**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For thequarterly period ended: September 30, 2004**

 

**OR**

 

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

 

**For thetransition period from        to       **

 

**Commissionfile number 333-53211**

 

**Hard Rock Hotel, Inc.**

(Exact name of registrantas specified in its charter)

 
| **Nevada**                                                      | ** ** | **88-0306263**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **4455  Paradise Road, Las Vegas NV**                           | ** ** | **89109**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:  **(702) 693-5000**

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o  

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes  o  No  ý  

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

Common Stock outstandingby class as of November 15, 2004

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

 

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HARD ROCK HOTEL, INC.

 

INDEX

 
| Part I  | FINANCIAL  INFORMATION |                                                                                                                  |
|---------|------------------------|-----------------------------------------------------------------------------------------------------------------------|
|    |                   |                                                                                                                  |
| Item 1. |                   | Financial  Statements (unaudited)                                                                                     |   |
|    |                   |                                                                                                                  |   |
|    |                   | Condensed Balance Sheets as of September 30,  2004 and December 31, 2003                                    |   |
|    |                   |                                                                                                                  |   |
|    |                   | Condensed Statements of Operations for the  three-month and nine-month periods ended September 30, 2004 and 2003 |   |
|    |                   |                                                                                                                  |   |
|    |                   | Condensed Statements of Cash Flows for the  nine-month periods ended September 30, 2004 and 2003                 |   |
|    |                   |                                                                                                                  |   |
|    |                   | Notes to Condensed Financial Statements                                                                               |   |
|    |                   |                                                                                                                  |   |
| Item 2. |                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   |
|    |                   |                                                                                                                  |   |
| Item 3. |                   | Quantitative  and Qualitative Disclosures about Market Risk                                                           |   |
|    |                   |                                                                                                                  |   |
| Item 4. |                   | Controls  and Procedures                                                                                              |   |
|    |                   |                                                                                                                  |   |
| PART II | OTHER INFORMATION      |                                                                                                                  |
|    |                   |                                                                                                                  |   |
| Item 1. |                   | Legal Proceedings                                                                                                     |   |
|    |                   |                                                                                                                  |   |
| Item 6. |                   | Exhibits                                                                                                              |   |

 

2

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Part I       FINANCIAL INFORMATION

 

Item 1.                                                     FinancialStatements

 

HARD ROCK HOTEL, INC.

CONDENSED BALANCE SHEETS (unaudited)

(in thousands, exceptshare amounts)

 
| ** **                                                                                                                                                | ** ** | **September 30, 2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                    |       |                        |       |                        |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Current assets:                                                                                                                                           |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                 |       | $                           | 16,837     |                        | $          | 10,882 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,068 and $1,237 as of September 30, 2004 and  December 31, 2003, respectively |       | 5,795                       |       | 6,554                       |       |
| Inventories                                                                                                                                               |       | 1,781                       |       | 1,743                       |       |
| Prepaid expenses and other current assets                                                                                                                 |       | 2,126                       |       | 2,678                       |       |
| Related party receivable                                                                                                                                  |       | 299                         |       | —                      |       |
| Total current assets                                                                                                                                      |       | 26,838                      |       | 21,857                      |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Property and equipment, (net)                                                                                                                             |       | 169,430                     |       | 166,782                     |       |
| Deferred income taxes                                                                                                                                     |       | 1,086                       |       | 1,086                       |       |
| Other assets, (net)                                                                                                                                       |       | 4,144                       |       | 4,352                       |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| TOTAL ASSETS                                                                                                                                              |       | $                           | 201,498    |                        | $          | 194,077 |   |
|                                                                                                                                                      |       |                        |       |                        |       |
| LIABILITIES AND SHAREHOLDERS’ DEFICIENCY                                                                                                             |       |                        |       |                        |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                      |       |                        |       |                        |       |
| Accounts payable                                                                                                                                          |       | $                           | 2,598      |                        | $          | 3,070 |   |
| Construction related payable                                                                                                                              |       | 120                         |       | 982                         |       |
| Related party payable                                                                                                                                     |       | 307                         |       | 224                         |       |
| Accrued expenses                                                                                                                                          |       | 15,085                      |       | 13,217                      |       |
| Interest payable                                                                                                                                          |       | 5,347                       |       | 4,184                       |       |
| Current portion of long-term debt                                                                                                                         |       | 6,423                       |       | 2,673                       |       |
| Total current liabilities                                                                                                                                 |       | 29,880                      |       | 24,350                      |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Deferred income taxes                                                                                                                                     |       | 860                         |       | 860                         |       |
| Long-term debt                                                                                                                                            |       | 206,859                     |       | 207,739                     |       |
| Total long-term liabilities                                                                                                                               |       | 207,719                     |       | 208,599                     |       |
| Total liabilities                                                                                                                                         |       | 237,599                     |       | 232,949                     |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Commitments and contingencies:                                                                                                                            |       |                        |       |                        |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Shareholders’ deficiency:                                                                                                                            |       |                        |       |                        |       |
|                                                                                                                                                      |       |                        |       |                        |       |
| Common stock, Class A voting, no par value,  40,000 shares authorized, 12,000 shares issued and outstanding                                               |       | —                      |       | —                      |       |
| Common stock, Class B non-voting, no par  value, 160,000 shares authorized, 64,023 shares issued and outstanding                                          |       | —                      |       | —                      |       |
| Paid-in capital                                                                                                                                           |       | 7,508                       |       | 7,508                       |       |
| Accumulated deficit                                                                                                                                       |       | (43,609                     | )          | (46,380                     | )          |
| Total shareholders’ deficiency                                                                                                                       |       | (36,101                     | )          | (38,872                     | )          |
|                                                                                                                                                      |       |                        |       |                        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’  DEFICIENCY                                                                                                      |       | $                           | 201,498    |                        | $          | 194,077 |   |

 

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

 

3

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per shareamounts)

(unaudited)

 
| ** **                                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                              |       |                                       |       |                                      |       |   |   |   |   |
| Casino                                                |       | $                                          | 14,165     |                                      | $          | 15,225 |   | $ | 44,250 |   | $ | 43,272 |   |
| Hotel                                                 |       | 9,303                                      |       | 8,015                                     |       | 27,328 |   | 23,111 |   |
| Food and beverage                                     |       | 14,849                                     |       | 12,406                                    |       | 39,862 |   | 35,804 |   |
| Retail store                                          |       | 1,931                                      |       | 2,256                                     |       | 6,042 |   | 6,492 |   |
| Other                                                 |       | 2,346                                      |       | 2,123                                     |       | 6,630 |   | 5,810 |   |
| Gross revenues                                        |       | 42,594                                     |       | 40,025                                    |       | 124,112 |   | 114,489 |   |
| Less: promotional allowances                          |       | (2,978                                     | )          | (2,787                                    | )          | (8,821 | ) | (8,392 | ) |
| Net revenues                                          |       | 39,616                                     |       | 37,238                                    |       | 115,291 |   | 106,097 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Costs and expenses:                                   |       |                                       |       |                                      |       |   |   |   |   |
| Casino                                                |       | 8,114                                      |       | 8,281                                     |       | 25,586 |   | 25,030 |   |
| Hotel                                                 |       | 2,328                                      |       | 1,981                                     |       | 6,708 |   | 5,765 |   |
| Food and beverage                                     |       | 7,736                                      |       | 6,474                                     |       | 20,795 |   | 18,576 |   |
| Retail store                                          |       | 859                                        |       | 958                                       |       | 2,703 |   | 2,819 |   |
| Other                                                 |       | 1,228                                      |       | 1,076                                     |       | 3,386 |   | 2,957 |   |
| Marketing, advertising and entertainment              |       | 1,552                                      |       | 2,314                                     |       | 7,109 |   | 5,551 |   |
| General and administrative                            |       | 6,040                                      |       | 5,293                                     |       | 16,741 |   | 14,691 |   |
| Related party expenses                                |       | 1,287                                      |       | 1,071                                     |       | 3,729 |   | 3,276 |   |
| Depreciation and amortization                         |       | 2,421                                      |       | 2,990                                     |       | 8,354 |   | 8,766 |   |
| Pre-opening expenses                                  |       | 9                                          |       | 37                                        |       | 530 |   | 60 |   |
| Total costs and expenses                              |       | 31,574                                     |       | 30,475                                    |       | 95,641 |   | 87,491 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income from operations                                |       | 8,042                                      |       | 6,763                                     |       | 19,650 |   | 18,606 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Other income (expense):                               |       |                                       |       |                                      |       |   |   |   |   |
| Other, net                                            |       | 1                                          |       | 53                                        |       | (59 | )  | 20 |   |
| Loss on early extinguishment of debt                  |       | —                                     |       | —                                    |       | — |   | (4,258 | )  |
| Loss on disposal of assets                            |       | —                                     |       | —                                    |       | (2,608 | )  | — |   |
| Interest income                                       |       | 22                                         |       | 12                                        |       | 42 |   | 27 |   |
| Interest expense                                      |       | (4,688                                     | )     | (4,940                                    | )     | (14,254 | )  | (11,974 | )  |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income before benefit for income taxes                |       | 3,377                                      |       | 1,888                                     |       | 2,771 |   | 2,421 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income tax benefit                                    |       | —                                     |       | —                                    |       | — |   | 100 |   |
| NET INCOME                                            |       | 3,377                                      |       | 1,888                                     |       | 2,771 |   | 2,521 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Preferred stock dividends                             |       | —                                     |       | —                                    |       | — |   | (2,346 | ) |
| Income applicable to common shareholders              |       | $                                          | 3,377      |                                      | $          | 1,888 |   | $ | 2,771 |   | $ | 175 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| BASIC AND DILUTED NET INCOME PER SHARE:               |       |                                       |       |                                      |       |   |   |   |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Applicable to common shareholders                     |       | $                                          | 44.42      |                                      | $          | 24.83 |   | $ | 36.45 |   | $ | 2.30 |   |
|                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average number of common shares  outstanding |       | 76,023                                     |       | 76,023                                    |       | 76,023 |   | 76,023 |   |

 

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

 

4

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, exceptsupplemental schedule)

(unaudited)

 
| ** **                                                                                                                  | ** ** | **Nine Months  Ended September 30,  2004** | ** ** | **Nine Months  Ended September 30,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| Cash flows from operating activities:                                                                                       |       |                                            |       |                                            |       |
| Net income                                                                                                                  |       | $                                               | 2,771      |                                            | $          | 2,521 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                                          |       |                                            |       |                                            |       |
| Depreciation and amortization                                                                                               |       | 8,354                                           |       | 8,766                                           |       |
| Provision for losses on accounts receivable                                                                                 |       | 25                                              |       | 223                                             |       |
| Amortization of bond offering fees and  costs                                                                               |       | 390                                             |       | 462                                             |       |
| Interest paid in kind on Junior  Subordinated Notes                                                                         |       | 3,000                                           |       | —                                          |       |
| Loss on sales of property and equipment                                                                                     |       | —                                          |       | (20                                             | )          |
| Loss on early extinguishment of debt                                                                                        |       | —                                          |       | 4,258                                           |       |
| Loss on disposal of assets                                                                                                  |       | 2,608                                           |       | —                                          |       |
| Changes in operating assets and liabilities                                                                                 |       |                                            |       |                                            |       |
| Accounts receivable                                                                                                         |       | 734                                             |       | 3,681                                           |       |
| Inventories                                                                                                                 |       | (38                                             | )          | 210                                             |       |
| Prepaid expenses and other current assets                                                                                   |       | 552                                             |       | 29                                              |       |
| Related party receivable                                                                                                    |       | (299                                            | )          | (272                                            | )          |
| Increase in deferred income taxes                                                                                           |       | —                                          |       | (150                                            | )          |
| Accounts payable                                                                                                            |       | (472                                            | )          | (130                                            | )          |
| Related party payable                                                                                                       |       | 83                                              |       | 152                                             |       |
| Accrued expenses                                                                                                            |       | 1,868                                           |       | (1,352                                          | )          |
| Interest payable                                                                                                            |       | 1,163                                           |       | 3,256                                           |       |
| Net cash provided by operating activities                                                                                   |       | 20,739                                          |       | 21,634                                          |       |
|                                                                                                                        |       |                                            |       |                                            |       |
| Cash flows (used in) investing activities:                                                                                  |       |                                            |       |                                            |       |
| Purchases of property and equipment                                                                                         |       | (13,671                                         | )          | (9,765                                          | )          |
| Construction related payables                                                                                               |       | (862                                            | )          | 1,351                                           |       |
| Proceeds from sale of operating assets                                                                                      |       | 61                                              |       | 35                                              |       |
| Increase in other assets                                                                                                    |       | (33                                             | )          | (13                                             | )          |
| Net cash (used in) investing activities                                                                                     |       | (14,505                                         | )          | (8,392                                          | )          |
|                                                                                                                        |       |                                            |       |                                            |       |
| Cash flows (used in) financing activities:                                                                                  |       |                                            |       |                                            |       |
| Net proceeds from borrowings                                                                                                |       | —                                          |       | 157,385                                         |       |
| Other debt issuance expenses                                                                                                |       | (149                                            | )          | (1,191                                          | )          |
| Payment of accrued dividends on preferred  stock                                                                            |       | —                                          |       | (15,000                                         | )          |
| Principal payments on long-term debt                                                                                        |       | (130                                            | )          | (144,373                                        | )          |
| Premium on early retirement of long-term  debt                                                                              |       | —                                          |       | (3,040                                          | )          |
| Net cash (used in) financing activities                                                                                     |       | (279                                            | )          | (6,219                                          | )          |
|                                                                                                                        |       |                                            |       |                                            |       |
| Net increase in cash and cash equivalents                                                                                   |       | 5,955                                           |       | 7,023                                           |       |
| Cash and cash equivalents, beginning of  period                                                                             |       | 10,882                                          |       | 9,139                                           |       |
|                                                                                                                        |       |                                            |       |                                            |       |
| Cash and cash equivalents, end of period                                                                                    |       | $                                               | 16,837     |                                            | $          | 16,162 |   |
|                                                                                                                        |       |                                            |       |                                            |       |
| Supplemental disclosures of cash flow  information:                                                                         |       |                                            |       |                                            |       |
| Cash paid during the period for interest,  (net of amount capitalized of $189 in the period ended September 30,  2004) |       | $                                               | 12,701     |                                            | $          | 8,256 |   |
| Cash paid during the period for income  taxes, net                                                                          |       | $                                               | —     |                                            | $          | 100 |   |

 

5

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Supplemental Schedule of Non-Cash Investing and FinancingActivities:

 

In accordance with the termsof the Junior Subordinated Notes, the Company paid interest in kind of$3,000,000 during the nine month period ended September 30, 2004 and increasedthe principal amount of the Junior Subordinated Notes.

 

In conjunction with theissuance of $140,000,000 of Second Lien Notes and a $40,000,000 Senior SecuredCredit Facility (of which the $20,000,000 Revolving Credit Facility portion wasnot drawn upon as of September 30, 2004) during May 2003, issuance costsof $2,450,000 and $567,000, respectively, were withheld from the proceeds.

 

During May 2003, the Companyissued $50,037,000 of Qualified Subordinated Notes to related parties andredeemed and retired the 9 1/4% Series A Cumulative Preferred Stock and the 91/4% Series B Cumulative Preferred Stock.

 

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

 

6

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HARD ROCK HOTEL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

1.                                       BASIS OFPRESENTATION

 

Hard Rock Hotel, Inc. (the “Company”), a Nevada corporationincorporated on August 30, 1993, operates a hotel-casino in Las Vegas,Nevada (the “Resort”).  Lily PondInvestments, Inc. (“Lily Pond”), a Nevada corporation controlled and majorityowned by Peter Morton, owns all of the voting shares and 93% of the non-votingshares of the Company.  Mr. Morton hasgranted a sublicense to the Company, pursuant to which the Company holds theexclusive right to use the “Hard Rock Hotel” trademark for the Company’soperations in Las Vegas.  These condensedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with instructionsto Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain notes and other informationhave been condensed or omitted from the interim financial statements presentedin this Quarterly Report on Form 10-Q and they do not include all informationrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.  Operating results for thenine-month period ended September 30, 2004 are not necessarily indicativeof future financial results or the results that may be expected for the yearending December 31, 2004.  Theunaudited interim financial statements contained herein should be read inconjunction with the audited financial statements and footnotes for the yearended December 31, 2003.

 

2.                                       AGREEMENTS WITH RELATED PARTIES

 

The Company entered into atwenty-five year Amended and Restated Supervisory Agreement with Peter Morton,Chairman and Chief Executive Officer, which provides for the supervision of thedevelopment, improvement, operation, and maintenance of the Company through2022.  Mr. Morton has the option to renewthe agreement for two successive 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 we are orMr. Morton is in Default (as defined in the Supervisory Agreement), thenon-defaulting party may terminate the agreement after the other party hasreceived the opportunity to cure such default. As part of this agreement, the Company pays to Mr. Morton a supervisoryfee equal to two percent of annual gross revenues (as defined in theSupervisory Agreement), net of complimentaries for each year.  Total supervisory fee expenses for theseservices for the nine months ended September 30, 2004 and 2003 amounted to$2,333,000 and $2,216,000, respectively. These expenses are included in related party expenses in theaccompanying statements of operations. The unpaid amounts at September 30, 2004 and December 31, 2003are $307,000 and $176,000, respectively, and are included in related partypayable in the accompanying balance sheets.

 

Entities controlled by Mr.Morton have provided additional technical support services for the development,ongoing improvement and operation of the Company.  The Company reimburses these entities for allcosts and expenses incurred in connection with these services, including,without limitation, employee salary and benefits and allocated overhead.  These expenses aggregated approximately $1,396,000and $1,060,000 for the nine months ended September 30, 2004 and 2003,respectively, and are included in the accompanying statements ofoperations.  At September 30, 2004,$234,000 was due from these entities for expenses paid in advance and isincluded in related party receivable in the accompanying balance sheet.  At December 31, 2003, $48,000 was due tothese entities for expenses and is included in related party payable in theaccompanying balance sheet.

 

The Company providestechnical support services and pays certain overhead expenses for thedevelopment and operation of PM Realty, LLC, an development entity owned by Mr.Morton.  PM Realty, LLC is to reimbursethe Company for all of these costs and expenses which aggregated approximately$65,000 for the nine months ended September 30, 2004 and all of which areincluded in related party receivable as of September 30, 2004.

 

Our preferred stock was, anda substantial portion of the junior subordinated notes are, held byMr. Morton or affiliates of Mr. Morton (see Note 3 below).

 

3.                                       LONG-TERM DEBT

 

As of September 30,2004, the Company had $140.0 million outstanding of its 8.875% Second LienNotes due 2013 (the “2013 Notes”).  TheCompany also has a $40 million Senior Secured Credit Facility (the “Facility”)through a group of banks.  The Facility consists of a $20 million,five-year senior secured term loan (the “Term Loan”) and a $20 million seniorsecured revolving credit facility (the “Revolving Credit Facility”).  As of September 30, 2004, the Companyhad $20.0 million outstanding on its Term Loan and had no balance outstandingon its Revolving Credit Facility.  As ofSeptember 30, 2004, the Company also has approximately $53.0 millionoutstanding of junior subordinated notes (the “Junior Notes”) including$3.0 million of interest paid in kind during the nine month period endedSeptember 30, 2004.

 

7

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2013 Notes

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013 Notes are secured by a securityinterest in substantially all of the Company’s existing and future assets,other than licenses which may not be pledged under applicable law.  The 2013 Notes are contractually subordinated in right of payment to allindebtedness incurred pursuant to the Facility. The liens and security interests securing the obligations of the Companyunder the 2013 Notes are contractually subordinated to the liens securing theobligations of the Company under the Facility and except for permittedsecured purchase money indebtedness.  The2013 Notes are subject to redemption at the option of the Company, in whole orin part, at any time on or after June 1, 2008, at a premium to the faceamount ($140 million) that decreases on each subsequent anniversary date, plus accruedinterest to the date of redemption.  The2013 Notes contain covenants restricting or limiting the ability of the Companyto, among other things, pay dividends, create liens or other encumbrances,incur additional indebtedness, issue certain preferred stock, sell or otherwisedispose of a portion of its assets, make acquisitions or merge or consolidatewith another entity and enter into transactions with affiliates.  TheCompany was in compliance with these covenants as of September 30, 2004.

 

# Facility

Interest on the Facility accrues on all individual borrowings at aninterest rate determined at the option of the Company, at either the LIBORIndex plus an applicable margin (not to exceed 3.5% (applicable margin was2.75% at September 30, 2004) and aggregating 4.4% at September 30,2004), or the Base Rate, defined as the higher of the Federal Funds Rate plus0.5%, or the reference rate, as defined, plus an applicable margin (not toexceed 2.25%).  The Company chose theLIBOR Index for all of its borrowings outstanding at September 30,2004.  These margins are dependent uponthe Company’s total debt to EBITDA ratio, as defined.  Interest accrued on the Base Rate borrowingsis due monthly, up to the maturity date, while interest on LIBOR borrowings isdue quarterly up to the maturity date. The Facility is secured by substantially all of the Company’s propertyat the Las Vegas site.  The Facilitycontains certain covenants including, among other things, financial covenants,limitations on the Company from disposing of capital stock, entering intomergers and certain acquisitions, incurring liens or indebtedness, issuingdividends on stock, and entering into transactions with affiliates.  The Company was in compliance with thesecovenants as of September 30, 2004.

 

JuniorSubordinated Notes

Interest on the Junior Subordinated 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 any semi-annual interest payment in cashbe equal to the lesser of (x) 50% of the amount of interest accrued on theJunior Notes since the most recent interest payment date and (y) the amount ofinterest that the Company is permitted to pay in cash without causing a defaultunder the 2013 Notes or the Facility. For interest payments payable in cash, interest accrues at a rate per annumequal to 9.875%, and for interest payments payable in kind, interest accrues ata rate per annum equal to 10.50% and increases the principal amount of theJunior Subordinated Notes.  OnJanuary 15, 2004, the Company paid in cash $1.5 million of interest on theJunior Subordinated Notes.  Thisrepresents 50% of the accrued interest at 9.875% due as of December 31,2003.  The remaining $1.6 million ofaccrued interest was paid in kind at a rate of 10.50%.  On July 15, 2004, the Company paid incash $1.4 million of interest on the Junior Subordinated Notes.  This represents 50% of the accrued interestat 9.875% due as of June 30, 2004. The remaining $1.4 million of accrued interest was paid in kind ata rate of 10.50%.  The Junior Notes arecontractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.

 

The Junior Notes mature on January 15, 2014 butare subject to redemption at the option of the Company, in whole or in part, atany time on or after January 15, 2009, at a premium to the principalamount thereof that decreases on each subsequent anniversary date, plus accruedinterest to the date of redemption.  TheJunior Notes contain covenants restricting the Company’s ability to, amongother things, sell or otherwise dispose of its assets, pay dividends, incuradditional indebtedness, make acquisitions or merge or consolidate with anotherentity and enter into transactions with affiliates.  The Company was in compliance with thesecovenants as of September 30, 2004.

 

4.                                       LEGALAND REGULATORY PROCEEDINGS

 

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

 

Management provides an accrual for estimated losses that may occur anddoes not believe that the outcome of any pending claims or litigation, in theaggregate, will have a material adverse effect on the Company’s financialposition, results of operations or liquidity beyond the amounts recorded in theaccompanying balance sheet as of September 30, 2004.

 

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During January 2004, theNevada Gaming Commission served us with a complaint for disciplinary actionpursuant to NRS 463.310(2) and NRS 463.312 charging violations of theNevada Gaming Control Act and State Gaming Control Board and Nevada GamingCommission Regulations.  The complaintcontained three counts, each carrying a penalty of up to $100,000.  Two of the counts were dismissed.  Subsequent to September 30, 2004, the Companysettled the remaining count and agreed to pay a $100,000 penalty to the NevadaGaming Commission.

 

5.                                       CONSTRUCTIONCOMMITMENT

 

DuringApril 2004, the Company entered into various agreements to install newtelevisions in the guest hotel rooms. Total costs of the project are estimated to be $1.9 million of which$0.9 million has been paid in cash as of September 30, 2004.

 

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

 

The following discussion should be read in conjunction with, and isqualified in its entirety by, the Company’s financial statements, including thenotes thereto, and the other financial information appearing elsewhere hereinand the Annual Report to Shareholders on Form 10-K for the year endedDecember 31, 2003, which may be obtained upon request from the Company.

 

SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS

 

This document includes various “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, andSections 21E of the Securities Exchange Act of 1934, as amended, whichrepresent the Company’s expectations or beliefs concerning future events.  Statements containing expressions such as “believes,”“anticipates” or “expects” used in our press releases and periodic reports onForms 10-K and 10-Q filed with the Securities and Exchange Commission areintended to identify forward-looking statements.  All forward-looking statements involve risksand uncertainties. Although we believe our expectations are based uponreasonable assumptions within the bounds of our knowledge of our business andoperations, there can be no assurances that actual results will not materiallydiffer from expected results. We caution that these and similar statementsincluded in this report and in previously filed periodic reports, includingreports filed on Forms 10-K and 10-Q, are further qualified by importantfactors that could cause actual results to differ materially from those in theforward-looking statements.  Such factorsinclude, without limitation, the following: increased competition in existing markets or the opening of new gamingjurisdictions; a decline in the public acceptance of gaming; the limitation,conditioning or suspension of any of our gaming licenses; increases in or newtaxes imposed on gaming revenues or gaming devices; a finding of unsuitabilityby regulatory authorities with respect to our officers, directors or keyemployees; loss or retirement of key executives; significant increases in fuelor transportation prices; adverse economic conditions in our key markets;severe and unusual weather in our key markets; and adverse results ofsignificant litigation matters.  Readersare cautioned not to place undue reliance on forward-looking statements, whichspeak only as of the date thereof.  Weexpressly disclaim any obligation or undertaking to disseminate any updates orrevisions to any forward-looking statement contained in this report, includingto reflect any change in our expectations with regard to that forward-lookingstatement or any change in events, conditions or circumstances on which thatforward-looking statement is based.  Formore information regarding risks inherent in an investment in the Company, seethe section ”Business — Risk Factors” in our Annual Report to Shareholderson Form 10-K filed with the SEC on March 30, 2004.

 

OVERVIEW

 

Our solebusiness is the operation of the Hard Rock Hotel and Casino in Las Vegas, NV.

 

RESULTSOF OPERATIONS

QUARTERENDED SEPTEMBER 30, 2004 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2003

 

NETREVENUES.  Net revenues increased 6% for the quarter endedSeptember 30, 2004 to $39.6 million compared to $37.2 millionfor the quarter ended September 30, 2003. The $2.4 million increase in net revenues was primarilyattributable to a $2.4 million or a 20% increase in food and beverage revenue,a $1.3 million or 16% increase in hotel revenue and a $0.2 million or 11%increase in other revenues.  Theseincreases in revenue were partially offset by a $1.1 million or 7%decrease in casino revenue, a $0.3 million or 14% decrease in retail revenueand a $0.2 million or 7% increase in promotional allowances related to itemsfurnished to customers on a complimentary basis.

 

CASINOREVENUES.  The $1.1 million decrease in casino revenues wasprimarily due to a $0.8 million or 7% decrease in table games revenues, a$0.2 million or 5% increase in slot machine revenues and a $0.1 million or30% decrease in Race and sports book revenue. The decrease in table games revenues was due to a decrease in tablegames drop of $6.4 million or 8% to $70.7 million from $77.1million.  Table games hold percentageincreased 0.2 percentage points to 14.0% from 13.8%.  The average number of table games inoperations remained constant at 91.  Thenet result of these changes in drop and hold percentage was a decrease in winper table game per day to $1,180 from $1,274, a decrease of $94 or 7%.  We have historically reported table gameshold percentage using the gross method, while casinos on the Strip report holdpercentage using the net method (which reduces the table game drop by markerrepayments made in the gaming pit area). For the purpose of comparison to properties on the Strip, our net hold percentagefor the quarter ended September 30, 2004 was 16.0% compared to 16.1% forthe quarter ended September 30, 2003. The decrease in slot machine revenues was due to a decrease in slotmachine handle partially offset by an increase in slot machine holdpercentage.    Slot machine handle decreased$6.8 million or 8% to $78.6 million from $85.4 million.  Slot machine hold percentage increased 0.2percentage points to 5.2% from 5.0%.  Theaverage number of slot machines in operation decreased to 546 from 558, adecrease of 12 machines or 2%.  The netresult of these changes in handle, hold percentage and average number of slotmachines in operation was an increase in win per slot machine per day to $82from $84, an increase of $2 or 2%.

 

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HOTEL REVENUES.  The$1.3 million increase in hotel revenues to $9.3 million was primarilydue to an increase in average daily rate (“ADR”) to $154 from $133.  Hotel occupancy increased slightly to 96.9%from 96.8% between periods.

 

FOOD ANDBEVERAGE REVENUES.  The $2.4 million increase in food andbeverage revenues was due to food revenues increasing by approximately $0.4million and beverage revenues increasing by approximately$2.0 million.  Food revenues increaseddue primarily to a $0.1 million increase in Banquet food revenue, a$0.1 million increase in Simon Kitchen and Bar, a $0.1 millionincrease in Mr. Lucky’s and a $0.1 million increase in the Beach Club.  Every food outlet had an increase in revenueyear over year.  Beverage revenuesincreased due primarily to a $1.4 million increase in Body English whichis our new club replacing Baby’s, a $0.4 million increase in Beach ClubBar, a $0.1 million increase in Casino Bars, a $0.1 million increasein Sports Deluxe and a $0.1 million increase in Banquet Bar.  These increases in beverage revenues werepartially offset by a decrease of $0.2 million in the Joint Bar.

 

RETAILREVENUES.  We believe the $0.3 million decrease in retailrevenues was due in part to continued general market decline in the themedmerchandise segment and the addition of other retail operations in Las Vegas.

 

OTHERINCOME.  Other income increased $0.2 million primarily due to a$0.1 million increase in each of Rock Spa, Love Jones and the BeachClub.  These increases were partiallyoffset by a $0.1 million decrease in other sales.

 

PROMOTIONALALLOWANCES.  Promotional allowances increased as a percentage ofcasino revenues to 21% from 18%.  Theincrease in promotional expense is due to additional marketing expensesassociated with the opening of our new club called Body English.

 

CASINOEXPENSES.  Casino expenses decreased $0.2 million or 2% to$8.1 million.  The decrease wasprimarily due to a $0.4 million decrease in bad debt expenses related topotentially uncollectible credit extended to casino customers, a $0.1 milliondecrease in gaming taxes and a $0.1 million decrease in customerpromotions.  These decreases were offsetpartially by a $0.2 million increase in payroll and related expenses, a$0.1 million increase in discounts and a $0.1 million increase in contractservices.  The Company’s provision andallowance for doubtful accounts are based on estimates by management of thecollectability of the receivable balances at each period end.  Management’s estimates consider, among otherfactors, the age of the receivables, the type or source of the receivables andthe results of collection efforts to date, especially with regard tosignificant accounts.  Casino expenses asa percentage of casino revenues increased to 57% from 54%, an increase of 3percentage points between comparative periods due a decrease in table gamesdrop without a corresponding decrease in payroll expense.

 

HOTELEXPENSES.  Hotel expenses in relation to hotel revenues, prior toreclassifying the cost of complimentaries to casino expense or departmentcomplimentaries to promotional allowances, remained constant at 30%.  Hotel expenses increased $0.3 million to $2.3million due to the increase in quality of our hotel rooms and services providedto our guests.  This focus on quality hasmade it possible for us to increase the hotel ADR by 16% in the quarter endedSeptember 30, 2004 compared to the quarter ended September 30, 2003.

 

FOODAND BEVERAGE COSTS AND EXPENSES.  Food and beverage costs andexpenses in relation to food and beverage revenues, prior to reclassifying thecost of complimentaries to casino expense or department complimentaries topromotional allowances decreased to 59% from 60% in the prior year period dueto the opening of Body English Nightclub which runs at a much higher profitmargin than other food and beverage outlets.

 

RETAILCOSTS AND EXPENSES.  Retail costs and expenses in relation to retailrevenues, prior to reclassifying the cost of complimentaries to casino expenseor department complimentaries to promotional allowances, increased to 50% from47% due to a shift in merchandise being sold from logo tee shirts to brand namemerchandise.

 

OTHERCOSTS AND EXPENSES.  Other costs and expenses in relation to otherincome increased to 52% from 51% in the prior year period due to a decrease inchip float taken to income.

 

MARKETING,GENERAL AND ADMINISTRATIVE.  Marketing, general and administrativeexpenses in relation to gross revenues decreased to 18% from 19% as theseexpenses remained constant while gross revenues increased.  Entertainment expense decreased by $0.6million.  This decrease was offset by anincrease in payroll and related expenses of $0.4 million, a $0.1 millionincrease in legal and guest claims and a $0.1 million increase in contract services.

 

DEPRECIATIONAND AMORTIZATION.  Depreciation and amortization decreased to$2.4 million from $3.0 million due to a large number of five year assetsbeing fully depreciated from our expansion in 1999.

 

INTERESTEXPENSE.  Interest expense decreased to $4.7 million from$4.9 million, a decrease of $0.2 million or 5%.

 

INCOME TAXES.  The Company didnot have income tax expense during the quarters ended September 30, 2004 and2003 due to 

 

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being able to offset 100% ofits income with net operating loss carryforwards (“NOL”) from previous periodsagainst which a valuation allowance has been placed. 

 

NETINCOME APPLICABLE TO COMMON SHAREHOLDERS.  Net income applicable tocommon shareholders was $3.4 million compared to net income of$1.9 million during the prior year period. The increase in net results for common shareholders was due to thefactors described above.

 

NINE-MONTHSENDED SEPTEMBER 30, 2004 COMPARED TO NINE-MONTHS ENDED SEPTEMBER 30,2003

 

NETREVENUES.  Net revenues increased 9% for the nine-month period endedSeptember 30, 2004 to $115.3 million compared to $106.1 millionfor the nine-month period ended September 30, 2003.  The $9.2 million increase in netrevenues was primarily attributable to a $1.0 million or 2% increase incasino revenue, a $4.2 million or 18% increase in hotel revenue, a $4.1million or an 11% increase in food and beverage revenue and a $0.8 million or14% increase in other revenues.  Theseincreases in revenue were partially offset by a $0.5 million or 7%decrease in retail revenue and a $0.4 million or 5% increase in promotionalallowances related to items furnished to customers on a complimentary basis.

 

CASINOREVENUES.  The $1.0 million increase in casino revenues wasprimarily due to a $1.0 million or 4% increase in table games revenuespartially offset by a $0.1 million or 10% decrease in race and sports bookrevenue.  The increase in table gamesrevenues was due to an increase in table games hold percentage and an increasein table games drop.  Table games holdpercentage increased 0.4 percentage points to 13.4% from 13.0%.  Table games drop increased $1.0 millionor less than 1% to $226.6 million from $225.6 million.  The average number of table games inoperations increased to 92 from 91, an increase of 1 table or 1%.  The net result of these changes in drop, holdpercentage and average number of table games in operation was an increase inwin per table game per day to $1,208 from $1,184, an increase of $24 or 2%.  We have historically reported table games holdpercentage using the gross method, while casinos on the Strip report holdpercentage using the net method (which reduces the table game drop by markerrepayments made in the gaming pit area). For the purpose of comparison to properties on the Strip, our net holdpercentage for the nine-month period ended September 30, 2004 was 15.6%compared to 14.9% for the nine-month period ended September 30, 2003.  Slot machine revenues remained constant inthe nine-month periods ended September 30, 2004 and September 30, 2003.  Slot machine handle decreased$16.3 million or 6% to $251.9 million from $268.2 million.  The decrease in slot machine handle wasoffset by an increase in slot machine hold percentage.  Slot machine hold percentage increased 0.3percentage points to 5.1% from 4.8%.  Theaverage number of slot machines in operation decreased to 550 from 560, adecrease of 10 machines or 2%.  The netresult of these changes in handle, hold percentage and average number of slotmachines in operation was an increase in win per slot machine per day to $85from $83, an increase of $2 or 2%.

 

HOTELREVENUES.  The $4.2 million increase in hotel revenues to$27.3 million was primarily due to an increase in average daily rate (“ADR”)to $155 from $130.  Hotel occupancydecreased slightly to 95.3% from 95.6% between periods.

 

FOODAND BEVERAGE REVENUES.  The $4.1 million increase in food andbeverage revenues was due to food revenues increasing by approximately $1.6million and beverage revenues increasing by approximately$2.5 million.  Food revenuesincreased due primarily to a $0.5 million increase in Simon Kitchen andBar, a $0.3 million increase in Pink Taco, a $0.2 million increase in bothMr. Lucky’s and Banquet Food and $0.1 million increases in each of Starbuck’s,Beach Club Food, Room Service and AJ’s Steakhouse.  Every food outlet had an increase in revenueyear over year.  Beverage revenuesincreased due primarily to a $0.7 million increase in Beach Club Bar $0.5 millionincrease in Body English which is our new club replacing Baby’s, a$0.6 million increase in Casino Bars, a $0.2 million increase in eachof Sports Deluxe, Pink Taco and Simon Kitchen and Bar, and a $0.1 millionincrease in both AJ’s Steakhouse and Room Service.  These increases in beverage revenues werepartially offset by a decrease of $0.1 million in the Joint Bar.

 

RETAILREVENUES.  We believe the $0.5 million decrease in retailrevenues was due in part to continued general market decline in the themedmerchandise segment and the addition of other retail operations in Las Vegas.

 

OTHERINCOME.  Other income increased $0.8 million primarily due to a$0.4 million increase in Love Jones and a $0.2 million increase inboth the Rock Spa and the Beach Club.

 

PROMOTIONALALLOWANCES.  Promotional allowances increased as a percentage ofcasino revenues to 20% from 19%.  Theincrease in promotional expense was primarily due to additional marketingexpenses associated with the opening of our new club called Body English.

 

CASINOEXPENSES.  Casino expenses increased $0.6 million or 2% to$25.6 million.  The increase wasprimarily due to a $0.5 million increase in payroll and related expenses,a $0.1 million increase in tickets given to customers for the Joint, a $0.1million

 

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increase in food and beveragecomps redeemed in outlets that are not owed by the Company, $0.1 millionincrease in customer reimbursed travel and a $0.1 million increase inapparel.  These increases were offsetpartially by a $0.2 million decrease in bad debt expense and a $0.1million decrease in equipment rental. The Company’s provision and allowance for doubtful accounts are based onestimates by management of the collectability of the receivable balances ateach period end.  Management’s estimatesconsider, among other factors, the age of the receivables, the type or sourceof the receivables and the results of collection efforts to date, especially withregard to significant accounts.  Casinoexpenses as a percentage of casino revenues remained constant at 58%.

 

HOTELEXPENSES.  Hotel expenses in relation to hotel revenues, prior toreclassifying the cost of complimentaries to casino expense or departmentcomplimentaries to promotional allowances, decreased to 28% from 29% in theprior year due primarily to a higher ADR while total operating expenses priorto reclassifying complimentaries to casino expense increased approximately$0.9 million primarily related to a $0.3 million increase in laborand related expenses, a $0.5 million increase in laundry and amenities expensesdue to upgrading their quality and a $0.1 million increase in professionalservices.

 

FOODAND BEVERAGE COSTS AND EXPENSES.  Food and beverage costs andexpenses in relation to food and beverage revenues, prior to reclassifying thecost of complimentaries to casino expense or department complimentaries topromotional allowances, remained constant at 57%.

 

RETAILCOSTS AND EXPENSES.  Retail costs and expenses in relation to retailrevenues, prior to reclassifying the cost of complimentaries to casino expenseor department complimentaries to promotional allowances, increased to 48% from46% in the prior year due to a shift in merchandise being sold from logo teeshirts to brand name merchandise.

 

OTHERCOSTS AND EXPENSES.  Other costs and expenses in relation to otherincome remained constant at 51%.

 

MARKETING,GENERAL AND ADMINISTRATIVE.  Marketing, general and administrativeexpenses in relation to gross revenues increased to 19% from 18%.  The $3.6 million increase in theseexpenses was primarily due to a $1.2 million increase in customer promotions, a$0.3 million increase in entertainment costs associated with the Joint, a $1.4 millionincrease in payroll and related expenses, including management incentives and1999 Performance Awards Plan expenses, a $0.3 million increase in guest claimsand legal expense, a $0.2 million increase in insurance costs, a $0.1 millionincrease in contract services, a $0.1 million increase in donations and a $0.2million increase in taxes.  These costswere slightly offset by a decrease of $0.2 in miscellaneous expense due toseverance that was accrued for in the prior year.

 

DEPRECIATIONAND AMORTIZATION.  Depreciation and amortization expense decreased to$8.4 million from $8.8 million due to a large number of five yearassets being fully depreciated from our expansion in 1999.

 

INTERESTEXPENSE.  Interest expense increased to $14.3 million from$12.0 million, an increase of $2.3 million or 19%.  This increase was primarily due to theincrease in outstanding borrowings, including debt issued to pay$15.0 million of accrued dividends on the Company’s preferred stock andinterest on the $50.0 million of qualified subordinated debt issued inexchange for the Company’s outstanding preferred stock and remaining accrueddividends during May 2003.

 

LOSS ON EARLY EXTINGUISHMENT OF DEBT.  Loss on earlyextinguishments of debt is related to the $3.0 million premium paid to theholders of the Company’s 9 1⁄4% Notes due 2005 (the “Notes”), which were tenderedor called during the three-month period ended June 30, 2003, and due to a$1.3 million write-off of unamortized deferred debt issuance costs relatedto the tendered and called Notes.

 

LOSS ON DISPOSAL OF ASSETS. During May 2004, the Company opened a new nightclub called BodyEnglish.  This club replaced Baby’sNightclub.  The loss included approximately$2.6 million of building improvement and equipment costs.

 

INCOME TAXES.  The Company hasrecorded a tax benefit of $0.1 million in the nine months ended September 30,2003 due to an adjustment of its deferred tax assets.  The Company did not have any income taxexpense during the nine months ended September 30, 2004 due to being able tooffset 100% of its income with net operating loss carryforwards from previousperiods against which a valuation allowance has been placed.

 

NETINCOME APPLICABLE TO COMMON SHAREHOLDERS.  Net income applicable tocommon shareholders was $2.8 million compared to net income of $0.2 millionduring the prior year period.    Theincrease in net results for common shareholders was due to the factorsdescribed above in addition to a $2.3 million decrease in preferred stockdividends.  Preferred dividends decreaseddue to the replacement of the preferred stock and remaining accrued dividendswith qualified subordinated debt during May 2003.

 

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LIQUIDITYAND CAPITAL RESOURCES

 

For the nine-month periodended September 30, 2004 our principal sources of funds were cash on-handat December 31, 2003, and cash provided by operating activities of $20.7million.  The amount of cash provided byoperating activities primarily included net income of $2.8 million,depreciation and amortization of $8.4 million, provision for losses on accountsreceivable of less than $0.1 million, amortization of loan fees of $0.4million, interest paid in kind of $3.0 million, loss on disposal of assetsof $2.6 million and net changes in operating assets and liabilities of $3.5million.  Other sources and uses of fundswere capital expenditures of $13.7 million, a decrease in construction payablesof $0.9 million and combined debt issuance costs and payments on debt of $0.3million.  As a result, as ofSeptember 30, 2004, we had cash and cash equivalents of $16.8 million.

 

During January 2004, the Company entered into various agreementsto remodel and expand its nightclub formerly called Baby’s.  Total costs of the remodel and expansion were$7.2 million all of which has been paid as of September 30, 2004.

 

During March 2004, the Company entered into various agreements toremodel its Race and Sports Book.  Totalcosts of the remodel were approximately $0.8 million all of which has been paidas of September 30, 2004.

 

During April 2004, the Company entered into various agreements toinstall new televisions in the guest hotel rooms.  Total costs of the project are estimated tobe $1.9 million of which $0.9 million has been paid in cash as ofSeptember 30, 2004.

 

Webelieve that our current cash balances and cash flow from operations and othersources of cash including the available borrowings under our $20.0 millionRevolving Credit Facility ($20.0 million as of September 30, 2004) will besufficient to provide operating and investing liquidity during the next 12months.  We may, however, need to raiseadditional funds prior to October 1, 2005. Our ability to raise additional funds is limited by restrictions on ourfinancing activities under our Facility and the 2013 Notes.  We cannot be certain that additionalfinancing will be available to us on favorable terms when required, if at all.

 

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013 Notes are secured by a securityinterest in substantially all of the Company’s existing and future assets,other than licenses which may not be pledged under applicable law.  The 2013 Notes are contractually subordinated in right of payment to allindebtedness incurred pursuant to the Facility. The liens and security interests securing the obligations of the Companyunder the 2013 Notes are contractually subordinated to the liens securing theobligations of the Company under the Facility and except for permittedsecured purchase money indebtedness.  The2013 Notes are subject to redemption at the option of the Company, in whole orin part, at any time on or after June 1, 2008, at a premium to the faceamount ($140 million) that decreases on each subsequent anniversary date, plusaccrued interest to the date of redemption. The 2013 Notes contain covenants restricting or limiting the ability ofthe Company to, among other things, pay dividends, create liens or otherencumbrances, incur additional indebtedness, issue certain preferred stock,sell or otherwise dispose of a portion of its assets, make acquisitions ormerge or consolidate with another entity and enter into transactions withaffiliates.  The Company was in compliance withthese covenants as of September 30, 2004.

 

Interest on the Facility accrues on all individual borrowings at aninterest rate determined at the option of the Company, at either the LIBORIndex plus an applicable margin (not to exceed 3.5% (applicable margin was3.00% at September 30, 2004) and aggregating 4.4% at September 30,2004), or the Base Rate, defined as the higher of the Federal Funds Rate plus0.5%, or the reference rate, as defined, plus an applicable margin (not toexceed 2.25%).  The Company chose the LIBORIndex for all of its borrowings outstanding at September 30, 2004.  These margins are dependent upon theCompany’s total debt to EBITDA ratio, as defined.  Interest accrued on the Base Rate borrowingsis due monthly, up to the maturity date, while interest on LIBOR borrowings isdue quarterly up to the maturity date. The Facility is secured by substantially all of the Company’s propertyat the Las Vegas site.  The Facilitycontains certain covenants including, among other things, financial covenants,limitations on the Company from disposing of capital stock, entering intomergers and certain acquisitions, incurring liens or indebtedness, issuingdividends on stock, and entering into transactions with affiliates.  The Company was in compliance with these covenantsas of September 30, 2004.

 

Interest on the Junior Subordinated 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 any semi-annual interest payment in cashbe equal to the lesser of (x) 50% of the amount of interest accrued on theJunior Notes since the most recent interest payment date and (y) the amount ofinterest that the Company is permitted to pay in cash without causing a defaultunder the 2013 Notes or the Facility. For interest payments payable in cash, interest accrues at a rate perannum equal to 9.875%, and for interest payments payable in kind, interestaccrues at a rate per annum equal to 10.50% and increases the principal amountof the Junior Subordinated Notes.  OnJanuary 15, 2004, the Company paid in cash $1.5 million of interest on theJunior Subordinated Notes.  Thisrepresents 50% of the accrued interest at 9.875% due as of December 31,2003.  The remaining $1.6 million ofaccrued interest was paid in kind at a rate of 10.50%.  On July 15, 2004, the Company paid incash $1.4 million of interest on the Junior Subordinated Notes.  This represents 50% of the accrued interestat 9.875% due as of June 30, 2004. The remaining $1.4 million of accrued interest was paid in kind ata rate of 10.50%.  The Junior Notes arecontractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.

 

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The Junior Notes are contractually subordinated to the 2013 Notes andthe Facility and any other senior debt of the Company.  The Junior Notes mature on January 15,2014 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 contain covenantsrestricting the Company’s ability to, among other things, sell or otherwisedispose of its assets, pay dividends, incur additional indebtedness, make acquisitionsor merge or consolidate with another entity and enter into transactions withaffiliates.  The Company was incompliance with these covenants as of September 30, 2004.

 

DuringJanuary 2004, the Nevada Gaming Commission served us with a complaint fordisciplinary action pursuant to NRS 463.310(2) and NRS 463.312charging violations of the Nevada Gaming Control Act and State Gaming ControlBoard and Nevada Gaming Commission Regulations. The complaint contained three counts, each carrying a penalty of up to$100,000.  Two of the counts weredismissed.  Subsequent to September 30,2004, the Company settled the remaining count and agreed to pay a $100,000penalty to the Nevada Gaming Commission.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements that have, or are reasonablylikely to have, a current or future effect on our financial condition, changesin financial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that are material.  Currently, we have no guarantees, such asperformance guarantees, keep-well agreements or indemnity.  We are not engaged in derivatives.

 

**Contractual Obligations and Commitments**

 

Wehave various contractual obligations which we record as liabilities in ourconsolidated financial statements.  Wealso enter into other purchase commitments and other executory contracts thatare not recognized as liabilities until services are performed or goods arereceived.  Additionally, we enter intocontracts for goods and services such as food, inventory andentertainment.  Such liabilities arerecorded as liabilities when so incurred and we expect that such contracts willgenerate revenue in excess of such liabilities. As of September 30, 2004, there have been no material changes tothe table of contractual obligations and commitments in our most recently filedForm 10-K except as described above related to television installation.

 

Wemade cash interest payments on long-term debt, including capitalized interest,of $12.7 million and $8.3 million in the nine month periods endedSeptember 30, 2004 and 2003, respectively. We anticipate our cash interest payments for the remainder of 2004 to bein excess of these levels due to the timing of payments.  We have not made significant cash tax paymentsduring the nine month periods ended September 30, 2004 and 2003 and, dueto available net operating loss and AMT tax credit carryforwards, we do notanticipate making significant cash tax payments in the remainder of 2004.  Total supervisory fee expenses for theseservices for the nine month periods ended September 30, 2004 and 2003amounted to $2.3 million and $2.2 million, respectively, under the Company’sAmended and Restated Supervisory Agreement with Peter Morton.  The supervisory fee is equal to two percentof annual gross revenues (as defined in the Supervisory Agreement), net ofcomplimentaries for each year.

 

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

 

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

 

Therehave been no changes in the Company’s critical accounting policies from thosedescribed in the Company’s most recently filed Form 10-K.

 

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Item 3.                                                     Quantitative and Qualitative Disclosures AboutMarket Risk

 

Marketrisks relating to our operations result primarily from changes in short-termLIBOR interest rates.  We do not have anyforeign exchange or other significant market risk.  We did not have any derivative financialinstruments at September 30, 2004.

 

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

 

We had $20.0 million in variable rate debtoutstanding at September 30, 2004 and December 31, 2003.  Based upon these variable rate debt levels, ahypothetical 10% adverse change in the effective interest rate (approximately a44 basis point increase) would increase interest expense by approximately $0.1million on an annual basis, and likewise decrease our earnings and cashflows.  We cannot predict marketfluctuations in interest rates and their impact on our variable rate debt, norcan there be any assurance that fixed rate long-term debt will be available tous at favorable rates, if at all. Consequently, future results may differ materially from the estimatedadverse changes discussed above.

 

Thefair value of the Company’s $140 million of 8.875% Second Lien Notes, which aredue in 2013 and are publicly traded, approximated $152.6 million atSeptember 30, 2004 based on published bid prices.  The fair value of the Company’s $50.0 millionof Junior Notes cannot be estimated as a substantial portion were held by Mr.Morton or affiliates of Mr. Morton and there was no established market norpublished bid prices.

 

Item 4.  Controls and Procedures

 

(a)  Disclosure Controls and Procedures.  The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that, as of the end of such period, theCompany’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 FinancialReporting.  There have not been any changesin the Company’s internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during thefiscal quarter to which this report relates that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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PART II OTHERINFORMATION

 

Item 1.                 Legal Proceedings

 

During January 2004, the Nevada Gaming Commission served us with acomplaint for disciplinary action pursuant to NRS 463.310(2) and NRS 463.312charging violations of the Nevada Gaming Control Act and State Gaming ControlBoard and Nevada Gaming Commission Regulations. The complaint contains three counts each carrying a penalty of up to$100,000.  Two of the counts weredismissed.  Subsequent to September 30,2004, the Company settled the remaining count and agreed to pay a $100,000penalty to the Nevada Gaming Commission.

 

Item 6.                 Exhibits

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                       |
| 10.                 |       | MATERIAL  CONTRACTS.                                                                                                                                                                       |
|                |       |                                                                                                                                                                                       |
| 10.1                |       | Registration  Rights Agreement, dated as of September 17, 2004, between the Company  and Bank of America Securities LLC.                                                              |
|                |       |                                                                                                                                                                                       |
| 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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SIGNATURES

 

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

 

 
|                               | HARD ROCK HOTEL, INC.                                      |
|------------------------------------|------------------------------------------------------------|
|                               |                                                       |
| Date:  November 15, 2004 | /s/ JAMES D. BOWEN                                         |   |
|                               | James D. Bowen                                             |
|                               | CHIEF FINANCIAL OFFICER                                    |
|                               | (PRINCIPAL FINANCIAL OFFICER AND DULY  AUTHORIZED OFFICER) |

 

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Exhibit Index

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                       |
| 10.                 |       | MATERIAL  CONTRACTS.                                                                                                                                                                       |
|                |       |                                                                                                                                                                                       |
| 10.1                |       | Registration  Rights Agreement, dated as of September 17, 2004, between the Company  and Bank of America Securities LLC.                                                              |
|                |       |                                                                                                                                                                                       |
| 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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