Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Hard Rock Hotel Holdings, LLC | c04421exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - Hard Rock Hotel Holdings, LLC | c04421exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Hard Rock Hotel Holdings, LLC | c04421exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Hard Rock Hotel Holdings, LLC | c04421exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010 |
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 000-52992
Hard Rock Hotel Holdings, LLC
(Exact name of registrant as specified in its charter)
Delaware | 16-1782658 | |
(State or other jurisdiction of | (I.R.S. employer | |
incorporation or organization) | identification no.) | |
4455 Paradise Road, Las Vegas, NV | 89169 | |
(Address of principal executive office) | (Zip Code) |
(702) 693-5000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of
Securities Exchange Act of 1934.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
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Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), provide a safe harbor for
forward-looking statements made by or on behalf of a company. We may from time to time make
written or oral statements that are forward-looking, including statements contained in this
report and other filings with the Securities and Exchange Commission (SEC), which represent
our expectations or beliefs concerning future events. Statements containing expressions such as
believes, anticipates, expects or other similar words or expressions are intended to
identify forward-looking statements. We caution that these and similar statements are subject to
risks, uncertainties, assumptions and changes in circumstances that may cause our actual results
to differ significantly from those expressed in any forward-looking statement. Although we
believe our expectations are based upon reasonable assumptions within the bounds of our
knowledge of our business and operations, we cannot guarantee future results, levels of
activity, performance or achievements. Important risks and factors that could cause our actual
results to differ materially from any forward-looking statements include, but are not limited
to, continued downturns in economic and market conditions, particularly levels of spending in
the hotel, resort and casino industry; changes in the competitive environment in our industry;
hostilities, including future terrorist attacks, or fear of hostilities that affect travel; the
seasonal nature of the hotel, casino and resort industry; the use of the Hard Rock brand name
by entities other than us; costs associated with compliance with extensive regulatory
requirements; increases in interest rates and operating costs; increases in uninsured and
underinsured losses; risks associated with conflicts of interest with entities which control us;
the loss of key members of our senior management; the impact of any material litigation; risks
related to natural disasters, such as earthquakes and floods; and other risks discussed in our
Annual Report on Form 10-K for the year ended December 31, 2009 and subsequently filed Quarterly
Reports on Form 10-Q in the section entitled Risk Factors and in this report in the section
entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations. Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date thereof. We undertake no obligation to publicly release any
revisions to such forward-looking statements to reflect events or circumstances after the date
hereof.
References in this report to Company, we, our, or us refer to Hard Rock Hotel
Holdings, LLC, a Delaware limited liability company, and its consolidated subsidiaries.
1
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PART IFINANCIAL INFORMATION
Item 1. | Financial Statements |
HARD ROCK HOTEL HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2010 | Dec 31, 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13,910 | $ | 12,277 | ||||
Accounts receivable, net |
13,858 | 11,259 | ||||||
Inventories |
3,138 | 3,062 | ||||||
Prepaid expenses and other current assets |
3,106 | 3,631 | ||||||
Related party receivable |
9 | 2 | ||||||
Restricted cash |
51,010 | 66,349 | ||||||
Total current assets |
85,031 | 96,580 | ||||||
Property and equipment, net of accumulated depreciation and amortization |
1,180,910 | 1,151,839 | ||||||
Intangible assets, net |
47,134 | 49,007 | ||||||
Deferred financing costs, net |
2,574 | 3,656 | ||||||
Interest rate caps, at fair value |
60 | | ||||||
TOTAL ASSETS |
$ | 1,315,709 | $ | 1,301,082 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 12,870 | $ | 9,954 | ||||
Construction related payables |
2,733 | 51,905 | ||||||
Related party payables |
6,634 | 6,010 | ||||||
Accrued expenses |
30,358 | 27,774 | ||||||
Interest payable |
12,140 | 2,585 | ||||||
Short term deferred tax liability |
1,739 | 1,739 | ||||||
Total current liabilities |
66,474 | 99,967 | ||||||
Long term deferred tax liability |
55,366 | 55,114 | ||||||
Long-term debt |
1,305,910 | 1,210,874 | ||||||
Total long-term liabilities |
1,361,276 | 1,265,988 | ||||||
Total liabilities |
1,427,750 | 1,365,955 | ||||||
Commitments and Contingencies (see Note 5) |
||||||||
Members deficit: |
||||||||
Paid-in capital |
500,218 | 500,218 | ||||||
Accumulated other comprehensive loss |
(839 | ) | (2,311 | ) | ||||
Accumulated deficit |
(611,420 | ) | (562,780 | ) | ||||
Total members deficit |
(112,041 | ) | (64,873 | ) | ||||
TOTAL LIABILITIES AND MEMBERS DEFICIT |
$ | 1,315,709 | $ | 1,301,082 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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HARD ROCK HOTEL HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Quarter | Quarter | Six Month Period | Six Month Period | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Casino |
$ | 13,496 | $ | 12,548 | $ | 32,516 | $ | 24,859 | ||||||||
Lodging |
16,412 | 8,803 | 28,333 | 15,842 | ||||||||||||
Food and beverage |
31,621 | 21,391 | 53,345 | 33,598 | ||||||||||||
Retail |
1,297 | 1,539 | 2,329 | 2,622 | ||||||||||||
Other income |
8,617 | 10,107 | 15,560 | 12,384 | ||||||||||||
Gross revenues |
71,443 | 54,388 | 132,083 | 89,305 | ||||||||||||
Less: promotional allowances |
(6,798 | ) | (7,252 | ) | (13,280 | ) | (12,184 | ) | ||||||||
Net revenues |
64,645 | 47,136 | 118,803 | 77,121 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Casino |
12,296 | 9,634 | 25,381 | 19,818 | ||||||||||||
Lodging |
4,949 | 1,566 | 8,891 | 2,905 | ||||||||||||
Food and beverage |
16,201 | 10,578 | 28,202 | 18,045 | ||||||||||||
Retail |
822 | 928 | 1,453 | 1,456 | ||||||||||||
Other |
6,684 | 5,629 | 11,583 | 7,454 | ||||||||||||
Marketing |
2,459 | 715 | 4,257 | 1,898 | ||||||||||||
Fees and expense reimbursements
related party |
2,916 | 2,109 | 4,960 | 3,288 | ||||||||||||
General and administrative |
10,582 | 7,375 | 20,714 | 13,727 | ||||||||||||
Depreciation and amortization |
11,237 | 4,876 | 25,528 | 10,373 | ||||||||||||
Loss on disposal of assets |
3 | 3 | 1 | | ||||||||||||
Pre-opening |
275 | 4,737 | 712 | 6,147 | ||||||||||||
Total costs and expenses |
68,424 | 48,150 | 131,682 | 85,111 | ||||||||||||
Loss From Operations |
(3,779 | ) | (1,014 | ) | (12,879 | ) | (7,990 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
3 | 66 | 4 | 321 | ||||||||||||
Interest expense, net of
capitalized interest |
(16,510 | ) | (20,115 | ) | (35,513 | ) | (40,067 | ) | ||||||||
Other expenses, net |
(16,507 | ) | (20,049 | ) | (35,509 | ) | (39,746 | ) | ||||||||
Net loss before income tax expense |
(20,286 | ) | (21,063 | ) | (48,388 | ) | (47,736 | ) | ||||||||
Income tax expense |
252 | | 252 | | ||||||||||||
Net loss |
(20,538 | ) | (21,063 | ) | (48,640 | ) | (47,736 | ) | ||||||||
Other comprehensive loss: |
||||||||||||||||
Interest rate cap fair market
value adjustment, net of tax |
(93 | ) | 3,557 | 1,472 | 5,898 | |||||||||||
Comprehensive loss |
$ | (20,631 | ) | $ | (17,506 | ) | $ | (47,168 | ) | $ | (41,838 | ) | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Table of Contents
HARD ROCK HOTEL HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Month Period | Six Month Period | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (48,640 | ) | $ | (47,736 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
23,655 | 7,834 | ||||||
Provision for (write off of) losses on accounts receivable |
(3,797 | ) | 123 | |||||
Amortization of loan fees and costs |
1,970 | 10,800 | ||||||
Amortization of intangibles |
1,873 | 2,539 | ||||||
Change in value of interest rate caps net of premium amortization
included in net loss |
1,412 | 6,001 | ||||||
Loss on sale of assets |
1 | | ||||||
Increase in deferred income taxes |
252 | | ||||||
(Increase) decrease in assets: |
||||||||
Accounts receivable |
1,198 | (4,915 | ) | |||||
Inventories |
(76 | ) | 150 | |||||
Prepaid expenses |
525 | (167 | ) | |||||
Related party receivable |
(7 | ) | 278 | |||||
Increase (decrease) in liabilities: |
||||||||
Accounts payable |
2,916 | 3,729 | ||||||
Related party payables |
624 | 3,026 | ||||||
Accrued interest payable |
9,555 | (276 | ) | |||||
Other accrued liabilities |
2,584 | 3,520 | ||||||
Net cash used in operating activities |
(5,955 | ) | (15,094 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(52,727 | ) | (224,261 | ) | ||||
Construction payables |
(49,172 | ) | (30,684 | ) | ||||
Restricted cash |
15,339 | 138,485 | ||||||
Net cash used in investing activities |
(86,560 | ) | (116,460 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from borrowings |
95,036 | 123,211 | ||||||
Capital investment |
| 11,203 | ||||||
Financing costs on debt |
(888 | ) | (45 | ) | ||||
Net cash provided by financing activities |
94,148 | 134,369 | ||||||
Net increase in cash and cash equivalents |
1,633 | 2,815 | ||||||
Cash and cash equivalents, beginning of period |
12,277 | 10,148 | ||||||
Cash and cash equivalents, end of period |
$ | 13,910 | $ | 12,963 | ||||
Supplemental cash flow information |
||||||||
Cash paid during the period for interest, net of amounts capitalized |
$ | 13,998 | $ | 32,884 | ||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Capitalized interest |
$ | | $ | 9,342 | ||||
Construction payables |
$ | 2,733 | $ | (38,277 | ) | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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HARD ROCK HOTEL HOLDINGS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY STRUCTURE AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Business
Hard Rock Hotel Holdings, LLC (the Company) is a Delaware limited liability company that
was formed on January 16, 2007 by DLJ Merchant Banking Partners (DLJMBP) and Morgans Hotel
Group Co. (Morgans) to acquire Hard Rock Hotel, Inc. (HRHI ), a Nevada corporation
incorporated on August 30, 1993, and certain related assets. The Company owns the Hard Rock Hotel
& Casino in Las Vegas (the Hard Rock). DLJMB HRH VoteCo, LLC, DLJ MB IV HRH, LLC and DLJ
Merchant Banking Partners IV, L.P., each of which is a member of the Company and an affiliate of
DLJMBP, are referred to collectively as the DLJMB Parties and Morgans and its affiliate Morgans
Group LLC, each of which is also a member of the Company, are referred to collectively as the
Morgans Parties.
The accompanying consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a fair presentation
of the results for the interim periods have been made.
The results for the quarter ended and six month period ended June 30, 2010 are not
necessarily indicative of results to be expected for the full fiscal year ending December 31,
2010. These consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.
The Companys operations are conducted in the destination resort segment, which includes
casino, lodging, food and beverage, retail and other related operations. Because of the
integrated nature of these operations, the Company is considered to have one operating segment.
Revenues and Complimentaries
Casino revenues are derived from patrons wagering on table games, slot machines, sporting
events and races. Table games generally include Blackjack or Twenty-One, Craps, Baccarat and
Roulette. Casino revenue is defined as the win from gaming activities, computed as the difference
between gaming wins and losses, not the total amounts wagered. Casino revenue is recognized at
the end of each gaming day.
Lodging revenues are derived from rooms and suites rented to guests and include related
revenues for telephones, movies and other room amenities. Room revenue is recognized at the time
the room or service is provided to the guest.
Food and beverage revenues are derived from sales in the food and beverage outlets located
at the Hard Rock, including restaurants, room service, banquets and a nightclub. Food and
beverage revenue is recognized at the time the food and/or beverage is provided to the guest.
Retail and other revenues include retail sales, spa income, sponsorship income and
commissions, estimated income for gaming chips and tokens not expected to be redeemed, payments
under tenant leases, license fees and other miscellaneous income at the Hard Rock. Retail and
other revenues are recognized at the point in time the sale occurs, when services are provided to
the guest, when lease payments, sponsorship commissions or license fees become due under the
agreements or the Company determines gaming chips and tokens are not expected to be redeemed.
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Table of Contents
Revenues in the accompanying statements of operations include the retail value of rooms,
food and beverage and other complimentaries provided to guests without charge, all of which are
then subtracted as promotional allowances to arrive at net revenues. The estimated costs of
providing such complimentaries have been classified as casino operating expenses through
interdepartmental allocations as follows (in thousands):
Six Month | Six Month | |||||||||||||||
Quarter Ended | Quarter Ended | Period Ended | Period Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Food and beverage |
$ | 2,256 | $ | 1,808 | $ | 5,152 | $ | 3,769 | ||||||||
Lodging |
851 | 551 | 1,739 | 1,207 | ||||||||||||
Other |
501 | 1,260 | 862 | 1,476 | ||||||||||||
Total costs
allocated to casino
operating costs |
$ | 3,608 | $ | 3,619 | $ | 7,753 | $ | 6,452 | ||||||||
Revenues are recognized net of certain sales incentives in accordance with the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-50, Revenue
Recognition, Customer Payments and Incentives (prior authoritative literature: Emerging Issues
Task Force consensus on Issue 01-9, Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors Products )) (FASB ASC 605-50 (EITF 01-9)). FASB
ASC 605-50 (EITF 01-9) requires that sales incentives be recorded as a reduction of revenue;
consequently, the Companys revenues are reduced by points redeemed from customers within the
players club loyalty program. Casino revenues are net of cash incentives earned in the
Companys Rock Star slot club. For the six month period and the quarter ended June 30, 2010,
the amount of such sales incentives awarded was $8,800 and $2,900, respectively. For the six
month period and the quarter ended June 30, 2009, the amount of such sales incentives awarded
was $34,000 and $19,000, respectively.
Recently Issued And Adopted Accounting Pronouncements
FASB ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (prior authoritative literature: FASB SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,
issued June 2009) (FASB ASC 105-10-65 (SFAS No. 168)), establishes the FASB Accounting
Standards Codification (the Codification) as the single source of authoritative nongovernmental
generally accepted accounting principles. The Codification is effective for fiscal years and
interim periods ending after September 15, 2009. The adoption of FASB ASC 105-10-65 (SFAS No.
168) did not have a material impact on the Companys consolidated financial statements.
FASB ASC 820-10, (Accounting Standards Update No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU No.
2010-06)), was adopted in the first quarter of 2010 by the Company. The provisions of ASU No.
2010-06 amended ASC 820-10, Fair Value Measurements and Disclosures, by requiring additional
disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as
requiring fair value measurement disclosures for each class of assets and liabilities, a subset
of the captions disclosed in our consolidated balance sheets. The adoption did not have a
material impact on the Companys consolidated financial statements or its disclosures, as the
Company did not have any transfers between Level 1 and Level 2 fair value measurements and did
not have material classes of assets and liabilities that required additional disclosure.
FASB ASC 855-10, (Accounting Standards Update No. 2010-09 Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (ASU No. 2010-09)) was adopted in
the first quarter of 2010 by the Company. ASU No. 2010-09 amended ASC 855-10, Subsequent Events
Overall by removing the requirement for an SEC registrant to disclose a date, in both issued and
revised financial statements, through which that filer had evaluated subsequent events.
Accordingly, the Company removed the related disclosure and the adoption did not have a material
impact on the Companys consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-16, Entertainment-Casinos (Topic 924): Accruals
for Casino Jackpot Liabilities. The authoritative guidance for companies that generate revenue
from gaming activities that involve base jackpots, which requires companies to accrue for a
liability and charge a jackpot (or portion thereof) to revenue at the time the company has the
obligation to pay the jackpot. The guidance is effective for interim and annual reporting periods
beginning on or after December 15, 2010. Base jackpots are currently not accrued for by the
Company until it has the obligation to pay such jackpots. As such, the application of this
guidance will not have a material effect on the Companys financial condition, results of
operations or cash flows.
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Derivative Instruments and Hedging Activities
FASB ASC 815-10 (SFAS No. 133), Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities. As required by FASB ASC 815-10 (SFAS No. 133), the Company records
all derivatives on the balance sheet at fair value. The accounting for changes in the fair
value of derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or
firm commitment attributable to a particular risk, such as interest rate risk, are considered
fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is initially reported in other comprehensive income (outside of earnings)
and subsequently reclassified to earnings when the hedged transaction affects earnings, and the
ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the effectiveness of each hedging relationship under the
hypothetical derivative method, which means that the Company compares the cumulative change in
fair value of the actual cap to the cumulative change in fair value of a hypothetical cap having
terms that exactly match the critical terms of the hedged transaction. For derivatives that do
not qualify for hedge accounting or when hedge accounting is discontinued, the changes in fair
value of the derivative instrument are recognized directly in earnings.
The Companys objective in using derivative instruments is to add stability to its interest
expense and to manage its exposure to interest rate movements or other identified risks. To
accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its
cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the
receipt of fixed-rate payments in exchange for variable-rate amounts over the life of the
agreements without exchange of the underlying principal amount. During the six month period ended
June 30, 2010, the Company used interest rate caps to hedge the variable cash flows associated
with its existing variable-rate debt.
In connection with satisfying the conditions to draw on the construction loan provided under
its commercial mortgage-backed securities (CMBS) facility on May 30, 2008, the Company
purchased five interest rate cap agreements with an aggregate notional amount of $871.0 million
with a LIBOR cap of 2.5%. Under one of the interest rate cap agreements, the aggregate notional
amount would have accreted over the life of the cap based on the draw schedule for the
construction loan so that the aggregate notional amount of all of the caps would have been equal
to $1.285 billion. The Company purchased these interest rate cap agreements for an amount equal
to approximately $19.1 million, which was funded through a cash contribution made by the DLJMB
Parties. The Company determined that all five of the caps qualified for hedge accounting and the
caps were designated as cash flow hedges.
On September 22, 2008, the Company amended the accreting interest rate cap agreement to
adjust its notional amount upward in order to meet a lender-required cap on future debt. In
addition, the Company determined that the amended interest rate cap qualified for hedge
accounting and, therefore, was designated as a cash flow hedge.
On February 9, 2010, the Company purchased five new interest rate cap agreements with an
aggregate notional amount of $1.285 billion with a LIBOR cap of 1.23313%. The Company purchased
the new interest rate cap agreements for an amount equal to approximately $1.6 million. These new
interest rate cap agreements replaced the interest rate cap agreements described above which
expired on February 9, 2010. The Company designated four out of the five interest rate caps for
hedge accounting as cash flow hedges. The changes in fair value of the remaining one interest
rate cap that does not qualify for hedge accounting are recognized directly in earnings.
As of June 30, 2010, the Company held five interest rate caps as follows (amounts in
thousands):
Notional Amount | Type of Instrument | Maturity Date | Strike Rate | |||||
$364,811 (1) |
Interest Cap | February 9, 2011 | 1.23 | % | ||||
$595,419 (2) |
Interest Cap | February 9, 2011 | 1.23 | % | ||||
$177,956 (1) |
Interest Cap | February 9, 2011 | 1.23 | % | ||||
$88,978 (1) |
Interest Cap | February 9, 2011 | 1.23 | % | ||||
$57,836 (1) |
Interest Cap | February 9, 2011 | 1.23 | % |
(1) | The Company has determined that the derivative qualifies for hedge accounting. | |
(2) | The Company has determined that the derivative does not qualify for hedge accounting. |
Four of the derivative instruments have been designated as hedges according to FASB ASC
815-10 (SFAS No. 133) and, accordingly, the effective portion of the change in fair value of
these derivative instruments is recognized in other comprehensive income in the Companys
consolidated financial statements.
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As of June 30, 2010 and December 31, 2009, the total fair value of derivative instruments
was $60,000 and $0, respectively. The change in fair value included in comprehensive income for
the quarters ended June 30, 2010 and 2009 was $0.1 million and $3.6 million, net of premium
amortization, respectively, and the change in fair value included in comprehensive income for the six
month periods ended June 30, 2010 and 2009 was $1.5 million and $5.9 million, net of premium
amortization, respectively. Amounts reported in accumulated other comprehensive income/loss
related to derivatives will be reclassified to interest expense as interest payments are made on
the Companys variable-rate debt. The Company reflects the change in fair value of all hedging
instruments in cash flows from operating activities. The net gain or loss recognized in earnings
during the reporting period representing the amount of the hedges ineffectiveness is
insignificant. For the quarters ended June 30, 2010 and 2009, the Company expensed $0 and $3.0
million to interest expense accumulated in other comprehensive income and attributable to the
derivatives not designated as hedges according to FASB ASC 815-10 (SFAS No. 133), respectively.
For the six month periods ended June 30, 2010 and 2009, the Company expensed $3.0 million and
$6.0 million to interest expense accumulated in other comprehensive income and attributable to
the derivatives not designated as hedges according to FASB ASC 815-10 (SFAS No. 133),
respectively.
CMBS Facility
In connection with the Companys acquisition of the Hard Rock, it entered into a debt
financing in the form of a real estate loan in the CMBS market. The CMBS facility provides for,
among other borrowing availability, a construction loan of up to $620.0 million for the expansion
project at the Hard Rock and an acquisition loan of $760.0 million which we used to pay a portion
of the purchase price and costs and expenses for our acquisition of the Hard Rock and related
assets. As of June 30, 2010, the Company had fully drawn the $620.0 million under the
construction loan. In conjunction with fully drawing the construction loan, the Company paid down
$32.9 million of the acquisition loan, paid $0.8 million in exit fees, funded $3.6 million into
the interest reserve, funded $20.0 million into a general reserve account and $11.3 million into
an equity/accrual subaccount, as required under the loan agreement. The equity accrual subaccount
holds amounts funded into the general reserve in excess of $20 million at any time. If a debt
service coverage ratio of 1.2:1 is satisfied, then the amounts held in such account will be
released to make certain payments to the DLJMB Parties on account of their equity contributions
to the Company. If the debt service coverage ratio is not satisfied within one year from the
date of the deposits into the equity accrual/subaccount, then such amounts may be used to repay
the mortgage loan. The current maturity date of the $1.3 billion outstanding under the CMBS
facility is February 9, 2011, with three one-year options to extend the maturity date provided
that we satisfy certain conditions.
The financing incurs interest payable through a funded interest reserve initially, then
through cash, at a rate (blended among the debt secured by assets and the junior and senior
mezzanine debt, if applicable) of LIBOR plus 4.25%, subject to adjustment upwards in certain
circumstances (i.e., extension of the term of the financing). The loan agreements under the CMBS
facility include customary affirmative and negative covenants for similar financings, including,
among others, restrictive covenants regarding incurrence of liens, sales of assets, distributions
to affiliates, changes in business, cancellation of indebtedness, dissolutions, mergers and
consolidations, as well as limitations on security issuances, transfers of any of our real
property and removal of any material article of furniture, fixture or equipment from our real
property. The Company has evaluated these requirements and determined that it was in compliance
as of June 30, 2010.
Fair Value Measurements
FASB ASC 820-10 (SFAS No. 157) emphasizes that fair value is a market-based measurement, not
an entity-specific measurement. Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or liability. As a basis
for considering market participant assumptions in fair value measurements, FASB ASC 820-10 (SFAS
No. 157) establishes a fair value hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entitys own assumptions about market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy). The Company has applied FASB ASC 820-10 (SFAS 157) to recognize
the asset related to its derivative instruments at fair value and considers the changes in the
creditworthiness of the Company and its counterparties in determining any credit valuation
adjustments.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in
active markets, as well as inputs that are observable for the asset or liability (other than
quoted prices), such as interest rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entitys own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Companys assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability.
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Currently, the Company uses interest rate caps to manage its interest rate risk. The
valuation of these instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis
reflects the contractual terms of the derivatives, including the period to maturity, and uses
observable market-based inputs, including interest rate curves and implied volatilities. To comply with
the provisions of FASB ASC 820-10 (SFAS No. 157), the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. The Company is exposed to
credit loss in the event of a non-performance by the counterparties to its interest rate cap
agreements; however, the Company believes that this risk is minimized because it monitors the
credit ratings of the counterparties to such agreements. In adjusting the fair value of its
derivative contracts for the effect of nonperformance risk, the Company has considered the impact
of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit
spreads to evaluate the likelihood of default by itself and its counterparties. However, as of
June 30, 2010 and December 31, 2009, the Company has assessed the significance of the impact of
the credit valuation adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are not significant to the overall valuation of
its derivatives. As a result, the Company has determined that its derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy. As of June 30, 2010, the total
value of the interest rate caps valued under FASB ASC 820-10 (SFAS No. 157) included in other
assets is approximately $0.1 million.
Although the Company has determined that the majority of the inputs used to value its
long-term debt fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its long-term debt utilize Level 3 inputs, such as estimates of current credit
spreads to evaluate the likelihood of default by itself or its lenders. However, as of June 30,
2010, the Company has assessed the significance of the impact of the credit valuation adjustments
on the overall valuation of its long-term debt and has determined that the credit valuation
adjustments are not significant to the overall valuation of its long-term debt. As a result, the
Company has determined that its long-term debt valuations in their entirety are classified in
Level 2 of the fair value hierarchy. As of June 30, 2010, the total fair value of the Companys
long-term debt valued under FASB ASC 820-10 (SFAS No. 157) does not materially differ from its
carrying value of approximately $1.3 billion.
2. INVENTORIES
Inventories are stated at the lower of cost (determined using the first-in, first-out
method), or market. Inventories consist of the following (in thousands):
June 30, 2010 | December 31, 2009 | |||||||
Retail merchandise |
$ | 1,246 | $ | 1,068 | ||||
Restaurants and bars |
1,803 | 1,769 | ||||||
Other inventory and operating supplies |
89 | 225 | ||||||
Total inventories |
$ | 3,138 | $ | 3,062 | ||||
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
June 30, 2010 | December 31, 2009 | |||||||
Land |
$ | 351,250 | $ | 351,250 | ||||
Buildings and improvements |
738,843 | 461,176 | ||||||
Furniture, fixtures and equipment |
154,623 | 105,087 | ||||||
Memorabilia |
4,435 | 4,267 | ||||||
Subtotal |
1,249,151 | 921,780 | ||||||
Less accumulated depreciation and amortization |
(68,704 | ) | (45,049 | ) | ||||
Construction in process |
463 | 275,108 | ||||||
Total property and equipment, net |
$ | 1,180,910 | $ | 1,151,839 | ||||
Depreciation and amortization relating to property and equipment for the six month periods
ended June 30, 2010 and 2009 was $23.7 million and $7.8 million, respectively. Capitalized
interest included in construction in process for the six month periods ended June 30, 2010 and
2009 was $0 and $9.3 million, respectively.
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4. AGREEMENTS WITH RELATED PARTIES
Management Agreement
The Companys subsidiaries, HRHH Hotel/Casino, LLC, HRHH Development, LLC and HRHH Cafe,
LLC, have entered into an Amended and Restated Property Management Agreement, dated as of May 30,
2008, (the Management Agreement) with Morgans Hotel Group Management LLC (Morgans
Management), pursuant to which the Company has engaged Morgans Management as (i) the exclusive
operator and manager of the Hard Rock (excluding the operation of the gaming facilities which are
operated by the Companys subsidiary, HRHH Gaming, LLC) and (ii) the asset manager of the
approximately 23-acre parcel adjacent to the Hard Rock and the land on which the Hard Rock Cafe
restaurant is situated (which is subject to a lease between the Companys subsidiary, HRHH Cafe,
LLC, as landlord, and Hard Rock Cafe International (USA), Inc., as tenant).
The Management Agreement originally commenced on February 2, 2007 and has an initial term of
20 years. Morgans Management may elect to extend this initial term for two additional 10-year
periods. The Management Agreement provides certain termination rights for the Company and Morgans
Management. Morgans Management may be entitled to a termination fee if such a termination occurs
in connection with a sale of the Company or the hotel at the Hard Rock.
As compensation for its services, Morgans Management receives a management fee equal to 4%
of defined net non-gaming revenues including casino rents and all other rental income, a gaming
facilities support fee equal to $828,000 per year and a chain service expense reimbursement,
which reimbursement is subject to a cap of 1.5% of defined non-gaming revenues and all other
income. Morgans Management was also entitled to receive an annual incentive fee of 10.0% of the
Hotel EBITDA (as defined in the Management Agreement) in excess of certain threshold amounts,
which increased each calendar year. However, as a result of the completion of the expansion
project at the Hard Rock, the amount of such annual incentive fee now is equal to 10% of annual
Hotel EBITDA in excess of 90% of annual projected post-expansion EBITDA of the Hard Rock, the
property on which the Hard Rock Cafe restaurant is situated and the property adjacent to the Hard
Rock (excluding any portion of the adjacent property not being used for the expansion). For
purposes of the Management Agreement, EBITDA generally is defined as earnings before interest,
taxes, depreciation and amortization in accordance with generally accepted accounting principles
applicable to the operation of hotels and the uniform system of accounts used in the lodging
industry, but excluding income, gain, expenses or loss that is extraordinary, unusual,
non-recurring or non-operating. Hotel EBITDA generally is defined as EBITDA of the Hard Rock,
the property on which the Hard Rock Cafe restaurant is situated and the adjacent property
(excluding any portion of the adjacent property not being used for the expansion), excluding an
annual consulting fee payable to DLJMB HRH VoteCo, LLC (DLJMB VoteCo) under the JV Agreement
(as defined below). Hotel EBITDA generally does not include any EBITDA attributable to any
facilities operated by third parties at the Hard Rock, unless the Company owns or holds an
interest in the earnings or profits of, or any equity interests in, such third party facility.
For the quarters ended June 30, 2010 and 2009, the Company accrued or paid to Morgans
Management a base management fee of $2.0 million and $1.4 million and a gaming facilities support
fee of $0.2 million and $0.2 million, respectively, and accrued or reimbursed Morgans Management
for chain services expenses of $0.8 million and $0.5 million, respectively. For the six month
periods ended June 30, 2010 and 2009, the Company accrued or paid to Morgans Management a base
management fee of $3.3 million and $2.1 million and a gaming facilities support fee of $0.4
million and $0.4 million, respectively, and accrued or reimbursed Morgans Management for chain
services expenses of $1.3 million and $0.8 million, respectively.
Joint Venture Agreement Consulting Fee
Under the Companys Second Amended and Restated Limited Liability Company Agreement (as
amended, the JV Agreement), subject to certain conditions, the Company is required to pay DLJMB
VoteCo (or its designee) a consulting fee of $250,000 each quarter in advance. In the event the
Company is not permitted to pay the consulting fee when required (pursuant to the terms of any
financing or other agreement approved by its board of directors), then the payment of such fee
will be deferred until such time as it may be permitted under such agreement. DLJMB VoteCo is a
member of the Company.
Technical Services Agreement
On February 2, 2007, a subsidiary of the Company, HRHH Hotel/Casino, LLC, entered into a
Technical Services Agreement with Morgans Management, pursuant to which Morgans Management
provided technical services for the expansion project at the Hard Rock prior to its opening.
Under the Technical Services Agreement, the Company is required to reimburse Morgans Management
for certain expenses it incurs in accordance with the terms and conditions of the agreement. For
the quarters ended June 30, 2010 and 2009, the Company reimbursed Morgans Management an aggregate
amount equal to approximately $0.1 million and $0.2 million, respectively, under the Technical
Services Agreement. For the six month periods ended June 30, 2010 and 2009, the Company
reimbursed Morgans Management an aggregate amount equal to approximately $1.9 million and $1.4
million, respectively, under the Technical Services Agreement.
CMBS Facility
The chairman of the Morgans board of directors and a former director of the Company is
currently the president, chief executive officer and an equity holder of NorthStar Realty Finance
Corp. (NorthStar), a subsidiary of which is a participant lender in the CMBS facility.
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Intercompany Land Acquisition Financing
Northstar is a lender under the land acquisition financing the Company has entered into with
respect to an approximately 11-acre parcel of land located adjacent to the Hard Rock.
5. COMMITMENTS AND CONTINGENCIES
Cafe Lease
The Company is party to a lease with the operator of the Hard Rock Cafe, pursuant to which
the Company is entitled to (a) minimum ground rent in an amount equal to $15,000 per month and
(b) additional rent, if any, equal to the amount by which six percent of the annual Gross Income
(as defined in the lease) of the operator exceeds the minimum ground rent for the year. For the
six month period ended June 30, 2010, the Company received $162,900 in rent from the Hard Rock
Cafe, which consisted of $90,000 in base rent and $72,900 in percentage rent. The current term of
the lease expires on June 30, 2015. Under the lease, the operator has one five-year option to
extend the lease, so long as it is not in default at the time of the extension.
Employment Agreement
Morgans and the Company (for the purposes of specified provisions only) have entered into a
four-year Employment Agreement with Joseph A. Magliarditi, Chief Operating Officer of the Company
and Chief Executive Officer of HRHI, dated May 23, 2010 (the Employment Agreement). Under the
Employment Agreement, among other benefits Mr. Magliarditi is entitled to receive an annual base
salary of $650,000, subject to increase in Morgans Managements discretion, and an annual cash
bonus with a maximum level of 75% of his annual base salary based on reasonable annual
performance targets. The exact amount of the bonus, if any, will be determined by Morgans
Management in its sole discretion. Mr. Magliarditis annual bonus for 2010, if any, will be
prorated for the amount of time he works for Morgans Management during 2010, and Mr. Magliarditi
and Morgans Management are expected to set reasonable performance goals upon which the 2010
annual bonus may be based. Pursuant to the Employment Agreement, Mr. Magliarditi also is entitled
to a grant of phantom equity awards that is tied to the value of common stock of Morgans in the
form of 50,000 phantom restricted stock units under Morgans Amended and Restated 2007 Omnibus
Stock Incentive Plan, which is referred to as the initial phantom equity grant. One-third of the
initial phantom equity grant will vest on each of the first three anniversaries of the date of
the grant.
The Employment Agreement provides Mr. Magliarditi severance as described immediately below
in each of the following circumstances:
| if, during his employment period, Morgans Management terminates Mr. Magliarditi without Cause (as defined in the Employment Agreement), he resigns for Good Reason (as defined in the Employment Agreement), or a successor to Morgans Management fails to assume its obligations under the Employment Agreement; | ||
| if, at the time of, or during the 12 month period following the effective date of, any Change in Control (as defined in the Employment Agreement), Morgans Management terminates Mr. Magliarditis employment with or without Cause, or he resigns for Good Reason; | ||
| if Mr. Magliarditis employment terminates due to a termination of the Management Agreement and he rejects or does not receive any Morgans employment notice and does not receive a qualifying Hard Rock employment offer; or | ||
| if Mr. Magliarditis employment terminates at the end of the four-year employment period. |
In each of the cases described above, other than under the indemnification provisions in
the Employment Agreement, Morgans Managements only obligations to Mr. Magliarditi will be:
| to pay his annual base salary through the date of termination to the extent it is unpaid and reimburse him for any business expenses not previously reimbursed, | ||
| to continue to pay his annual base salary for a period of 18 months after the date of termination (or six months after the date of termination in the case employment terminates at the end of the four-year employment period), | ||
| to continue to provide him medical and dental insurance benefits on the same basis as Morgans Managements other executive employees for 18 months after the date of termination (or six months after the date of termination in the case employment terminates at the end of the four-year employment period), |
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| to the extent not paid or provided, to pay or provide him any other amounts or benefits required to be paid or provided or which he is eligible to receive under any plan, program, policy or practice or other contract or agreement of Morgans Management through the date of termination, including, without limitation, any accrued but unused vacation, and | ||
| except in the case employment terminates at the end of the four-year employment period, to fully vest any unvested portion, if any, of the initial phantom equity grant, which, in the case of a termination of the Management Agreement, will be paid in a lump sum amount of equal value. |
If, during his employment period, Mr. Magliarditis employment is terminated for Cause, due
to death or Disability, or he resigns without Good Reason, Morgans Management will have the
obligations described below. In addition, if Mr. Magliarditis employment terminates due to a
termination of the Management Agreement, and he rejects or does not receive a Morgans employment
notice and receives and rejects or fails to timely respond to a qualifying Hard Rock employment
offer, then Morgans Management will have no further obligations to Mr. Magliarditi other than as
described below. In each of these cases, other than under the indemnification provisions in the
Employment Agreement, Morgans Managements only obligations to Mr. Magliarditi, or his estate or
beneficiaries, as applicable, will be:
| to pay his base salary through the date of termination, | ||
| to pay for any accrued, unused vacation time as of the date of termination, | ||
| to pay any reasonable business expenses incurred as of the date of termination, and | ||
| if his employment terminates due to death or disability, to immediately vest the initial phantom equity grant in accordance with the terms of the applicable award agreement. |
Construction Commitments
The expansion project at the Hard Rock included the addition of approximately 865 guest
rooms and suites, approximately 490 of which are in the new Paradise Tower that opened in July
2009 and the remaining 375 of which are in the new all-suite HRH Tower that opened in late
December 2009. As part of the expansion project, in April 2009, the Company opened approximately
74,000 square feet of additional meeting and convention space, several new food and beverage
outlets and a new and larger The Joint live entertainment venue with a doubled maximum capacity
of 4,100. In December 2009, the Company opened approximately 30,000 square feet of new casino
space, a new spa, salon and fitness center, Reliquary and a new nightclub, Vanity. The expansion
project also included the addition of a new authentic rock lounge, Wasted Space, a new Poker
Lounge and upgrades to existing suites, restaurants and bars, retail shops and common areas, each
of which were completed in 2008. In March 2010, the Company completed the expansion of the hotel
pool, outdoor gaming and additional food and beverage outlets. The Company completed the
expansion as scheduled and within the parameters of the original budget. The project was funded
from the Companys existing debt funding under its CMBS facility.
The Company entered into a construction management and general contractors agreement with
M.J. Dean Construction, Inc. (M.J. Dean), which set forth the terms and conditions for M.J.
Deans work on the expansion project. The contract provided that the project would be broken into
multiple phases, each of which was governed by a separate guaranteed maximum price work
authorization order. As of June 30, 2010, the Company delivered work authorization orders to M.J.
Dean for an aggregate of $512.4 million of work, which has been completed.
The Company also entered into a design build agreement with Pacific Custom Pools, Inc
(PCI), which set forth the terms and conditions pursuant to which PCI constructed the new west
pool project at the Hard Rock. The contract included all conceptual design, design development,
construction documents, construction administration, engineering and construction for the site as
it pertained to the pools, spas, lounge pool, site service structures, service bars, cabanas,
perimeter walls, landscape, audio visual system, site lighting, pool pavilion building, grading
and gravity site drainage within the perimeter. The project called for an aggregate of $23.9
million of work. The west pool project opened in March of 2010.
The Company signed construction commitments for an aggregate of approximately $595.4
million, which consists of commitments to the general contractor and for other items related to
the expansion and renovation of the Hard Rock. As of June 30, 2010, approximately $0.1 million of
these commitments remained outstanding.
Self-Insurance
The Company is self-insured for workers compensation claims for an annual stop-loss of up
to $350,000 per claim. Management has established reserves it considers adequate to cover
estimated future payments on existing claims incurred and claims incurred but not reported.
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The Company has a partial self-insurance plan for general liability claims for an annual
stop-loss of up to $100,000 per claim.
Legal and Regulatory Proceeding
The Company is a defendant in various lawsuits relating to routine matters incidental to its
business. Management provides an accrual for estimated losses that may occur and does not believe
that the outcome of any pending claims or litigation, individually or in the aggregate, will have
a material adverse effect on the Companys financial position, results of operations or liquidity
beyond the amounts recorded in the accompanying balance sheet as of June 30, 2010.
Indemnification
The JV Agreement provides that neither the Companys members nor the affiliates, agents,
officers, partners, employees, representatives, directors, members or shareholders of any member,
affiliate or the Company (collectively, Indemnitees) will be liable to the Company or any of
its members for any act or omission if: (a) the act or omission was in good faith, within the
scope of such Indemnitees authority and in a manner it reasonably believed to be in the best
interest of the Company, and (b) the conduct of such person did not constitute fraud, willful
misconduct, gross negligence or a material breach of, or default under, the JV Agreement.
Subject to certain limitations, the Company will indemnify and hold harmless any Indemnitee
to the greatest extent permitted by law against any liability or loss as a result of any claim or
legal proceeding by any person relating to the performance or nonperformance of any act
concerning the activities of the Company if: (a) the act or failure to act of such Indemnitee was
in good faith, within the scope of such Indemnitees authority and in a manner it reasonably
believed to be in the best interest of the Company, and (b) the conduct of such person did not
constitute fraud, willful misconduct, gross negligence or a material breach of, or default under,
the JV Agreement. The JV Agreement provides that the Company will, in the case of its members and
their affiliates, and may, in the discretion of the members with respect to other Indemnitees
advance such attorneys fees and other expenses prior to the final disposition of such claims or
proceedings upon receipt by the Company of an undertaking by or on behalf of such Indemnitee to
repay such amounts if it is determined that such Indemnitee is not entitled to be indemnified.
Any indemnification provided under the JV Agreement will be satisfied first out of assets of
the Company as an expense of the Company. In the event the assets of the Company are insufficient
to satisfy the Companys indemnification obligations, the members will, for indemnification of
the members or their affiliates, and may (in their sole discretion), for indemnification of other
indemnitees, require the members to make further capital contributions to satisfy all or any
portion of the indemnification obligations of the Company pursuant to the JV Agreement.
6. PROFITS INTERESTS
On September 10, 2008, the board of directors of the Company adopted the Companys 2008
Profits Interest Award Plan (the Plan). The purpose of the Plan is to provide eligible officers
and employees with an opportunity to participate in the Companys future by granting them profits
interest awards in the form of Class C Units of the Company so as to enhance the Companys
ability to attract and retain certain valuable individuals. The Class C Units are membership
interests in the Company whose terms are governed by the JV Agreement, the Plan and an individual
profits interest Award Agreement. The maximum aggregate number of Class C Units available for
issuance under the Plan is one million units.
On January 14, 2009, the Companys named executive officers received aggregate awards
totaling 360,000 Class C Units which included an aggregate award of 300,000 Class C Units to the
Companys former principal executive officer, Andrew A. Kwasniewski, and 60,000 Class C Units to
the Companys principal financial officer, Arnold D. Boswell. Each grantees award consists of
the following three vesting components, which are equally spread and are generally subject to the
grantees continued employment with the Company: (i) a time-based vesting award that vests over
the period commencing on the grant date and continuing through December 31, 2010; (ii) a
performance-based vesting award that vests with respect to 25% of the units on the date of grant
and the remaining 75% of the units based on the Companys attainment of pre-established EBITDA
targets for each of the Companys fiscal years through December 31, 2010; and (iii) a milestone
vesting award that vests based on the Companys timely completion of the expansion project at the
Hard Rock in accordance with the development budget approved by the Companys board of directors.
As of June 30, 2010, 15,000 of the 360,000 Class C Units issued to the above named executive
officers remain unvested.
If a Sale of the Company (as defined in the Plan) occurs prior to December 31, 2010 and
the grantee remains employed with the Company until the closing of the Sale of the Company, 100%
of the remaining outstanding unvested Class C Units covered by the award will vest immediately
prior to the closing. Vesting is also accelerated if the grantees employment with the Company is
terminated without cause (as defined in the grantees Award Agreement) or by the grantee for good
reason (as defined in the grantees Award Agreement). Awards of Class C Units will be forfeited
to the extent that the award is not vested as of the date of a termination of the grantees
employment or to the extent that the award fails to satisfy the performance or milestone targets
set forth in the Award Agreement. The entire award, whether vested or unvested, will be forfeited
upon a termination of the grantees employment for cause (as defined in his or her Aware Agreement). The Award
Agreements include a number of restrictions permitted under the Plan, including, without
limitation, that the Company will have a right to repurchase any or all vested Class C Units from
the holder within a specified period of time following the holders termination of employment or
December 31, 2010, if later. The repurchase price per unit is determined pursuant to a
methodology set forth in the Award Agreement that is intended to approximate the fair market
value of a Class C Unit as of the date on which the repurchase right arises.
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The Company accounts for share-based compensation in accordance with FASB ASC 718 (SFAS No.
123R). The Class C Units granted during January 2009 are equity classified awards and have a
grant date fair value of zero. Accordingly, no compensation expense has been recorded related to
these Class C Units.
7. CAPITAL CONTRIBUTIONS BY MEMBERS
During the six month period ended June 30, 2010, the Companys members did not contribute
any cash to, or post any letters of credit on behalf of, the Company. For the period from the
closing of the acquisition of the Hard Rock on February 2, 2007 through June 30, 2010, the DLJMB
Parties had cumulatively contributed an aggregate of $424.4 million in cash to the Company and
the Morgans Parties had cumulatively contributed an aggregate of $75.8 million in cash to the
Company.
8. SUBSEQUENT EVENTS
None.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our Annual Report on Form 10-K for the year ended December
31, 2009 and our consolidated financial statements and related notes appearing elsewhere in this
report. In addition to historical information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in any forward-looking statements as a result of
certain factors, including but not limited to, those factors set forth in the section entitled
Forward-Looking Statements and elsewhere in this report and in the section entitled Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequently
filed Quarterly Reports on Form 10-Q.
Overview
We own and operate the Hard Rock, which we believe is a premier destination entertainment
resort with a rock music theme. As recently expanded, the Hard Rock consists of, among other
amenities, three hotel towers with approximately 1,500 stylishly furnished hotel rooms, an
approximately 60,000 square-foot uniquely styled casino, a retail store, a jewelry store, a
lingerie store, a nightclub, a banquet facility, a concert hall, a beach club, quality
restaurants, cocktail lounges and a spa. We believe that we have successfully differentiated the
Hard Rock in the Las Vegas hotel, resort and casino market by targeting a predominantly youthful
and hip customer base, which consists primarily of rock music fans and youthful individuals, as
well as actors, musicians and other members of the entertainment industry.
Substantially all of our current business is comprised of our operations at the Hard Rock.
For the quarter ended June 30, 2010, our gross revenues were derived 44.3% from food and beverage
operations, 18.9% from gaming operations, 13.8% from retail and other sales and 23.0% from
lodging. For the six month period ended June 30, 2010, our gross revenues were derived 40.4% from
food and beverage operations, 24.6% from gaming operations, 21.5% from lodging and 13.5% from
retail and other sales. Our business strategy is to provide our guests with an energetic and
exciting gaming and entertainment environment with the services and amenities of a luxury
boutique hotel. In March 2010, we completed a large-scale expansion project at the Hard Rock. The
expansion included the addition of approximately 865 guest rooms and suites, approximately 490 of
which are in our new Paradise Tower that opened in July 2009 and the remaining approximately 375
of which are in our new all-suite HRH Tower that opened in late December 2009. As part of the
expansion project, in April 2009, we opened approximately 74,000 square feet of additional
meeting and convention space, several new food and beverage outlets and a new and larger The
Joint live entertainment venue. In December 2009, we opened approximately 30,000 square feet of
new casino space, a new spa, salon and fitness center, Reliquary and a new nightclub, Vanity. The
expansion project also included the addition of a new authentic rock lounge, Wasted Space, a new
Poker Lounge and upgrades to existing suites, restaurants and bars, retail shops and common
areas, each of which were completed in 2008. In March 2010, we opened an expanded hotel pool,
outdoor gaming and additional food and beverage outlets, which completed the remaining portions
of the expansion project on schedule and within the parameters of the original budget.
14
Table of Contents
Due to a number of factors affecting consumers, including continued recessionary
conditions in local, national and global economies, contracted credit markets, and reduced
consumer spending, the outlook for the gaming, travel, and entertainment industries both
domestically and abroad remains highly uncertain. Auto traffic into Las Vegas and air travel to
McCarran International airport has declined, resulting in lower casino volumes and a reduced
demand for hotel rooms. Based on these adverse circumstances, we believe that we will continue to
experience lower hotel occupancy rates and casino volumes as compared to that of periods prior to
the recession. Changes in discretionary consumer spending has resulted in fewer customers
visiting, or customers spending less, at our property, which has adversely impacted and may
continue to adversely impact our revenues and results of operations. The current situation in the
world credit markets may adversely impact the availability and cost of credit, which could
adversely affect our liquidity, future growth and operations.
As is customary for companies in the gaming industry, we present average occupancy rate and
average daily rate for the Hard Rock including rooms provided on a complimentary basis. Operators
of hotels in the lodging industry generally may not follow this practice, as they may present
average occupancy rate and average daily rate net of rooms provided on a complimentary basis. We
calculate (a) average daily rate by dividing total daily lodging revenue by total daily rooms
rented and (b) average occupancy rate by dividing total rooms occupied by total number of rooms
available. We account for lodging revenue on a daily basis. Rooms provided on a complimentary
basis include rooms provided free of charge or at a discount to the rate normally charged to
customers as an incentive to use the casino. Complimentary rooms reduce average daily rate for a
given period to the extent the provision of such rooms reduces the amount of revenue we would
otherwise receive. We do not separately account for the number of occupied rooms that are
provided on a complimentary basis, and obtaining such information would require unreasonable
effort and expense within the meaning of Rule 12b-21 under the Exchange Act.
The following are key gaming industry-specific measurements we use to evaluate casino
revenues. Table game drop, slot machine handle and race and sports book write are used to
identify the amount wagered by patrons for a casino table game, slot machine or racing events and
sports games, respectively. Drop and handle are abbreviations for table game drop and slot
machine handle. Table game hold percentage, slot machine hold percentage and race and sports
book hold percentage represent the percentage of the total amount wagered by patrons that the
casino has won. Such hold percentages are derived by dividing the amount won by the casino by the
amount wagered by patrons. Based on historical experience, in the normal course of business we
expect table games hold percentage for any period to be within the range of 12% to 16%, slot
machine hold percentage for any period to be within the range of 4% to 7% and race and sports
book hold percentage to be within the range of 4% to 8%.
Results of Operations
Comparison of the Quarter Ended June 30, 2010 to the Quarter Ended June 30, 2009
The following table presents our consolidated operating results for the quarters ended June
30, 2010 and 2009, and the change in such data between the two periods.
Quarter Ended | Quarter Ended | Change | Change | |||||||||||||
June 30, 2010 | June 30, 2009 | ($) | (%) | |||||||||||||
(in thousands) | ||||||||||||||||
INCOME STATEMENT DATA: |
||||||||||||||||
REVENUES: |
||||||||||||||||
Casino |
$ | 13,496 | $ | 12,548 | $ | 948 | 7.6 | % | ||||||||
Lodging |
16,412 | 8,803 | 7,609 | 86.4 | % | |||||||||||
Food and beverage |
31,621 | 21,391 | 10,230 | 47.8 | % | |||||||||||
Retail |
1,297 | 1,539 | (242 | ) | -15.7 | % | ||||||||||
Other |
8,617 | 10,107 | (1,490 | ) | -14.7 | % | ||||||||||
Gross Revenues |
71,443 | 54,388 | 17,055 | 31.4 | % | |||||||||||
Less: promotional allowances |
(6,798 | ) | (7,252 | ) | 454 | -6.3 | % | |||||||||
Net revenues |
64,645 | 47,136 | 17,509 | 37.1 | % | |||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Casino |
12,296 | 9,634 | (2,662 | ) | -27.6 | % | ||||||||||
Lodging |
4,949 | 1,566 | (3,383 | ) | -216.0 | % | ||||||||||
Food and beverage |
16,201 | 10,578 | (5,623 | ) | -53.2 | % | ||||||||||
Retail |
822 | 928 | 106 | 11.4 | % | |||||||||||
Other |
6,684 | 5,629 | (1,055 | ) | -18.7 | % | ||||||||||
Marketing |
2,459 | 715 | (1,744 | ) | -243.9 | % | ||||||||||
Fees and expensesrelated party |
2,916 | 2,109 | (807 | ) | -38.3 | % | ||||||||||
General and administrative |
10,582 | 7,375 | (3,207 | ) | -43.5 | % | ||||||||||
Depreciation and amortization |
11,237 | 4,876 | (6,361 | ) | -130.5 | % | ||||||||||
Loss on disposal of assets |
3 | 3 | | 0.0 | % | |||||||||||
Pre-opening |
275 | 4,737 | 4,462 | 94.2 | % | |||||||||||
15
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Quarter Ended | Quarter Ended | Change | Change | |||||||||||||
June 30, 2010 | June 30, 2009 | ($) | (%) | |||||||||||||
(in thousands) | ||||||||||||||||
Total costs and expenses |
68,424 | 48,150 | (20,274 | ) | -42.1 | % | ||||||||||
LOSS FROM OPERATIONS |
(3,779 | ) | (1,014 | ) | (2,765 | ) | 272.7 | % | ||||||||
Interest income |
3 | 66 | (63 | ) | -95.5 | % | ||||||||||
Interest expense, net of
capitalized interest |
(16,510 | ) | (20,115 | ) | 3,605 | -17.9 | % | |||||||||
Loss before income tax expense |
(20,286 | ) | (21,063 | ) | 777 | -3.7 | % | |||||||||
Income tax expense |
252 | | 252 | 100.0 | % | |||||||||||
Net loss |
(20,538 | ) | (21,063 | ) | 525 | -2.5 | % | |||||||||
Other Comprehensive Loss: |
||||||||||||||||
Interest rate cap fair market
value adjustment, net of tax |
(93 | ) | 3,557 | (3,650 | ) | -102.6 | % | |||||||||
Comprehensive loss |
$ | (20,631 | ) | $ | (17,506 | ) | $ | (3,125 | ) | 17.9 | % | |||||
Results of Operations for the Quarter Ended June 30, 2010 Compared to the Results of
Operations for the Quarter Ended June 30, 2009
Net Revenues. Net revenues increased $17.5 million or 37.1% for the quarter ended June 30,
2010 to $64.6 million, compared to $47.1 million for the quarter ended June 30, 2009. The
increase in net revenues was primarily due to a $0.9 million or 7.6% increase in casino revenue,
a $7.6 million or 86.4% increase in lodging revenue, a $10.2 million or a 47.8% increase in food
and beverage revenue and $0.5 million or 6.3% decrease in promotional allowances related to items
furnished to guests on a complimentary basis. These increases in net revenue were partially
offset by a $1.5 million or 14.7% decrease in other revenues and a $0.2 million or 15.7% decrease
in retail revenue.
Casino Revenues. Casino revenues increased $0.9 million to $13.5 million for the quarter
ended June 30, 2010, compared to $12.5 million for the quarter ended June 30, 2009. The increase
in casino revenues was primarily due to a $0.9 million or 11.7% increase in table games revenue
and a $0.1 million or 2.5% increase in slot revenue, slightly offset by a $0.1 million or 23.8%
decrease in race and sports revenue. Poker revenue remained flat at $0.4 million period over
period. The increase in table games revenues was due to an increase in table game drop, partially
offset by a decrease in table game hold percentage. Management believes that table game drop
increased due to an increase in visitation to the casino at the Hard Rock, resulting from the
completion of the expansion project. Table game drop increased $15.9 million or 23.4% to $83.7
million from $67.8 million. The table game hold percentage decreased 110 basis points to 10.5%
from 11.6%, which was less than the expected range of 12% to 16%. The average number of table
games in operations was increased from 87 tables in 2009 to 127 tables in 2010. The net result of
these changes in table game drop and table game hold percentage was a decrease in win per table
game per day to $765 from $997, a decrease of $232 or 23.3%. We have historically reported table
game hold percentage using the gross method, while casinos on the Las Vegas Strip report table
game hold percentage using the net method (which reduces the table game drop by marker repayments
made in the gaming pit area). For the purpose of comparison to properties on the Las Vegas Strip,
our net hold percentage for the quarter ended June 30, 2010 was 13.6%, compared to 14.8% for the
quarter ended June 30, 2009. Slot machine revenues increased $0.1 million to $4.1 million from
$4.0 million. Slot machine handle increased $2.7 million to $84.1 million from $81.4 million.
Slot machine hold percentage remained constant at 4.9%, which was within the expected range of 4%
to 7%. The average number of slot machines in operation increased to 815 from 513, an increase of
302 slot machines or 58.9%. The net result of these changes in handle, hold percentage and
average number of slot machines in operation was a decrease in win per slot machine per day to
$55.49 from $86.02, a decrease of $30.53 or 35.5%. Race and sports book revenue decreased $0.1
million due to an increase in race and sports book write and a decrease in hold percentage. The
race and sports book write increased $0.4 million to $3.4 million from $3.0 million. Race and
sports book hold percentage decreased 2.4% to 5.1% from 7.5%, which was within the expected range
of 4% to 8%.
Lodging Revenues. Lodging revenues increased $7.6 million to $16.4 million for the quarter
ended June 30, 2010, compared to $8.8 million for the quarter ended June 30, 2009. The increase
in lodging revenues was primarily due to an increase in occupied rooms to 85,735 from 51,718, an
increase of 34,017 or 65.8%. The increase in occupied rooms was a result of completing the
expansion project which added approximately 865 additional guest rooms. The average daily rate
increased to $191 from $170, an increase of $21 or 12.5%. Hotel occupancy decreased 700 basis
points to 85.2% from 92.3%.
16
Table of Contents
Food and Beverage Revenues. Food and beverage revenues increased $10.2 million to $31.6
million for the quarter ended June 30, 2010, compared to $21.4 million for the quarter ended June
30, 2009. The increase in food and beverage revenues was partially due to a $3.5 million increase from Vanity (which replaced Body English), a $1.4
million increase in banquet revenue, a $0.6 million increase from Mr. Luckys, a $0.6 million
increase from Beach Club, a $0.6 million increase in room service, a $0.3 million increase from
Rare 120, a $0.1 million increase from Pink Taco, a $0.1 million increase from Starbucks and a
$0.1 million increase from Ago. The increase also was partially due to $1.3 million in revenue
from West Pool, $0.6 million in revenue from Luxe Bar, $0.4 million in revenue from Johnny
Smalls, $0.2 million in revenue from Espumoso, $0.2 million in revenue from Midway Bar, $0.1
million in revenue from Sports Deluxe and $0.1 million in revenue from Skybar, Juice Bar and
Helles Bells Bar, which were not open during the second quarter of 2009. Management believes that
the increase in visitation to the Hard Rock, as a result of completing the expansion project, has
had a positive effect on food and beverage revenues.
Retail Revenues. Retail revenues decreased $0.2 million to $1.3 million for the quarter
ended June 30, 2010, compared to $1.5 million for the quarter ended June 30, 2009. As a result of
the expansion, the Retail store lost 10% of the square footage and roughly 25% of the available
merchandising capacity. Management believes that this, coupled with the additional retail tenants
and poor market conditions, has caused the retail revenue to decline year over year.
Other Revenues. Other revenues decreased $1.5 million to $8.6 million for the quarter ended
June 30, 2010, compared to $10.1 million for the quarter ended June 30, 2009. The decrease in
other revenues was due to a $1.7 million decrease in entertainment revenue, which was slightly
offset by a $0.2 million increase in sundries. We hosted 34 entertainment events during the
quarter ended June 30, 2010, compared to 32 entertainment events during the quarter ended June
30, 2009.
Promotional Allowances. Promotional allowances decreased $0.5 million or 6.3% in the quarter
ended June 30, 2010, compared to the quarter ended June 30, 2009. Promotional allowances
decreased as a percentage of total revenues to 9.5% from 13.3% between periods.
Casino Expenses. Casino expenses increased $2.7 million or 27.6% to $12.3 million for the
quarter ended June 30, 2010, compared to $9.6 million for the quarter ended June 30, 2009. The
increase in casino expenses was primarily due to a $1.3 million increase in returned markers, a
$1.0 million increase in payroll and related expenses, a $0.8 million increase in complimentary
expenses (items furnished to customers on a complimentary basis) and a $0.3 million increase in
miscellaneous operating expenses. These increases were slightly offset by a $0.7 million decrease
in customer discounts. We issue credit in the form of markers to approved casino customers
following investigations of creditworthiness. Non-performance by these parties results in losses
up to the recorded amount of the related receivables. Business or economic conditions or other
significant events could affect the collectability of such receivables. Our provision and
allowance for doubtful accounts are based on estimates by management of the collectability of the
receivable balances at each period end. Managements estimates consider, among other factors, the
age of the receivables, the type or source of the receivables and the results of collection
efforts to date, especially with regard to significant accounts.
Lodging Expenses. Lodging costs and expenses increased 216.0% or $3.4 million to $5.0
million for the quarter ended June 30, 2010, compared to $1.6 million for the quarter ended June
30, 2009. The increase in lodging expenses was primarily due to a $1.8 million increase in labor
and related expenses, a $0.7 million increase in laundry expense, a $0.4 million increase in
travel agent commissions, a $0.2 million increase in credit card fees, a $0.2 million increase in
contract maintenance and a $0.1 million increase in other miscellaneous operating supplies. The
increase in lodging expenses are a result of completing the expansion project which increased the
total available rooms by approximately 865 rooms per night.
Food and Beverage Costs and Expenses. Food and beverage costs and expenses increased by
53.2% or $5.6 million to $16.2 million for the quarter ended June 30, 2010, compared to $10.6
million for the quarter ended June 30, 2009. Food and beverage costs and expenses in relation to
food and beverage revenues increased to 51.2% from 49.5% in the prior year on increases in food
and beverage revenues of 47.8% to $31.6 million from $21.4 million. The increase in food and
beverage costs and expenses was primarily due to a $2.3 million increase in labor and related
expenses, a $1.3 million increase in outlet management fees, a $1.2 million increase in food and
beverage product costs, a $0.3 million increase in professional services for disc jockeys and
special events, a $0.2 million increase in advertising, a $0.2 million increase in miscellaneous
operating supplies and a $0.1 million increase in credit card fees. Management believes the
increase in food and beverage expenses is a result of increased customer volumes as a result of
completing the expansion project.
Retail Costs and Expenses. Retail costs and expenses decreased slightly by 11.4% or $106,000
in the quarter ended June 30, 2010, compared to the quarter ended June 30, 2009.
Other Costs and Expenses. Other costs and expenses increased 18.7% or $1.1 million to $6.7
million for the quarter ended June 30, 2010, compared to $5.6 million for the quarter ended June
30, 2009. Other costs and expenses in relation to other income increased to 77.6% from 55.7%. The
increase in other costs and expenses was due to a $0.7 million increase in cost of
complimentaries and a $0.4 million increase in labor and related expenses. We hosted 34
entertainment events in the quarter ended June 30, 2010 compared to 32 entertainment events in
the second quarter ended June 30, 2009.
17
Table of Contents
Marketing, General and Administrative. Marketing, general and administrative expenses
increased 61.2% or $5.0 million in the quarter ended June 30, 2010, compared to the quarter ended
June 30, 2009. Marketing, general and administrative expenses in relation to gross revenues
increased to 18.3% from 14.9%. The increase in marketing, general and administrative expenses was
primarily due to a $1.6 million increase in labor and related expenses, a $1.2 million increase
in taxes and insurance, a $0.9 million increase in utilities, a $0.6 million increase in contract
maintenance, a $0.5 million increase in advertising and marketing and a $0.2 million increase in
contact services.
Management Fee-Related Party. Management fee-related party expenses increased 38.3% to $2.9
million for the quarter ended June 30, 2010. Management fees increased due to increased revenues
as a result of the completion of the expansion project. As compensation for its services, Morgans
Management receives a management fee equal to four percent of defined non-gaming revenues,
including casino rents and all other rental income, and a chain service expense reimbursement.
The reimbursement is subject to a cap of 1.5% of defined non-gaming revenues, including casino
rents and all other income.
Depreciation and Amortization. Depreciation and amortization expense increased by $6.4
million to $11.2 million for the quarter ended June 30, 2010, compared to $4.9 million for the
quarter ended June 30, 2009. The increase in depreciation and amortization expense is a result of
additional assets being placed into service, as a result of completing the expansion project.
Interest Expense. Interest expense decreased $3.6 million or 17.9% to $16.5 million for the
quarter ended June 30, 2010, compared to $20.1 million for the quarter ended June 30, 2009. The
decrease in interest expense reflects a reduction of $5.1 million in loan cost amortization, as
the initial loan costs were fully amortized in February 2010, partially offset by an increase in
interest expense of $1.5 million. The deferred financing amortization occurred over the 36-month
life of the applicable loans at approximately $1.7 million per month. Payments on the debt under
the CMBS facility are based upon LIBOR, plus a spread of 4.25%, subject to adjustment upwards in
certain circumstances (i.e., extension of the term of the financing). Payments on the debt under
the land acquisition financing are based on 30-day LIBOR, plus a blended spread of 17.9%.
Pre-opening Expenses. Pre-opening expenses decreased $4.4 million to $0.3 million for the
quarter ended June 30, 2010, compared to $4.7 million for the quarter ended June 30, 2009. The
decrease in pre-opening expenses was primarily due to completing the majority of the expansion
project in December 2009.
Income Taxes. The Company reported income tax expense of $252,000 for the quarter ended June
30, 2010 because of an increase in the deferred tax liability related to indefinite life
intangibles. The Company maintains a full valuation allowance to offset net deferred tax assets
due to the uncertainty of future earnings as required under FASB ASC 740-10 (SFAS 109), and as
further discussed below. The valuation allowance was established subsequent to the purchase
allocation on February 1, 2007 (not including deferred tax liabilities related to indefinite life
intangibles) because it could not be determined that it is more likely than not that future
taxable income will be realized to recognize deferred tax assets.
Other Comprehensive Loss. For the quarter ended June 30, 2010, the total fair value of
derivative instruments that qualified for hedge accounting changed by $3.7 million in comparison
to the quarter ended June 30, 2009 and was included in other comprehensive loss. Amounts reported
in accumulated other comprehensive loss related to derivative instruments that qualify for hedge
accounting will be reclassified to interest expense as interest payments are made on our
variable-rate debt. We reflect the change in fair value of all hedging instruments in cash flows
from operating activities.
Comprehensive (Loss) Income. Comprehensive loss was $20.6 million for the quarter ended June
30, 2010, compared to a comprehensive loss of $17.5 million for the quarter ended June 30, 2009.
The increase in comprehensive loss was due to the factors described above.
18
Table of Contents
Comparison of the Six Month Period Ended June 30, 2010 to the Six Month Period Ended June
30, 2009
The following table presents our consolidated operating results for the six month periods
ended June 30, 2010 and 2009, and the change in such data between the two periods.
Six Month | Six Month | |||||||||||||||
Period Ended | Period Ended | Change | Change | |||||||||||||
June 30, 2010 | June 30, 2009 | ($) | (%) | |||||||||||||
(in thousands) | ||||||||||||||||
INCOME STATEMENT DATA: |
||||||||||||||||
REVENUES: |
||||||||||||||||
Casino |
$ | 32,516 | $ | 24,859 | $ | 7,657 | 30.8 | % | ||||||||
Lodging |
28,333 | 15,842 | 12,491 | 78.8 | % | |||||||||||
Food and beverage |
53,345 | 33,598 | 19,747 | 58.8 | % | |||||||||||
Retail |
2,329 | 2,622 | (293 | ) | -11.2 | % | ||||||||||
Other |
15,560 | 12,384 | 3,176 | 25.6 | % | |||||||||||
Gross revenues |
132,083 | 89,305 | 42,778 | 47.9 | % | |||||||||||
Less: promotional allowances |
(13,280 | ) | (12,184 | ) | (1,096 | ) | 9.0 | % | ||||||||
Net revenues |
118,803 | 77,121 | 41,682 | 54.0 | % | |||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Casino |
25,381 | 19,818 | (5,563 | ) | -28.1 | % | ||||||||||
Lodging |
8,891 | 2,905 | (5,986 | ) | -206.1 | % | ||||||||||
Food and beverage |
28,202 | 18,045 | (10,157 | ) | -56.3 | % | ||||||||||
Retail |
1,453 | 1,456 | 3 | 0.2 | % | |||||||||||
Other |
11,583 | 7,454 | (4,129 | ) | -55.4 | % | ||||||||||
Marketing |
4,257 | 1,898 | (2,359 | ) | -124.3 | % | ||||||||||
Management feerelated party |
4,960 | 3,288 | (1,672 | ) | -50.9 | % | ||||||||||
General and administrative |
20,714 | 13,727 | (6,987 | ) | -50.9 | % | ||||||||||
Depreciation and amortization |
25,528 | 10,373 | (15,155 | ) | -146.1 | % | ||||||||||
Loss on disposal of assets |
1 | | (1 | ) | 100.0 | % | ||||||||||
Pre-opening |
712 | 6,147 | 5,435 | 88.4 | % | |||||||||||
Total costs and expenses |
131,682 | 85,111 | (46,571 | ) | -54.7 | % | ||||||||||
INCOME (LOSS) FROM OPERATIONS |
(12,879 | ) | (7,990 | ) | (4,889 | ) | 61.2 | % | ||||||||
Interest income |
4 | 321 | (317 | ) | -98.8 | % | ||||||||||
Interest expense, net of capitalized interest |
(35,513 | ) | (40,067 | ) | 4,554 | -11.4 | % | |||||||||
Loss before income tax expense |
(48,388 | ) | (47,736 | ) | (652 | ) | 1.4 | % | ||||||||
Income tax expense |
252 | | 252 | 100 | % | |||||||||||
Net Loss |
(48,640 | ) | (47,736 | ) | (904 | ) | 1.9 | % | ||||||||
Other Comprehensive Loss: |
||||||||||||||||
Interest rate cap fair market value
adjustment, net of tax |
1,472 | 5,898 | (4,426 | ) | -75.0 | % | ||||||||||
Comprehensive loss |
$ | (47,168 | ) | $ | (41,838 | ) | $ | (5,330 | ) | 12.7 | % | |||||
Results of Operations for the Six Month Period Ended June 30, 2010 Compared to the Results
of Operations for the Six Month Period Ended June 30, 2009
Net Revenues. Net revenues increased $41.7 million or 54.0% to $118.9 million for the six
month period ended June 30, 2010, compared to $77.1 million for the six month period ended June
30, 2009. The increase in net revenues was primarily due to a $7.7 million or 30.8% increase in
casino revenue, a $12.5 million or 78.8% increase in lodging revenue, a $19.7 million or 58.8%
increase in food and beverage revenue and a $3.2 million increases in other revenue. These
increases were slightly offset by a $0.3 million or 11.2% decrease in retail revenues and a $1.1
million or 9.0% increase in promotional allowances related to items furnished to customers on a
complimentary basis.
19
Table of Contents
Casino Revenues. Casino revenues increased $7.7 million to $32.5 million for the six month
period ended June 30, 2010, compared to $24.9 million for the six month period ended June 30,
2009. The increase in casino revenues was primarily due to a $6.5 million or 39.6% increase in
table games revenue and a $1.5 million or 21.4% increase in slot revenue, which was partially
offset by a $0.3 million decrease in race and sports revenue. Poker revenue remained flat at $0.8
million. The increase in table games revenues was due to an increase in table game hold
percentage and an increase in table game drop. Management believes
that table game drop increased due to an increase in visitation to the Hard Rock as a result
of completing the expansion project. Table game hold percentage increased 80 basis points to
13.1% from 12.3%, which was within the expected range of 12% to 16%. Table game drop increased
$40.5 million or 30.3% to $174.2 million from $133.6 million. The average number of table games
in operations was increased from 87 tables in 2009 to 125 tables in 2010. The net result of these
changes in table game drop and table game hold percentage was a decrease in win per table game
per day to $1,013 from $1,076, a decrease of $63 or 5.8%. We have historically reported table
game hold percentage using the gross method, while casinos on the Las Vegas Strip report hold
percentage using the net method (which reduces the table game drop by marker repayments made in
the gaming pit area). For the purpose of comparison to properties on the Las Vegas Strip, our net
hold percentage for the six month period ended June 30, 2010 was 16.7%, compared to 15.4% for the
six month period ended June 30, 2009. Slot machine revenues increased $1.5 million to $8.5
million from $7.0 million. Slot machine handle increased $19.6 million to $181.3 million from
$161.6 million. Slot machine hold percentage increased 40 basis points to 4.7% from 4.3%, which
was within the expected range of 4% to 7%. The average number of slot machines in operation
increased to 827 from 522, an increase of 305 slot machines or 58.3%. The net result of these
changes in handle, hold percentage and average number of slot machines in operation was a
decrease in win per slot machine per day to $56.87 from $74.16, a decrease of $17.29 or 23.3%.
Race and sports book revenue decreased $0.3 million due to a decrease in hold percentage,
partially offset by an increase in race and sports book write. The race and sports book write
increased $3.7 million to $14.4 million from $10.7 million. Race and sports book hold percentage
decreased 3.8% to 2.5% from 6.3%, which was less than the expected range of 4% to 8%.
Lodging Revenues. Lodging revenues increased $12.5 million to $28.3 million for the six
month period ended June 30, 2010, compared to $15.8 million for the six month period ended June
30, 2009. The increase in lodging revenues was primarily due to an increase in occupied rooms to
167,689 from 101,140, an increase of 66,549 or 65.8%. The increase in occupied rooms was a result
of completing the expansion project which added approximately 865 additional guest rooms. Hotel
occupancy decreased to 83.6% from 90.8% between periods and average daily rate increased to $169
from $157, an increase of 7.9% between periods.
Food and Beverage Revenues. Food and beverage revenues increased $19.7 million to $53.3
million for the six month period ended June 30, 2010, compared to $33.6 million for the six month
period ended June 30, 2009. The increase in food and beverage revenues was partially due to a
$7.4 million increase in Vanity (which replaced Body English), a $1.6 million increase from Rare
120, a $1.1 million increase from Mr. Luckys, a $1.0 million increase from room service, a $0.4
million increase from Pink Taco, a $0.4 million increase from Beach Club, a $0.3 million increase
from banquet revenue, a $0.2 million increase from Starbucks, a $0.1 million increase from The
Joint Bar and a $0.1 million increase from Ago. This increase also was partially due to $1.5
million in revenue from West Pool, $1.0 million in revenue from Luxe Bar, $0.4 million in revenue
from Midway Bar, $0.3 million in revenue from Espumoso, $0.3 million in revenue from Johnny
Smalls, $0.2 million in revenue from Sports Deluxe and $0.1 million in revenue from Skybar,
Helles Bells Bar, and Juice Bar which were not open in the six months ended June 30, 2009.
Management believes these increases are a result of increased visitation as a result of
completing the expansion project.
Retail Revenues. Retail revenues decreased $0.3 million to $2.3 million for the six month
period ended June 30, 2010, compared to $2.6 million for the six month period ended June 30,
2009. As a result of the expansion, the Retail store lost 10% of the square footage and roughly
25% of the available merchandising capacity. Management believes that this, coupled with the
additional retail tenants and poor market conditions, has caused the retail revenue to decline
year over year.
Other Revenues. Other revenues increased $3.2 million to $15.6 million for the six month
period ended June 30, 2010, compared to $12.4 million for the six month period ended June 30,
2009. The increase in other revenues was due to a $0.7 million increase in entertainment revenue,
a $0.4 million increase in Reliquary and Rock Spa revenue and a $2.1 million increase in other
miscellaneous revenue resulting from retail tenants and licensees. Management believes the
entertainment revenue increased due to additional patron volume as a result of opening the new
expanded The Joint in April 2009. We hosted 52 entertainment events during the six month period
ended June 30, 2010, compared to 37 during the six month period ended June 30, 2009.
Promotional Allowances. Promotional allowances increased $1.1 million or 9.0% to $13.3
million for the six month period ended June 30, 2010, compared to $12.2 million for the six month
period ended June 30, 2009. Promotional allowances decreased as a percentage of total revenues to
10.1% from 13.6% between periods.
Casino Expenses. Casino expenses increased $5.6 million or 28.1% to $25.4 million for the
six month period ended June 30, 2010, compared to $19.8 million for the six month period ended
June 30, 2009. The increase in casino expenses was primarily due to a $2.1 million increase in
complimentary expenses (items furnished to customers on a complimentary basis), a $1.9 million
increase in labor and related expenses, a $1.1 million increase in returned markers, a $0.7
million increase in taxes and licenses, and a $0.2 million increase in miscellaneous operating
supplies, which were slightly offset by a $0.4 million decrease in customer discounts. We issue
credit in the form of markers to approved casino customers following investigations of
creditworthiness. Non-performance by these parties results in losses up to the recorded amount of
the related receivables. Business or economic conditions or other significant events could affect
the collectability of such receivables. Our provision and allowance for doubtful accounts are
based on estimates by management of the collectability of the receivable balances at each period
end. Managements estimates consider, among other factors, the age of the receivables, the type
or source of the receivables and the results of
collection efforts to date, especially with regard to significant accounts. Management
believes bad debt is increasing due to a number of factors affecting consumers, including a
slowdown in the economy and other economic factors.
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Lodging Expenses. Lodging costs and expenses increased 206.1% or $6.0 million to $8.9
million for the six month period ended June 30, 2010, compared to $2.9 million for the six month
period ended June 30, 2009. Lodging expenses in relation to lodging revenues increased to 31.4%
from 18.3% in the prior period. The increase in lodging expenses was primarily due to a $3.4
million increase in labor and related expenses, a $1.2 million increase in laundry expense, a
$0.5 million increase in travel agent commissions, a $0.4 million increase in miscellaneous
operating supplies, a $0.3 million increase in credit card fees and a $0.2 million increase in
room amenities. The increase in lodging expenses are a result of completing the expansion project
which increased the total available rooms by approximately 865 rooms per night.
Food and Beverage Costs and Expenses. Food and beverage costs and expenses increased by
56.3% or $10.2 million to $28.2 million for the six month period ended June 30, 2010, compared to
$18.0 million for the six month period ended June 30, 2009. Food and beverage costs and expenses
in relation to food and beverage revenues decreased slightly to 52.9% from 53.7% in the prior
year due primarily to increases in food and beverage revenues of 58.8% to $53.3 million from
$33.6 million. The increase in food and beverage costs and expenses was primarily due to a $4.4
million increase in labor and related expenses, a $2.9 million increase in food and beverage
product costs, a $1.7 million increase in management fees, a $0.6 million increase in
professional services for disc jockeys and special events and a $0.4 million increase in
advertising expense.
Retail Costs and Expenses. Retail costs and expenses remained constant at $1.5 million in
the six month period ended June 30, 2010, compared to the six month period ended June 30, 2009.
Other Costs and Expenses. Other costs and expenses increased 55.4% or $4.1 million in the
six month period ended June 30, 2010, compared to the six month period ended June 30, 2009. Other
costs and expenses in relation to other income increased to 74.4% from 60.2%. The increase in
other costs and expenses was primarily due to a $1.9 million increase in entertainment expense, a
$0.9 million increase in labor and related expenses, a $0.7 million increase in complimentaries
expense, a $0.2 million increase in product costs, a $0.1 million increase in repairs and
maintenance and a $0.3 million increase in miscellaneous operating supplies.
Marketing, General and Administrative. Marketing, general and administrative expenses
increased 59.8% or $9.3 million in the six month period ended June 30, 2010, compared to the six
month period ended June 30, 2009. Marketing, general and administrative expenses in relation to
gross revenues increased to 18.9% from 17.5%. The increase in marketing, general and
administrative expenses was primarily due to a $3.6 million increase in payroll and related
expenses, a $2.0 million increase in taxes, a $1.9 million increase in contract maintenance and a
$1.8 million increase in utilities.
Management Fee-Related Party. Management fee-related party expenses increased $1.7 million
or 50.9% to $5.0 million for the six month period ended June 30, 2010, compared to $3.3 million
for the six month period ended June 30, 2009, due to increased revenues as a result of completing
our expansion project. As compensation for its services, Morgans Management receives a management
fee equal to 4% of defined non-gaming revenues, including casino rents and all other rental
income, and a chain service expense reimbursement. The reimbursement is subject to a cap of 1.5%
of defined non-gaming revenues, including casino rental and all other income.
Depreciation and Amortization. Depreciation and amortization expense increased by $15.1
million to $25.5 million for the six month period ended June 30, 2010, compared to $10.4 million
for the six month period ended June 30, 2009. The increase in depreciation and amortization
expense is a result of additional assets being placed into service, as a result of completing the
expansion project.
Interest Expense. Interest expense decreased $4.6 million or 11.4% to $35.5 million for the
six month period ended June 30, 2010, compared to $40.1 million for the six month period ended
June 30, 2009. The decrease in interest expense reflects a reduction of $8.8 million in loan cost
amortization, as the initial loan costs were fully amortized in February 2010, partially offset
by an increase in interest expense of $4.3 million. The deferred financing amortization occurred
over the 36-month life of the applicable loans at approximately $1.7 million per month. Payments
on the debt under the CMBS facility are based upon LIBOR, plus a spread of 4.25%, subject to
adjustment upwards in certain circumstances (i.e., extension of the term of the financing).
Payments on the debt under the land acquisition financing are based on 30-day LIBOR, plus a
blended spread of 17.9%.
Pre-opening Expenses. Pre-opening expenses decreased $5.4 million to $0.7 million for the
six month period ended June 30, 2010, compared to $6.1 million for the six month period ended
June 30, 2009. The decrease in pre-opening expenses was primarily due to completing the majority
of the expansion project in December 2009.
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Income Taxes. The Company reported income tax expense of $252,000 for the six month period
ended June 30, 2010 because of an increase in the deferred tax liability related to indefinite
life intangibles. The Company maintains a full valuation allowance to offset net deferred tax
assets due to the uncertainty of future earnings as required under FASB ASC 740-10 (SFAS 109),
and as further discussed below. The valuation allowance was established subsequent to the purchase
allocation on February 1, 2007 (not including deferred tax liabilities related to indefinite life
intangibles) because it could not be determined that it is more likely than not that future
taxable income will be realized to recognize deferred tax assets.
Other Comprehensive Loss. For the six month period ended June 30, 2010, the total fair value
of derivative instruments that qualified for hedge accounting changed by $4.4 million in
comparison to the six month period ended June 30, 2009 and was included in other comprehensive
loss. Amounts reported in accumulated other comprehensive loss related to derivative instruments
that qualify for hedge accounting will be reclassified to interest expense as interest payments
are made on our variable-rate debt. We reflect the change in fair value of all hedging
instruments in cash flows from operating activities.
Comprehensive Loss. Comprehensive loss was $47.2 million for the six month period ended June
30, 2010, compared to a comprehensive loss of $41.8 million for the six month period ended June
30, 2009. The increase in comprehensive loss was due to the factors described above.
Cash Flows for the Six Month Period Ended June 30, 2010 Compared to Cash Flows for the Six
Month Period Ended June 30, 2009
Operating Activities. Net cash used by operating activities amounted to $6.0 million for the
six month period ended June 30, 2010, compared to $15.1 million for the six month period ended
June 30, 2009. The decrease in net cash used in operating activities was primarily due to a
decline in interest expense on the mezzanine loans under the CMBS facility as a result of the
interest being deferred which will compound and accrue until either certain cash flow covenants
have been met or the maturity date of such loans.
Investing Activities. Net cash used in investing activities amounted to $86.6 million for
the six month period ended June 30, 2010, compared to $116.5 million for the six month period
ended June 30, 2009. The net cash used in investing activities primarily relates to the
construction expenses of the expansion project and the change in restricted reserve accounts
under the CMBS facility. The decrease in net cash used in investing activities primarily results
from utilizing restricted cash construction reserves to complete the expansion project and the
resulting reduction in the investment in new assets.
Financing Activities. Net cash provided by financing activities amounted to $94.1 million
for the six month period ended June 30, 2010, compared to $134.4 million for the six month period
ended June 30, 2009. The net cash provided by financing activities for the quarter ended June 30,
2010 represents an additional $95.0 million of borrowings under the CMBS facility, offset by a
$0.9 million reduction in loan financing costs. The decrease in net cash provided by financing
activities primarily results from our completion of the expansion project and the resulting
reduction in construction funding under the CMBS facility.
Liquidity and Capital Resources
As of June 30, 2010, we had approximately $13.9 million in available cash and cash
equivalents. As of June 30, 2010, our total long-term debt, including the current portion, was
approximately $1.3 billion and our total members deficit was approximately $112.0 million.
Sources of Liquidity
CMBS Facility. In connection with our acquisition of the Hard Rock, we entered into a debt
financing in the form of a real estate loan in the CMBS market. The CMBS facility provided for,
among other borrowing availability, a construction loan of up to $620.0 million for the expansion
project at the Hard Rock and an acquisition loan of $760.0 million which we used to pay a portion
of the purchase price and costs and expenses for our acquisition of the Hard Rock and related
assets. As of June 30, 2010, we had fully drawn the $620.0 million under the construction loan.
In conjunction with fully drawing the construction loan, we paid down $32.9 million of the
acquisition loan, paid $0.8 million in exit fees, funded $3.6 million into the interest reserve,
funded $20.0 million into a general reserve account and $11.3 million into an equity/accrual
subaccount, as required under the loan agreement. The equity accrual subaccount holds amounts
funded into the general reserve in excess of $20 million at any time. If a debt service coverage
ratio of 1.2:1 is satisfied, then the amounts held in such account will be released to make
certain payments to the DLJMB Parties on account of their equity contributions to us. If the
debt service coverage ratio is not satisfied within one year from the date of the deposits into
the equity accrual/subaccount, then such amounts may be used to repay the mortgage loan.
The financing incurs interest payable through a funded interest reserve initially, then
through cash, at a rate (blended among the debt secured by assets and the junior and senior
mezzanine debt, if applicable) of LIBOR plus 4.25%, subject to adjustment upwards in certain
circumstances (i.e., extension of the term of the financing). The loan agreements under the CMBS
facility include customary affirmative and negative covenants for similar financings, including,
among others, restrictive covenants regarding incurrence of liens, sales of assets, distributions
to affiliates, changes in business, cancellation of indebtedness, dissolutions, mergers and
consolidations, as well as limitations on security issuances, transfers of any of our real
property and removal of any material article of furniture, fixture or equipment from our real property.
We have evaluated these requirements and determined that we were in compliance as of June 30,
2010.
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Equity Contributions. During the six month period ended June 30, 2010, our members did not
contribute additional cash or post additional letters of credit to the Company. As of June 30,
2010, the members had funded all of the required capital contributions needed to fund the equity
for the expansion project. The JV Agreement provides that in certain cases DLJMB IV HRH, LLC
(DLJMB IV HRH) may request that our members make necessary capital contributions contemplated
by the operating plans and budgets approved by our board of directors, or in the event of an
unexpected shortfall in capital. If we require additional capital with respect to matters
approved by our board of directors, DLJMB IV HRH also has the right, without the approval of our
board of directors, to determine appropriate sources of such capital in the form of debt or
equity financing. Such financing must be funded either by third parties who are not specified
competitors of Morgans or our existing members or their affiliates on fair market terms (as
determined by our board of directors, or, in some cases by a written appraisal or fairness
opinion).
Liquidity Requirements
Short-Term Liquidity Requirements. We generally consider our short-term liquidity
requirements to consist of those items that are expected to be incurred within the next 12 months
and believe those requirements consist primarily of funds necessary to pay operating expenses,
debt amortization, expansion project costs and requirements and other expenditures associated
with the Hard Rock, including funding our reserve accounts. We expect our short-term liquidity
requirements for the next 12 months to include (a) expenditures of $0.1 million (of the total
budgeted amount of $760 million) for the expansion and renovation project at the Hard Rock and
(b) additional expenses of three percent of our gross revenues for replacements and
refurbishments at the Hard Rock.
We expect to meet our short-term liquidity needs through existing working capital, cash
provided by operations, licensing of our intellectual property and restricted cash reserves.
Management anticipates we will not return to a positive cash position, at the earliest until the
economic environment has improved from its current condition. In the event that our expected sources of liquidity do not meet the levels
we anticipate, then a further restructuring of debt may be necessary. We believe that these sources of
capital will be sufficient to meet our short-term liquidity requirements, however there can be no assurances.
In addition, gaming regulators require that we maintain a certain amount of cash on hand for
our gaming operations. Under the CMBS facility, we established a cash management account to hold
the cash that we generate from our operations. This account is under the sole control of the
lenders under the CMBS facility, which has a first priority security interest in the account and
any amounts on deposit therein. The terms of the CMBS facility govern the use of amounts on
deposit in the account, and condition our ability to receive such amounts on the satisfaction of
other payments required by the CMBS facility.
Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements
to consist of those items that are expected to be incurred beyond the next 12 months and believe
these requirements consist primarily of funds necessary to pay interest payments and perform necessary renovations and other non-recurring capital expenditures
that need to be made periodically to our property. We intend to satisfy these long-term liquidity
requirements through various sources of capital, including our existing working capital, cash
provided by operations, licensing of our intellectual property and restricted cash reserves.
Other sources may be sales of equity securities and/or cash generated through property
dispositions and joint venture transactions. In addition, the current maturity date of the $1.3
billion outstanding under the CMBS facility is February 9, 2011, with three one-year options to
extend the maturity date provided that we satisfy certain conditions.
Our ability to incur additional debt is dependent upon our ability to satisfy the borrowing
restrictions imposed by our current lenders. In addition, our ability to raise funds through the
issuance of equity securities is dependent upon, among other things, general market conditions
and market perceptions about us. We will continue to analyze which source of capital is most
advantageous to us at any particular point in time, but the equity markets may not be
consistently available on terms that are attractive or at all.
Global market and economic conditions continue to be challenging with tight credit
conditions and recessionary conditions in most major economies continuing into 2010. As a result
of these market conditions, the cost and availability of credit has been and may continue to be
adversely affected by illiquid credit markets and wider credit spreads. These factors also have
lead to a decrease in spending by businesses and consumers alike, especially in the markets in
which we do business. Continued instability in the U.S. and international markets and economies
and a prolonged slowness in business and consumer spending have and may continue to adversely
affect our liquidity and financial condition, and the liquidity and financial condition of our
customers, including our ability to refinance maturing liabilities and access the capital markets
to meet liquidity needs.
We believe that the sources of capital described above will continue to be available to us
in the future and will be sufficient to meet our long-term liquidity requirements.
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Capital Expenditures, Interest Expense and Reserve Funds
We are obligated to maintain reserve funds for capital expenditures at the Hard Rock as
determined pursuant to our CMBS facility. These capital expenditures relate primarily to the
periodic replacement or refurbishment of furniture, fixtures and equipment. Our CMBS facility
requires us to deposit funds into a replacements and refurbishments reserve fund at amounts equal
to three percent of the Hard Rocks gross revenues and requires that the funds be set aside in
restricted cash. As of June 30, 2010, $1.3 million was available in restricted cash reserves for
future capital expenditures in the replacements and refurbishments reserve fund.
In addition, we are also obligated to maintain a reserve fund for interest expense as
determined pursuant to the CMBS facility. On the closing date of our acquisition of the Hard
Rock, we deposited $45 million into an interest reserve fund to be held as additional collateral
under the CMBS facility for the payment of interest expense shortfalls and in December 2009 we
deposited an additional $1.0 million into the interest reserve fund. The lenders under the CMBS
facility will make disbursements from the interest reserve fund upon our satisfaction of
conditions to disbursement under the CMBS facility. As of June 30, 2010, $6.6 million was
available in restricted cash reserves in the interest reserve fund. Furthermore, as a result of
fully drawing the construction loan, we have funded a general reserve account and an
equity/accrual subaccount, as required under the loan agreement. As of June 30, 2010, $20.0
million and $11.3 million was available in restricted cash reserves in the general and
equity/accrual subaccount reserve funds, respectively. The equity accrual subaccount holds
amounts funded into the general reserve in excess of $20 million at any time. If a debt service
coverage ratio of 1.2:1 is satisfied, then the amounts held in such account will be released to
make certain payments to the DLJMB Parties on account of their equity contributions to us. If
the debt service coverage ratio is not satisfied within one year from the date of the deposits
into the equity accrual/subaccount, then such amounts may be used to repay the mortgage loan.
We are also obligated to maintain reserve funds for interest expense and property tax as
determined pursuant to the $50.0 million land acquisition loan we have entered into with respect
to an approximately 11-acre parcel of land located adjacent to the Hard Rock. The lenders will
make disbursements from the interest and property tax reserve funds upon our satisfaction of
conditions to disbursement under the land acquisition loan. As of June 30, 2010, $3.1 million and
$0.7 million was available in restricted cash reserves in the interest and property tax reserve
funds, respectively.
Derivative Financial Instruments
We use derivative financial instruments to manage our exposure to the interest rate risks
related to the variable rate debt under our CMBS facility. We do not use derivatives for trading
or speculative purposes and only enter into contracts with major financial institutions based on
their credit rating and other factors. The fair value of our derivative financial instruments is
determined by our management. Such methods incorporate standard market conventions and techniques
such as discounted cash flow and option pricing models to determine fair value. We believe these
methods of estimating fair value result in general approximation of value, and such value may or
may not be realized.
On February 9, 2010, we purchased five new interest rate cap agreements with an aggregate
notional amount of $1.285 billion with a LIBOR cap of 1.23313%. We purchased the new interest
rate cap agreements for an amount equal to approximately $1.6 million. We determined that four
out of the five interest rate caps qualify for hedge accounting and the caps are designated as
cash flow hedges. The changes in fair value of the remaining interest rate cap that does not
qualify for hedge accounting are recognized directly in earnings.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is initially reported in other comprehensive income (outside of earnings)
and subsequently reclassified to earnings when the hedged transaction affects earnings, and the
ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings. We assess the effectiveness under the hypothetical derivative method where the
cumulative change in fair value of the actual cap is compared to the cumulative change in fair
value of a hypothetical cap having terms that exactly match the critical terms of the hedged
transaction. For derivatives that do not qualify for hedge accounting or when hedge accounting is
discontinued, the changes in fair value of the derivative instrument is recognized directly in
earnings.
Off-Balance-Sheet Arrangements
We do not have any off-balance-sheet arrangements that have, or are reasonably likely to
have, a current or future material effect on our financial condition, revenue, expenses, results
of operations, liquidity, capital expenditures or capital resources. Currently, we have no
guarantees, such as performance guarantees, keep-well agreements or indemnities in favor of third
parties.
Contractual Obligations and Commitments
We have entered into various contractual obligations as detailed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009. During the six month period ended June 30,
2010, we signed construction commitments bringing the aggregate amount to
approximately $595.4 million, which consists of commitments to the general contractor for the
expansion project and for other items related to the expansion and renovation of the Hard Rock.
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CRITICAL ACCOUNTING POLICIES
Critical accounting policies and estimates are those that are both important to the
presentation of our financial condition and results of operations and requires our most
difficult, complex or subjective judgments and that have the most significant impact on our
financial condition and results of operations.
The preparation of our consolidated financial statements in conformity accounting principles
generally accepted in the United States (GAAP) require us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience, information that is currently available to us and on various
other assumptions that we believe are reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. We believe the following
critical accounting policies affect the most significant judgments and estimates used in the
preparation of our consolidated financial statements.
Impairment of Intangible Assets and Other Long-lived Assets
We evaluate our goodwill, intangible assets and other long-lived assets in accordance with
the applications of FASB ASC 350 (prior authoritative literature : SFAS No. 142 , Accounting
for Goodwill and Other Intangible Assets, (SFAS No. 142)), related to goodwill and other
intangible assets and of FASB ASC 360-10 (prior authoritative literature: SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144 )), related to
possible impairment of or disposal of long-lived assets. For goodwill and indefinite-life
intangible assets, we will review the carrying values on an annual basis and between annual dates
in certain circumstances. For assets to be disposed of, we recognize the asset at the lower of
carrying value or fair market value less costs of disposal, as estimated based on comparable
asset sales, solicited offers, or a discounted cash flow model. For assets to be held and used,
we review for impairment whenever indicators of impairment exist.
Inherent in reviewing the carrying amounts of the above assets is the use of various
estimates. First, our management must determine the usage of the asset. Impairment of an asset is
more likely to be recognized where and to the extent our management decides that such asset may
be disposed of or sold. Assets must be tested at the lowest level for which identifiable cash
flows exist. This testing means that some assets must be grouped and our management exercises
some discretion in grouping those assets. Future cash flow estimates are, by their nature,
subjective and actual results may differ materially from our estimates. If our ongoing estimates
of future cash flows are not met, we may have to record additional impairment charges in future
accounting periods. Our estimates of cash flows are based on the current regulatory, social and
economic climates where we conduct our operations as well as recent operating information and
budgets for our business. These estimates could be negatively impacted by changes in federal,
state or local regulations, economic downturns, or other events affecting various forms of travel
and access to our hotel casino.
Indefinite-lived intangible assets must be reviewed for impairment at least annually and
between annual test dates in certain circumstances. We perform our annual impairment test for
indefinite-lived intangible assets in the fourth quarter of each fiscal year. While certain of
the inputs used in our valuation model for assessing the value relative to our indefinite-lived
intangible assets potentially constitute Level 2 inputs (observable inputs), we often apply
adjustments to the inputs, and, thus, render those inputs as Level 3 (unobservable inputs). As a
result, the majority of our inputs used in our valuation model constitute Level 3 inputs. We
believe that no significant events occurred during the quarter ended June 30, 2010 that would
indicate impairment exists.
Non-financial assets must be reviewed for impairment at least annually and between annual
test dates in certain circumstances. We perform our annual impairment test for non-financial
assets in the fourth quarter of each fiscal year. Most of the inputs used in our valuation model
for assessing the value relative to our non-financial assets constitute Level 2 inputs. We
believe that no significant events occurred during the quarter ended June 30, 2010 that would
indicate impairment exists.
Depreciation and Amortization Expense
Depreciation expense is based on the estimated useful life of our assets. The respective
lives of the assets are based on a number of assumptions made by us, including the cost and
timing of capital expenditures to maintain and refurbish our hotel casino, as well as specific
market and economic conditions. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives for financial reporting purposes and
accelerated methods for income tax purposes.
While our management believes its estimates are reasonable, a change in the estimated lives
could affect depreciation expense and net income or the gain or loss on the sale of our hotel
casino or any of its assets. Substantially all property and equipment is pledged as collateral
for long-term debt.
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Derivative Instruments and Hedging Activities
We manage risks associated with our current and anticipated future borrowings, such as
interest rate risk and its potential impact on our variable rate debt. FASB ASC 815-10,
Derivatives and Hedging ( prior authoritative literature: SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted) (FASB ASC 815-10
(SFAS No. 133)), establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities.
As required by FASB ASC 815-10 (SFAS No. 133), we record all derivatives on our balance sheet at
fair value. The accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and the resulting designation. Derivatives used to hedge the exposure to
changes in the fair value of an asset, liability, or firm commitment attributable to a particular
risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the
exposure to variability in expected future cash flows, or other types of forecasted transactions,
are considered cash flow hedges.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is initially reported in other comprehensive income (outside of earnings)
and subsequently reclassified to earnings when the hedged transaction affects earnings, and the
ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings. We assess the effectiveness under the hypothetical derivative method where the
cumulative change in fair value of the actual cap is compared to the cumulative change in fair
value of a hypothetical cap having terms that exactly match the critical terms of the hedged
transaction. For derivatives that do not qualify for hedge accounting or when hedge accounting is
discontinued, the changes in fair value of the derivative instrument is recognized directly in
earnings.
Our objective in using derivatives is to add stability to interest expense and to manage its
exposure to interest rate movements or other identified risks. To accomplish this objective, we
primarily use interest rate caps as part of its cash flow hedging strategy. During the quarter
ended June 30, 2010, interest rate caps were used to hedge the variable cash flows associated
with existing variable-rate debt.
Derivative instruments and hedging activities require us to make judgments on the nature of
our derivatives and their effectiveness as hedges. These judgments determine if the changes in
fair value of the derivative instruments are reported as a component of interest expense in the
consolidated statements of operations or as a component of equity on our consolidated balance
sheets. While we believe our judgments are reasonable, a change in a derivatives fair value or
effectiveness as a hedge could affect expenses, net income and equity.
Fair Value Measurements
FASB ASC 820-10, Fair Value Measurements and Disclosures (prior authoritative literature:
SFAS No. 157, Fair Value Measurements, issued September 2006) (FASB ASC 820-10 (SFAS No. 157)),
emphasizes that fair value is a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, FASB ASC 820-10 (SFAS No. 157) establishes a
fair value hierarchy that distinguishes between market participant assumptions based on market
data obtained from sources independent of the reporting entity (observable inputs that are
classified within Levels 1 and 2 of the hierarchy) and the reporting entitys own assumptions
about market participant assumptions (unobservable inputs classified within Level 3 of the
hierarchy). We have applied FASB ASC 820-10 (SFAS No. 157) to recognize the liability related to
our derivative instruments at fair value to consider the changes in our creditworthiness and the
creditworthiness of our counterparties in determining any credit valuation adjustments.
Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted
prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates and yield curves that are observable at commonly-quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entitys own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. Our assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment and considers factors specific to
the asset or liability.
Currently, we use interest rate cap agreements to manage our interest rate risk. The
valuation of these derivative instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative
instrument. This analysis reflects the contractual terms of the derivative instruments, including
the period to maturity, and uses observable market-based inputs, including interest rate curves
and implied volatilities. To comply with the provisions of FASB ASC 820-10 (SFAS No. 157), we
incorporate credit valuation adjustments to appropriately reflect both our own nonperformance
risk and the respective counterpartys nonperformance risk in the fair value measurements. In
adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we
have considered the impact of netting and any applicable credit enhancements, such as collateral
postings, thresholds, mutual puts and guarantees.
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Although we have determined that the majority of the inputs used to value our derivative
instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with our derivative instruments use Level 3 inputs, such as estimates of current
credit spreads to evaluate the likelihood of default by us or any of our counterparties. However,
as of June 30, 2010, we have assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and have determined that the
credit valuation adjustments are not significant to the overall valuation of our derivative
instruments. As a result, we have determined that our derivative valuations in their entirety are
classified in Level 2 of the fair value hierarchy. As of June 30, 2010, the total value of the
interest rate caps valued under FASB ASC 820-10 (SFAS No. 157) included in other assets is
approximately $60,000.
Although we have determined that the majority of the inputs used to value our long-term debt
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
our long-term debt use Level 3 inputs, such as estimates of current credit spreads to evaluate
the likelihood of default by us or our lenders. However, as of June 30, 2010, we have assessed
the significance of the impact of the credit valuation adjustments on the overall valuation of
our long-term debt and have determined that the credit valuation adjustments are not significant
to the overall valuation of our long-term debt. As a result, we have determined that our
long-term debt valuations in their entirety are classified in Level 2 of the fair value
hierarchy. As of June 30, 2010, the total fair value of our long-term debt valued under FASB ASC
820-10 (SFAS No. 157) did not materially differ from its carrying value of approximately $1.3
billion.
Share-Based Payments
Our only share-based award activity is the grant of Class C Units of the Company to certain
executive officers and other employees. Under FASB ASC 718-10, Compensation (prior authoritative
literature: SFAS No. 123R, Share-Based Payment), at the issuance date of January 14, 2009, the
Class C Units were valued at zero as their value is subordinate to the capital contributions of
our other members and all of our outstanding debt, which currently exceeds the fair market value
of the Company. The Class C Units contain certain vesting conditions, including time thresholds,
our attainment of performance targets and our completion of milestones related to our expansion
project. As of June 30, 2010, no GAAP expense has been recorded for the Class C Units. No taxable
event occurs with respect to the Class C Units until they fully vest and are available to the
respective grantee.
Income Taxes
Under FASB ASC 740-10, an entity is required to record a valuation allowance against some
or all of the deferred tax assets if it is more likely than not that some or all of the deferred
tax assets will not be realized. To make such determination, we analyze positive and negative
evidence, including history of earnings or losses, loss carryback potential, impact of reversing
temporary differences, tax planning strategies, and future taxable income. We have reported net
operating losses for consecutive years and do not have projected taxable income in the near
future. This significant negative evidence causes our management to believe a full valuation
allowance should be recorded against the deferred tax assets. The deferred tax liability related
to the stepped-up basis on land and indefinite-lived intangibles are the only deferred tax items
not offset by the valuation allowance. This treatment is consistent with the valuation allowance
calculations in prior periods.
We use estimates related to cash flow projections for the application of FASB ASC 740-10 to
the realization of deferred income tax assets. Our estimates are based upon recent operating
results and budgets for future operating results. These estimates are made using assumptions
about the economic, social and regulatory environments in which we operate. These estimates
could be negatively impacted by numerous unforeseen events, including changes to the regulations
affecting how we operate our business, changes in the labor market or economic downturns in the
areas where we operate.
We assess our projected future taxable income (loss) based on our expansion plans, debt
service and history of earnings and losses. Our management could not determine that it is more
likely than not that future taxable income will be realized to recognize deferred tax assets.
Accordingly, during the quarter ended June 30, 2010, we maintained a valuation allowance equal
to our Net Deferred Tax Assets (excluding deferred tax liabilities relating to land and
indefinite life intangible assets).
On January 1, 2007, we adopted the provisions for uncertain tax positions under FASB ASC
740-10 (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of SFAS No. 109) . As of December 31, 2009 and June 30, 2010, we had zero
unrecognized tax benefits. We do not believe we will have any material changes in our
unrecognized tax positions over the next 12 months. We do not have any interest or penalties
associated with any unrecognized tax benefits.
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Allowance for Uncollectible Receivables
Substantially all of our accounts receivable are unsecured and are due primarily from the
our casino and hotel patrons and convention functions. Financial instruments that potentially
subject us to concentrations of credit risk consist principally of casino accounts receivable. We
issue credit in the form of markers to approved casino customers following investigations of
creditworthiness. Non-performance by these parties would result in losses up to the recorded
amount of the related receivables. Business or economic conditions or other significant events
could also affect the collectibility of such receivables.
Accounts receivable, including casino and hotel receivables, are typically non-interest
bearing and are initially recorded at cost. Accounts are written off when management deems them
to be uncollectible. Recoveries of accounts previously written off are recorded when received. An
estimated allowance for doubtful accounts is maintained to reduce our receivables to their
carrying amount, which approximates fair value. The allowance is estimated based on specific
review of customer accounts as well as our managements experience with collection trends in the
casino industry and current economic and business conditions. Our managements estimates
consider, among other factors, the age of the receivables, the type or source of the receivables,
and the results of collection efforts to date, especially with regard to significant accounts.
Change in customer liquidity or financial condition could affect the collectability of that
account, resulting in the adjustment upward or downward in the provision for bad debts, with a
corresponding impact to our results of operations.
Recently Issued and Adopted Accounting Pronouncements
FASB ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (prior authoritative literature: FASB SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,
issued June 2009) (FASB ASC 105-10-65 (SFAS No. 168)), establishes the FASB Accounting
Standards Codification as the single source of authoritative nongovernmental GAAP. The
Codification is effective for fiscal years and interim periods ending after September 15, 2009.
The adoption of FASB ASC 105-10-65 (SFAS No. 168) did not have a material impact on our
consolidated financial statements.
FASB ASC 820-10, (Accounting Standards Update No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU No.
2010-06)), was adopted in the first quarter of 2010 by us. These provisions of ASU No. 2010-06
amended ASC 820-10, Fair Value Measurements and Disclosures, by requiring additional disclosures
for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring
fair value measurement disclosures for each class of assets and liabilities, a subset of the
captions disclosed in our consolidated balance sheets. The adoption did not have a material
impact on our consolidated financial statements or our disclosures, as we did not have any
transfers between Level 1 and Level 2 fair value measurements and did not have material classes
of assets and liabilities that required additional disclosure.
FASB ASC 855-10, (Accounting Standards Update No. 2010-09 Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (ASU No. 2010-09)) was adopted in
the first quarter of 2010 by us. ASU No. 2010-09 amended ASC 855-10, Subsequent Events Overall
by removing the requirement for an SEC registrant to disclose a date, in both issued and revised
financial statements, through which that filer had evaluated subsequent events. Accordingly, we
removed the related disclosure from our consolidated financial statements in this report and the
adoption did not have a material impact on our consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-16, Entertainment-Casinos (Topic 924): Accruals
for Casino Jackpot Liabilities. The authoritative guidance for companies that generate revenue
from gaming activities that involve base jackpots, which requires companies to accrue for a
liability and charge a jackpot (or portion thereof) to revenue at the time the company has the
obligation to pay the jackpot. The guidance is effective for interim and annual reporting periods
beginning on or after December 15, 2010. We currently do not accrue for base jackpots until we
have the obligation to pay such jackpots. As such, the application of this guidance will not have
a material effect on our financial condition, results of operations or cash flows.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Our future income, cash flows and fair values relevant to financial instruments are
dependent upon prevailing market interest rates. Market risk refers to the risk of loss from
adverse changes in market prices and interest rates. The outstanding debt under our loan
agreements has a variable interest rate. We are therefore most vulnerable to changes in
short-term U.S. prime interest rates. We use some derivative financial instruments, primarily
interest rate caps, to manage our exposure to interest rate risks related to our floating rate
debt. We do not use derivatives for trading or speculative purposes and only enter into contracts
with major financial institutions based on their credit rating and other factors. As of June 30,
2010, our total outstanding debt was approximately $1.3 billion, all of which was variable rate
debt. We have entered into five interest rate cap agreements for our CMBS facility with an
aggregate notional amount of $1.285 billion and with a LIBOR cap of 1.23313%. At June 30, 2010,
the LIBOR index rate applicable to us was 0.35% thereby making the caps for the CMBS facility out
of the money. Subject to the caps, as of June 30, 2010, an increase in market rates of interest
by 0.125% would have increased our annual interest expense by $1.6 million, and a decrease in
market interest rates by 0.125% would have decreased our annual interest expense by $1.6 million.
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Item 4. | Controls and Procedures. |
(a) Disclosure Controls and Procedures. Our management, with the participation of the
principal executive officer and principal financial officer of the Company, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the principal executive officer and principal financial officer
have concluded that, as of June 30, 2010, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act. The principal
executive officer and principal financial officer have concluded the controls and procedures were
effective in ensuring that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in
our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended June 30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART IIOTHER INFORMATION
Item 1. | Legal Proceedings. |
The Company is a defendant in various lawsuits relating to routine matters incidental to its
business. Management provides an accrual for estimated losses that may occur and does not believe
that the outcome of any pending claims or litigation, individually or in the aggregate, will have
a material adverse effect on the Companys financial position, results of operations or liquidity
beyond the amounts recorded in the accompanying balance sheet as of June 30, 2010.
Item 1A. | Risk Factors. |
We believe the economic drivers that impact underlying destination resort fundamentals, such
as growth in gross domestic product, business investment and employment, are likely to remain
weak in 2010. The expected weakness in these drivers may significantly negatively impact revenues
in future periods.
In addition to the other information set forth in this report, you should carefully consider
the risks discussed in the section entitled Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2009 and in our subsequently filed Quarterly Reports on Form 10-Q.
These risks and uncertainties have the potential to materially affect our business, financial
condition, results of operations, cash flows, projected results and future prospects. We do not
believe that there have been any material changes to the risk factors previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
None.
Item 6. | Exhibits |
See Exhibit Index below.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HARD ROCK HOTEL HOLDINGS, LLC |
||||
August 9, 2010 | By: | /S/ JOSEPH A. MAGLIARDITI | ||
Name: | Joseph A. Magliarditi | |||
Title: | Chief Operating Officer | |||
August 9, 2010 | By: | /S/ ARNOLD D. BOSWELL | ||
Name: | Arnold D. Boswell | |||
Title: | Chief Financial Officer of HRHI |
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EXHIBIT INDEX
EXHIBIT NUMBER | DESCRIPTION | |||
10.1 | Employment Agreement, dated as of May 23, 2010, by
and between Morgans Hotel Group Management LLC and
Joseph A. Magliarditi (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form
8-K filed on May 27, 2010) |
|||
31.1 | * | Certification of the Companys Chief Operating
Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934 and Section 302 of the
Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Hard Rock Hotel, Inc.s Chief
Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 and Section 302 of
the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certification of the Companys Chief Operating
Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of
2002. This certification is being furnished solely
to accompany this Quarterly Report on Form 10-Q and
is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is
not to be incorporated by reference into any filing
of the Company. |
||
32.2 | * | Certification of Hard Rock Hotel, Inc.s Chief
Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002. This certification is
being furnished solely to accompany this Quarterly
Report on Form 10-Q and is not being filed for
purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the
Company. |
* | Filed herewith. |
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