unpaid increased to $1.7 million from $1.1 million as of September 30,2003 and 2002, respectively.  Casinoexpenses as a percentage of casino revenues decreased to 54% from 56%, adecrease of 2 percentage points between comparative periods due to the itemsdescribed above.

 

LODGING EXPENSES. Lodging expenses in relation to lodging revenues,prior to reclassifying the cost of complimentaries to casino expense, decreasedto 30% from 33% in the prior year period due to a higher ADR and occupancypercentage while total operating expenses increased approximately $0.1 millionprimarily related to labor and related expenses.

 

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,decreased to 60% from 64% in the prior year period due primarily to food laborand related expenses increasing 16% while food revenues increased by 25% andbeverage labor and related expenses increasing 11% and cost of goods soldincreasing 5% while beverage revenues increased by 19%.

 

RETAIL COSTS AND EXPENSES. Retail costs and expenses in relation to retail revenues, prior toreclassifying the cost of complimentaries to casino expense, increased to 47%from 46% in the prior year period due primarily to the cost of retail goodssold in relation to revenues increasing to 37% from 36%.

 

OTHER COSTS AND EXPENSES.  Othercosts and expenses in relation to other income decreased to 51% from 52%, adecrease of 1 percentage point.  Thedecrease is primarily due to increased Rockspa and Box Office operating marginsoffset partially by the closing of the Arcade to begin construction of the LoveJones lingerie store, which opened subsequent to September 30, 2003.

 

MARKETING, GENERAL AND ADMINISTRATIVE. General and administrative expenses increased at the same rate as grossrevenues and in relation to gross revenues remained constant at 19%.  The increase in expenses was primarily due to a $0.2million increase in entertainment expenses, as there were 28 concerts in theJoint during the current year quarter and 15 in the prior year period, a $0.3million expense related to a bid for the Pauma Indian management agreement, a$0.3 million increase in labor and related expenses including managementincentives and $0.1 million increases in each of repairs and maintenance andinsurance costs.  These increases wereoffset partially by a $0.2 million decrease in marketing events such as beachparties, which

 

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were not heldduring the current year quarter but were held during the prior year period, anda $0.1 million decrease in advertising expenditures, primarily nationaladvertising.

 

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased to $3.0 million from$2.8 million between comparative periods due to the addition of various assetssince the prior year period including, among other assets, four full color livevideo LED sign systems for $1.4 million, a “mega-suite” of approximately 4,500square feet with 3 bedrooms, 4 bathrooms, a dining room, a kitchen, a spa room,a billiard room and a professional style bowling alley for approximately $2.6million and Simon Kitchen and Bar for approximately $2.6 million.

 

INTEREST EXPENSE.  Interestexpense increased to $4.9 million from $3.3 million, an increase of $1.6million or 48%.  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.

 

INCOME TAXES.  The Company didnot have income tax expense during the third quarter of 2003 or 2002 due tobeing able to offset income with net operating loss carryforwards (“NOL”) fromprevious periods.

 

INCOME APPLICABLE TO COMMON SHAREHOLDERS.  Income applicable to common shareholders was $1.9 millioncompared to $0.5 million during the prior year three-month period.  The increase in net results for common shareholderswas due to the factors described above in addition to a $1.4 million decreasein preferred stock dividends.  Preferreddividends decreased due to a the replacement of the preferred stock andremaining accrued dividends with qualified subordinated debt duringMay 2003.

 

Nine Months EndedSeptember 30, 2003 and 2002

 

NET REVENUES.  Net revenuesincreased 7% for the nine-month period ended September 30, 2003 to $106.1million compared to $99.2 million for the nine-month period endedSeptember 30, 2002.  The $6.9million increase in net revenues is primarily attributable to a $4.0 million or12% increase in food and beverage revenues, a $2.5 million or 12% increase inhotel revenues, a $0.9 million or 2% increase in casino revenues and a $0.2million or 4% increase in other revenues. These increases were partially offset by a $0.4 million or 5% decreasein retail revenues and a $0.3 million or 4% increase in promotional allowancesrelated to items furnished to customers on a complimentary basis.

 

CASINO REVENUES.  The $0.9million increase in casino revenues was primarily due to a $1.5 million or 14%increase in slot machine revenues and a $0.6 million or 136% increase in raceand sports book revenues.  Theseincreases were partially offset by a $1.3 million or 4% decrease in table gamesrevenues.  The increase in slot machinerevenues was due to an increase in slot machine handle and holdpercentage.  Slot machine handle increased$5.3 million or 2% to $268.2 million from $262.9 million.  Slot machine hold percentage increased 0.5percentage points to 4.8% from 4.3%. 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 $84 from $73, an increase of $11 or 15%.  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 $1.6 million or 160% to $2.6 million from $1.0 million.  Sports book handle decreased $0.1 million to$11.2 million from $11.3 million.  Raceand sports hold percentage increased 4.6 percentage points to 8.7% from4.1%.  The decrease in table gamesrevenues was due to a decrease in table games drop and hold percentage.  Table games drop decreased $0.1 million orless than 1% to $225.0 million from $225.1 million.  Table games hold percentage decreased 0.5 percentage points to13.1% from 13.6%.  The average number oftable games in operations decreased to 91 from 92, a decrease of 1 table or1%.  The net result of these changes indrop, hold percentage and average number of table games in operation was adecrease in win per table game per day to $1,184 from $1,221, a decrease of $38or 3%.  We have historically reportedtable games hold percentage using the gross method, while casinos on the Stripreport hold percentage using the net method (which reduces the table game dropby marker repayments made in the gaming pit area).  For the purpose of comparison to properties on the Strip, our nethold percentage for the nine-month period ended September 30, 2003 was15.0% compared to 15.8% for the nine-month period ended September 30,2002.

 

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LODGING REVENUES.  The $2.5million increase in lodging revenues to $23.1 million from $20.6 million wasprimarily due to an increase in ADR to $130 from $115 and a $0.4 millionincrease in miscellaneous sales, offset partially by a decrease in occupancypercentage to 95.6% from 95.9% between periods and a $0.2 million decrease intelephone sales.

 

FOOD AND BEVERAGE REVENUES.  The$4.0 million increase in food and beverage revenues was due to food revenuesincreasing by approximately $1.8 million and beverage revenues increasingapproximately $2.2 million.  Foodrevenues increased due primarily to a $1.7 million increase from the opening ofSimon Kitchen and Bar, a $0.4 million increase in the Pink Taco, a $0.2 millionincrease in Room Service and a $0.1 million increase in Mr. Lucky’s.  These increases in food revenues werepartially offset by a $0.5 million decrease in Mortoni’s which was permanentlyclosed during July 2002, and was replaced by Simon Kitchen and Bar whichopened during October 2002, and a $0.2 million decrease in Banquets.  Beverage revenues increased due primarily toa $0.8 million increase from the opening of Simon Kitchen and Bar, a $0.5million increase in each of Beach Club and Baby’s nightclub, a $0.3 millionincrease in the Las Vegas Lounge and a $0.1 million increase in each of theSports Deluxe Bar, the Center Bar, the Pink Taco, Banquets and the Joint.  These increases in beverage revenues wereoffset partially by $0.2 million decrease in Mortoni’s and a $0.1 milliondecrease in each of AJ’s and Room Service.

 

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 $0.2 million due to various changes in other operations, each ofwhich was less than $0.1 million and the largest of which were income from theChevrolet Rock and Roll mobile tour and rent from Rocks Jewelry Store.

 

PROMOTIONALALLOWANCES.  Promotional allowancesremained consistent as a percentage of casino revenues at 19% betweencomparative periods and decreased as a percentage of total gross revenues.

 

CASINO EXPENSES.  Casinoexpenses increased $0.2 million or 1%to $25.0 million from $24.8 million. The increase was primarily due to a $1.0 million increase in payroll andrelated expenses, a $0.2 million increase in the cost of complimentariesfurnished to customers and a $0.1 million increase in each of gaming taxes anddiscounts on receivables.  Theseincreases were offset partially by a $0.6 million decrease in table games andslot marketing expenditures, a $0.2 million decrease in travel reimbursementsand a $0.1 million decrease in each of slot marketing software license fees,slot conversions and bad debt expenses related to potentially uncollectiblecredit extended to casino customers.  The 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 $1.7 million from $1.1 million as ofSeptember 30, 2003 and 2002, respectively. Casino expenses as a percentage of casino revenues remained a constant58% of casino revenues between comparative periods due to the items describedabove in relation to increasing revenues.

 

LODGING EXPENSES. Lodging expenses in relation to lodging revenues,prior to reclassifying the cost of complimentaries to casino expense, decreasedto 31% from 32% in the prior year period due to a higher ADR while totaloperating expenses increased approximately $0.4 million primarily related to a$0.2 million increase in labor and related expenses and a $0.2 million increasein repairs and maintenance 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,remained constant at 60% between comparative periods due primarily to food costof goods sold increasing in relation to revenues offset by beverage cost ofsales and payroll and related expenses decreasing in relation to revenues.

 

RETAIL COSTS AND EXPENSES. Retail costs and expenses in relation to retail revenues, prior toreclassifying the cost of complimentaries to casino expense, increased to 48%from 47% in the prior year period due primarily to the cost of retail goodssold in relation to revenues increasing to 38% from 37%.

 

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 increased Sundry Store operating margins andincreased income from Beach Club cabana rentals, income from the Chevrolet Rockand Roll mobile tour and rent from Rocks Jewelry Store for which there are norelated expenses.

 

MARKETING, GENERAL AND ADMINISTRATIVE. General and administrative expenses in relation to gross revenues

 

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increased to 18% from 17%, an increase of 1 percentage point.  The $1.7 million increase was primarily due to a $0.5million increase in payroll and related expenses, including managementincentives, a $0.5 million increasein promotions and special events such as the Howard Stern live broadcast, whichcost increased during 2003, a $0.3 million expense related to a bid for the PaumaIndian management agreement, and $0.2 million increases in each of repairs andmaintenance, insurance costs and computermaintenance and other administrative expenses. These increases were offset partially by a $0.5 million decrease inadvertising expense, primarily national advertising, and a $0.2 milliondecrease in entertainment expense as artist fees decreased even though therewere 44 concerts in the Joint during the current year period and 36 in theprior year period.

 

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased to $8.8 million from$8.5 million between comparative periods due to the addition of various assetssince the prior year period including, among other assets, four full color livevideo LED sign systems for $1.4 million, a “mega-suite” of approximately 4,500square feet with 3 bedrooms, 4 bathrooms, a dining room, a kitchen, a spa room,a billiard room and a professional style bowling alley for approximately $2.6million and Simon Kitchen and Bar for approximately $2.6 million.

 

INTEREST EXPENSE.  Interestexpense increased to $12.0 million from $9.9 million, an increase of $2.1million or 21%.  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.

 

LOSSON EARLY EXTINGUISHMENT OF DEBT.  Losson early extinguishments of debt is related to the $3.0 million premium paid tothe holders of the Company’s 9 1/4% Notes due 2005 (the “Notes”) which weretendered or called during the three-month period ended June 30, 2003 and due toa $1.3 million write-off of unamortized deferred debt issuance costs related tothe tendered and called Notes.

 

INCOMETAXES.  The Company has recorded a taxbenefit of $0.1 million in the nine-month period ended September 30, 2003 dueto an adjustment of its deferred tax assets. The Company did not have income tax expense during 2002 due to beingable to offset 100% of alternative minimum taxable (“AMT”) income with AMT netoperating loss carryforwards (“NOL”) from previous periods.  This is dueto legislation passed in the Job Creation and Worker Assistance Act of 2002which increases the limit on AMT NOL deductions from 90 percent to 100 percentfor NOL’s generated or taken as carryforwards in the tax year ending during 2002.

 

INCOME APPLICABLE TO COMMON SHAREHOLDERS.  Income applicable to common shareholders was $0.2 millioncompared to $3.1 million during the prior year period.  The decrease in net results for commonshareholders was due to the factors described above in addition to a $1.7million decrease in preferred stock dividends. Preferred dividends decreased due to the replacement of the preferredstock and remaining accrued dividends with qualified subordinated debt duringMay 2003.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the nine-month period ended September 30, 2003 our principalsources of funds were cash on-hand at December 31, 2002, and cash providedby operating activities of $21.6 million. Additionally, in May 2003, the Company obtained funding of approximately$137.6 million in net proceeds from the offering of $140.0 million aggregateprincipal amount of its 8.875% Second Lien Notes due in 2013 (the “2013 Notes”)and paid additional costs of approximately $0.4 million in cash million inconjunction with this issuance. Concurrent with the issuance of the 2013 Notes, the Company secured a$40.0 million Senior Secured Credit Facility (the “Facility”) through a groupof banks at a cost of approximately $0.6 million, which was withheld from theproceeds therefrom.  The Facilityconsists of a $20.0 million, five-year senior secured term loan (the “TermLoan”) and a $20.0 million senior secured revolving credit facility (the“Revolving Credit Facility”).  As ofSeptember 30, 2003, the Company had $140.0 million outstanding in 2013Notes, $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 2013 Notes together with theborrowings under the Facility and cash on hand, were used to redeem andrepurchase the Company’s $120.0 million 9.25% Senior Subordinated Notes due in2005, repay the entire $18.0 million balance outstanding of its $30.0 millionsenior revolving credit facility, repay $1.3 million of purchase money indebtedness,pay $15.0 million accrued dividends on the Company’s preferred stock, pay costsand expenses related to the foregoing, finance working capital and  provide liquidity to fund general andcorporate purposes.  In addition, theRevolving Credit Facility will provide the Company with financial flexibilityto pursue targeted growth capital expenditures.

 

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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 $50.0 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.

 

                The amount ofcash provided by operating activities primarily includes net income of $2.5million, depreciation and amortization of $8.8 million, provision for losses onaccounts receivable of $0.2 million, amortization of loan fees of $0.5 million,loss on early extinguishments of debt of $4.3 million and net changes inoperating assets and liabilities of $5.4 million.  Other uses of funds were capital expenditures of $9.8 million.  Other sources of funds were an increase inconstruction payables of $1.4 million. As a result, as of September 30, 2003, we had cash and cashequivalents of $16.2 million.

 

DuringAugust 2003, the Company entered into an agreement to expand its parkinggarage facility by 380 spaces for approximately $4.0 million of which $2.1million has been paid as of September 30, 2003.

 

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 September 30, 2003)will be sufficient to provide operating and investing liquidity during the next12 months.  We may, however, need toraise additional funds prior to October 1, 2004.  Our ability to raise additional funds is limited by restrictionson our financing 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 which 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 after June 1,2008, at a premium to the face amount ($140 million) that decreases on eachsubsequent 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 was in compliance with these covenants as ofSeptember 30, 2003.

 

The Facility contains certain covenants including, among other things,financial covenants, limitations on the Company from disposing of capital stock,entering into mergers and certain acquisitions, incurring liens orindebtedness, issuing dividends on stock, and entering into transactions withaffiliates.  The Company is incompliance with these covenants as of September 30, 2003.  The Facility is secured by substantially allof the Company’s property at the Las Vegas site.  Interest on the Facility accrues on all individual borrowings atan interest rate determined at the option of the Company, at either the LIBORIndex plus an applicable margin (not to exceed 3.5% (applicable margin was3.25% at September 30, 2003) and aggregating 4.4% at September 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 September 30,2003.  These margins are dependent uponthe Company’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.

 

As of September 30, 2003, there have been no material changes tothe information previously reported under Item 7A in the Company’s annual reporton Form 10-K for the year ended December 31, 2002, except that onApril 9, 2003, the Company entered into a $1.3 million conditional saleagreement, payable on or before October 1, 2003, for the purchase of fourfull color live video LED sign systems. During August 2003, the Company entered into various agreements tocombine ten of its existing hotel rooms into a “mega-suite” of approximately4,500 square feet with 3 bedrooms, 4 bathrooms, a dining room, a kitchen, a sparoom, a billiard room and a professional style bowling alley for approximately$2.6 million. During August 2003, the Company entered into an agreement toexpand its parking garage facility by 380 spaces for approximately $4.0million.

 

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.

 

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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 September 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, includingassessment of the current and future economic environment.

 

We had$20.0 million and $22.9 million in variable rate debt outstanding atSeptember 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 40 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.

 

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 September 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.

 

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PART II                                                    OTHERINFORMATION

 

Item 6.                                                   Exhibitsand 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(7)           |   | 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)                                  Incorporated byreference to designated exhibit to our Registration Statement on Form S-4,filed with the Securities and Exchange Commission on May 21, 1998 (FileNo. 333- 53211).

 

(2)                                  Incorporated byreference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended August 31, 1999(File No. 333-53211).

 

(3)                                  Incorporated byreference 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)                                  Incorporated byreference 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)                                  Incorporated byreference 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)                                  Incorporated byreference to designated exhibit to our Registration Statement on Form S-4,filed with the Securities and Exchange Commission on July 8, 2003 (FileNo. 333- 106863).

 

(7)                                  Incorporated byreference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended June 30, 2003 (FileNo. 333-53211).

 

(b)                                 Reports on Form 8-K

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

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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(7)            |   | 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)                                  Incorporated byreference to designated exhibit to our Registration Statement on Form S-4,filed with the Securities and Exchange Commission on May 21, 1998 (FileNo. 333- 53211).

 

(2)                                  Incorporated byreference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended August 31, 1999(File No. 333-53211).

 

(3)                                  Incorporated byreference 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)                                  Incorporated byreference 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)                                  Incorporated byreference 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)                                  Incorporated byreference to designated exhibit to our Registration Statement on Form S-4,filed with the Securities and Exchange Commission on July 8, 2003 (FileNo. 333- 106863).

 

(7)                                  Incorporated byreference to designated exhibit to our Report on Form 10-Q, filed with theSecurities and Exchange Commission for the quarter ended June 30, 2003 (FileNo. 333-53211).

 

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