**UNITED STATES SECURITIES & EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

**(MarkOne)**

** **
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|----------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended March 31, 2006**

 

**OR**

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

** **

**For the transition period from                       to                     **

 

**Commission File No. 333-53211**

 

**HardRock Hotel, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                      | ** ** | **88-0306263**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**4455 Paradise Road, Las Vegas NV  89109**

(Address of principal executive offices — Zip Code)

 

**(702) 693-5000**

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. ý Yes o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.    (Check one):

 
| Large  Accelerated Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer ý |
|----------------------------|--------|----------------------|--------|-------------------------------|

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). o Yes ý No

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. 

 

Common Stock outstandingby class as of May 15, 2006

 

| **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 March 31, 2006 and  December 31, 2005                     |   |
|         |                                                                                               |   |
|         | Condensed Statements of Operations for the three month periods ended  March 31, 2006 and 2005 |   |
|         |                                                                                               |   |
|         | Condensed Statements of Cash Flows for the three month periods ended  March 31, 2006 and 2005 |   |
|         |                                                                                               |   |
|         | 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 1A.     | Risk  Factors                                                                                      |   |
|         |                                                                                               |   |
| Item 5.      | Other  Information                                                                                 |   |
|         |                                                                                               |   |
| Item 6.      | Exhibits  and Reports on Form 8-K                                                             |   |
|         |                                                                                               |   |
|         | (a)  Exhibits                                                                                 |   |
|         |                                                                                               |   |
|         | (b)  Reports on Form 8-K                                                                 |   |

 

2

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**Part I FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**HARD ROCK HOTEL, INC.**

**CONDENSEDBALANCE SHEETS (unaudited)**

**(in thousands, except shareamounts)**

 
| ** **                                                                                                                                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                |       |                     |       |                        |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Current assets:                                                                                                                                       |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                             |       | $                        | 10,613     |                        | $          | 8,895 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,142 and $1,002 as of March 31, 2006 and  December 31, 2005, respectively |       | 8,255                    |       | 6,986                       |       |
| Inventories                                                                                                                                           |       | 2,149                    |       | 2,205                       |       |
| Prepaid expenses and other current assets                                                                                                             |       | 2,499                    |       | 2,590                       |       |
| Deferred income taxes                                                                                                                                 |       | 5,805                    |       | 5,832                       |       |
| Related party receivables                                                                                                                             |       | 661                      |       | 589                         |       |
| Total current assets                                                                                                                                  |       | 29,982                   |       | 27,097                      |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Property and equipment, net of accumulated  depreciation and amortization                                                                             |       | 168,203                  |       | 165,662                     |       |
| Deferred income taxes, net                                                                                                                            |       | 2,034                    |       | 2,034                       |       |
| Other assets, net                                                                                                                                     |       | 4,740                    |       | 4,164                       |       |
| TOTAL ASSETS                                                                                                                                          |       | $                        | 204,959    |                        | $          | 198,957 |   |
|                                                                                                                                                  |       |                     |       |                        |       |
| LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY                                                                                                        |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                  |       |                     |       |                        |       |
| Accounts payable                                                                                                                                      |       | $                        | 2,932      |                        | $          | 3,968 |   |
| Related party payable                                                                                                                                 |       | 911                      |       | 784                         |       |
| Accrued expenses and other liabilities                                                                                                                |       | 16,837                   |       | 13,141                      |       |
| Interest payable                                                                                                                                      |       | 5,115                    |       | 3,024                       |       |
| Current portion of long-term debt                                                                                                                     |       | 17,000                   |       | 58                          |       |
| Total current liabilities                                                                                                                             |       | 42,795                   |       | 20,975                      |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Deferred compensation                                                                                                                                 |       | 2,553                    |       | 2,478                       |       |
| Junior subordinated notes                                                                                                                             |       | 41,929                   |       | 40,857                      |       |
| Long-term debt, less current portion                                                                                                                  |       | 140,000                  |       | 157,000                     |       |
| Total long-term liabilities                                                                                                                           |       | 184,482                  |       | 200,335                     |       |
| Total liabilities                                                                                                                                     |       | 227,277                  |       | 221,310                     |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| Commitments and contingencies (Note 4)                                                                                                                |       |                     |       |                        |       |
|                                                                                                                                                  |       |                     |       |                        |       |
| 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                                                                                                                                   |       | (29,826                  | )          | (29,861                     | )          |
| Total shareholders’ deficiency                                                                                                                   |       | (22,318                  | )          | (22,353                     | )          |
|                                                                                                                                                  |       |                     |       |                        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’  DEFICIENCY                                                                                                  |       | $                        | 204,959    |                        | $          | 198,957 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

3

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**HARD ROCK HOTEL, INC.**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**

 
| ** **                                            | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenue:                                              |       |                                             |       |   |   |
| Casino                                                |       | $                                                | 14,846     |   | $ | 16,609 |   |
| Lodging                                               |       | 9,846                                            |       | 9,286 |   |
| Food and beverage                                     |       | 16,946                                           |       | 15,826 |   |
| Retail store                                          |       | 1,740                                            |       | 1,743 |   |
| Other                                                 |       | 3,038                                            |       | 3,785 |   |
| Gross revenues                                        |       | 46,416                                           |       | 47,249 |   |
| Less: promotional allowances                          |       | (3,121                                           | )          | (3,246 | ) |
| Net revenues                                          |       | 43,295                                           |       | 44,003 |   |
|                                                  |       |                                             |       |   |   |
| Costs and expenses:                                   |       |                                             |       |   |   |
| Casino                                                |       | 9,177                                            |       | 8,749 |   |
| Lodging                                               |       | 2,727                                            |       | 2,444 |   |
| Food and beverage                                     |       | 9,460                                            |       | 8,124 |   |
| Retail store                                          |       | 1,013                                            |       | 763 |   |
| Other                                                 |       | 3,175                                            |       | 3,856 |   |
| Marketing, advertising and entertainment              |       | 1,289                                            |       | 1,282 |   |
| General and administrative                            |       | 8,357                                            |       | 6,514 |   |
| Depreciation and amortization                         |       | 3,049                                            |       | 2,952 |   |
| Loss on disposal of assets                            |       | 362                                              |       | — |   |
| Pre-opening expenses                                  |       | —                                           |       | 72 |   |
| Total costs and expenses                              |       | 38,609                                           |       | 34,756 |   |
|                                                  |       |                                             |       |   |   |
| Income from operations                                |       | 4,686                                            |       | 9,247 |   |
|                                                  |       |                                             |       |   |   |
| Other income (expense):                               |       |                                             |       |   |   |
| Interest income                                       |       | 53                                               |       | 40 |   |
| Interest expense                                      |       | (4,677                                           | )          | (4,870 | ) |
|                                                  |       |                                             |       |   |   |
| Income before income tax expense                      |       | 62                                               |       | 4,417 |   |
|                                                  |       |                                             |       |   |   |
| Income tax expense                                    |       | 27                                               |       | — |   |
|                                                  |       |                                             |       |   |   |
| Net income                                            |       | $                                                | 35         |   | $ | 4,417 |   |
|                                                  |       |                                             |       |   |   |
| BASIC AND DILUTED NET INCOME PER SHARE:               |       |                                             |       |   |   |
|                                                  |       |                                             |       |   |   |
| Net income                                            |       | $                                                | 0.46       |   | $ | 58.10 |   |
|                                                  |       |                                             |       |   |   |
| Weighted average number of common shares  outstanding |       | 76,023                                           |       | 76,023 |   |

 

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

 

4

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**HARD ROCK HOTEL, INC.**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(in thousands, exceptsupplemental schedule)**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Three Months  Ended March 31,  2006** | ** ** | **Three Months  Ended March 31,   2005** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Cash flows from operating activities:                                              |       |                                                   |       |                                                         |       |
| Net income                                                                         |       | $                                                      | 35         |                                                         | $          | 4,417 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                   |       |                                                         |       |
| Depreciation and amortization                                                      |       | 3,049                                                  |       | 2,952                                                        |       |
| Provision for losses on accounts receivable                                        |       | 67                                                     |       | 96                                                           |       |
| Amortization of bond offering fees and  costs                                      |       | 128                                                    |       | 128                                                          |       |
| Loss on disposal of assets                                                         |       | 362                                                    |       | —                                                       |       |
| Changes in operating assets and  liabilities:                                      |       |                                                   |       |                                                         |       |
| Accounts receivable                                                                |       | (1,336                                                 | )          | (1,687                                                       | )          |
| Inventories                                                                        |       | 56                                                     |       | 320                                                          |       |
| Prepaid expenses and other current assets                                          |       | 91                                                     |       | (225                                                         | )          |
| Related party receivable                                                           |       | (72                                                    | )          | (133                                                         | )          |
| Accounts payable                                                                   |       | (1,036                                                 | )          | 2,118                                                        |       |
| Related party payable                                                              |       | 127                                                    |       | (298                                                         | )          |
| Long term deferred compensation                                                    |       | 75                                                     |       | 308                                                          |       |
| Accrued expenses                                                                   |       | 3,696                                                  |       | 1,280                                                        |       |
| Decrease in deferred income taxes                                                  |       | 27                                                     |       | —                                                       |       |
| Interest payable                                                                   |       | 3,163                                                  |       | 3,186                                                        |       |
| Net cash provided by operating activities                                          |       | 8,432                                                  |       | 12,462                                                       |       |
|                                                                               |       |                                                   |       |                                                         |       |
| Cash flows used in investing activities:                                           |       |                                                   |       |                                                         |       |
| Purchases of property and equipment                                                |       | (5,955                                                 | )          | (2,734                                                       | )          |
| Proceeds from sale of operating assets                                             |       | 3                                                      |       | —                                                       |       |
| Purchase of long lived assets                                                      |       | (704                                                   | )          | —                                                       |       |
| Net cash used in investing activities                                              |       | (6,656                                                 | )          | (2,734                                                       | )          |
|                                                                               |       |                                                   |       |                                                         |       |
| Cash flows used in financing activities:                                           |       |                                                   |       |                                                         |       |
| Principal payments on long-term debt                                               |       | (58                                                    | )          | (2,043                                                       | )          |
| Net cash used in financing activities                                              |       | (58                                                    | )          | (2,043                                                       | )          |
|                                                                               |       |                                                   |       |                                                         |       |
| Net increase in cash and cash equivalents                                          |       | 1,718                                                  |       | 7,685                                                        |       |
| Cash and cash equivalents, beginning of  period                                    |       | 8,895                                                  |       | 10,655                                                       |       |
|                                                                               |       |                                                   |       |                                                         |       |
| Cash and cash equivalents, end of period                                           |       | $                                                      | 10,613     |                                                         | $          | 18,340 |   |
|                                                                               |       |                                                   |       |                                                         |       |
| Supplemental disclosures of cash flow  information:                                |       |                                                   |       |                                                         |       |
| Cash paid during the period for interest                                           |       | $                                                      | 1,386      |                                                         | $          | 1,557 |   |

 

Supplemental Schedule of Non-Cash Investing and FinancingActivities:

 

In accordance with the terms of the JuniorNotes, the Company recorded interest in kind of $1.1 million during the threemonth period ended March 31, 2006 and increased the principal amount ofthe Junior Notes.

 

In accordance with the terms of the JuniorNotes, the Company recorded interest in kind of $1.4 million during the threemonth period ended March 31, 2005 and increased the principal amount ofthe Junior Notes.

 

*The accompanying notes are an integral part of these unauditedcondensed financial statements*

 

5

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**HARD ROCK HOTEL, INC.**

**NOTES TO UNAUDITED CONDENSEDFINANCIAL STATEMENTS**

 

1.             BASIS OF PRESENTATION

 

Hard Rock Hotel, Inc. (the “Company”), a Nevadacorporation incorporated on August 30, 1993, operates a hotel-casino inLas 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. Mortonhas granted a sublicense to the Company, pursuant to which the Company holdsthe exclusive right to use the “Hard Rock Hotel” trademark for the Company’soperations in Las Vegas.

 

These condensed financial statements have beenprepared 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 otherinformation have been condensed or omitted from the interim financialstatements presented in this Quarterly Report on Form 10-Q and they do notinclude all information required by accounting principles generally accepted inthe United States of America for complete financial statements. In the opinionof management, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the amounts of revenues and expenses during thereporting period. Actual results could differ from these estimates.

 

Certain reclassifications have been made to theprior years financial statements to conform to the current year presentation.The reclassifications relate primarily to recording revenue and relatedexpenses on certain transactions on a gross basis versus net basis. During thethree month period ended March 31, 2005, the Company recorded certaintransactions for entertainment ticket sales and catering production on a netbasis and included the net expense in marketing expense. The Company hasreclassified $1.5 million of revenue that had previously been netted with marketingexpense to other income, $2.7 million from marketing expense to other expenseand $0.3 million of revenue that had previously been netted with food andbeverage expense to food and beverage revenue for the three month period ended March31, 2005. The Company reclassed $0.7 million, on the statement of operations,to general and administrative expenses for technical support services for thedevelopment, ongoing improvement and operation of the Company from relatedparty expense for the three months ended March 31, 2005. The Company reclassed$0.9 million to operating expenses, on the statement of operations, for theAmended and Restated Supervisory Agreement from related party expenses. TheCompany reclassified $4.2 million in deferred income tax liability to deferredincome tax asset long term on the balance sheet as of December 31, 2005. Thesereclassification did not have an effect on net income in the statements ofoperations.

 

Operating results for the three month period ended March 31,2006 are not necessarily indicative of future financial results or the resultsthat may be expected for the year ending December 31, 2006. The unauditedinterim financial statements contained herein should be read in conjunction withthe audited financial statements and notes in our Annual Report onForm 10-K for the year ended December 31, 2005.

 

Recently Adopted Accounting Standards

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 123(R), “Share Based Payment.” This statement is a revision of SFAS No. 123, “Accounting forStock-Based Compensation” and supercedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. SFASNo. 123(R) establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods and services orincurs a liability in exchange for goods and services that are based on thefair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. It requires an entity to measure thecosts of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award and recognize thatcost over the service period. The Company adopted this statement on January 1,2006 and there was no material impact on its financial position or results ofoperations.

 

In December 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4.” This statementamends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing” toclarify the accounting for abnormal

 

6

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amounts of idle facility expense, freight,handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter4, previously stated, that “...under some circumstances, items such as idlefacility expense, excessive spoilage, double freight, and rehandling costs maybe so abnormal as to require treatment as current period charges....”  This statement requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.”  In addition,this statement requires that allocation of the fixed production overheads tothe costs of conversion be based on the normal capacity of the productionfacilities. The Company adopted this statement on January 1, 2006 and there wasno material impact on its financial position or results of operations.

 

2.             AGREEMENTS WITH RELATED PARTIES

 

The Company has a twenty-five year Amended andRestated Supervisory Agreement with Peter Morton, which provides for thesupervision of the development, improvement, operation, and maintenance of theCompany through 2022. Mr. Morton has the option to renew the agreement for twosuccessive fifteen year terms. Pursuant to the terms of the SupervisoryAgreement, Mr. Morton is to provide consulting and supervisory services to theCompany. In the event either the Company or Mr. Morton is in Default (asdefined in the agreement), the non-defaulting party may terminate the agreementafter the other party has received the opportunity to cure such default. Aspart of this agreement, the Company pays to Mr. Morton a supervisory fee equalto two percent of annual gross revenues (as defined), net of complimentariesfor each year. Total supervisory fee expenses for these services for the threemonths ended March 31, 2006 and 2005 amounted to $869,000 and $843,000,respectively. These expenses are included in the accompanying statements ofoperations. The unpaid amounts at March 31, 2006 and December 31, 2005 are$911,000 and $784,000, respectively, and are included in related party payablein the accompanying balance sheets.

 

Entities controlled by Mr. Morton have providedadditional technical support services for the development, ongoing improvementand 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. OnAugust 15, 2005, the Company entered a Commercial Sublease with 510Development, whereby the Company pays $20,000 a month for this lease whichexpires December 31, 2009. The expense associated with this lease is includedas part of the allocated overhead which is reimbursed by the Company. Theseexpenses aggregated approximately $761,000 and $734,000 for the three months endedMarch 31, 2006 and 2005, respectively, and are included in the line itemgeneral and administrative in the accompanying statements of operations. Theunpaid amounts at March 31, 2006 and December 31, 2005 are $253,000 and$157,000, respectively, was due from these entities for expenses paid inadvance and is included in related party receivable in the accompanying balancesheets.

 

The Company has provided technical support servicesand paid certain overhead expenses for the development and operation of HRCondominium Investors (Vegas), LLC (“HRCI”), an affiliate of our ChiefExecutive Officer Mr. Morton. HR Condominium Investors (Vegas), LLCreimburses the Company for all of these costs and expenses. The unpaid amountsat March 31, 2006 and December 31, 2005 are $386,000 and $251,000,respectively, and are included in related party receivable in the accompanyingbalance sheets.

 

During the three months ended March 31, 2006 and2005, the Company paid compensation to Harry Morton, son of Peter Morton, of $46,000and $40,000, respectively, for his position as Special Projects Director whichhe started in the year ended December 31, 2004. The Company also providedhousing and other services to Harry Morton at the resort with a total estimatedvalue during the three months ended March 31, 2006 and 2005, of $5,000 and $52,000,respectively. These costs are included in food and beverage expense on thestatements of operations for the three months ended March 31, 2006 and 2005.

 

The Company provides technical support services andpays certain overhead expenses for the development and operation of Pink TacoScottsdale, LLC, an entity managed by Harry Morton, son of the Company’s ChiefExecutive Officer Mr. Morton. Pink Taco Scottsdale, LLC reimburses the Companyfor all of these costs and expenses. The unpaid amounts at March 31, 2006 andDecember 31, 2005 are $22,000 and $181,000, respectively, and are included inrelated party receivable in the accompanying balance sheets.

 

On December 24, 2004, PM Realty LLC (a developmententity involved in the condominium project and owned by Mr. Morton) and theCompany entered into a lease for a ten year initial term with Mr. Chow of LasVegas, LLC (“Mr. Chow”) for commercial space anticipated to be developed onland contiguous to the resort. The lease provides that if ground-breaking workon such development has not been received, in each case on or before June 1,2006, Mr. Chow may elect to terminate such lease and receive a leasetermination fee of $250,000.

 

7

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3.             LONG-TERM DEBT

 

As of March 31, 2006, the Company had$140.0 million outstanding of its 8.875% Second Lien Notes due 2013 (the “2013Notes”). The Company also has a $40 million Senior Secured Credit Facility (the“Facility”) through a group of banks.  The Facility consists of a $20million, five-year senior secured term loan (the “Term Loan”) and a $20 millionsenior secured revolving credit facility (the “Revolving Credit Facility”). Asof March 31, 2006, the Company had $17.0 million outstanding on itsRevolving Credit Facility and had no balance outstanding on the Term Loan.As of March 31, 2006, the Company also had approximately $41.9 millionoutstanding of junior subordinated notes (the “Junior Notes”), including $1.1 millionof interest paid in kind during the three month period ended March 31,2006.

 

2013 Notes

 

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013Notes are secured by a security interest in substantially all of the Company’sexisting and future assets, other than licenses which may not be pledged underapplicable law.  The security interest is junior to the security interestin the assets securing our obligation under our Facility and except forpermitted secured purchase money indebtedness.  The 2013 Notes are subjectto redemption at the option of the Company, in whole or in part, at any time onor after June 1, 2008, at a premium to the face amount ($140 million) thatdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The redemption rates are as follows: after June 1,2008, 104.438%, after June 1, 2009, 102.958%, after June 2010, 101.479% andafter June 1, 2011, 100%. The 2013 Notes contain covenants restricting orlimiting the ability of the Company to, among other things, pay dividends,create liens or other encumbrances, incur additional indebtedness, issuecertain preferred stock, sell or otherwise dispose of a portion of its assets,make acquisitions or merge or consolidate with another entity and enter intotransactions with affiliates. The Company was in compliance with thesecovenants as of March 31, 2006.

 

Facility

 

Interest on the Facility accrues on allindividual borrowings at an interest rate determined at the option of theCompany, at either the LIBOR Index plus an applicable LIBOR margin (not toexceed 3.5% (applicable margin was 2.50% at March 31, 2006) andaggregating 7.3% at March 31, 2006), or the Base Rate, defined as thehigher of the Federal Funds Rate plus 0.5%, or the reference rate, as defined,plus an applicable margin (not to exceed 2.25%). The Company chose the LIBORIndex for all of its borrowings outstanding at March 31, 2006. Thesemargins are dependent upon the Company’s total debt to EBITDA ratio, as defined.Interest accrued on the Base Rate borrowings is due monthly, up to the maturitydate, while interest on LIBOR borrowings is due three months up to the maturitydate. The Facility is secured by substantially all of the Company’s property atthe Las Vegas site. The Facility contains certain covenants including, amongother things, financial covenants, limitations on the Company from disposing ofcapital stock, entering into mergers and certain acquisitions, incurring liensor indebtedness, issuing dividends on stock, and entering into transactionswith affiliates. The Company was not in compliance with the total leverage northe maximum capital expenditures covenants as of March 31, 2006,and the Company is currently seeking a waiver from its lenders for suchnoncompliance. Pending receipt of such waiver, the principal amount has beenclassified as current as of March 31, 2006.

 

The Company has a $0.3 million irrevocable standbyletter of credit for the benefit of the State of Nevada related to the self insuredportion of the Company’s workers compensation insurance.

 

Junior Notes

 

Interest on the Junior Notes is payable on eachJanuary 15 and July 15, commencing on January 15, 2004, and maybe paid in cash or in kind at the Company’s option, provided that interest willbe paid in kind if a payment of such interest in cash would cause a defaultunder the 2013 Notes or the Facility.  The Junior Notes require that anysemi-annual interest payment in cash be equal to the lesser of (x) 50% of theamount of interest accrued on the Junior Notes since the most recent interestpayment date and (y) the amount of interest that the Company is permitted topay in cash without causing a default under the 2013 Notes or theFacility.  For interest payments payable in cash, interest accrues at arate per annum equal to 9.875%, and for interest payments payable in kind,interest accrues at a rate per annum equal to 10.50%.  The Junior Notesare contractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.  The Junior Notes mature on January 15,2014 but are subject to redemption at the option of the Company, in whole or inpart, at any time on or after January 15, 2009, at a premium to theprincipal amount thereof that decreases on each subsequent anniversary date,plus accrued interest to the date of redemption.  The Junior Notes containcovenants restricting the Company’s ability to, among other things, sell orotherwise dispose of its assets, pay dividends, incur additional

 

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indebtedness, make acquisitions or merge orconsolidate with another entity and enter into transactions with affiliates. InDecember of 2005, the Company received consent from lenders under the Facility andrepurchased $15.0 million of the outstanding Junior Subordinated Notes. Thistransaction had a purchase premium of $1.2 million. For the three months endedMarch 31, 2006 and 2005 the Company paid interest in kind of $1.1 millionand $1.4 million, respectively. The Company was in compliance with thesecovenants as of March 31, 2006.

 

4.             COMMITMENTSAND CONTINGINCIES

 

Legal

 

The Company is a defendant in various lawsuitsrelating to routine matters incidental to its business.

 

The Company is a defendant in a lawsuit filed byACM, Inc. ACM, Inc. alleges the company failed to pay approximately $600,000due under a telephone consulting contract. The Company disputes the allegationsand denies any further amounts are due.

 

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 March 31, 2006.

 

Self-Insurance

 

The Company is self-insured for workers’compensation claims, up to an annual stop loss of $350,000 per claim. Managementhas established reserves it considers adequate to cover estimated futurepayments on claims incurred by the Company through March 31, 2006.

 

5.             SUBSEQUENTEVENT

 

OnMay 11, 2006, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with Morgans Hotel Group Co. (“Morgans”) and MHG HR AcquisitionCorp. (“Merger Sub”), a wholly owned subsidiary of Morgans. Under the terms ofthe Merger Agreement, Merger Sub will be merged with and into the Company, withthe Company continuing as the surviving corporation and becoming a wholly ownedsubsidiary of Morgans. Each share of common stock of the Company issued andoutstanding immediately prior to the effective time of the merger will beautomatically converted into the right to receive cash based on the totaltransaction consideration of approximately $421.0 million, which is subject toa number of adjustments, including, among others, outstanding indebtedness andrelated party payables, working capital, cage cash, retention bonuses,transaction costs and expenses, and certain capital expenditures by the Company.In addition, $40.0 million of the total transaction consideration will be paidto Peter Morton, our Chief Executive Officer, as consideration for the earlytermination of his Supervisory Agreement. Of the total transactionconsideration, $2.5 million will be held in an escrow to cover post-closingadjustments for working capital and cage cash, and $15.0 million will be heldin an escrow to cover post-closing indemnification obligations of the Company’sstockholders.

 

Concurrentlywith the execution of the Merger Agreement and pursuant to the terms therein,Morgans has deposited into escrow $30.0 million, a portion of which, upon theclosing of the merger, will be credited towards the total transactionconsideration, and a portion of which, upon the closing of the merger, will beheld in escrow as described above.

 

Ifthe Merger Agreement is terminated under certain circumstances, the Company mayretain the $30 million deposit, and, in the event of a default by the Companyor its affiliates under the Merger Agreement, Morgans may seek specificperformance of the Merger Agreement.

 

TheMerger Agreement provides that the closing of the merger must occur on or priorto the earlier of (1) seven business days after Morgans’ receipt of allnecessary gaming approvals to consummate the transaction and (2) February 10,2007, unless further extended by the parties.

 

Thecompletion of the merger is subject to a number of conditions, including, amongother things, Morgans’ or related parties’ receipt of all necessary antitrust,gaming and other approvals, the repayment of all outstanding indebtedness ofthe Company, the closing of certain other transactions, and the satisfaction orwaiver of all other conditions precedent. The merger is not subject to afinancing condition.

 

Inaddition, completion of the Merger is conditioned on the concurrent closing ofother transactions contemplated by the Merger Agreement, which transactions aregoverned by certain agreements between Morgans (or an affiliate thereof) and

 

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Mr. Morton, the Company’s Chief ExecutiveOfficer, pursuant to the Merger Agreement, as well as the termination ofcertain existing agreements between the Company and Mr. Morton.

 

The Company has agreed to stay bonuses ofapproximately $1.8 million in total which will be paid to select employees whoare critical to the continued operations of the Company through the completionof the merger. The stay bonuses will become payable at the completion of the mergerprovided that the selected employee has remained in our employment to theapplicable date. The stay bonuses were communicated to select employees inApril 2006 and are being accrued over the expected service period. The Companybegan expensing this liability in April of 2006 and therefore does not have anyaccrued stay bonus expense in the three months ended March 31, 2006.

 

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

 

The following discussion should be read inconjunction with, and is qualified in its entirety by the Company’s financialstatements, including the notes thereto, and the other financial informationappearing elsewhere herein and the Annual Report to Shareholders onForm 10-K for the year ended December 31, 2005, which may be obtainedupon request from the Company.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document includes various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, asamended, which represent the Company’s expectations or beliefs concerningfuture events. Statements containing expressions such as “believes,” “anticipates”or “expects” used in our press releases and periodic reports on Forms 10-K and10-Q filed with the Securities and Exchange Commission are intended to identifyforward-looking statements. All forward-looking statements involve risks anduncertainties. Although we believe our expectations are based upon reasonableassumptions within the bounds of our knowledge of our business and operations,there can be no assurances that actual results will not materially differ fromexpected results. We caution that these and similar statements included in thisreport and in previously filed periodic reports, including reports filed onForms 10-K and 10-Q, are further qualified by important factors that couldcause actual results to differ materially from those in the forward-lookingstatements. Such factors include, without limitation, the following:  increased competition in existing markets orthe opening of new gaming jurisdictions; a decline in the public acceptance ofgaming; the limitation, conditioning or suspension of any of our gaminglicenses; increases in or new taxes imposed on gaming revenues or gamingdevices; a finding of unsuitability by regulatory authorities with respect toour officers, directors or key employees; loss or retirement of key executives;significant increases in fuel or transportation prices; adverse economicconditions in our key markets; severe and unusual weather in our key markets;and adverse results of significant litigation matters. Readers are cautionednot to place undue reliance on forward-looking statements, which speak only asof the date thereof. We expressly disclaim any obligation or undertaking todisseminate any updates or revisions to any forward-looking statement containedin this report, including to reflect any change in our expectations with regardto that forward-looking statement or any change in events, conditions orcircumstances on which that forward-looking statement is based. For moreinformation regarding risks inherent in an investment in the Company, see thesection ”Business — Risk Factors” in our Annual Report to Shareholders onForm 10-K for the year ended December 31, 2005 filed with the SEC on April 17,2006.

 

OVERVIEW

 

Our sole business is the operation of theHard Rock Hotel and Casino in Las Vegas, NV.

 

RESULTSOF OPERATIONS

 

THREEMONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31,2005

 

NET REVENUES.  Net revenues decreased 2%for the three months ended March 31, 2006 to $43.3 million compared to $44.0 millionfor the three months ended March 31, 2005. The $0.7 million decrease innet revenues was primarily attributable to a $1.8 million or 11% decrease incasino revenues and a $0.7 million decrease in other revenue offset partiallyby a $1.1 million or a 7% increase in food and beverage revenue, a$0.6 million or 6% increase in lodging revenue and a $0.1 million or 4% decreasein promotional allowances related to items furnished to customers on acomplimentary basis.

 

CASINO REVENUES.  The $1.8 million decreasein casino revenues was primarily due to a $1.9 million or 16% decrease intable games revenues and a $0.1 million or 21% decrease in race and sports bookrevenue. These decreases in revenue were partially offset by a$0.2 million or 5% increase in slot machine revenues. The decrease in tablegames revenues was due to a decrease in hold percentage and a decrease in tablegames drop. Table games hold percentage decreased 1.0 percentage points to13.0% from 14.0%. Table games drop decreased $8.5 million or 10% to $72.9 millionfrom $81.3 million. The average number of table games in operation remainedconstant at 92. The net result of these changes in drop and hold percentage wasa decrease in win per table game per day to $1,148 from $1,373, a decrease of$255

 

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or 16%. We have historically reported tablegames hold percentage using the gross method, while casinos on the Strip reporthold percentage using the net method (which reduces the table game drop bymarker repayments made in the gaming pit area). For the purpose of comparisonto properties on the Strip, our net hold percentage for the three months ended March31, 2006 was 14.7% compared to 16.2% for the three months ended March 31, 2005.The increase in slot machine revenues was due to an increase in slot machinehold percentage partially offset by a decrease slot machine handle. Slotmachine handle decreased $8.6 million or 10% to $81.4 million from$90.0 million. Slot machine hold percentage increased 0.8 percentagepoints to 5.9% from 5.1%. The average number of slot machines in operation increasedto 557 from 552, an increase of 5 machines or 1%. The net result of thesechanges in handle, hold percentage and average number of slot machines inoperation was an increase in win per slot machine per day to $96 from $92, anincrease of $4 or 4%. The decrease in race and sports revenues was due to a decreasein race and sports hold percentage and handle. Race and sports hold percentage decreased2.0 percentage points to 10.0% from 12.0%. Race and sports handle decreased to $5.8 millionfrom $5.9 million.

 

LODGING REVENUES.  The $0.6 millionincrease in lodging revenues to $9.8 million was primarily due to anincrease in average daily rate (“ADR”) to $180 from $159. Hotel occupancydecreased to 93.2% from 93.4% between periods.

 

FOOD AND BEVERAGE REVENUES.  The $1.1 millionincrease in food and beverage revenues was due to food revenues increasing byapproximately $0.4 million and beverage revenues increasing by approximately$0.7 million. Food revenues increased due primarily to a $0.6 millionincrease in banquet food revenue. This increase was partially offset by a $0.1million decrease in both Mr. Lucky’s and Simon. Beverage revenues increaseddue primarily to a $0.6 million increase in Body English, a $0.2 millionincrease banquet bar and a $0.1 million increase in Pink Taco. These increaseswere partially offset by a decrease of $0.1 million in the Beach Club Bar, dueto poor weather and a $0.1 million decrease in other bars.

 

RETAIL REVENUES.  Retail revenue remainedconstant at $1.7 million.

 

OTHER REVENUE.  Other revenue decreased$0.7 million primarily due to a $0.7 million decrease in ticketrevenue. We decreased the number of concerts to 9 from 12 in during the threemonth periods ended March 31, 2006 and 2005, respectively.

 

PROMOTIONAL ALLOWANCES.  Promotionalallowances increased as a percentage of casino revenues to 21% from 20%. This increaseis due to the 1.0 percentage point decrease in table hold percentage. The decreasein table games hold percentage decreases table games revenue without a decreasein promotional allowances. Promotional allowances are generally offered on theamount of play instead of the amount lost.

 

CASINO EXPENSES.  Casino expenses increased$0.4 million or 5% to $9.2 million. The increase was primarily due toa $0.2 million increase in payroll and related costs, a $0.1 million increasein customer promotions and a $0.1 million increase in taxes. The Company’sprovision and allowance for doubtful accounts are based on estimates bymanagement of the collectability of the receivable balances at each period end.Management’s estimates consider, among other factors, the age of thereceivables, the type or source of the receivables and the results ofcollection efforts to date, especially with regard to significant accounts. Casinoexpenses as a percentage of casino revenues increased to 62% from 53%, an increaseof 9 percentage points between comparative periods.

 

LODGING EXPENSES.  Lodging expenses inrelation to hotel revenues, prior to reclassifying the cost of complimentariesto casino expense or department complimentaries to promotional allowances, increasedto 32% from 31%, an increase of 1 percentage point between comparative periods.This increase is due to increasing the quality of the product that is offered.

 

FOOD AND BEVERAGE COSTS AND EXPENSES.  Foodand beverage costs and expenses in relation to food and beverage revenues,prior to reclassifying the cost of complimentaries to casino expense ordepartment complimentaries to promotional allowances increased to 63% from 59%in the prior year period. This increase is due to salary and wage increasesthat have affected the Las Vegas market.

 

RETAIL COSTS AND EXPENSES.  Retail costsand expenses in relation to retail revenues, prior to reclassifying the cost ofcomplimentaries to casino expense or department complimentaries to promotionalallowances, increased to 63% from 51%. This decrease in efficiency is due tochanging our product mix in the retail store. Old products have been reduced tomake room for the new products.

 

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OTHER COSTS AND EXPENSES.  Other costs andexpenses decreased $0.7 million due to less concerts being held in 2006 ascompared to 2005.

 

MARKETING, GENERAL AND ADMINISTRATIVE. Marketing,general and administrative expenses in relation to gross revenues increased to 21%from 17% in the prior year period. This increase is due to $1.1 million inexpenses related to the potential sale of the Company, a $0.6 million increasein payroll and related costs and a $0.1 million increase in claims.

 

DEPRECIATION ANDAMORTIZATION.  Depreciation and amortization expense remainedconstant at $3.0 million.

 

INTEREST EXPENSE.  Interest expensedecreased to $4.7 million from $4.9 million, a decrease of$0.2 million or 4%. In December of 2005, the Company received consent fromlenders under the facility and repurchased $15.0 million of the outstandingJunior Subordinated Notes. This is the cause for the reduction in interestexpense.

 

LOSS ON DISPOSAL OF ASSETS. During 2006, the Companyrecorded a $0.4 million loss on the disposal of assets, which was related to ourpool remodel. During 2005, the Company did not have a loss on the disposal ofassets.

 

PRE-OPENING. During 2005, the Company recorded a$0.1 million in pre-opening expense for a possible casino in California. During2006, the Company did not have pre-opening expense.

 

INCOME TAXES. During the three months ended March31, 2006 the Company recognized an income tax expense of $27,000. The Companydid not have income tax expense during the three months ended March 31,2005 due to being able to offset 100% of its income with NOL from previousperiods against which a valuation allowance has been placed.

 

NET INCOME. Net income was $35,000 compared to $4.4 millionduring the prior year period. The decrease in net results for commonshareholders was due to the factors described above.

 

LIQUIDITYAND CAPITAL RESOURCES

 

For the three month period ended March 31, 2006our principal sources of funds were cash on-hand at December 31, 2005, andcash provided by operating activities of $8.4 million. The amount of cashprovided by operating activities primarily included net income of $35,000,depreciation and amortization of $3.0 million, provision for losses on accountsreceivable of $0.1 million, amortization of loan fees of $0.1 million, loss ondisposal of asset of $0.4 million and net changes in operating assets andliabilities of $4.8 million. Other uses of funds were capital expenditures of$6.0 million, an increase in other assets of $0.7 million and payments on debtof $0.1 million. As a result, as of March 31, 2006, we had cash and cashequivalents of $10.6 million.

 

OnMay 11, 2006, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with Morgans Hotel Group Co. (“Morgans”) and MHG HR AcquisitionCorp. (“Merger Sub”), a wholly owned subsidiary of Morgans. Under the terms ofthe Merger Agreement, Merger Sub will be merged with and into the Company, withthe Company continuing as the surviving corporation and becoming a wholly ownedsubsidiary of Morgans. Each share of common stock of the Company issued andoutstanding immediately prior to the effective time of the merger will beautomatically converted into the right to receive cash based on the totaltransaction consideration of approximately $421.0 million, which is subject toa number of adjustments, including, among others, outstanding indebtedness andrelated party payables, working capital, cage cash, retention bonuses,transaction costs and expenses, and certain capital expenditures by the Company.In addition, $40.0 million of the total transaction consideration will be paidto Peter Morton, our Chief Executive Officer, as consideration for the earlytermination of his Supervisory Agreement. Of the total transactionconsideration, $2.5 million will be held in an escrow to cover post-closingadjustments for working capital and cage cash, and $15.0 million will be heldin an escrow to cover post-closing indemnification obligations of the Company’sstockholders.

 

Concurrentlywith the execution of the Merger Agreement and pursuant to the terms therein,Morgans has deposited into escrow $30.0 million, a portion of which, upon theclosing of the merger, will be credited towards the total transactionconsideration, and a portion of which, upon the closing of the merger, will beheld in escrow as described above.

 

Ifthe Merger Agreement is terminated under certain circumstances, the Company mayretain the $30 million deposit, and, in the event of a default by the Companyor its affiliates under the Merger Agreement, Morgans may seek specificperformance of the Merger Agreement.

 

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TheMerger Agreement provides that the closing of the merger must occur on or priorto the earlier of (1) seven business days after Morgans’ receipt of allnecessary gaming approvals to consummate the transaction and (2) February 10,2007, unless further extended by the parties.

 

Thecompletion of the merger is subject to a number of conditions, including, amongother things, Morgans’ or related parties’ receipt of all necessary antitrust,gaming and other approvals, the repayment of all outstanding indebtedness ofthe Company, the closing of certain other transactions, and the satisfaction orwaiver of all other conditions precedent. The merger is not subject to afinancing condition.

 

Inaddition, completion of the Merger is conditioned on the concurrent closing ofother transactions contemplated by the Merger Agreement, which transactions aregoverned by certain agreements between Morgans (or an affiliate thereof) andMr. Morton, the Company’s Chief Executive Officer, pursuant to the MergerAgreement, as well as the termination of certain existing agreements betweenthe Company and Mr. Morton.

 

The Company has agreed to stay bonuses of approximately $1.8 million intotal which will be paid to select employees who are critical to the continuedoperations of the Company through the completion of the merger. The staybonuses will become payable at the completion of the merger provided that theselected employee has remained in our employment to the applicable date. Thestay bonuses were communication to select employees in April 2006 and are beingaccrued over the expected service period. The Company began expensing thisliability in April of 2006 and therefore does not have any accrued stay bonusexpense in the three months ended March 31, 2006.

 

We believe that our current cash balances and cashflow from operations and other sources of cash including the availableborrowings under our $20.0 million Revolving Credit Facility($2.7 million as of March 31, 2006) will be sufficient to provideoperating and investing liquidity during the next 12 months. We may,however, need to raise additional funds prior to April 1, 2007.

 

The Company has a $0.3 million irrevocable standbyletter of credit for the benefit of the State of Nevada related to the selfinsured portion of the Company’s workers compensation insurance.

 

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013Notes are secured by a security interest in substantially all of the Company’sexisting and future assets, other than licenses which may not be pledged underapplicable law.  The security interest is junior to the security interestin the assets securing our obligation under our Facility and except forpermitted secured purchase money indebtedness.  The 2013 Notes are subjectto redemption at the option of the Company, in whole or in part, at any time onor after June 1, 2008, at a premium to the face amount ($140 million) thatdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The redemption rates are as follows: after June 1,2008, 104.438%, after June 1, 2009, 102.958%, after June 2010, 101.479% andafter June 1, 2011, 100%. The 2013 Notes contain covenants restricting orlimiting the ability of the Company to, among other things, pay dividends,create liens or other encumbrances, incur additional indebtedness, issuecertain preferred stock, sell or otherwise dispose of a portion of its assets,make acquisitions or merge or consolidate with another entity and enter intotransactions with affiliates. The Company was in compliance with thesecovenants as of March 31, 2006.

 

Interest on the Facility accrues on allindividual borrowings at an interest rate determined at the option of theCompany, at either the LIBOR Index plus an applicable LIBOR margin (not toexceed 3.5% (applicable margin was 2.50% at March 31, 2006) andaggregating 7.3% at March 31, 2006), or the Base Rate, defined as thehigher of the Federal Funds Rate plus 0.5%, or the reference rate, as defined,plus an applicable margin (not to exceed 2.25%). The Company chose the LIBORIndex for all of its borrowings outstanding at March 31, 2006. Thesemargins are dependent upon the Company’s total debt to EBITDA ratio, as defined.Interest accrued on the Base Rate borrowings is due monthly, up to the maturitydate, while interest on LIBOR borrowings is due three months up to the maturitydate. The Facility is secured by substantially all of the Company’s property atthe Las Vegas site. The Facility contains certain covenants including, amongother things, financial covenants, limitations on the Company from disposing ofcapital stock, entering into mergers and certain acquisitions, incurring liensor indebtedness, issuing dividends on stock, and entering into transactionswith affiliates. The Company was not in compliance with the total leverage northe maximum capital expenditures covenants as of March 31, 2006,and the Company is currently seeking a waiver from its lenders for suchnoncompliance. Pending receipt of such waiver, the principal amount has beenclassified as current as of March 31, 2006.

 

Interest on the Junior Notes is payable on eachJanuary 15 and July 15, commencing on January 15, 2004, and maybe paid in cash or in kind at the Company’s option, provided that interest willbe paid in kind if a payment of such interest in cash would cause a defaultunder the 2013 Notes or the Facility.  The Junior Notes require that anysemi-annual interest payment in cash be equal to the lesser of (x) 50% of theamount of interest accrued on the Junior Notes since the most recent interestpayment date and (y) the amount of interest that the Company is permitted topay in cash without causing a default under the 2013 Notes or theFacility.  For interest payments payable in cash, interest accrues at arate per annum equal to 9.875%, and for interest payments payable in kind,interest accrues at a rate per annum equal to 10.50%.  The Junior Notesare contractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.  The Junior Notes mature on January 15,2014 but are subject to redemption at the option of the Company, in whole or inpart, at any time on or after January 15, 2009, at a premium to theprincipal amount thereof that decreases on each subsequent

 

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anniversary date, plus accrued interest tothe date of redemption.  The Junior Notes contain covenants restrictingthe Company’s ability to, among other things, sell or otherwise dispose of itsassets, pay dividends, incur additional indebtedness, make acquisitions ormerge or consolidate with another entity and enter into transactions withaffiliates. In December of 2005, the Company received consent from lendersunder the Facility and repurchased $15.0 million of the outstanding JuniorSubordinated Notes. This transaction had a purchase premium of $1.2 million. Forthe three months ended March 31, 2006 and 2005 the Company paid interestin kind of $1.1 million and $1.4 million, respectively. The Company was incompliance with these covenants as of March 31, 2006.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangementsthat have, 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 no guarantees, such as performanceguarantees, keep-well agreements or indemnity. We are not engaged inderivatives activities.

 

**Contractual Obligations and Commitments**

 

We have various contractual obligations that werecord as liabilities in our financial statements. 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 for goods and services such as food, inventory andentertainment. Such liabilities are recorded as liabilities when so incurredand we expect that such contracts will generate revenue in excess of suchliabilities. As of March 31, 2006, there have been no material changes tothe table of contractual obligations and commitments in our most recently filedForm 10-K.

 

We made cash interest payments on long-term debt of$1.4 million and $1.6 million in the three month periods ended March 31,2006 and 2005, respectively. We anticipate our cash interest payments for theremainder of 2006 to be in excess of these levels due to the timing of payments.We have not made significant cash tax payments during the three month periodsended March 31, 2006 and 2005 and, due to available net operating loss andAMT tax credit carryforwards, we do not anticipate making significant cash taxpayments in the remainder of 2006. Total supervisory fee expense for the threemonth periods ended March 31, 2006 and 2005 amounted to $0.9 million and $0.8million, respectively, under the Company’s Amended and Restated SupervisoryAgreement with Peter Morton. The supervisory fee is equal to two percent of annualgross revenues (as defined in the Supervisory Agreement), net ofcomplimentaries for each year.

 

Our ability to service our contractual obligationsand commitments will be dependent on our future performance, which will beaffected by, among other things, prevailing economic conditions and financial,business and other factors, certain of which are beyond our control.

 

The Company is a defendant in various lawsuitsrelating to routine matters incidental to its business. Management provides anaccrual for estimated losses that may occur and does not believe that theoutcome of any pending claims or litigation, in the aggregate, will have amaterial adverse effect on the Company’s financial position, results ofoperations or liquidity.

 

CRITICALACCOUNTING POLICIES

 

There have been no changes in the Company’s criticalaccounting policies from those described in the Company’s most recently filedForm 10-K.

 

**Item 3.****   ****Quantitative and QualitativeDisclosures About Market Risk**

 

Market risks relating to our operations resultprimarily from changes in short-term LIBOR interest rates. We do not have anyforeign exchange or other significant market risk. We did not have anyderivative financial instruments at March 31, 2006.

 

Our exposure to market risk for changes in interestrates relates primarily to our current Revolving Credit Facility. In accordancewith the Revolving Credit Facility, we enter into variable rate debtobligations to support general corporate purposes, including capitalexpenditures and working capital needs. We continuously evaluate our level ofvariable rate debt with respect to total debt and other factors, includingassessment of the current and future economic environment.

 

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We had $17.0 million in variable rate debtoutstanding at March 31, 2006. Based upon these variable rate debt levels,a hypothetical 10% adverse change in the effective interest rate (approximatelya 73 basis point increase) would increase interest expense less than $0.1 millionon an annual basis, and likewise decrease our earnings and cash flows. Wecannot predict market fluctuations in interest rates and their impact on ourvariable rate debt, nor can there be any assurance that fixed rate long-termdebt will be available to us at favorable rates, if at all. Consequently,future results may differ materially from the estimated adverse changesdiscussed above.

 

The fair value of the Company’s $140 million of8.875% Second Lien Notes, which are due in 2013 and are publicly traded,approximated $150.9 million at March 31, 2006 based on published bidprices. The fair value of the Company’s $41.9 million of Junior Notes cannot beestimated as there was no established market nor published bid prices.

 

**Item 4.****   ****Controls and Procedures**

 

(a)  Disclosure Controls and Procedures. TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure 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 such evaluation, the Company’s Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of such period,the Company’s disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by the Company in the reports that it files or submits underthe Exchange Act.

 

(b)  Internal Control Over Financial Reporting.There have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the period covered this report thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II OTHER INFORMATION**

 

**Item 1.****   ****Legal Proceedings**

 

The Company is a defendant in various lawsuitsrelating to routine matters incidental to its business.

 

The Company is a defendant in a lawsuit filed byACM, Inc. ACM, Inc. alleges the company failed to pay approximately $600,000due under a telephone consulting contract. The Company disputes the allegationsand denies any further amounts are due.

 

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 March 31, 2006.

 

**Item 1A. Risk Factors**

 

Asa result of the proposed merger with a subsidiary of Morgans Hotel Group Co. (“Morgans”),the following additional risk factors are material updates to the risk factorscontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005:

 

**The completion of the proposed merger is subject to obtaining theregulatory approvals to complete the merger and any delays in obtainingregulatory approvals will delay and may possibly prevent the merger.**

 

Thecompletion of the merger is conditioned upon Morgans or related parties receivingthe necessary approvals from state and local gaming and regulatory authorities.The Company cannot be certain that all of the required gaming approvals will beobtained by Morgans, nor can the Company be certain that the approvals will beobtained within the time contemplated by the merger agreement. A delay inobtaining the required approvals will delay and may possibly prevent thecompletion of the merger.

 

**If the proposed merger is not completed, the Company will have incurredsubstantial costs that may adversely affect the Company’s financial results andoperations.**

 

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TheCompany has incurred and will continue to incur substantial costs in connectionwith the proposed merger. These costs are primarily associated with the fees ofattorneys, accountants and the Company’s financial advisors. In addition, theCompany has diverted significant management resources in an effort to completethe merger and is subject to restrictions contained in the merger agreement onthe conduct of its business. If the merger is not completed, the Company willhave incurred significant costs, including the diversion of managementresources, for which it will have received little or no benefit.

 

Inaddition, if the merger is not completed, the Company may experience negativereactions from the financial markets, collaborative partners, customers andemployees. Each of these factors may adversely affect the Company’s financialresults and operations.

 

**Item 5.****   ****Other Information**

 

**ProposedMerger**

 

OnMay 11, 2006, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with Morgans Hotel Group Co. (“Morgans”) and MHG HR AcquisitionCorp. (“Merger Sub”), a wholly owned subsidiary of Morgans. Under the terms ofthe Merger Agreement, Merger Sub will be merged with and into the Company, withthe Company continuing as the surviving corporation and becoming a wholly ownedsubsidiary of Morgans. Each share of common stock of the Company issued andoutstanding immediately prior to the effective time of the merger will beautomatically converted into the right to receive cash based on the totaltransaction consideration of approximately $421.0 million, which is subject toa number of adjustments, including, among others, outstanding indebtedness andrelated party payables, working capital, cage cash, retention bonuses,transaction costs and expenses, and certain capital expenditures by the Company.In addition, $40.0 million of the total transaction consideration will be paidto Peter Morton, our Chief Executive Officer, as consideration for the earlytermination of his Supervisory Agreement. Of the total transactionconsideration, $2.5 million will be held in an escrow to cover post-closingadjustments for working capital and cage cash, and $15.0 million will be heldin an escrow to cover post-closing indemnification obligations of the Company’sstockholders.

 

Concurrentlywith the execution of the Merger Agreement and pursuant to the terms therein,Morgans has deposited into escrow $30.0 million, a portion of which, upon theclosing of the merger, will be credited towards the total transactionconsideration, and a portion of which, upon the closing of the merger, will beheld in escrow as described above.

 

Ifthe Merger Agreement is terminated under certain circumstances, the Company mayretain the $30 million deposit, and, in the event of a default by the Companyor its affiliates under the Merger Agreement, Morgans may seek specificperformance of the Merger Agreement.

 

TheMerger Agreement provides that the closing of the merger must occur on or priorto the earlier of (1) seven business days after Morgans’ receipt of allnecessary gaming approvals to consummate the transaction and (2) February 10,2007, unless further extended by the parties.

 

Thecompletion of the merger is subject to a number of conditions, including, amongother things, Morgans’ or related parties’ receipt of all necessary antitrust,gaming and other approvals, the repayment of all outstanding indebtedness ofthe Company, the closing of certain other transactions, and the satisfaction orwaiver of all other conditions precedent. The merger is not subject to afinancing condition.

 

Inaddition, completion of the Merger is conditioned on the concurrent closing ofother transactions contemplated by the Merger Agreement, which transactions aregoverned by certain agreements between Morgans (or an affiliate thereof) andMr. Morton, the Company’s Chief Executive Officer, pursuant to the MergerAgreement, as well as the termination of certain existing agreements betweenthe Company and Mr. Morton.

 

TheCompany has agreed to stay bonuses of approximately $1.8 million in total whichwill be paid to select employees who are critical to the continued operationsof the Company through the completion of the merger. The stay bonuses willbecome payable at the completion of the merger provided that the selectedemployee has remained in our employment to the applicable date. The staybonuses were communicated to select employees in April 2006 and are beingaccrued over the expected service period. The Company began expensing thisliability in April of 2006 and therefore does not have any accrued stay bonusexpense in the three months ended March 31, 2006.

 

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Item 6.    Exhibits

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                 |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                            |
| 2.1                |       | Agreement and Plan of Merger, dated as of May 11, 2006, by and among  Hard Rock Hotel, Inc., Morgans Hotel Group Co. and MHG HR Acquisition Corp.*                                                              |
|               |       |                                                                                                                                                                                                            |
| 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. |
|               |       |                                                                                                                                                                                                            |   |   |
| 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.                                                                                        |
|               |       |                                                                                                                                                                                                            |
| 10.2               |       | Performance Awards Plan/Award Agreement between the Company and Kevin  Kelley dated March 20, 2003.                                                                                                        |
|               |       |                                                                                                                                                                                                            |   |   |
| 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                       |

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|   |   | * Hard Rock Hotel agrees to furnish copies of the Schedules and  Exhibits referenced in this agreement to the Securities and Exchange  Commission upon request. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| (1)    |   | Incorporated by reference to designated exhibit to our Registration  Statement on Form S-4, filed with the Securities and Exchange Commission  on May 21, 1998 (File No. 333-53211).                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                              |
| (2)    |   | Incorporated by reference to designated exhibit to our Report on  Form 10-Q, filed with the Securities and Exchange Commission for the  three months ended August 31, 1999 (File No. 333-53211).                   |
|   |   |                                                                                                                                                                                                                              |
| (3)    |   | Incorporated by reference to designated exhibit to our Registration  Statement on Form S-4, filed with the Securities and Exchange Commission  on July 8, 2003 (File No. 333-106863).                              |
|   |   |                                                                                                                                                                                                                              |
| (4)    |   | Incorporated by reference to designated exhibit 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 designated exhibit to our Report on  Form 10-Q, filed with the Securities and Exchange Commission for the  three months ended March 31, 2005 (File No. 333-53211).                    |

 

**SIGNATURES**

 

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

 
|                    | HARD ROCK HOTEL, INC.                                     |
|-------------------------|-----------------------------------------------------------|
|                    |                                                      |
| Date: May 15, 2006 | By: /s/ JAMES D. BOWEN                                    |
|                    | Name: James D. Bowen                                      |
|                    | Title: CHIEF FINANCIAL OFFICER                            |
|                    | (PRINCIPAL FINANCIAL OFFICER AND DULY AUTHORIZED OFFICER) |

 

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