** **

**SECURITIESAND 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, 2005**

 

**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**

 

**HardRock 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 telephonenumber, including area code:  **(702) 693-5000**

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes o No ý

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

 

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

 

Common Stock outstandingby class as of November 14, 2005

 

| **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, 2005 and December 31, 2004                                     |   |
|         |                                                                                                                   |   |
|         | Condensed Statements of  Operations for the three-month and nine-month periods ended  September 30, 2005 and 2004 |   |
|         |                                                                                                                   |   |
|         | Condensed Statements of Cash  Flows for the nine-month periods ended September 30, 2005 and 2004                  |   |
|         |                                                                                                                   |   |
|         | 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 1.      | Legal Proceedings                                                                                                      |   |
|         |                                                                                                                   |   |
| Item 6.      | Exhibits and Reports on Form 8-K                                                                                  |   |
|         |                                                                                                                   |   |
|         | (a)   Exhibits                                                                                                    |   |
|         |                                                                                                                   |   |
|         | (b)   Reports on Form 8-K                                                                                    |   |

 

2

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**Part IFINANCIAL INFORMATION**

**Item 1. Financial Statements**

**HARD ROCK HOTEL, INC.**

**CONDENSED BALANCE SHEETS(unaudited)**

**(in thousands, except shareamounts)**

 
| ** **                                                                                                                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                |       |                         |       |                        |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| Current assets:                                                                                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                             |       | $                            | 17,499     |                        | $          | 10,655 |   |
| Accounts receivable, net of allowance for doubtful accounts of $879  and $656 as of September 30, 2005 and December 31, 2004,  respectively |       | 8,311                        |       | 5,921                       |       |
| Inventories                                                                                                                                           |       | 1,954                        |       | 2,234                       |       |
| Prepaid expenses and other current assets                                                                                                             |       | 2,801                        |       | 2,429                       |       |
| Related party receivable                                                                                                                              |       | 869                          |       | 122                         |       |
| Total current assets                                                                                                                                  |       | 31,434                       |       | 21,361                      |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| Property and equipment,  (net)                                                                                                                        |       | 165,685                      |       | 168,694                     |       |
| Deferred income taxes                                                                                                                                 |       | 1,408                        |       | 1,408                       |       |
| Other assets, (net)                                                                                                                                   |       | 4,252                        |       | 4,619                       |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| TOTAL ASSETS                                                                                                                                          |       | $                            | 202,779    |                        | $          | 196,082 |   |
|                                                                                                                                                  |       |                         |       |                        |       |
| LIABILITIES AND  SHAREHOLDERS’ DEFICIENCY                                                                                                        |       |                         |       |                        |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                  |       |                         |       |                        |       |
| Accounts payable                                                                                                                                      |       | $                            | 2,396      |                        | $          | 2,105 |   |
| Construction payable                                                                                                                                  |       | —                       |       | 119                         |       |
| Related party payable                                                                                                                                 |       | 300                          |       | 298                         |       |
| Accrued expenses                                                                                                                                      |       | 14,580                       |       | 13,282                      |       |
| Interest payable                                                                                                                                      |       | 5,367                        |       | 3,620                       |       |
| Current portion of long-term debt                                                                                                                     |       | 72                           |       | 5,173                       |       |
| Total current liabilities                                                                                                                             |       | 22,715                       |       | 24,597                      |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| Deferred income taxes                                                                                                                                 |       | 1,155                        |       | 1,155                       |       |
| Deferred compensation                                                                                                                                 |       | 2,211                        |       | 1,161                       |       |
| Junior notes                                                                                                                                          |       | 55,857                       |       | 53,036                      |       |
| Long-term debt                                                                                                                                        |       | 144,000                      |       | 152,528                     |       |
| Total long-term liabilities                                                                                                                           |       | 203,223                      |       | 207,880                     |       |
| Total liabilities                                                                                                                                     |       | 225,938                      |       | 232,477                     |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| 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                                                                                                                                   |       | (30,667                      | )          | (43,903                     | )          |
| Total shareholders’ deficiency                                                                                                                   |       | (23,159                      | )          | (36,395                     | )          |
|                                                                                                                                                  |       |                         |       |                        |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ DEFICIENCY                                                                                                  |       | $                            | 202,779    |                        | $          | 196,082 |   |

 

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

 

3

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**HARD ROCK HOTEL, INC.**

**CONDENSED STATEMENTS OF OPERATIONS**

**(in thousands, except share and per share amounts)**

**(unaudited)**

 
| ** **                                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                              |       |                                       |       |                                      |       |   |   |   |   |
| Casino                                                |       | $                                          | 17,949     |                                      | $          | 14,165 |   | $ | 50,699 |   | $ | 44,250 |   |
| Lodging                                               |       | 10,180                                     |       | 9,303                                     |       | 29,858 |   | 27,328 |   |
| Food and beverage                                     |       | 17,315                                     |       | 14,849                                    |       | 51,256 |   | 39,862 |   |
| Retail store                                          |       | 2,050                                      |       | 1,931                                     |       | 5,893 |   | 6,042 |   |
| Other                                                 |       | 2,633                                      |       | 2,346                                     |       | 7,653 |   | 6,630 |   |
| Gross revenues                                        |       | 50,127                                     |       | 42,594                                    |       | 145,359 |   | 124,112 |   |
| Less: promotional allowances                          |       | (3,602                                     | )          | (2,978                                    | )          | (10,322 | ) | (8,821 | ) |
| Net revenues                                          |       | 46,525                                     |       | 39,616                                    |       | 135,037 |   | 115,291 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Costs and expenses:                                   |       |                                       |       |                                      |       |   |   |   |   |
| Casino                                                |       | 9,792                                      |       | 8,114                                     |       | 27,075 |   | 25,586 |   |
| Lodging                                               |       | 2,405                                      |       | 2,328                                     |       | 7,079 |   | 6,708 |   |
| Food and beverage                                     |       | 8,769                                      |       | 7,736                                     |       | 25,318 |   | 20,795 |   |
| Retail store                                          |       | 1,002                                      |       | 859                                       |       | 2,764 |   | 2,703 |   |
| Other                                                 |       | 1,465                                      |       | 1,228                                     |       | 4,053 |   | 3,386 |   |
| Marketing, advertising and entertainment              |       | 2,102                                      |       | 1,552                                     |       | 8,334 |   | 7,109 |   |
| General and administrative                            |       | 6,880                                      |       | 6,040                                     |       | 18,587 |   | 16,741 |   |
| Related party expenses                                |       | 1,451                                      |       | 1,287                                     |       | 4,501 |   | 3,729 |   |
| Depreciation and amortization                         |       | 3,001                                      |       | 2,421                                     |       | 8,900 |   | 8,354 |   |
| Loss (gain) on disposal of assets                     |       | (37                                        | )          | (1                                        | )          | 514 |   | 2,667 |   |
| Pre-opening expenses                                  |       | 87                                         |       | 9                                         |       | 283 |   | 530 |   |
| Total costs and expenses                              |       | 36,917                                     |       | 31,573                                    |       | 107,408 |   | 98,308 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income from operations                                |       | 9,608                                      |       | 8,043                                     |       | 27,629 |   | 16,983 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Other income (expense):                               |       |                                       |       |                                      |       |   |   |   |   |
| Interest income                                       |       | 88                                         |       | 22                                        |       | 218 |   | 42 |   |
| Interest expense                                      |       | (4,863                                     | )          | (4,688                                    | )          | (14,611 | ) | (14,254 | ) |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income before benefit for  income taxes               |       | 4,833                                      |       | 3,377                                     |       | 13,236 |   | 2,771 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income tax benefit                                    |       | —                                     |       | —                                    |       | — |   | — |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                            |       | $                                          | 4,833      |                                      | $          | 3,377 |   | $ | 13,236 |   | $ | 2,771 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| BASIC AND DILUTED NET  INCOME PER SHARE:              |       |                                       |       |                                      |       |   |   |   |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                            |       | $                                          | 63.57      |                                      | $          | 44.42 |   | $ | 174.11 |   | $ | 36.45 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| 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 CASHFLOWS**

**(in thousands, exceptsupplemental schedule)**

**(unaudited)**

 
| ** **                                                                                                                 | ** ** | **Nine Months  Ended September 30,  2005** | ** ** | **Nine Months  Ended September 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| Cash flows from operating  activities:                                                                                     |       |                                            |       |                                            |       |
| Net income                                                                                                                 |       | $                                               | 13,236     |                                            | $          | 2,771 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                                         |       |                                            |       |                                            |       |
| Depreciation and amortization                                                                                              |       | 8,900                                           |       | 8,354                                           |       |
| Provision for losses on accounts receivable                                                                                |       | 358                                             |       | 25                                              |       |
| Amortization of bond offering fees and costs                                                                               |       | 384                                             |       | 390                                             |       |
| Loss on disposal of assets                                                                                                 |       | 514                                             |       | 2,667                                           |       |
| Changes in operating assets and liabilities                                                                                |       |                                            |       |                                            |       |
| Accounts receivable                                                                                                        |       | (2,748                                          | )          | 734                                             |       |
| Inventories                                                                                                                |       | 280                                             |       | (38                                             | )          |
| Prepaid expenses and other current assets                                                                                  |       | (372                                            | )          | 552                                             |       |
| Related party receivable                                                                                                   |       | (747                                            | )          | (299                                            | )          |
| Accounts payable                                                                                                           |       | 291                                             |       | (472                                            | )          |
| Related party payable                                                                                                      |       | 2                                               |       | 83                                              |       |
| Long term deferred compensation                                                                                            |       | 1,050                                           |       | —                                          |       |
| Accrued expenses                                                                                                           |       | 1,298                                           |       | 1,868                                           |       |
| Interest payable                                                                                                           |       | 4,569                                           |       | 4,163                                           |       |
| Net cash provided by operating  activities                                                                                 |       | 27,015                                          |       | 20,798                                          |       |
|                                                                                                                       |       |                                            |       |                                            |       |
| Cash flows from investing  activities:                                                                                     |       |                                            |       |                                            |       |
| Purchases of property and equipment                                                                                        |       | (6,424                                          | )          | (13,730                                         | )          |
| Construction related payables                                                                                              |       | (119                                            | )          | (862                                            | )          |
| Proceeds from sale of operating assets                                                                                     |       | 19                                              |       | 61                                              |       |
| Decrease in other assets                                                                                                   |       | (17                                             | )          | (33                                             | )          |
| Net cash used in investing  activities                                                                                     |       | (6,541                                          | )          | (14,564                                         | )          |
|                                                                                                                       |       |                                            |       |                                            |       |
| Cash flows from financing  activities:                                                                                     |       |                                            |       |                                            |       |
| Other debt issuance expenses                                                                                               |       | —                                          |       | (149                                            | )          |
| Principal payments on long-term debt                                                                                       |       | (13,630                                         | )          | (130                                            | )          |
| Net cash used in financing  activities                                                                                     |       | (13,630                                         | )          | (279                                            | )          |
|                                                                                                                       |       |                                            |       |                                            |       |
| Net increase in cash and  cash equivalents                                                                                 |       | 6,844                                           |       | 5,955                                           |       |
| Cash and cash equivalents,  beginning of period                                                                            |       | 10,655                                          |       | 10,882                                          |       |
|                                                                                                                       |       |                                            |       |                                            |       |
| Cash and cash equivalents,  end of period                                                                                  |       | $                                               | 17,499     |                                            | $          | 16,837 |   |
|                                                                                                                       |       |                                            |       |                                            |       |
| Supplemental disclosures  of cash flow information:                                                                        |       |                                            |       |                                            |       |
| Cash paid during the period for interest, (net of amount capitalized  of $189 in the period ended September 30, 2004) |       | $                                               | 9,658      |                                            | $          | 12,701 |   |
| Cash paid during the  period for income taxes, net                                                                         |       | $                                               | 210        |                                            | $          | — |   |

 

SupplementalSchedule of Non-Cash Investing and Financing Activities:

 

Inaccordance with the terms of the Junior Notes, the Company paid interest inkind of $2.8 million during the nine month period ended September 30, 2005and increased the principal amount of the Junior Notes.

 

Inaccordance with the terms of the Junior Notes, the Company paid interest inkind of $3.0 million during the nine month period ended September 30, 2004and increased the principal amount of the Junior Notes.

 

*The accompanying notes are an integral part of theseunaudited condensed financial statements*

 

5

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**HARD ROCK HOTEL, INC.**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

1.             BASIS OF PRESENTATION

 

Hard RockHotel, Inc. (the “Company”), a Nevada corporation incorporated onAugust 30, 1993, operates a hotel-casino in Las Vegas, Nevada (the “Resort”).  Lily Pond Investments, Inc. (“Lily Pond”),a Nevada corporation controlled and majority owned by Peter Morton, owns all ofthe voting shares and 93% of the non-voting shares of the Company.  Mr. Morton has granted a sublicense tothe Company, pursuant to which the Company holds the exclusive right to use the“Hard Rock Hotel” trademark for the Company’s operations in Las Vegas.  These condensed financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed oromitted from the interim financial statements presented in this QuarterlyReport on Form 10-Q and they do not include all information required byaccounting 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 been included.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the amountsof revenues and expenses during the reporting period.  Certain reclassifications have been made tothe income statement but these reclassifications did not have an effect on netincome.  Actual results could differ fromthese estimates.  Operating results forthe nine-month period ended September 30, 2005 are not necessarilyindicative of future financial results or the results that may be expected forthe year ending December 31, 2005. The unaudited interim financial statements contained herein should beread in conjunction with the audited financial statements and notes in ourAnnual Report on Form 10-K for the year ended December 31, 2004.

 

2.             AGREEMENTS WITH RELATED PARTIES

 

The Company has enteredinto a twenty-five year Amended and Restated Supervisory Agreement with PeterMorton, Chairman and Chief Executive Officer, which provides for thesupervision of the development, improvement, operation, and maintenance of theCompany through 2022.  Mr. Mortonhas the option to renew the agreement for two successive fifteen yearterms.  Pursuant to the terms of theSupervisory Agreement, Mr. Morton is to provide consulting and supervisoryservices to the Company.  In the eventeither we are or Mr. Morton is in Default (as defined in the SupervisoryAgreement), the non-defaulting party may terminate the agreement after theother party has received the opportunity to cure such default.  As part of this agreement, the Company paysMr. Morton a supervisory fee equal to two percent of annual gross revenues(as defined in the Supervisory Agreement), net of promotional allowances foreach year.  Total supervisory feeexpenses for these services for the nine months ended September 30, 2005and 2004 amounted to $2,695,000 and $2,333,000, respectively.  These expenses are included in related partyexpenses in the accompanying statements of operations.  The unpaid amounts atSeptember 30, 2005 and December 31, 2004 are $300,000 and $224,000,respectively, and are included in related party payable in the accompanyingbalance sheets.

 

Entities controlled byMr. Morton have provided additional technical support services for thedevelopment, ongoing improvement and operation of the Company.  The Company reimburses these entities for allcosts and expenses incurred in connection with these services, including,without limitation, employee salary and benefits and allocated overhead.  These expenses aggregated approximately$1,806,000 and $1,396,000 for the nine months ended September 30, 2005 and2004, respectively, and are included in related party expenses the accompanyingstatements of operations.  AtSeptember 30, 2005, $314,000 was due from these entities for expenses paidin advance and is included in related party receivable in the accompanying balancesheet.  At December 31, 2004,$74,000 was due to these entities for expenses and is included in related partypayable in the accompanying balance sheet.

 

The Company providestechnical support services and pays certain overhead expenses for the developmentand operation of HR Condominium Investors (Vegas), LLC, an affiliate of ourChief Executive Officer Mr. Morton. HR Condominium Investors (Vegas), LLC is developing the propertyadjacent to the Resort and has recently signed a commitment for a loan facilityin the amount of $1,250,000,000 for such development.  The development is expected to addapproximately 1,350 condominiums, a new Joint, new restaurants, new spa,meeting and ballroom facilities, new pools and other amenities.  HR Condominium Investors (Vegas), LLC (“HRCI”)reimburses the Company for all of these costs and expenses, which aggregatedapproximately $601,000 for the nine months ended September 30, 2005.  The unpaid amounts at September 30, 2005and December 31, 2004 are $555,000 and $122,000, respectively, and areincluded in related party receivable in the accompanying balance sheets.

 

6

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On December 24,2004, PM Realty LLC, a development entity owned by our Chief Executive OfficerMr. Morton, and the Company entered into a lease for a ten year initial termwith Mr. Chow of Las Vegas, LLC, a Nevada limited liability company, forcommercial space anticipated to be developed on land contiguous to the Resort.

 

During the nine monthsended September 30, 2005 and 2004, the Company paid compensation to HarryMorton, son of Peter Morton, of $168,000 and $114,000, respectively, for hisposition as Special Projects Director. The Company also provided housing and other services to Harry Morton atthe resort with a total estimated value during the nine months ended September30, 2005 and 2004, of $37,000 and $48,000, respectively.

 

Our preferred stock was,and a portion of the junior subordinated notes are, held by an affiliate ofMr. Morton (see Note 3 below).

 

3.                                       LONG-TERM DEBT

 

Asof September 30, 2005, the Company had $140.0 million outstanding of its8.875% Second Lien Notes due 2013 (the “2013 Notes”).  The Company also has a $40 million SeniorSecured Credit Facility (the “Facility”) through a group of banks.  TheFacility consists of a $20 million, five-year senior secured term loan (the “TermLoan”) and a $20 million senior secured revolving credit facility (the “RevolvingCredit Facility”).  As ofSeptember 30, 2005, the Company had $4.0 million outstanding on its TermLoan and had no balance outstanding on its Revolving Credit Facility.  As of September 30, 2005, the Companyalso had approximately $55.9 million outstanding of junior subordinated notes(the “Junior Notes”), including $2.8 million of interest paid in kindduring the nine month period ended September 30, 2005.

 

2013Notes

 

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013 Notes are secured by a securityinterest in substantially all of the Company’s existing and future assets,other than licenses which may not be pledged under applicable law.  The 2013 Notes arecontractually subordinated in right of payment to all indebtedness incurredpursuant to the Revolving CreditFacility. The 2013 Notesare subject to redemption at the option of the Company, in whole or in part, atany time on or after June 1, 2008, at a premium to the face amount ($140million) that decreases on each subsequent anniversary date, plus accruedinterest to the date of redemption.  The2013 Notes contain covenants restricting or limiting the ability of the Companyto, among other things, pay dividends, create liens or other encumbrances,incur additional 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 these covenants asof September 30, 2005.

 

Facility

 

Intereston the Facility accrues on all individual borrowings at an interest ratedetermined at the option of the Company, at either the LIBOR Index plus anapplicable LIBOR margin (not to exceed 3.5% (applicable margin was 2.50% atSeptember 30, 2005) and aggregating 5.9% at September 30, 2005), 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, 2005.  These margins are dependent upon the Company’stotal debt to EBITDA ratio, as defined. Interest accrued on the Base Rate borrowings is due monthly, up to thematurity date, while interest on LIBOR borrowings is due three-months up to thematurity date.  The Facility is securedby substantially all of the Company’s property at the Las Vegas site.  The Facility contains certain covenantsincluding, among other things, financial covenants, limitations on the Companyfrom disposing of capital stock, entering into mergers and certainacquisitions, incurring liens or indebtedness, issuing dividends on stock, andentering into transactions with affiliates. The Company was in compliance with these covenants as ofSeptember 30, 2005.

 

JuniorNotes

 

Intereston the Junior Notes is payable on each January 15 and July 15,commencing on January 15, 2004, and may be paid in cash or in kind at theCompany’s option, provided that interest will be paid in kind if a payment ofsuch interest 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 

 

7

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9.875%,and for interest payments payable in kind, interest accrues at a rate per annumequal to 10.50% and increases the principal amount of the Junior Notes.  For the nine months ended September 30, 2005,the Company paid in cash $2.7 million of interest on the Junior Notes.  The remaining $2.8 million of accruedinterest was paid in kind at a rate of 10.50%. The Junior Notes are contractually subordinated to the 2013 Notes andthe Facility and any other senior debt of the Company.

 

The Junior Notes mature on January 15, 2014 butare subject to redemption at the option of the Company, in whole or in part, atany time on or after January 15, 2009, at a premium to the principalamount thereof that decreases on each subsequent anniversary date, plus accruedinterest to the date of redemption.  TheJunior Notes contain covenants restricting the Company’s ability to, amongother things, sell or otherwise dispose of its assets, pay dividends, incuradditional indebtedness, make acquisitions or merge or consolidate with anotherentity and enter into transactions with affiliates.  The Company was in compliance with thesecovenants as of September 30, 2005.

 

4.             LEGAL AND REGULATORY PROCEEDINGS

 

TheCompany is a defendant in various lawsuits relating to routine mattersincidental to its business.

 

Management provides an accrual for estimated lossesthat may occur and does not believe that the outcome of any pending claims orlitigation, in the aggregate, will have a material adverse effect on theCompany’s financial position, results of operations or liquidity beyond theamounts recorded in the accompanying balance sheet as of September 30,2005.

 

5.             COMMITMENT

 

DuringJanuary 2005, the Company entered into an agreement to install a new hotelreservation system.  Total costs of theproject were approximately $0.7 million all of which has been paid in cash asof September 30, 2005.

 

**Item 2.            Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with, and is qualified inits entirety by the Company’s financial statements, including the notesthereto, and the other financial information appearing elsewhere herein and theAnnual Report to Shareholders on Form 10-K for the year endedDecember 31, 2004, which may be obtained upon request from the Company.

 

SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Thisdocument includes various “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Sections 21E ofthe Securities Exchange Act of 1934, as amended, which represent the Company’sexpectations or beliefs concerning future events.  Statements containing expressions such as “believes,”“anticipates” or “expects” used in our press releases and periodic reports onForms 10-K and 10-Q filed with the Securities and Exchange Commission areintended 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.  Such factorsinclude, without limitation, the following: increased competition in existing markets or the opening of new gamingjurisdictions; a decline in the public acceptance of gaming; the limitation,conditioning or suspension of any of our gaming licenses; increases in or newtaxes imposed on gaming revenues or gaming devices; a finding of unsuitabilityby regulatory authorities with respect to our officers, directors or keyemployees; loss or retirement of key executives; significant increases in fuelor transportation prices; adverse economic conditions in our key markets;severe and unusual weather in our key markets; and adverse results ofsignificant litigation matters.  Readersare cautioned not to place undue reliance on forward-looking statements, whichspeak only as of the date thereof.  Weexpressly disclaim any obligation or undertaking to disseminate any updates orrevisions to any forward-looking statement contained in this report, includingto reflect any change in our expectations with regard to that forward-lookingstatement or any change in events, conditions or circumstances on which thatforward-looking statement is based.  Formore information regarding risks inherent in an investment in the Company, seethe section ”Business — Risk Factors” in our Annual Report to Shareholderson Form 10-K for the year ended December 31, 2004 filed with the SECon March 31, 2005.

 

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OVERVIEW

 

Oursole business is the operation of the Hard Rock Hotel and Casino in Las Vegas,NV.

 

RESULTSOF OPERATIONS

 

THREE-MONTHSENDED SEPTEMBER 30, 2005 COMPARED TO THREE-MONTHS ENDED SEPTEMBER 30,2004

 

NETREVENUES.  Net revenues increased 17% for the three-months endedSeptember 30, 2005 to $46.5 million compared to $39.6 million for thethree-months ended September 30, 2004. The $6.9 million increase in net revenues was primarilyattributable to a $3.8 million or 27% increase in casino revenues, a $2.5million or a 17% increase in food and beverage revenue, a $0.9 million or9% increase in lodging revenue, a $0.3 million or 12% increase in otherrevenues and a $0.1 million or a 6% increase in retail revenue.  These increases in revenue were partiallyoffset by a $0.6 million or 21% increase in promotional allowances related toitems furnished to customers on a complimentary basis.

 

CASINOREVENUES.  The $3.8 million increase in casino revenues wasprimarily due to a $3.2 million or 31% increase in table games revenues, a$0.4 million or 10% increase in slot machine revenues and a $0.2 millionor 119% increase in race and sports book revenue.  The increase in table games revenues was dueto an increase in hold percentage and an increase in table games drop.  Table games hold percentage increased2.5 percentage points to 16.5% from 14.0%. Table games drop increased $8.5 million or 12% to$79.2 million from $70.7 million. The average number of table games in operation increased to 94 from 91,an increase of 3 table games or 4%.  Thenet result of these changes in drop and hold percentage was an increase in winper table game per day to $1,504 from $1,180, an increase of $324 or 27%.  We have historically reported table gameshold percentage using the gross method, while casinos on the Strip report holdpercentage using the net method (which reduces the table game drop by markerrepayments made in the gaming pit area). For the purpose of comparison to properties on the Strip, our net holdpercentage for the three-months ended September 30, 2005 was 19.3% compared to16.0% for the three-months ended September 30, 2004.  The increase in slot machine revenues was dueto an increase in slot machine handle partially offset by a decrease in slotmachine hold percentage.  Slot machinehandle increased $21.8 million or 28% to $100.4 million from$78.6 million.  Slot machine holdpercentage decreased 0.7 percentage points to 4.5% from 5.2%.  The average number of slot machines inoperation increased to 552 from 546, an increase of 6 machines or 1%.  The net result of these changes in handle,hold percentage and average number of slot machines in operation was anincrease in win per slot machine per day to $89 from $82, an increase of $7 or9%.  The increase in race and sportsrevenues was due to an increase in race and sports hold percentage.  Race and sports hold percentage increased 5.0percentage points to 11.7% from 6.7%. Race and sports handle remained constant at $3.4 million.

 

LODGINGREVENUES.  The $0.9 million increase in lodging revenues to$10.2 million from $9.3 million was primarily due to an increase inaverage daily rate (“ADR”) to $177 from $154. Hotel occupancy decreased to 95.6% from 96.9% between periods.

 

FOODAND BEVERAGE REVENUES.  The $2.5 million increase in food andbeverage revenues was due to food revenues increasing by approximately $0.7million and beverage revenues increasing by approximately$1.8 million.  Food revenuesincreased due primarily to a $0.2 million increase in room service revenuedue to the installation of new in room mini bars, a $0.1 million increasein each of Mr. Lucky’s, banquet food revenue, Pink Taco and AJ’sSteakhouse.  Every food outlet had anincrease in revenue year over year. Beverage revenues increased due primarily to a $0.9 millionincrease in Body English, a $0.4 million increase in Beach Club bar due toour “Rehab” pool party on Sundays and a $0.1 million increase in each ofbanquet bar, Joint bar, casino bars and Pink Taco.

 

RETAILREVENUES.  Retail revenue increased $0.1 million to $2.1million.  We believe this is due totraining programs implemented to increase customer service and sellingtechniques.

 

OTHERINCOME.  Other income increased $0.3 million primarily due to a$0.1 million increase in both chip and token float taken to income andsponsorship.

 

PROMOTIONALALLOWANCES.  Promotional allowances decreased as a percentage ofcasino revenues to 20% from 21%.  Thisdecrease is due to the 2.5 percentage point increase in table hold percentage.  The increase in table games hold percentageincreases table games revenue without an increase in promotional allowances.

 

CASINOEXPENSES.  Casino expenses increased $1.7 million or 21% to$9.8 million.  The increase wasprimarily due to a $0.5 million increase in bad debt expenses related topotentially uncollectible credit extended to casino customers, a 

 

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$0.3million increase in customer promotions, a $0.2 million increase in gamingtaxes, a $0.2 million increase in payroll and related expenses, a $0.1 millionincrease in concert tickets given to guests, a $0.1 million increase incustomer reimbursed travel and a $0.1 million increase in apparel.  The Company’s provision and allowance fordoubtful accounts are based on estimates by management of the collectability ofthe receivable balances at each period end. Management’s estimates consider, among other factors, the age of thereceivables, the type or source of the receivables and the results ofcollection efforts to date, especially with regard to significantaccounts.  Casino expenses as apercentage of casino revenues decreased to 55% from 57%, a decrease of 2percentage points between comparative periods.

 

LODGINGEXPENSES.  Lodging expenses in relation to hotel revenues, prior toreclassifying the cost of complimentaries to casino expense or departmentcomplimentaries to promotional allowances, decreased to 29% from 30%, adecrease of 1 percentage point between comparative periods.  This increase in efficiency is due to the $23increase in average daily rate which increases lodging revenue without acorresponding increase in lodging expense.

 

FOODAND BEVERAGE COSTS AND EXPENSES.  Food and beverage costs andexpenses in relation to food and beverage revenues, prior to reclassifying thecost of complimentaries to casino expense or department complimentaries topromotional allowances decreased to 58% from 59% in the prior year period dueto the opening of Body English Nightclub, which runs at a much higher profitmargin than other food and beverage outlets.

 

RETAILCOSTS AND EXPENSES.  Retail costs and expenses in relation to retailrevenues, prior to reclassifying the cost of complimentaries to casino expenseor department complimentaries to promotional allowances, increased to 54% from50%.  This decrease in efficiency is dueto additional expense in training our staff.

 

OTHERCOSTS AND EXPENSES.  Other costs and expenses in relation to otherincome increased to 56% from 52%.  Theincrease is due to upgrading the quality of our hair salon.

 

MARKETING,GENERAL AND ADMINISTRATIVE.  Marketing,general and administrative expenses in relation to gross revenues remainedconstant at 18%.

 

DEPRECIATION ANDAMORTIZATION.  Depreciation and amortization expense increased to$3.0 million from $2.4 million, an increase of $0.6 million or24%.

 

INTERESTEXPENSE.  Interest expense increased to $4.9 million from$4.7 million, an increase of $0.2 million or 4%.  The additional interest expense was a resultof the increase in the amount of outstanding Junior Notes.

 

INCOME TAXES.  The Company did not have income tax expenseduring the three-months ended September 30, 2005 and 2004 due to beingable to offset 100% of its income with net operating loss carryforwards (“NOL”)from previous periods against which a valuation allowance has been placed.

 

NET INCOME.  Net income was $4.8 million compared to$3.4 million during the prior year period. The increase in net results for common shareholders was due to the factorsdescribed above.

 

NINE-MONTHSENDED SEPTEMBER 30, 2005 COMPARED TO NINE-MONTHS ENDED SEPTEMBER 30,2004

 

NETREVENUES.  Net revenues increased 17% for the nine-months endedSeptember 30, 2005 to $135.0 million compared to $115.3 million forthe nine-months ended September 30, 2004. The $19.7 million increase in net revenues was primarilyattributable to a $11.4 million or 29% increase in food and beverage revenue, a$6.4 million or 15% increase in casino revenues, a $2.5 million or 9%increase in lodging revenue and a $1.0 million or 15% increase in other revenues.  These increases in revenue were partiallyoffset by $0.1 million or 2% decrease in retail revenue and a $1.5 millionor 17% increase in promotional allowances related to items furnished tocustomers on a complimentary basis.

 

CASINOREVENUES.  The $6.4 million increase in casino revenues wasprimarily due to a $4.7 million or 15% increase in table games revenues, a$1.4 million or 11% increase in slot machine revenues and a $0.3 millionor 35% increase in race and sports book revenue.  The increase in table games revenues was dueto an increase in table games drop as well as hold percentage.  Table games drop had an increase of$16.8 million or 7% to $243.4 million from $226.6 million.  Table games hold percentage had an increaseof 1.0 percentage points to 14.4% from 13.4%.  The average number of table games inoperations remained constant at 92.  Thenet result of these changes in drop and hold percentage was an increase in winper table game per day to $1,402 from $1,208, an increase of $194 or 16%.  We have historically reported table gameshold percentage using the gross method, while casinos on the Strip report holdpercentage using the net method (which reduces the table game drop by markerrepayments made in the gaming pit area). For the purpose of comparison to properties on the 

 

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Strip,our net hold percentage for the nine-months ended September 30, 2005 was16.7% compared to 15.6% for the nine-months ended September 30, 2004.  The increase in slot machine revenues was dueto an increase in slot machine handle. Slot machine handle increased $25.7 million or 10% to$277.6 million from $251.9 million. Slot machine hold percentage remained constant at 5.1%.  The average number of slot machines in operationincreased to 552 from 550, an increase of 2 machines or less than 1%.  The net result of these changes in handle andaverage number of slot machines in operation was an increase in win per slotmachine per day to $94 from $85, an increase of $9 or 11%.  The increase in race and sports revenues wasdue to an increase in race and sports hold percentage and an increase in raceand sports handle.  Race and sports holdpercentage increased 2.1 percentage points to 11.0% from 8.9%.  Race and sports handle increased$1.0 million or 8% to $13.2 million.

 

LODGINGREVENUES.  The $2.5 million increase in lodging revenues to$29.9 million was primarily due to an increase in ADR to $172 from$155.  Hotel occupancy increased to 95.4%from 94.3% between periods.

 

FOODAND BEVERAGE REVENUES.  The $11.4 million increase in food andbeverage revenues was due to food revenues increasing by approximately $2.8million and beverage revenues increasing by approximately $8.6 million.  Food revenues increased due primarily to a$1.3 million increase in banquet food revenue, a $0.6 millionincrease in room service revenue due to the installation of new in room minibars, a $0.3 million increase in Pink Taco, a $0.3 million increasein Mr. Lucky’s, a $0.2 million increase in AJ’s Steakhouse and a$0.1 million increase in Beach Club food. Every food outlet except for Simon Kitchen and Bar had an increase inrevenue year over year.  Simon Kitchenand Bar had several competitors open in the surrounding Las Vegas area in thelast 12 months.  Beverage revenuesincreased due primarily to a $6.2 million increase in Body English, whichis our new club replacing Baby’s, a $0.7 million increase in Beach Clubbar, a $0.6 million increase in banquet bar, a $0.4 million increasein The Joint bar, a $0.3 million increase in casino bars and a$0.1 million increase in both Sports Deluxe Bar and Pink Taco Bar.

 

RETAILREVENUES.  We believe the $0.1 million decrease in retailrevenues was due in part to continued general market decline in the themed merchandisesegment and the addition of other retail operations in Las Vegas.

 

OTHERINCOME.  Other income increased $1.0 million primarily due to a$0.3 million increase in token float taken to income and a$0.2 million increase in both Rock Spa and sponsorship income and a $0.1million increase in each of Sundry Store, Love Jones and box office revenue.

 

PROMOTIONALALLOWANCES.  Promotional allowances remained constant as a percentageof casino revenues at 20%.

 

CASINOEXPENSES.  Casino expenses increased $1.5 million or 6% to$27.1 million.  The increase wasprimarily due to a $0.5 million increase in payroll and related expenses, a$0.2 million increase in bad debt expenses related to potentially uncollectiblecredit extended to casino customers, a $0.1 million increase in gaming taxesand a $0.1 million increase in apparel. The Company’s provision and allowance for doubtful accounts are based onestimates by management of the collectability of the receivable balances ateach period end.  Management’s estimatesconsider, among other factors, the age of the receivables, the type or sourceof the receivables and the results of collection efforts to date, especiallywith regard to significant accounts. Casino expenses as a percentage of casino revenues decreased to 53% from58%, a decrease of 5 percentage points between comparative periods.

 

LODGINGEXPENSES.  Lodging expenses in relation to hotel revenues, prior toreclassifying the cost of complimentaries to casino expense or departmentcomplimentaries to promotional allowances, decreased to 29% from 30%, adecrease of 1 percentage point between comparative periods.  This increase in efficiency is due to the $17increase in average daily rate which increases lodging revenue without acorresponding increase in lodging expense.

 

FOODAND BEVERAGE COSTS AND EXPENSES.  Food and beverage costs andexpenses in relation to food and beverage revenues, prior to reclassifying thecost of complimentaries to casino expense or department complimentaries topromotional allowances decreased to 57% from 60% in the prior year period dueto the opening of Body English Nightclub, which runs at a much higher profitmargin than other food and beverage outlets.

 

RETAILCOSTS AND EXPENSES.  Retail costs and expenses in relation to retailrevenues, prior to reclassifying the cost of complimentaries to casino expenseor department complimentaries to promotional allowances, increased to 52% from49%.  This decrease in efficiency is dueto additional expense in training our staff to perform at a higher level.

 

OTHERCOSTS AND EXPENSES.  Other costs and expenses in relation to otherincome increased to 53% from 51%.  Theincrease is due to upgrading the quality of our hair salon.

 

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MARKETING,GENERAL AND ADMINISTRATIVE.  Marketing,general and administrative expenses in relation to gross revenues remainedconstant at 19%.

 

DEPRECIATION ANDAMORTIZATION.  Depreciation and amortization expense increased to$8.9 million from $8.4 million, an increase of $0.5 million or7%.

 

INTERESTEXPENSE.  Interest expense increased to $14.6 million from$14.3 million, an increase of $0.3 million or 3%.  The additional interest expense was a resultof the increase in the amount of outstanding Junior Notes.

 

INCOME TAXES.  The Company did not have income tax expenseduring the nine-months ended September 30, 2005 and 2004 due to being ableto offset 100% of its income with NOL from previous periods against which a valuationallowance has been placed.

 

NET INCOME.  Netincome was $13.2 million compared to $2.8 million during the prioryear period.  The increase in net resultsfor common shareholders was due to the factors described above as well a $2.2million decrease in other expense.  Otherexpenses for the nine months ended September 30, 2004, included a $2.6 millionloss for the renovation of our night club called Baby’s into our new night clubcalled Body English.

 

LIQUIDITY AND CAPITALRESOURCES

 

For the nine-month period ended September 30,2005 our principal sources of funds were cash on-hand at December 31,2004, and cash provided by operating activities of $27.0 million.  The amount of cash provided by operatingactivities primarily included net income of $13.2 million, depreciation andamortization of $8.9 million, provision for losses on accounts receivable of$0.4 million, amortization of loan fees of $0.4 million and net changes inoperating assets and liabilities of $4.1 million.  Other sources and uses of funds were capitalexpenditures of $6.4 million, a decrease in construction payables of $0.1million and payments on debt of $13.6 million. As a result, as of September 30, 2005, we had cash and cashequivalents of $17.4 million.

 

DuringJanuary 2005, the Company entered into an agreement to install a new hotelreservation system.  Total costs of theproject were approximately $0.7 million all of which has been paid in cash asof September 30, 2005.

 

                During the nine months ended September30, 2005, the Company incurred $0.4 million on potential expansion plansrelating to our property as a result of the adjacent being developed project byHRCI.  Due to the preliminary nature ofthese plans at this time, we do not have the ability to estimate our futurecost for such expansion.

 

We believe that ourcurrent cash balances and cash flow from operations and other sources of cashincluding the available borrowings under our $20.0 million Facility ($20.0million available as of September 30, 2005) will be sufficient to provideoperating and investing liquidity during the next 12 months.  We may, however, need to raise additionalfunds prior to October 1, 2006.  Ourability to raise additional funds is limited by restrictions on our financingactivities 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 the 2013Notes is payable on each June 1 and December 1 which began onDecember 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 2013 Notes arecontractually subordinated in right of payment to all indebtedness incurredpursuant to the Facility.  The 2013 Notesare subject to redemption at the option of the Company, in whole or in part, atany time on or after June 1, 2008, at a premium to the face amount ($140million) that decreases on each subsequent anniversary date, plus accruedinterest to the date of redemption.  The2013 Notes contain covenants restricting or limiting the ability of the Companyto, among other things, pay dividends, create liens or other encumbrances,incur additional 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, 2005.

 

Interest on the Facility accrues on all individualborrowings at an interest rate determined at the option of the Company, ateither the LIBOR Index plus an applicable LIBOR margin (not to exceed 3.5%(applicable margin was 2.5% at September 30, 2005) and aggregating 5.9% atSeptember 30, 2005), or the Base Rate, defined as the higher of theFederal Funds Rate plus 0.5%, or the reference rate, as defined, plus anapplicable margin (not to exceed 2.25%). The Company chose the LIBOR Index for all of its borrowings outstandingat September 30, 2005.  Thesemargins are dependent upon the 

 

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Company’s total debt to EBITDA ratio, as defined.  Interest accrued on the Base Rate borrowingsis due monthly, up to the maturity date, while interest on LIBOR borrowings isdue three-months up to the maturity date. The Facility is secured by substantially all of the Company’s propertyat the Las Vegas site.  The Facilitycontains certain covenants including, among other things, financial covenants,limitations on the Company from disposing of capital stock, entering intomergers and certain acquisitions, incurring liens or indebtedness, issuingdividends on stock, and entering into transactions with affiliates.  The Company was in compliance with thesecovenants as of September 30, 2005.

 

Intereston the Junior Notes is payable on each January 15 and July 15,commencing on January 15, 2004, and may be paid in cash or in kind at theCompany’s option, provided that interest will be paid in kind if a payment ofsuch interest 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 to 10.50%and increases the principal amount of the Junior Notes.  For the nine months ended September 30, 2005,the Company paid in cash $2.7 million of interest on the Junior Notes.  The remaining $2.8 million of accruedinterest was paid in kind at a rate of 10.50%. The Junior Notes are contractually subordinated to the 2013 Notes andthe Facility and any other senior debt of the Company.

 

The Junior Notes mature on January 15, 2014 butare subject to redemption at the option of the Company, in whole or in part, atany time on or after January 15, 2009, at a premium to the principalamount thereof that decreases on each subsequent anniversary date, plus accruedinterest to the date of redemption.  TheJunior Notes contain covenants restricting the Company’s ability to, amongother things, sell or otherwise dispose of its assets, pay dividends, incuradditional indebtedness, make acquisitions or merge or consolidate with anotherentity and enter into transactions with affiliates.  The Company was in compliance with thesecovenants as of September 30, 2005.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements thathave, or are reasonably likely to have, a current or future effect on ourfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat are material.  Currently, we have noguarantees, such as performance guarantees, keep-well agreements orindemnity.  We are not engaged inderivatives.

 

**Contractual Obligations andCommitments**

 

We have variouscontractual obligations that we record as liabilities in our financialstatements.  We also enter into otherpurchase commitments and other executory contracts that are not recognized asliabilities until services are performed or goods are received.  Additionally, we enter into contracts forgoods and services such as food, inventory and entertainment.  Such liabilities are recorded as liabilitieswhen so incurred and we expect that such contracts will generate revenue inexcess of such liabilities.  As ofSeptember 30, 2005, there have been no material changes to the table ofcontractual obligations and commitments in our most recently filedForm 10-K.

 

We made cash interestpayments on long-term debt, including capitalized interest, of $9.7 million and$12.7 million in the nine month periods ended September 30, 2005 and 2004,respectively.  We anticipate our cashinterest payments for the remainder of 2005 to be in excess of these levels dueto the timing of payments.  We have notmade significant cash tax payments during the nine month periods ended September 30,2005 and 2004 and, due to available net operating loss and AMT tax creditcarryforwards, we do not anticipate making significant cash tax payments in theremainder of 2005.  Total supervisory feeexpense for the nine month periods ended September 30, 2005 and 2004amounted to $2.7 million and $2.3 million, respectively, under the Company’sAmended and Restated Supervisory Agreement with Peter Morton.  The supervisory fee is equal to two percentof annual gross revenues (as defined in the Supervisory Agreement), net ofcomplimentaries for each year.

 

Our ability to serviceour contractual obligations and commitments will be dependent on our futureperformance, which will be affected by, among other things, prevailing economicconditions and financial, business and other factors, certain of which arebeyond our control.

 

The Company is adefendant in various lawsuits relating to routine matters incidental to itsbusiness.  Management provides an accrualfor estimated losses that may occur and does not believe that the outcome ofany pending claims or litigation, in the aggregate, will have a materialadverse effect on the Company’s financial position, results of operations orliquidity.

 

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CRITICAL ACCOUNTINGPOLICIES

 

There have been no changesin the Company’s critical accounting policies from those described in theCompany’s most recently filed Form 10-K.

 

**Item 3.    Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Market risks relating toour operations result primarily from changes in short-term LIBOR interestrates.  We do not have any foreignexchange or other significant market risk. We did not have any derivative financial instruments at September 30,2005.

 

Our exposure to marketrisk for changes in interest rates relates primarily to our current RevolvingCredit Facility.  In accordance with theRevolving Credit Facility, we enter into variable rate debt obligations tosupport general corporate purposes, including capital expenditures and workingcapital needs.  We continuously evaluateour level of variable rate debt with respect to total debt and other factors,including assessment of the current and future economic environment.

 

We had $4.0 million invariable rate debt outstanding at September 30, 2005.  Based upon these variable rate debt levels, ahypothetical 10% adverse change in the effective interest rate (approximately a59 basis point increase) would increase interest expense less than $0.1 millionon an annual basis, and likewise decrease our earnings and cash flows.  We cannot predict market fluctuations ininterest rates and their impact on our variable rate debt, nor can there be anyassurance that fixed rate long-term debt will be available to us at favorablerates, if at all.  Consequently, futureresults may differ materially from the estimated adverse changes discussedabove.

 

The fair value of theCompany’s $140 million of 8.875% Second Lien Notes, which are due in 2013 andare publicly traded, approximated $149.8 million at September 30, 2005based on published bid prices.  The fairvalue of the Company’s $55.9 million of Junior Notes cannot be estimated asthere was no established market nor published bid prices and a portion was heldby an affiliate of Mr. Morton.

 

**Item 4.    Controls and Procedures**

 

(a)  DisclosureControls and Procedures.  The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this report.  Based on suchevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of such period, the Company’s disclosurecontrols and 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)  InternalControl Over Financial Reporting.  Therehave not been any changes in the Company’s internal control over financialreporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal nine-months to whichthis report relates that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**PART II OTHER INFORMATION**

 

Item 1.    Legal Proceedings

 

We are a defendant invarious lawsuits relating to routine matters incidental to our business.  Management does not believe that the outcomeof any litigation, in the aggregate, will have a material adverse effect on ourbusiness or results of operations.

 

Item 6.    Exhibits

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION** |
|---------------------|------------|-----------------|
|                |       |            |
|                | 3.         |            | CERTIFICATE OF  INCORPORATION AND BY-LAWS |
|                     |            |                 |  |

 

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| (1)    | 3.1    |   | Second Amended and  Restated Certificate of Incorporation of the Company.                                                                                                                                        |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                             |
| (2)    | 3.2    |   | Certificate of  Amendment of Second Amended and Restated Articles of Incorporation.                                                                                                                              |
|   |   |   |                                                                                                                                                                                                             |
| (1)    | 3.3    |   | Second Amended and  Restated By-Laws of the Company                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                             |
|   | 4.     |   | INSTRUMENTS DEFINING  THE RIGHT OF SECURITY HOLDERS, INCLUDING INDENTURES.                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                             |
| (3)    | 4.1    |   | Indenture dated as of  May 30, 2003, by and between the Company and U.S. Bank National  Association, as trustee, relating to the 8 7/8% Second Lien Notes due 2013.                                         |
|   |   |   |                                                                                                                                                                                                             |
| (3)    | 4.2    |   | Form of Global 8  7/8% Second Lien Notes due 2013 (included in Exhibit 4.1)                                                                                                                            |
|   |   |   |                                                                                                                                                                                                             |
| (3)    | 4.3    |   | 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.                                      |
|   |   |   |                                                                                                                                                                                                             |
| (3)    | 4.4    |   | Intercreditor  Agreement, dated as of May 30, 2003, among the Company, U.S. Bank, N.A.  and Bank of America, N.A.                                                                                           |
|   |   |   |                                                                                                                                                                                                             |
| (3)    | 4.5    |   | Form of Junior  Subordinated Notes.                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                             |
| (4)    | 4.6    |   | First Supplemental  Indenture to Indenture, dated as of November 20, 2003, by and between  the Company and U.S. Bank National Association, as trustee, relating to the 8  7/8% Second Lien Notes due 2013.  |
|   |   |   |                                                                                                                                                                                                             |
| (4)    | 4.7    |   | Second Supplemental  Indenture to Indenture, dated as of November 24, 2003, by and between  the Company and U.S. Bank National Association, as trustee, relating to the 8  7/8% Second Lien Notes due 2013. |
|   |   |   |                                                                                                                                                                                                             |
|   | 31.    |   | CERTIFICATIONS.                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                             |
|   | 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                       |
|   |   |   |                                                                                                                                                                                                             |
|   | 10.    |   | MATERIAL CONTRACTS.                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                             |
| (5)    | 10.1   |   | Lease by and between  the Company, PM Realty, LLC and Mr. Chow of Las Vegas, LLC dated  December 24, 2004.                                                                                             |

----

(1)                                  Incorporated by reference to designatedexhibit to our Registration Statement on Form S-4, filed with theSecurities and Exchange Commission on May 21, 1998 (FileNo. 333-53211).

 

(2)                                  Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the three-months ended August 31, 1999 (FileNo. 333-53211).

 

(3)                                  Incorporated by reference to designatedexhibit to our Registration Statement on Form S-4, filed with theSecurities and Exchange Commission on July 8, 2003 (FileNo. 333-106863).

 

(4)                                  Incorporated by reference to designatedexhibit to our Registration Statement on Amendment No. 1 to Form S-4,filed with the Securities and Exchange Commission on November 26, 2003(File No. 333-106863).

 

(5)                                  Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the three-months ended March 31, 2005 (FileNo. 333-53211).

 

15

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**SIGNATURES**

 

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

 
|                          | HARD ROCK HOTEL, INC.                                      |
|-------------------------------|------------------------------------------------------------|
|                          |                                                       |
| Date: November 14,  2005 | /s/ JAMES D. BOWEN                                         |
|                          | James D. Bowen                                             |
|                          | CHIEF FINANCIAL OFFICER                                    |
|                          | (PRINCIPAL FINANCIAL  OFFICER AND DULY AUTHORIZED OFFICER) |

 

16

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**Exhibit Index**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION** |
|---------------------|------------|-----------------|
|                |       |            |
|                | 3.         |            | CERTIFICATE OF  INCORPORATION AND BY-LAWS |
|                |       |            |   |
| (1)                 | 3.1        |            | Second Amended  and Restated Certificate of Incorporation of the Company. |
|                |       |            |   |
| (2)                 | 3.2        |            | Certificate of  Amendment of Second Amended and Restated Articles of Incorporation. |
|                |       |            |   |
| (1)                 | 3.3        |            | Second Amended  and Restated By-Laws of the Company |
|                |       |            |   |
|                | 4.         |            | INSTRUMENTS  DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING INDENTURES. |
|                |       |            |   |
| (3)                 | 4.1        |            | Indenture dated  as of May 30, 2003, by and between the Company and U.S. Bank National  Association, as trustee, relating to the 8 7/8% Second Lien Notes due 2013. |
|                |       |            |   |
| (3)                 | 4.2        |            | Form of  Global 8 7/8% Second Lien Notes due 2013 (included in Exhibit 4.1) |
|                |       |            |   |
| (3)                 | 4.3        |            | 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. |
|                |       |            |   |
| (3)                 | 4.4        |            | Intercreditor  Agreement, dated as of May 30, 2003, among the Company, U.S. Bank, N.A.  and Bank of America, N.A. |
|                |       |            |   |
| (3)                 | 4.5        |            | Form of  Junior Subordinated Notes. |
|                |       |            |   |
| (4)                 | 4.6        |            | First  Supplemental Indenture to Indenture, dated as of November 20, 2003, by  and between the Company and U.S. Bank National Association, as trustee,  relating to the 8 7/8% Second Lien Notes due 2013. |
|                |       |            |   |
| (4)                 | 4.7        |            | Second  Supplemental Indenture to Indenture, dated as of November 24, 2003, by  and between the Company and U.S. Bank National Association, as trustee,  relating to the 8 7/8% Second Lien Notes due 2013. |
|                |       |            |   |
|                | 31.        |            | CERTIFICATIONS. |
|                |       |            |   |
|                | 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 |
|                |       |            |   |
|                | 10.        |            | MATERIAL  CONTRACTS. |
|                |       |            |   |
| (5)                 | 10.1       |            | Lease by and  between the Company, PM Realty, LLC and Mr. Chow of Las Vegas, LLC dated  December 24, 2004. |

----

(1)                                  Incorporated by reference to designatedexhibit to our Registration Statement on Form S-4, filed with theSecurities and Exchange Commission on May 21, 1998 (FileNo. 333-53211).

 

(2)                                  Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the three-months ended August 31, 1999 (FileNo. 333-53211).

 

(3)                                  Incorporated by reference to designatedexhibit to our Registration Statement on Form S-4, filed with theSecurities and Exchange Commission on July 8, 2003 (FileNo. 333-106863).

 

17

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(4)                                  Incorporated by reference to designatedexhibit to our Registration Statement on Amendment No. 1 to Form S-4,filed with the Securities and Exchange Commission on November 26, 2003(File No. 333-106863).

 

(5)                                  Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the three-months ended March 31, 2005 (FileNo. 333-53211).

 

18

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