**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For thequarterly period ended: March 31, 2002**

 

**OR**

 

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

 

**For thetransition periodfrom           to           **

 

**Commissionfile number 333-53211**

 

**Hard Rock Hotel, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

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

 

Common Stock outstandingby class as of April 14, 2001

 

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

 

 

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HARD ROCK HOTEL, INC.

 

INDEX

 
| Part I   | FINANCIAL INFORMATION                                                                        |
|----------|----------------------------------------------------------------------------------------------|
|     |                                                                                         |
| Item 1.  | Financial Statements  (unaudited)                                                            |
|     |                                                                                         |
|     | Condensed  Balance Sheets as of March 31, 2002 and December 31, 2001                    |
|     |                                                                                         |
|     | Condensed Statements  of Operations for the three-month period ended March 31, 2002 and 2001 |
|     |                                                                                         |
|     | Condensed Statements  of Cash Flows for the three-month period ended March 31, 2002 and 2001 |
|     |                                                                                         |
|     | 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                                  |
|     |                                                                                         |
| PART  II | OTHER  INFORMATION                                                                           |
|     |                                                                                         |
| Item  1. | Legal  Proceedings                                                                           |
|     |                                                                                         |
| Item 6:  | Exhibits and  Reports on Form 8-K                                                            |
|     |                                                                                         |
|     | (a)  Exhibits                                                                           |
|     |                                                                                         |
|     | (b)  Reports on Form 8-K                                                                |
|          |                                                                                              |  |  |

 

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PartI                                                                    FINANCIALINFORMATION

 

Item1.                                                     FinancialStatements

 

HARD ROCK HOTEL, INC.

CONDENSED BALANCE SHEETS(unaudited)

(in thousands, exceptshare amounts)

ASSETS

 
|                                                                                                                                        |   | **March 31,****2002** |    | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|-------------------------|--------|
|                                                                                                                                        |   |                  |    |                    |   |
| Current assets:                                                                                                                             |   |                  |    |                    |   |
| Cash and cash  equivalents                                                                                                                  |   | $                     | 10,579  |                    | $      | 8,591 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,577 and $1,904 as of  March 31, 2002 and December 31, 2001, respectively |   | 4,247                 |    | 5,445                   |   |
| Inventories                                                                                                                                 |   | 1,370                 |    | 1,640                   |   |
| Prepaid expenses  and other current assets                                                                                                  |   | 853                   |    | 358                     |   |
| Deferred income  taxes                                                                                                                      |   | 881                   |    | 881                     |   |
| Total current  assets                                                                                                                       |   | 17,930                |    | 16,915                  |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Property and  equipment, net of accumulated depreciation and amortization                                                                   |   | 167,520               |    | 169,357                 |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Other assets                                                                                                                                |   | 3,291                 |    | 3,503                   |   |
|                                                                                                                                        |   |                  |    |                    |   |
| TOTAL ASSETS                                                                                                                                |   | $                     | 188,741 |                    | $      | 189,775 |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Current  liabilities:                                                                                                                       |   |                  |    |                    |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Accounts payable                                                                                                                            |   | $                     | 2,627   |                    | $      | 2,160 |   |
| Construction related  payables                                                                                                              |   | —                |    | 2,024                   |   |
| Related party  payable                                                                                                                      |   | 248                   |    | 300                     |   |
| Accrued expenses                                                                                                                            |   | 10,064                |    | 11,419                  |   |
| Interest payable                                                                                                                            |   | 5,726                 |    | 2,963                   |   |
| Current portion  of long-term debt                                                                                                          |   | 561                   |    | 424                     |   |
| Total current  liabilities                                                                                                                  |   | 19,226                |    | 19,290                  |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Deferred income  taxes                                                                                                                      |   | 678                   |    | 678                     |   |
| Long-term debt                                                                                                                              |   | 145,767               |    | 148,259                 |   |
| Total long-term  liabilities                                                                                                                |   | 146,445               |    | 148,937                 |   |
| Total  liabilities                                                                                                                          |   | 165,671               |    | 168,227                 |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Commitments and  contingencies                                                                                                              |   |                  |    |                    |   |
|                                                                                                                                        |   |                  |    |                    |   |
| Preferred stock,  9 1⁄4% Series A Cumulative, no par value, redeemable, 40,000 shares authorized,  28,000 shares issued and outstanding  |   | 34,946                |    | 34,167                  |   |
| Preferred stock,  9 1⁄4% Series B Cumulative, no par value, redeemable, one share authorized,  issued and outstanding                    |   | 23,615                |    | 23,088                  |   |
|                                                                                                                                        |   |                  |    |                    |   |
| 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                                                                                                                        |   | (42,999               | )       | (43,215                 | )      |
| Total  shareholders’ deficiency                                                                                                        |   | (35,491               | )       | (35,707                 | )      |
|                                                                                                                                        |   |                  |    |                    |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ DEFICIENCY                                                                                        |   | $                     | 188,741 |                    | $      | 189,775 |   |

 

*Theaccompanying notes are an integral part of these statements*

 

3

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OFOPERATIONS

(in thousands, exceptshare and per share amounts)

(unaudited)

 
|                                                  |   | **Three  Months Ended  March 31** |       |
|-------------------------------------------------------|--------|-----------------------------------|------------|
|                                                  |   | **2002**                          |       | **2001** |   |
| Revenue:                                              |   |                              |       |   |   |
| Casino                                                |   | $                                 | 13,393     |   | $ | 12,580 |   |
| Lodging                                               |   | 6,613                             |       | 7,175 |   |
| Food and  beverage                                    |   | 9,960                             |       | 9,930 |   |
| Retail                                                |   | 2,241                             |       | 2,304 |   |
| Other income                                          |   | 1,652                             |       | 1,735 |   |
| Gross revenues                                        |   | 33,859                            |       | 33,724 |   |
| Less:  promotional allowances                    |   | (2,543                            | )          | (2,831 | ) |
| Net revenues                                          |   | 31,316                            |       | 30,893 |   |
|                                                  |   |                              |       |   |   |
| Costs and  expenses:                                  |   |                              |       |   |   |
| Casino                                                |   | 7,812                             |       | 7,440 |   |
| Lodging                                               |   | 1,734                             |       | 1,716 |   |
| Food and  beverage                                    |   | 5,030                             |       | 5,035 |   |
| Retail                                                |   | 1,009                             |       | 1,032 |   |
| Other                                                 |   | 871                               |       | 813 |   |
| Marketing                                             |   | 1,939                             |       | 1,363 |   |
| Related party  expenses                               |   | 890                               |       | 881 |   |
| General and  administrative                           |   | 4,133                             |       | 4,186 |   |
| Depreciation and  amortization                        |   | 2,913                             |       | 2,978 |   |
| Total costs and  expenses                             |   | 26,331                            |       | 25,444 |   |
|                                                  |   |                              |       |   |   |
| Income from  operations                               |   | 4,985                             |       | 5,449 |   |
|                                                  |   |                              |       |   |   |
| Other expense:                                        |   |                              |       |   |   |
| Interest  expense, net                                |   | (3,375                            | )          | (4,208 | ) |
| Other, net                                            |   | (88                               | )          | — |   |
|                                                  |   |                              |       |   |   |
| Income before  provision for income taxes             |   | 1,522                             |       | 1,241 |   |
|                                                  |   |                              |       |   |   |
| Income tax  (provision) benefit                       |   | —                            |       | — |   |
| NET INCOME                                            |   | 1,522                             |       | 1,241 |   |
|                                                  |   |                              |       |   |   |
| Preferred stock  dividends                            |   | (1,306                            | )          | (1,184 | ) |
| Income  applicable to common shareholders             |   | $                                 | 216        |   | $ | 57 |   |
|                                                  |   |                              |       |   |   |
| BASIC AND  DILUTED NET LOSS PER SHARE:                |   |                              | ** ** |   | ** ** |
|                                                  |   |                              |       |   |   |
| Applicable to  common shareholders                    |   | $                                 | 2.84       |   | $ | 0.75 |   |
|                                                  |   |                              |       |   |   |
| Weighted average  number of common shares outstanding |   | 76,023                            |       | 76,023 |   |

 

*Theaccompanying notes are an integral part of these statements*

 

4

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HARD ROCK HOTEL, INC.

CONDENSED STATEMENTS OFCASH FLOWS

(in thousands, exceptsupplemental schedule)

(unaudited)

 
|                                                                                         |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                         |   | **2002**                           |   | **2001** |   |
| Cash flows from  operating activities:                                                       |   |                               |   |   |   |
| Net income                                                                                   |   | $                                  | 1,522  |   | $ | 1,241 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |   |                               |   |   |   |
| Depreciation and  amortization                                                               |   | 2,913                              |   | 2,978 |   |
| Provision for  losses on accounts receivable                                                 |   | (132                               | )      | 455 |   |
| Amortization of  loan fees                                                                   |   | 184                                |   | 396 |   |
| Loss on sales of  property and equipment                                                     |   | 88                                 |   | — |   |
| Changes in  operating assets and liabilities:                                                |   |                               |   |   |   |
| Accounts  receivable                                                                         |   | 1,330                              |   | (507 | ) |
| Inventories                                                                                  |   | 270                                |   | 288 |   |
| Prepaid expenses  and other current assets                                                   |   | (495                               | )      | 291 |   |
| Accounts payable                                                                             |   | 467                                |   | 352 |   |
| Related party  payable                                                                       |   | (52                                | )      | 49 |   |
| Accrued expenses                                                                             |   | (1,355                             | )      | (3,407 | ) |
| Interest payable                                                                             |   | 2,763                              |   | 2,766 |   |
| Net cash  provided by (used in) operating activities                                         |   | 7,503                              |   | 4,902 |   |
|                                                                                         |   |                               |   |   |   |
| Cash flow from  investing activities:                                                        |   |                               |   |   |   |
| Purchases of  property and equipment                                                         |   | (914                               | )      | (1,135 | ) |
| Proceeds  from sales of property and equipment                                               |   | 36                                 |   | — |   |
| Construction  payables                                                                       |   | (2,024                             | )      | (2,058 | ) |
| Decrease  (increase) in other assets                                                         |   | 28                                 |   | 384 |   |
| Net cash provided  by (used in) investing activities                                         |   | (2,874                             | )      | (2,809 | ) |
|                                                                                         |   |                               |   |   |   |
| Cash flows from  financing activities:                                                       |   |                               |   |   |   |
| Principal  payments on long-term debt                                                        |   | (2,641                             | )      | (1,000 | ) |
| Net cash  provided by (used in) financing activities                                         |   | (2,641                             | )      | (1,000 | ) |
|                                                                                         |   |                               |   |   |   |
| Net increase in  cash and cash equivalents                                                   |   | 1,988                              |   | 1,093 |   |
| Cash and cash  equivalents, beginning of period                                              |   | 8,591                              |   | 7,979 |   |
| Cash and cash  equivalents, end of period                                                    |   | $                                  | 10,579 |   | $ | 9,072 |   |
|                                                                                         |   |                               |   |   |   |
| Supplemental  disclosures of cash flow information:                                          |   |                               |   |   |   |
| Cash paid during  the period for interest                                                    |   | $                                  | 428    |   | $ | 1,047 |   |
| Cash paid  (received) during the period for income taxes, net                                |   | $                                  | — |   | $ | — |   |

 

*Theaccompanying notes are an integral part of these statements*

 

 

5

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Supplemental Schedule of Non-Cash Investing and Financing Activities:

 

The value of the 9 1/4% Series A Cumulative Preferred Stock increasedby approximately $779,000 and $707,000 in unpaid accrued dividends for thethree-month periods ended March 31, 2002 and 2001, respectively.

 

The value of the 9 1/4% Series B Cumulative Preferred Stock increasedby approximately $527,000 and $477,000 in unpaid accrued dividends for thethree-month periods ended March 31, 2002 and 2001, respectively.

 

The Company purchased $286,000 of equipment in exchange forindebtedness for the three-month period ended March 31, 2002.

 

 

6

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1.             BASIS OFPRESENTATION

 

**The accompanying unaudited financial statements of HardRock Hotel, Inc. (the “Company”) have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith instructions to Form 10-Q and Article 10 of Regulation S-X.   Accordingly, certain notes and otherinformation have been condensed or omitted from the interim financialstatements presented in this Quarterly Report on Form 10-Q and they do notinclude all information required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have beenincluded.  The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the amounts of revenues andexpenses during the reporting period. Actual results could differ from these estimates.  Operating results for the three-month periodended March 31, 2002 are not necessarily indicative of future financial resultsor the results that may be expected for the year ending December 31, 2002.  The unaudited interim financial statementscontained herein should be read in conjunction with the audited financialstatements and footnotes for the year ended December 31, 2001.  The Company has made certain financialstatement reclassifications for the 2001 financial statements in order toclassify amounts in a manner consistent with the 2002 financial statementswhich have had no effect upon net income.**

** **

2.             LONG-TERM DEBT

 

**In March 1998, the Companyoffered $120 million aggregate principal amount of its 9.25%, SeniorSubordinated Notes due in 2005 (the “Notes”). Concurrent with the execution of the Notes, the Company secured a seniorsecured reducing revolving line of credit under a new credit facility (the“Credit Facility”) through a group of banks. As of March 31, 2002, the Company had $120.0 million outstanding inNotes and $25.4 million outstanding on its Credit Facility.  In addition, the Company has financed certaingaming equipment with the respective manufacturers.  As of March 31, 2002, the Company had $0.9 million of gamingequipment financing outstanding.**

 

Notes

 

Intereston the Notes is payable on each April 1 and October 1.  The Notes are general unsecured obligationsof the Company, subordinated in right of payment to all existing and futuresenior indebtedness, including all borrowings under the Credit Facility.  The Notes are subject to redemption at theoption of the Company, in whole or in part, at any time on or afterApril 1, 2002, at a premium to the face amount ($120 million) whichdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The Notes containcovenants restricting or limiting the ability of the Company to, among otherthings, pay dividends, incur additional indebtedness, issue certain preferredstock and enter into transactions with affiliates.

 

7

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### Credit Facility

 

Effective June2000, the Company entered into an amendment with regard to the Credit Facilitywhereby, among other things the commitment amount available under the CreditFacility was reduced to $42.0 million, the commitment further reduces by $2.0million on the last day of each fiscal quarter commencing March 31, 2001,and also reduces, beginning September 30, 2001 and on each succeeding September30, by 50% of excess cash flow, as defined, for the then most recentlycompleted fiscal year.  Based on ourcalculations, we generated approximately $1.6 million excess cash flow asdefined for the year ended December 31, 2001. Accordingly, we expect the commitment will reduce by approximately thisamount on September 30, 2002.

 

Effective March2001, the Company entered into another amendment with regard to the CreditFacility whereby the $2.0 million quarterly commitment reduction was deferredto commence with the quarter ending September 30, 2001.

 

Effective December2001, the Company entered into another amendment with regard to the CreditFacility whereby the $2.0 million quarterly commitment reduction for thequarter ending December 31, 2001 was waived.

 

The totalcommitment under the Credit Facility as of March 31, 2002 was $38.0million.  The reduction provisions aboveshall terminate the date upon which the commitment available under the CreditFacility is reduced to $25.0 million. The Credit Facility expires on March 23, 2004.

 

The Credit 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 Credit Facility is secured bysubstantially all of the Company’s property at the Las Vegas site.  Interest on the credit facility accrues onall individual borrowings at an interest rate determined at the option of theCompany, at either the LIBOR Index plus an applicable margin (not to exceed3.5% (applicable margin was 3.0% at March 31, 2002) and aggregating 5.1% atMarch 31, 2002), or the Base Rate, defined as the higher of the Federal FundsRate plus .5%, or the reference rate, as defined, plus an applicable margin(not to exceed 2.25%).  The Companychose the LIBOR Index for all borrowings outstanding at March 31, 2002.  These margins are dependent upon theCompany’s debt to EBITDA ratio, as defined. Interest accrued on the Base Rate borrowings is due monthly, up to thematurity date, while interest on LIBOR borrowings is due quarterly up to thematurity date.

 

3.             LEGALAND REGULATORY PROCEEDINGS

 

The Company is adefendant in various lawsuits relating to routine matters incidental to itsbusiness.

 

The Company hasbeen served with an Order to Show Cause why a complaint should not be filedwith the Nevada Gaming Commission pursuant to NRS 463.312 and NGC Regulation 7charging violations of the Nevada Gaming Control Act and State Gaming ControlBoard and Nevada Gaming Commission Regulations.  The Company has responded to the Order to Show Cause and receivedcorrespondence from the gaming authorities that all issues related to theiraudit have been resolved.  Furtherresponse from the Company was submitted subsequent to

 

8

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March 31, 2002 and a responsefrom the gaming authorities regarding certain operational issues is pending.

 

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 beyond the amounts recorded in the accompanying balancesheet as of March 31, 2002.

 

4.             RECENT ACCOUNTING PRONOUNCEMENTS

 

**InJune 2001, the Financial Accounting Standards Board (FASB) issued SFASNo. 141, Business Combinations, and SFAS No. 142, Goodwill and OtherIntangible Assets.  These statementsrequire that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001 and prohibits the pooling of interestmethod and changes the accounting for goodwill from an amortization method toan impairment-only approach.  TheCompany adopted the new method of accounting for goodwill and other intangibleassets on January 1, 2002.  The newmethod of accounting for goodwill and other intangible assets applies to allexisting and future unamortized balances at the time of adoption.  Adoption of SFAS 141 and 142 had no effecton the Company’s results of operations.**

 

**In June 2001, the FASB issuedSFAS No. 143, Accounting for Asset Retirement Obligations.  This statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This statement applies to all entities andapplies to all legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and thenormal operation of a long-lived asset, except for certain obligations oflessees.  This statement is effectivefor our 2003 fiscal year and early adoption is permitted.  We have not yet determined the impact ofSFAS No. 143 on our financial position and results of operations, if any.**

 

**In August 2001, the FASB issuedSFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets,which addresses financial accounting and reporting for the impairment ordisposal of long-lived assets and supersedes SFAS No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.  The provisions of this statementare effective for fiscal years beginning after December 15, 2001 and interimperiods within those fiscal years. Adoption of SFAS No. 144 had no effect on the Company's results ofoperations.**

 

The Emerging Issues Task Force, or EITF, reached a consensus inEITF No. 01-09, Accounting for Consideration Given by a Vendor to a Customer(Including a Reseller of the Vendor’s Products).  EITF No. 01-09 codifiesand reconciles certain issues related to the consideration given by a vendor toa customer that were previously addressed in EITF No. 00-14, Accounting forCertain Sales Incentives, EITF No. 00-22, Accounting for ‘Points’ andCertain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers forFree Products or Services to be Delivered in the Future, and Issue EITF No.00-25, Vendor Income Statement Characterization of Consideration Paid to aReseller of the Vendor’s Products.  Generally, EITF 01-09 is scheduled tobe effective for fiscal years ending after December 15, 2001.  Weadopted EITF 01-09 during the quarter ended March 31, 2002 and our adoption didnot have a material effect on our financial statements.

 

9

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Item 2.                                                     Management’s Discussion and Analysis of FinancialCondition and Results of Operations

 

The following discussion should be read inconjunction with, and is qualified in its entirety by, the Company’s financialstatements, including the notes thereto, and the other financial informationappearing elsewhere herein and by the auditedfinancial statements and footnotes for the year ended December 31, 2001, whichmay be obtained upon request from the Company.

 

SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Allstatements contained herein that are not historical facts, including but notlimited to, statements regarding our business strategies and expectationsconcerning future operations, margins, profitability, liquidity, capitalexpenditures and capital resources, are based on current expectations.  These statements are forward-looking innature and involve a number of risks and uncertainties.  Generally, the words “anticipates,”“believes,” “estimates,” “expects” and similar expressions as they relate tothe Company and its management are intended to identify forward-lookingstatements. Although management believes that the expectations in suchforward-looking statements are reasonable, it can give no assurance that anyforward looking statements will prove to be correct and actual results maydiffer materially. Among the factors that could cause actual results to differmaterially are the following: competition in Las Vegas, government regulationrelated to the gaming industry, uncertainty of casino customer spending andvacationing in casino resorts in Las Vegas, occupancy rates and average roomrates in Las Vegas, the popularity of Las Vegas as a convention and trade showdestination, the completion of infrastructure improvements in Las Vegas, andgeneral economic and business conditions that may affect levels of disposableincome and pricing of hotel rooms, and other factors described at various timesin the Company’s reports filed with the Securities and ExchangeCommission.  The Company wishes tocaution readers not to place undue reliance on any forward-looking statements,which statements are made pursuant to the Private Litigation Reform Act of1995.  The forward-looking statementscontained in this quarterly report on Form 10-Q speak only as of the date thatwe have filed the report. We expressly disclaim any obligation or undertakingto disseminate any updates or revisions to any forward-looking statementcontained in this report, including to reflect any change in our expectationswith regard to that forward-looking statement or any change in events,conditions or circumstances on which that forward-looking statement isbased.  For more information regardingrisks inherent in an investment in the Company, see the section “Business — RiskFactors” in our annual Report on Form 10-K filed with the SEC on April 1, 2002.

 

OVERVIEW

 

HardRock Hotel, Inc.’s (the “Company”) sole business is the operation of the HardRock Hotel and Casino in Las Vegas, Nevada, which commenced operations on March9, 1995.

 

IMPACTOF SEPTEMBER 11, 2001 TRAGIC EVENTS

 

**We believe the tragic events ofSeptember 11 have had a negative impact on the Company’s net revenues andearnings.  The continuing effectsrelated to these events cannot be estimated with a reasonable level of confidenceat this time.**

** **

**10**

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** **

**Casino volume and hotel occupancy levels havereturned to pre-September 11 levels. Room rates have increased since the initial impact after these events,but have not, on average, returned to pre-September 11 levels compared tosimilar prior year periods.  None of theCompany’s personnel, facilities or suppliers were directly impacted andmanagement believes the strategies the Company has been diligently pursuing forthe past several years have positioned us well to meet the challenges we arefacing at this time.  Further terroristattacks, or the escalation of armed conflicts may, however, continue toadversely affect our results of operations.**

 

RESULTSOF OPERATIONS

 

ThreeMonths Ended March 31, 2002 and 2001

 

NET REVENUES.  Netrevenues increased 1% for the three month period ended March 31, 2002 to $31.3million compared to $30.9 million for the three month period ended March 31,2001.  The increase in revenues isprimarily attributable to a $0.8 million or 6% increase in casino revenues anda $0.3 million or 11% decrease in promotional allowances related to itemsfurnished to customers on a complimentary basis.  These changes were partially offset by a $0.6 million or 8%decrease in lodging revenues and a $0.1 million or 4% decrease in retailrevenues.

 

CASINOREVENUES.  The $0.8 million increase incasino revenues was primarily due to a $0.8 million or 9% increase in tablegame revenues and a $0.1 million or 3% increase in slot machine revenues offsetpartially be a less than $0.1 million decrease in race and sportsrevenues.  The increase in table gamesrevenues was due to an increase in hold percentage and an increase in tablegames drop.  Table games hold percentageincreased 1.0 percentage point to 13.7% from 12.7%.  Table games drop increased 1% to $72.1 million from $71.7million.  The average number of tablegames in operations increased 14% to 89 from 78.  The net result of these changes in drop, hold percentage andaverage number of table games in operation was a decrease in win per table gameper day to $1,232 from $1,300, a decrease of $68 or 5%.  We have historically reported table gameshold percentage using the gross method, while casinos on the Las Vegas Stripreport hold percentage using the net method (which reduces the table game dropby marker repayments made in the gaming pit area).  For the purpose of comparison to properties on the Las VegasStrip, our net hold percentage for the three month period ended March 31, 2002was 15.3% compared to 14.7% for the three month period ended March 31,2001.  Slot machine revenues increaseddue to an increase in handle offset partially by a decrease in winpercentage.  Slot machine handleincreased 7% to $78.8 million from $73.4 million.  Slot machine net win percentage decreased 0.1 percentage point to4.3% from 4.4%.  We decreased theaverage number of slot machines in operation to 569 from 656, a decrease of 87or 13% between comparative periods.  Thenet result of these changes in slot machine handle, win percent and averagenumber of slot machines in operation was an increase in net win per slotmachine per day to $65 from $55.

 

LODGINGREVENUES.  The $0.6 million decrease inlodging revenues to $6.6 million from $7.2 million was primarily due to adecrease in the average daily room rate (“ADR”).  ADR decreased to $113 from $122, a decrease of $9 or 7%.  We believe the decrease in ADR was primarilydue to competitive pressure in the market created by the larger hotels on theLas Vegas Strip post-September 11.  Theoccupancy percentage remained constant between periods at 93%.

 

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FOODAND BEVERAGE REVENUES.  Food andbeverage revenues increased by less than $0.1 million.  Food revenues increased over $0.3 millionand beverage revenues decreased by approximately $0.3 million.  The increase in food revenues was primarilydue to $0.2 million of revenue contributed by our Starbucks coffee bar thatopened during July 2001, a $0.1 million increase in Mr. Lucky’s food revenueand a $0.1 million increase in Pink Taco food revenue.  These increases in food revenues werepartially offset by a $0.1 million decrease in banquet food revenue.  The decrease in beverage revenues wasprimarily due to a $0.3 million decrease in banquet beverage revenue, a $0.1million decrease in Baby’s nightclub beverage revenues and a $0.1 milliondecrease in Center Bar beverage revenues. These decreases in beverage revenues were offset partially by a $0.2million increase in Center Bar beverage revenue.

 

RETAILREVENUES.  We believe the $0.1 milliondecrease in retail revenues was due in part to continued general market declinein the themed restaurant merchandise segment, the addition of other retailoperations in Las Vegas and a reduction in foreign tourists after the September11 tragedy.

 

OTHERINCOME.  Other income decreased by lessthan $0.1 million.  The decrease isprimarily due to a $0.1 million decrease in revenue from gaming chips purchasedby customers that are not expected to be redeemed.

 

PROMOTIONALALLOWANCES.  Promotional allowancesdecreased to $2.5 million from $2.8 million, a decrease of $0.3 million or11%.  The amount of complimentary itemsoffered to table games customers is based on a percentage of the amountswagered.  The decrease was due in partto a relatively high level of promotional allowances during the prior yearperiod in relation to table games and slot volumes.

 

CASINOEXPENSES.  Casino expenses increased$0.4 million or 5% to $7.8 million from $7.4 million.  The increase was primarily due to a $0.5 million increase ingaming taxes and license expense, a $0.2 million increase in credit discountarrangements made with customers to promote goodwill or secure timely payment,$0.2 million increase in table games labor and benefit costs, a $0.2 millionincrease in slot advertising and tournament expenses and a $0.1 millionincrease in the cost of slot machine conversions to different game types.  These increases were offset partially by a$0.5 million decrease in bad debt expenses related to potentially uncollectiblecredit extended to casino customers, a $0.1 million reduction in the cost ofcomplimentaries furnished to customers and a $0.1 million reduction in othercasino marketing costs.  Casino expensesas a percentage of casino revenues decreased to 58% from 59%, a decrease of 1percentage point due in part to the increase in hold percentage.

 

LODGINGEXPENSES. Lodging expenses in relation to lodging revenues, prior toreclassifying the cost of complimentaries to casino expense, increased to 32%from 30%, an increase of 2 percentage points due in part to the decrease in ADRwhile the occupancy percentage remained constant.

 

FOODAND BEVERAGE COSTS AND EXPENSES.  Foodand beverage costs and expenses in relation to food and beverage revenues,prior to reclassifying the cost of complimentaries to casino expense, remainedconstant at 60%.

 

RETAILCOSTS AND EXPENSES.  Retail costs andexpenses in relation to retail revenues, prior to reclassifying the cost ofcomplimentaries to casino expense, remained constant at 49%.

 

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OTHERCOSTS AND EXPENSES.  Other costs andexpenses in relation to other income increased to 53% from 47%, an increase of6 percentage points.  The increase isprimarily due to a decrease in other income as noted above for which there wereno corresponding decreases in costs or expenses.

 

MARKETING,GENERAL AND ADMINISTRATIVE.  Marketing,general and administrative expenses in relation to gross revenues increased to18% from 16%, an increase of 2 percentage points.  The relative increase is primarily due to an increase inmarketing expenditures associated with the Howard Stern broadcast live from the casinoin February 2002, an increase in nationaladvertising and in entertainment costs and expenses.

 

DEPRECIATIONAND AMORTIZATION.  Depreciation andamortization expense decreased by less than $0.1 million.  The decrease was due to a decrease indepreciation related to short-lived property offset partially by depreciationrelated to the completion of the second phase of the hotel room remodelcompleted during the fourth quarter of 2001.

 

NETINTEREST EXPENSE.  Net interest expensedecreased to $3.4 million from $4.2 million, a decrease of $0.8 million or19%.  The decrease is primarily due tothe decrease in outstanding borrowings and a decrease in the effective interestrate on the Company’s Credit Facility.

 

INCOMEAPPLICABLE TO COMMON SHAREHOLDERS. Income applicable to common shareholders was $0.2 million compared to$0.1 million during the prior year period. The increase was due to the factorsdescribed above offset partially by a $0.1 million increase in preferreddividends.  Preferred dividends declaredincreased due to compounding returns on dividends that were not distributed.

 

LIQUIDITYAND CAPITAL RESOURCES

For the three month period ended March31, 2002, our principal sources of funds were cash on-hand at December 31, 2001and cash provided by operating activities of $7.5 million.  The amount of cash provided by operatingactivities primarily includes net income of $1.5 million, depreciation andamortization of $2.9 million, and $2.9 million of net changes in operatingassets and liabilities.  The primaryuses of funds were capital expenditures of $0.9 million, a $2.0 milliondecrease in construction payables and a $2.6 million reduction in theoutstanding borrowings under our credit facility.  As a result, as of March 31, 2002, we had cash and cashequivalents of $10.6 million.

We believe that our current cash balancesand cash flow from operations and other sources of cash including the availableborrowings under our $38.0 million credit facility ($12.6 million as of March31, 2002) will be sufficient to provide operating and investing liquidityduring the next 12 months.  We may,however, need to raise additional funds prior to April 1, 2003.  Our ability to raise additional funds islimited by restrictions on our financing activities under our credit facility and theNotes.  We cannot be certain thatadditional financing will be available to us on favorable terms when required,if at all.

 

The amountavailable under the commitment began reducing by $2.0 million on September 30,2001 and will continue to reduce by $2.0 million

 

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on the last day of each subsequentfiscal quarter until it reaches $25.0 million. Effective December 2001, the Company entered into an amendment withregard to the Credit Facility whereby the $2.0 million quarterly commitmentreduction for the quarter ending December 31, 2001 was waived.  Beginning September 30, 2001 and on eachsucceeding September 30, the credit line reduces by 50% of Excess Cash Flow, asdefined, for the then most recently completed fiscal year.  Based on our calculations, we generatedapproximately $1.6 million excess cash flow as defined for the year endedDecember 31, 2001.  Accordingly, weexpect the commitment will reduce by approximately this amount on September 30,2002.

Thecredit facility contains certain covenantsincluding, among other things, financial covenants, limitations on our abilityto dispose of capital stock, enter into mergers and certain acquisitions, incurliens or indebtedness, issue dividends on stock, and enter into transactionswith affiliates.  The credit facility issecured by substantially all of our property and equipment.

As of March 31, 2002, $10.6 millionaggregate in dividends have accrued on our 9 1/4% Series A CumulativePreferred Stock and 9 1/4% Series B Cumulative Preferred Stock.

 

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

 

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Item 3.                                                     Quantitativeand Qualitative Disclosures About Market Risk

 

Market risks relating to our operations resultprimarily from changes in short-term LIBOR interest rates.  We do not have any foreign exchange or othersignificant market risk.  We did nothave any derivative financial instruments at March 31, 2002.

 

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

 

Wehad $26.3 million and $28.7. million in variable rate debt outstanding at March31, 2002 and December 31, 2001, respectively. Based upon these variable rate debt levels, a hypothetical 10% adversechange in interest rates (approximately a 52 basis point increase in theeffective interest rate) 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.

 

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PARTII                                                    OTHER INFORMATION

 

Item1.                                                             Legal Proceedings

 

Weare a defendant in various lawsuits relating to routine matters incidental to ourbusiness.  Management does not believethat the outcome of any litigation, in the aggregate, will have a materialadverse effect on our business or results of operations.

 

Item 6.                                                             Exhibitsand Reports on Form 8-K

 

(a)           Exhibits

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION**                                                                                     |
|---------------------|--------|-----------------------------------------------------------------------------------------------------|
|                |   |                                                                                                |
| 3.                  |   | CERTIFICATE OF  INCORPORATION AND BY-LAWS                                                           |
|                |   |                                                                                                |
| (1) 3.1             |   | Second Amended  and Restated Certificate of Incorporation of the Company.                           |
|                |   |                                                                                                |
| (2) 3.2             |   | Certificate of  Amendment of Second Amended and Restated Articles of Incorporation.                 |
|                |   |                                                                                                |
| (2) 3.3             |   | Certificate of  Designation of 9 1/4% Series A Cumulative Preferred Stock, no par value per  share. |
|                |   |                                                                                                |
| (3) 3.4             |   | Certificate of  Designation of 9 1/4% Series B Cumulative Preferred Stock, no par value per  share. |
|                |   |                                                                                                |
| (1) 3.5             |   | Second Amended  and Restated By-Laws of the Company                                                 |

 

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(1)                                              Incorporated by reference to designatedexhibit to our Registration Statement on Form S-4, filed with the Securitiesand Exchange Commission on May 21, 1998 (File No. 333- 53211).

 

(2)                                              Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the quarter ended August 31, 1999 (File No. 333-53211).

 

(3)                                              Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the quarter ended June 30, 2000 (File No. 333-53211).

 

(b)                                 Reports on Form 8-K

 

Wefiled a current report on Form 8-K, dated January 30, 2002, announcing, underItem 4, a change in our principal independent auditors.

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                     | HARD  ROCK HOTEL, INC.         |
|--------------------------|--------------------------------|
|                     |                           |
| Date:  May 14, 2002 | /s/  James D. Bowen            |   |
|                     | James  D. Bowen                |
|                     | DULY  AUTHORIZED OFFICER       |
|                     |                           |
|                     | /s/  JAMES D. BOWEN            |   |
|                     | James  D. Bowen                |
|                     | CHIEF  FINANCIAL OFFICER       |
|                     | (PRINCIPAL  FINANCIAL OFFICER) |

 

 

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Exhibit Index

 

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION**                                                                                     |
|---------------------|--------|-----------------------------------------------------------------------------------------------------|
|                |   |                                                                                                |
| 3.                  |   | CERTIFICATE OF  INCORPORATION AND BY-LAWS                                                           |
|                |   |                                                                                                |
| (1) 3.1             |   | Second Amended  and Restated Certificate of Incorporation of the Company.                           |
|                |   |                                                                                                |
| (2) 3.2             |   | Certificate of  Amendment of Second Amended and Restated Articles of Incorporation.                 |
|                |   |                                                                                                |
| (2) 3.3             |   | Certificate of  Designation of 9 1/4% Series A Cumulative Preferred Stock, no par value per  share. |
|                |   |                                                                                                |
| (3) 3.4             |   | Certificate of  Designation of 9 1/4% Series B Cumulative Preferred Stock, no par value per  share. |
|                |   |                                                                                                |
| (1) 3.5             |   | Second Amended  and Restated By-Laws of the Company                                                 |

 

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(1)                                              Incorporated by reference to designatedexhibit to our Registration Statement on Form S-4, filed with the Securitiesand Exchange Commission on May 21, 1998 (File No. 333- 53211).

 

(2)                                              Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the quarter ended August 31, 1999 (File No. 333-53211).

 

(3)                                              Incorporated by reference to designatedexhibit to our Report on Form 10-Q, filed with the Securities and ExchangeCommission for the quarter ended June 30, 2000 (File No. 333-53211).

 

 

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