Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - Hard Rock Hotel Holdings, LLC | c08046exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Hard Rock Hotel Holdings, LLC | c08046exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Hard Rock Hotel Holdings, LLC | c08046exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Hard Rock Hotel Holdings, LLC | c08046exv31w2.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 quarter ended September 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 the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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Table of Contents
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 adverse economic and
market conditions, particularly in levels of spending in the hotel, resort and casino industry in
Las Vegas, Nevada; 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; changes in the competitive environment in our industry; hostilities,
including future terrorist attacks, or fear of hostilities that affect travel; 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 the Company, we, our or us refer to Hard Rock Hotel
Holdings, LLC, a Delaware limited liability company, and its consolidated subsidiaries.
1
Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
HARD ROCK HOTEL HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
(in thousands)
Sep 30, 2010 | Dec 31, 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,531 | $ | 12,277 | ||||
Accounts receivable, net |
10,138 | 11,259 | ||||||
Inventories |
2,809 | 3,062 | ||||||
Prepaid expenses and other current assets |
4,208 | 3,631 | ||||||
Related party receivable |
7 | 2 | ||||||
Restricted cash |
32,890 | 66,349 | ||||||
Total current assets |
70,583 | 96,580 | ||||||
Property and equipment, net of accumulated depreciation and amortization |
1,171,001 | 1,151,839 | ||||||
Intangible assets, net |
46,241 | 49,007 | ||||||
Deferred financing costs, net |
2,709 | 3,656 | ||||||
Interest rate caps, at fair value |
1 | | ||||||
TOTAL ASSETS |
$ | 1,290,535 | $ | 1,301,082 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,518 | $ | 9,954 | ||||
Construction related payables |
2,528 | 51,905 | ||||||
Related party payables |
12,492 | 6,010 | ||||||
Accrued expenses |
32,520 | 27,774 | ||||||
Interest payable |
14,700 | 2,585 | ||||||
Short term deferred tax liability |
1,739 | 1,739 | ||||||
Short-term debt |
53,850 | | ||||||
Total current liabilities |
126,347 | 99,967 | ||||||
Long term deferred tax liability |
55,473 | 55,114 | ||||||
Long-term debt |
1,252,060 | 1,210,874 | ||||||
Total long-term liabilities |
1,307,533 | 1,265,988 | ||||||
Total liabilities |
1,433,880 | 1,365,955 | ||||||
Commitments and Contingencies (see Note 5) |
||||||||
Members deficit: |
||||||||
Paid-in capital |
500,218 | 500,218 | ||||||
Accumulated other comprehensive loss |
(761 | ) | (2,311 | ) | ||||
Accumulated deficit |
(642,802 | ) | (562,780 | ) | ||||
Total members deficit |
(143,345 | ) | (64,873 | ) | ||||
TOTAL LIABILITIES AND MEMBERS DEFICIT |
$ | 1,290,535 | $ | 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)
(in thousands)
(unaudited)
Quarter Ended | Quarter Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
Sep 30, 2010 | Sep 30, 2009 | Sep 30, 2010 | Sep 30, 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Casino |
$ | 15,898 | $ | 9,763 | $ | 48,414 | $ | 34,622 | ||||||||
Lodging |
15,098 | 10,396 | 43,431 | 26,238 | ||||||||||||
Food and beverage |
25,990 | 25,358 | 79,336 | 58,956 | ||||||||||||
Retail |
1,243 | 1,416 | 3,572 | 4,038 | ||||||||||||
Other income |
8,089 | 9,151 | 23,649 | 21,535 | ||||||||||||
Gross revenues |
66,318 | 56,084 | 198,402 | 145,389 | ||||||||||||
Less: promotional allowances |
(5,784 | ) | (7,142 | ) | (19,063 | ) | (19,326 | ) | ||||||||
Net revenues |
60,534 | 48,942 | 179,339 | 126,063 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Casino |
12,214 | 10,356 | 37,607 | 30,174 | ||||||||||||
Lodging |
5,132 | 2,276 | 14,017 | 5,181 | ||||||||||||
Food and beverage |
13,980 | 11,137 | 42,182 | 29,182 | ||||||||||||
Retail |
830 | 848 | 2,283 | 2,304 | ||||||||||||
Other |
6,553 | 8,336 | 18,136 | 15,790 | ||||||||||||
Marketing |
2,265 | 1,437 | 6,515 | 3,335 | ||||||||||||
Fees and expense reimbursements related
party |
2,545 | 2,311 | 7,505 | 5,599 | ||||||||||||
General and administrative |
18,302 | 7,033 | 39,016 | 20,760 | ||||||||||||
Depreciation and amortization |
13,519 | 6,273 | 39,047 | 16,646 | ||||||||||||
Loss on disposal of assets |
| 89 | 2 | 89 | ||||||||||||
Pre-opening |
14 | 1,859 | 726 | 8,006 | ||||||||||||
Total costs and expenses |
75,354 | 51,955 | 207,036 | 137,066 | ||||||||||||
Loss From Operations |
(14,820 | ) | (3,013 | ) | (27,697 | ) | (11,003 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
20 | 9 | 24 | 330 | ||||||||||||
Interest expense, net of capitalized interest |
(16,477 | ) | (19,334 | ) | (51,990 | ) | (59,401 | ) | ||||||||
Other expenses, net |
(16,457 | ) | (19,325 | ) | (51,966 | ) | (59,071 | ) | ||||||||
Loss before income tax expense |
(31,277 | ) | (22,338 | ) | (79,663 | ) | (70,074 | ) | ||||||||
Income tax expense |
107 | | 359 | | ||||||||||||
Net loss |
(31,384 | ) | (22,338 | ) | (80,022 | ) | (70,074 | ) | ||||||||
Other comprehensive gain (loss): |
||||||||||||||||
Interest rate cap fair market value
adjustment, net of tax |
78 | 4,164 | 1,550 | 10,062 | ||||||||||||
Comprehensive loss |
$ | (31,306 | ) | $ | (18,174 | ) | $ | (78,472 | ) | $ | (60,012 | ) | ||||
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)
Nine Months Ended | Nine Months Ended | |||||||
Sep 30, 2010 | Sep 30, 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (80,022 | ) | $ | (70,074 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
36,281 | 12,956 | ||||||
Provision for (write off of) losses on accounts receivable |
(3,852 | ) | 132 | |||||
Amortization of loan fees and costs |
2,218 | 15,761 | ||||||
Amortization of intangibles |
2,766 | 3,690 | ||||||
Change in value of interest rate caps net of premium amortization included
in net loss |
1,549 | 10,168 | ||||||
Loss on sale of assets |
2 | 89 | ||||||
Increase in deferred income taxes |
359 | | ||||||
(Increase) decrease in assets: |
||||||||
Accounts receivable |
4,973 | (3,852 | ) | |||||
Inventories |
253 | 47 | ||||||
Prepaid expenses |
(577 | ) | (546 | ) | ||||
Related party receivable |
(5 | ) | 276 | |||||
Increase (decrease) in liabilities: |
||||||||
Accounts payable |
(1,436 | ) | 4,426 | |||||
Related party payables |
6,482 | 4,091 | ||||||
Accrued interest payable |
12,115 | (329 | ) | |||||
Other accrued liabilities |
4,746 | 1,920 | ||||||
Net cash used in operating activities |
(14,148 | ) | (21,245 | ) | ||||
Cash flow from investing activities: |
||||||||
Purchases of property and equipment |
(55,445 | ) | (327,411 | ) | ||||
Construction payables |
(49,377 | ) | 14,112 | |||||
Restricted cash |
33,459 | 58,139 | ||||||
Net cash used in investing activities |
(71,363 | ) | (255,160 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from borrowings |
95,036 | 123,211 | ||||||
Capital investment |
| 153,261 | ||||||
Financing costs on debt |
(1,271 | ) | (45 | ) | ||||
Net cash provided by financing activities |
93,765 | 276,427 | ||||||
Net increase in cash and cash equivalents |
8,254 | 22 | ||||||
Cash and cash equivalents, beginning of period |
12,277 | 10,148 | ||||||
Cash and cash equivalents, end of period |
$ | 20,531 | $ | 10,170 | ||||
Supplemental cash flow information: |
||||||||
Cash paid during the period for interest, net of amounts capitalized |
$ | 24,971 | $ | 48,323 | ||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Capitalized interest |
$ | | $ | 14,523 | ||||
Construction payables |
$ | 2,528 | $ | 14,111 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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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 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. Hard Rock Hotel Holdings, LLC, together with its consolidated subsidiaries
(the Company) own 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 Hard Rock Hotel Holdings, LLC 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 Hard Rock Hotel Holdings, LLC, 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 nine month period ended September 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.
Liquidity and Capital Resources
Anticipated sources of the Company’s
liquidity needs during the next 12 months include our subsidiaries existing working capital, cash provided by
our subsidiaries operations and our subsidiaries restricted cash reserves. Due to the downturn in the Las Vegas
economy, the Company’s high degree of leverage and seasonality, the
operating cash flows of the Company’s subsidiaries were not sufficient to
fully cover debt service under the subsidiaries’ Credit Facility (as
defined below) for the nine month period ended September 30, 2010.
However, the subsidiaries used funds from the reserves they had established
under the Credit Facility to meet their liquidity needs. The Company
anticipates that its subsidiaries may not be able to fully fund both their
operating expenses and debt service under their Credit Facility solely from
their revenues until the economic conditions affecting Las Vegas have improved
from their current conditions. If there is an event of default under the Credit
Facility, the lenders could take certain actions that would have a significant
negative impact on the Company. The consolidated financial statements in this
report do not contain any adjustments as a result of such uncertainties.
The
Company is reviewing its options to identify the best possible resolution to
its liquidity position, including pursuing discussions with its
subsidiaries’ lenders. Additional potential sources of liquidity may
include licensing or sale of the Company’s intellectual property or
additional debt or equity financing. However, the Company’s ability to
raise funds through additional financings is dependent upon a number of
factors, many of which are outside of the Company’s control. The
Company’s high levels of indebtedness substantially limit its ability to
borrow more money. Global market and economic conditions have also continued to
be challenging and the cost and availability of capital have been and may
continue to be adversely affected. Moreover, in order to incur additional
indebtedness or restructure the existing indebtedness of the Company’s
subsidiaries, those subsidiaries generally would need to
obtain the consent of the lenders under their loan agreements. As a result, there can be no assurance
that the subsidiaries would be able to refinance or restructure maturing liabilities
or to meet liquidity needs by accessing capital markets or other sources of
liquidity.
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Table of Contents
Revenues and Complimentaries
Casino revenues are derived from patrons wagering on table games, slot machines, poker,
sporting events and races. Table games generally include Blackjack or Twenty One, Craps, Baccarat
and Roulette. Casino revenue is (a) the win from gaming activities, which is the difference between
gaming wins and losses, less sales incentives and other adjustments, and (b) revenue from
gaming-related activities such as poker, pari-mutuel wagering and tournaments. Jackpots, other than
the incremental amount of progressive jackpots, are recognized at the time they are won by
customers. The Company accrues the incremental amount of progressive jackpots as the progressive
machine is played and the progressive jackpot amount increases, with a corresponding reduction of
gaming revenue.
Lodging revenues are derived from rooms and suites rented to guests and include related
revenues for telephones, movies and other in-room amenities. Lodging 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 nightclubs. 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, commissions, estimated income for
gaming chips and tokens not expected to be redeemed, fees for licensing the Hard Rock brand and
other miscellaneous income at the Hard Rock. Retail and other revenues are recognized at the point
in time the retail sale occurs, when services are provided to the guest, when we determine that
gaming chips or tokens are not expected to be redeemed or when licensing fees become due and
payable.
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):
Quarter Ended | Quarter Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
Sep 30, 2010 | Sep 30, 2009 | Sep 30, 2010 | Sep 30, 2009 | |||||||||||||
Food and beverage |
$ | 2,052 | $ | 2,138 | $ | 7,204 | $ | 5,907 | ||||||||
Lodging |
846 | 792 | 2,585 | 1,999 | ||||||||||||
Other |
390 | 581 | 1,252 | 2,057 | ||||||||||||
Total costs allocated to casino
operating costs |
$ | 3,288 | $ | 3,511 | $ | 11,041 | $ | 9,963 | ||||||||
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 nine month period and the quarter ended September 30, 2010, the amount of such sales
incentives awarded was approximately $22,000 and $14,000, respectively. For the nine month period
and the quarter ended September 30, 2009, the amount of such sales incentives awarded was $67,000
and $33,000, respectively.
Recently Issued 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.
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Table of Contents
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 the Companys 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 did not have a
material effect on the Companys financial condition, results of operations or cash flows.
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.
7
Table of Contents
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 nine month period ended
September 30, 2010, the Company used interest rate caps to hedge the variable cash flows associated
with its existing variable-rate debt.
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. 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 September 30, 2010, the Company held five interest rate caps as follows (dollar 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.
As of September 30, 2010 and December 31, 2009, the total fair value of derivative instruments
was $1,000 and $0, respectively. The change in fair value included in comprehensive income for the
quarters ended September 30, 2010 and 2009 was $0.1 million and $4.1 million, net of premium
amortization, respectively, and the change in fair value included in comprehensive income for the
nine month periods ended September 30, 2010 and 2009 was $1.6 million and $10.1 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 September 30, 2010 and 2009, the Company expensed $0.1
million and $4.2 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 nine month periods ended September 30, 2010 and 2009, the Company
expensed $3.2 million and $10.2 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.
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Credit Facility
The Company’s long-term debt is comprised of a
senior mortgage loan and three mezzanine loans incurred by certain of the Company’s subsidiaries
(collectively, the “Credit Facility”). As of September 30, 2010, no additional borrowings
were available under the Credit Facility. The current maturity date of the $1.3 billion outstanding under the
Credit Facility is February 9, 2011, with three one-year options to extend the maturity date provided that
the subsidiaries party to the Credit Facility satisfy certain conditions, including that no events of default or
monetary defaults have occurred under the facility’s mortgage loan or any mezzanine loan, payment of all
unpaid interest and other amounts due and payable to the mortgage and mezzanine lenders at such time, deposits
into certain reserves if required, simultaneous extension of the mortgage and all mezzanine loans, and payment of
a .25% extension fee to the mortgage lender. In the event of default, the Company may be required to reclassify
the Credit Facility as a current liability.
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 Credit 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 the subsidiaries real property and removal of any material article of furniture, fixture or
equipment from the subsidiaries real property. The Company has evaluated these requirements and determined that its applicable
subsidiaries were in compliance as of September 30, 2010.
Intercompany Land Acquisition Financing
One of the Company’s subsidiaries is obligated to
maintain reserve funds for interest expense and insurance and property tax pursuant to a land acquisition loan it
has 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 insurance and property tax reserve funds upon the
subsidiary’s satisfaction of conditions to disbursement under the land acquisition loan. As of
September 30, 2010, $2.1 million and $0.6 million were available in restricted cash reserves in the
interest and insurance and property tax reserve funds, respectively. On December 9, 2010, the subsidiary will
be required to either deposit an additional estimated $3.5 million into the interest reserve account or
convey the land securing the loan to the lenders in accordance with arrangements pre-negotiated with the lenders.
It is anticipated that the reserve payment will not be made. As
a result, the Company has reclassified the land acquisition loan as a current liability. The Company does not
expect any other material negative consequences from not making the payment.
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.
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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.
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
September 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 September 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 $1,000.
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
September 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 September 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):
Sep 30, 2010 | Dec 31, 2009 | |||||||
Retail merchandise |
$ | 1,034 | $ | 1,288 | ||||
Restaurants and bars |
1,688 | 1,523 | ||||||
Other inventory and operating supplies |
87 | 92 | ||||||
Total inventories |
$ | 2,809 | $ | 2,903 | ||||
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3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
Sep 30, 2010 | Dec 31, 2009 | |||||||
Land |
$ | 351,250 | $ | 364,810 | ||||
Buildings and improvements |
641,785 | 170,578 | ||||||
Furniture, fixtures and equipment |
252,759 | 54,732 | ||||||
Memorabilia |
4,772 | 4,250 | ||||||
Subtotal |
1,250,566 | 594,370 | ||||||
Less accumulated depreciation and amortization |
(81,330 | ) | (39,787 | ) | ||||
Construction in process |
1,765 | 543,910 | ||||||
Total property and equipment, net |
$ | 1,171,001 | $ | 1,098,493 | ||||
Depreciation and amortization relating to property and equipment was $36.3 million and $13.0
million for the nine month periods ended September 30, 2010 and 2009, respectively. Capitalized
interest included in construction in process was $0 and $14.5 million for the nine month periods
ended September 30, 2010 and 2009, respectively.
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 property adjacent to the Hard Rock (excluding any portion
of the adjacent property not 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.
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For the quarters ended September 30, 2010 and 2009, the Company accrued or paid to Morgans
Management a base management fee of $1.7 million and $1.5 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 $0.6 million and $0.6 million, respectively. For the nine month
periods ended September 30, 2010 and 2009, the Company accrued or paid to Morgans Management a base
management fee of $5.0 million and $3.6 million and a
gaming facilities support fee of $0.6 million and $0.6 million, respectively, and accrued or
reimbursed Morgans Management for chain services expenses of $1.9 million and $1.4 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 Hard Rock Hotel Holdings, LLC.
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 September 30, 2010 and 2009, the Company reimbursed Morgans Management an aggregate amount
equal to approximately $39 thousand and $0.1 million, respectively, under the Technical Services
Agreement. For the nine month periods ended September 30, 2010 and 2009, the Company reimbursed
Morgans Management an aggregate amount equal to approximately $2.0 million and $1.4 million,
respectively, under the Technical Services Agreement.
Credit 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 Credit Facility.
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
nine month period ended September 30, 2010, the Company received $251,212 in rent from the Hard
Rock Cafe, which consisted of $135,000 in base rent and $116,212 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.
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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 received 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 in certain circumstances.
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 existing debt funding under
the Credit 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 September 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 September 30, 2010, approximately $0.1 million of
these commitments remained outstanding.
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Self-Insurance
The Company is self-insured for workers compensation claims for an annual stop-loss of up to
$250,000 per claim. Management has established reserves it considers adequate to cover estimated
future payments on existing claims incurred and claims incurred but not reported.
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
On September 21, 2010, Hard Rock Café International (USA), Inc. filed a lawsuit, Hard Rock
Café International (USA), Inc. v. Hard Rock Hotel Holdings, LLC et al., against the Company, its
subsidiaries Hard Rock Hotel, Inc. and HRHH IP, LLC and other entities in the United States
District Court for the Southern District of New York. Plaintiff asserts claims for trademark
infringement, trademark dilution, unfair competition and breach of
contract. The gravamen of the claims is that defendants allegedly have caused injury to
plaintiff through (i) the reality television show Rehab: Party at the Hard Rock Hotel and (ii)
various ventures in which the Company or its affiliates are alleged to have used or sublicensed the
Hard Rock marks in an unauthorized manner, including the Hard Rock Hotel & Casino Tulsa, the Hard
Rock Hotel & Casino Albuquerque, certain facilities branded HRH, and the registration of certain
domain names. The Company believes the claims are without merit, among other reasons, because it
is entitled to use and sublicense the Hard Rock marks pursuant to a 1996 license agreement. The
Company intends to vigorously defend the suit.
The Company is a defendant in various other 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 these other pending claims or litigation, individually or in the
aggregate, will have a material adverse effect on our financial position, results of operations or
liquidity beyond the amounts recorded in the accompanying balance sheet as of September 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.
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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 September 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.
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 nine month period ended September 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 September 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.
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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 September 30, 2010, our gross revenues were derived 39.2% from food and beverage
operations, 24.0% from gaming operations, 22.8% from lodging and 14.0% from retail and other sales.
For the nine month period ended September 30, 2010, our gross revenues were derived 40.0% from food
and beverage operations, 24.4% from gaming operations, 22.0% from lodging and 13.6% 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.
Due to a number of factors affecting consumers, including continued adverse economic
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 and other amenities. 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.
16
Table of Contents
As is customary for companies in the gaming industry, we present 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 daily rate net of
rooms provided on a complimentary basis. We calculate average daily rate by dividing total daily
lodging revenue by total daily rooms rented. 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 September 30, 2010 to the Quarter Ended September 30, 2009
The following table presents our consolidated operating results for the quarters ended
September 30, 2010 and 2009, and the change in such data between the two periods.
Quarter Ended | Quarter Ended | Change | Change | |||||||||||||
Sep 30, 2010 | Sep 30, 2009 | ($) | (%) | |||||||||||||
(in thousands) | ||||||||||||||||
INCOME STATEMENT DATA: |
||||||||||||||||
REVENUES: |
||||||||||||||||
Casino |
$ | 15,898 | $ | 9,763 | $ | 6,135 | 62.8 | % | ||||||||
Lodging |
15,098 | 10,396 | 4,702 | 45.2 | % | |||||||||||
Food and beverage |
25,990 | 25,358 | 632 | 2.5 | % | |||||||||||
Retail |
1,243 | 1,416 | (173 | ) | -12.2 | % | ||||||||||
Other |
8,089 | 9,151 | (1,062 | ) | -11.6 | % | ||||||||||
Gross revenues |
66,318 | 56,084 | 10,234 | 18.2 | % | |||||||||||
Less: promotional allowances |
(5,784 | ) | (7,142 | ) | 1,358 | -19.0 | % | |||||||||
Net revenues |
60,534 | 48,942 | 11,592 | 23.7 | % | |||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Casino |
12,214 | 10,356 | (1,858 | ) | -17.9 | % | ||||||||||
Lodging |
5,132 | 2,276 | (2,856 | ) | -125.5 | % | ||||||||||
Food and beverage |
13,980 | 11,137 | (2,843 | ) | -25.5 | % | ||||||||||
Retail |
830 | 848 | 18 | 2.1 | % | |||||||||||
Other |
6,553 | 8,336 | 1,783 | 21.4 | % | |||||||||||
Marketing |
2,265 | 1,437 | (828 | ) | -57.6 | % | ||||||||||
Fees and expense reimbursementrelated party |
2,545 | 2,311 | (234 | ) | -10.1 | % | ||||||||||
General and administrative |
18,302 | 7,033 | (11,269 | ) | -160.2 | % | ||||||||||
Depreciation and amortization |
13,519 | 6,273 | (7,246 | ) | -115.5 | % | ||||||||||
Loss on disposal of assets |
| 89 | 89 | 100.0 | % | |||||||||||
Pre-opening |
14 | 1,859 | 1,845 | 99.2 | % | |||||||||||
Total costs and expenses |
75,354 | 51,955 | (23,399 | ) | -45.0 | % | ||||||||||
LOSS FROM OPERATIONS |
(14,820 | ) | (3,013 | ) | (11,807 | ) | 391.9 | % | ||||||||
Interest income |
20 | 9 | 11 | 122.2 | % | |||||||||||
Interest expense, net of capitalized interest |
(16,477 | ) | (19,334 | ) | 2,857 | -14.8 | % | |||||||||
Loss before income tax expense |
(31,277 | ) | (22,338 | ) | (8,939 | ) | 40.0 | % | ||||||||
Income tax expense |
107 | | 107 | -100.0 | % | |||||||||||
Net loss |
(31,384 | ) | (22,338 | ) | (9,046 | ) | 40.5 | % | ||||||||
Other comprehensive loss: |
||||||||||||||||
Interest rate cap fair market value
adjustment, net of tax |
78 | 4,164 | (4,086 | ) | -98.1 | % | ||||||||||
Comprehensive loss |
$ | (31,306 | ) | $ | (18,174 | ) | $ | (13,132 | ) | 72.3 | % | |||||
17
Table of Contents
Results of Operations for the Quarter Ended September 30, 2010 Compared to the Results of
Operations for the Quarter Ended September 30, 2009
Net Revenues. Net revenues increased 23.7% for the quarter ended September 30, 2010 to $60.5
million compared to $48.9 million for the quarter ended September 30, 2009. The $11.6 million
increase in net revenues was primarily attributable to a $4.7 million or 45.2% increase in lodging
revenue, a $0.6 million or 2.5% increase in food and beverage revenue, a $6.1 million or 62.8%
increase in casino revenue and a $1.4 million decrease in promotional allowances related to items
furnished to customers on a complimentary basis. The increase in net revenue was partially offset
by a $1.0 million decrease in other revenues and a $0.2 million decrease in retail revenues.
Casino Revenues. The $6.1 million increase in casino revenues to $15.9 million was primarily
due to a $6.0 million or 104% increase in table games revenue and a $0.2 million or 67.6% increase
in race and sports revenue, which was slightly offset by a $0.1 million or 13.3% decrease in poker
revenue, while slot revenue remained constant at $3.4 million. The increase in table games revenues
was due to an increase in table games hold percentage and an increase in table games drop.
Management believes that table games drop increased because of an increase in visitation to the
casino at the Hard Rock, resulting from the completion of the expansion project and an increase in
hosted play (i.e., players attracted to the Hard Rocks casino by our casino hosts) and a change
in the rules for the use of promotional chips, which allows the promotional chips to be played
until lost versus only played for one hand, similar to other properties on the Las Vegas strip. The
table games hold percentage increased 580 basis points to 14.7% from 8.9%, which was within the
expected range of 12% to 16% for the current quarter. Table games drop increased $15.8 million or
24.4% to $80.6 million from $64.8 million. The average number of table games in operations was
increased from 81 tables in the 2009 quarter to 101 tables in the 2010 quarter. The net result of
these changes in drop and hold percentage was an increase in win per table game per day to $1,271
from $777, an increase of $494 or 63.6%. We have historically reported table games 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
quarter ended September 30, 2010 was 18.9% compared to 11.0% for the quarter ended September 30,
2009. Slot machine revenues remained constant at $3.4 million. Slot machine handle decreased
$10.4 million from $84.8 million to $74.4 million. Although overall visitation to the casino is up,
management believes slot machine handle is down in part due to a large portion of slot machines
being out of service while the casino floor was reconfigured in the quarter ended September 30,
2010. However, slot machine hold percentage increased 60 basis points from 3.9% to 4.5%, which was
within the expected range of 4% to 7%. The average number of slot machines in operation increased
to 639 from 520, an increase of 119 machines or 22.9%. 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 $57.26 from $69.95, a decrease of $12.69 or 18.1%. Race and sports book revenue
increased $0.2 million due to an increase in hold percentage. The race and sports book write
decreased $0.2 million to $4.1 million in the quarter ended September 30, 2010 from $4.3 million in
the quarter ended September 30, 2009. Race and sports book hold percentage increased 3.9 percentage
points to 9.1% from 5.2%, which was slightly higher than the expected range of 4% to 9%.
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Table of Contents
Lodging Revenues. Lodging revenues increased $4.7 million to $15.1 million for the quarter
ended September 30, 2010, compared to $10.4 million for the quarter ended September 30, 2009. The
increase in lodging revenues was primarily due to an increase in occupied rooms to 112,559 from
76,698, an increase of 35,861 or 46.8%. The increase in occupied rooms was a result of completing
the expansion project and opening the all suite HRH Tower in late December 2009. The average daily
rate decreased to $134 from $136, a decrease of $2 or 1.0%. Hotel occupancy decreased 760 basis
points to 81.3% from 89.0%.
Food and Beverage Revenues. The $0.6 million increase in food and beverage revenues was due
primarily to a $1.2 million increase in Vanity over Body English, which closed January 1, 2010, a
$0.2 million increase in Mr. Luckys and a $0.2 million increase in room service. In addition to
these increases, there was $1.1 million in revenue from West Pool, $0.7 million in revenue from Sky
Bar, $0.5 million in revenue from Luxe Bar, $0.3 million in revenue from Johnny Smalls, $0.1
million in revenue from Espumoso, $0.1 million in revenue from Midway Bar and $0.1 million in
revenue from Sports Deluxe which opened as a result of completing the expansion project in late
December 2009. These increases were offset by a $1.2 million decrease in Beach Club, a $0.9 million
decrease in Wasted Space (which closed September 2010), a $0.6 million decrease in banquets, a $0.4
million decrease in Joint Bar, a $0.2 million decrease in AGO, a $0.2 million decrease in Center
Bar, a $0.1 million decrease in Rare 120, a $0.1 million decrease in service bar, a $0.1 million
decrease in Poker Lounge and a $0.1 million decrease in Pink
Taco. Management believes the overall increase in food and beverage revenue is due to higher
customer volumes as a result of completing the expansion project.
Retail Revenues. Retail revenues decreased $0.2 million to $1.2 million for the quarter ended
September 30, 2010, compared to $1.4 million for the quarter ended September 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
at the Hard Rock and in Las Vegas and poor market conditions, has caused the retail revenue to
decline year over year.
Other Revenues. Other revenue decreased approximately $1.1 million primarily due to a decrease
in entertainment revenue as a result of hosting 7 fewer concerts in the third quarter of 2010 than
in the third quarter 2009. The Hard Rock hosted 32 and 39 entertainment events in the third quarter
of 2010 and 2009, respectively.
Promotional Allowances. Promotional allowances decreased $1.4 million or 19.0% over the prior
period for the quarter ended September 30, 2010. Promotional allowances decreased as a percentage
of total revenues to 8.7% from 12.7% between periods. This decrease is due to fewer promotional
allowances offered by Vanity and less promotional activity by Casino Marketing.
Casino Expenses. Casino expenses increased $1.8 million or 17.9% to $12.2 million from $10.4
million. The increase was primarily due to a $0.7 million increase in customer discounts, a $0.4
million increase in payroll related expenses, a $0.4 million increase in taxes and license fees, a
$0.3 million increase in bad debt expense and a $0.2 million increase in travel reimbursements,
which were slightly offset by a $0.2 million decrease in complimentary expenses. 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 125.5% or $2.8 million to $5.1 million
for the quarter ended September 30, 2010. Lodging expenses increased from the prior period due
primarily to approximately a $1.4 million increase in payroll and related expenses, a $0.5 million
increase in contract maintenance, a $0.3 million increase in laundry expenses, a $0.3 million
increase in miscellaneous operating supplies, a $0.2 million increase in travel agent commissions
and a $0.1 million increase in credit card fees.
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Table of Contents
Food and Beverage Costs And Expenses. Food and beverage costs and expenses increased by 25.5%
or $2.8 million over the prior period for the quarter ended September 30, 2010. Food and beverage
costs and expenses in relation to food and beverage revenues increased to 53.4% from 43.9% in the
prior year on increases in food and beverage revenues of 2.5% to $26.0 million from $25.4 million.
The increase in expenses was primarily due to a $0.9 million increase in advertising, a $0.9
million increase in professional services for disc jockeys and special events, a $0.4 million
increase in product costs, a $0.2 million increase in payroll and related expenses and a
$0.4 million increase in miscellaneous operating supplies.
Retail Costs and Expenses. Retail costs and expenses remained constant at $0.8 million for the
quarter ended September 30, 2010 compared to the quarter ended September 30, 2009.
Other Costs and Expenses. Other costs and expenses decreased 21.4% or $1.8 million over the
prior period for the quarter ended September 30, 2010. Other costs and expenses in relation to
other income decreased to 81.0% from 91.1%. Concert and event costs decreased $1.8 million over the
prior period as a result of hosting seven fewer concerts and events.
Marketing, General and Administrative. Marketing, general and administrative expenses
increased 142.8% or $12.1 million over the prior period for the quarter ended September 30, 2010.
Marketing, general and administrative expenses in relation to gross revenues increased to 31.0%
from 15.1%. The $12.1 million increase in these expenses was primarily due to a $3.5 million
increase in DLJMBP consulting fees, a $2.5 million increase in reimbursable expenditures to DLJMBP,
a $2.1 million increase in payroll and related expenses, a $1.4 million increase in utilities, a
$0.9 million increase in contract services and maintenance, a $0.6 million increase in judgments
and settlements, a $0.5 million increase in property insurance, a $0.5 million increase in property
taxes, a $0.3 million increase in
complimentary expenses, and a $0.4 million increase in advertising expense. These increases
were slightly offset by a $0.6 million decrease in legal and professional services associated with
the protection and development of our intellectual property, Sarbanes Oxley compliance work and
joint venture costs.
Fees and Expense Reimbursements Related Party. Management feerelated party expenses
increased $0.2 million or 10.1% to $2.5 million from $2.3 million. 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, which reimbursement is subject to a cap of one and one half percent of defined
non-gaming revenues and all other income.
Depreciation and Amortization. Depreciation and amortization expense increased by $7.2 million
to $13.5 million for the quarter ended September 30, 2010 from $6.3 million for the quarter ended
September 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 $2.8 million or 14.8% to $16.5 million for the
quarter ended September 30, 2010, compared to $19.3 million for the quarter ended September 30,
2009. The decrease in interest expense reflects a reduction of $4.7 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 $1.9 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 Credit 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 $1.8 million to $14,000 for the quarter
ended September 30, 2010 from $1.8 million for the quarter ended September 30, 2009. The decrease
in pre-opening expenses was due to completing the expansion project.
Income Taxes. The Company reported income tax expense of $107,000 for the quarter ended
September 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.
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Table of Contents
Other Comprehensive Loss. For the quarter ended September 30, 2010, the total fair value of
derivative instruments that qualify for hedge accounting changed by $4.1 million and is included in
other comprehensive loss. Amounts reported in accumulated other comprehensive loss related to
derivatives 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 $31.3 million compared to a comprehensive
loss of $18.2 million during the prior quarter. The increase in comprehensive loss was due to the
factors described above.
Comparison of the Nine Month Period ended September 30, 2010 to the Nine Month Period ended
September 30, 2009
The following table presents our consolidated operating results for the nine month periods
ended September 30, 2010 and 2009, and the change in such data between the two periods.
Nine Months Ended | Nine Months Ended | Change | Change | |||||||||||||
Sep 30, 2010 | Sep 30, 2009 | ($) | (%) | |||||||||||||
(in thousands) | ||||||||||||||||
INCOME STATEMENT DATA: |
||||||||||||||||
REVENUES: |
||||||||||||||||
Casino |
$ | 48,414 | $ | 34,622 | $ | 13,792 | 39.8 | % | ||||||||
Lodging |
43,431 | 26,238 | 17,193 | 65.5 | % | |||||||||||
Food and beverage |
79,336 | 58,956 | 20,380 | 34.6 | % | |||||||||||
Retail |
3,572 | 4,038 | (466 | ) | -11.5 | % | ||||||||||
Other |
23,649 | 21,535 | 2,114 | 9.8 | % | |||||||||||
Gross Revenues |
198,402 | 145,389 | 53,013 | 36.5 | % | |||||||||||
Less: promotional allowances |
(19,063 | ) | (19,326 | ) | 263 | -1.4 | % | |||||||||
Net revenues |
179,339 | 126,063 | 53,276 | 42.3 | % | |||||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Casino |
37,607 | 30,174 | (7,433 | ) | -24.6 | % | ||||||||||
Lodging |
14,017 | 5,181 | (8,836 | ) | -170.5 | % | ||||||||||
Food and beverage |
42,182 | 29,182 | (13,000 | ) | -44.5 | % | ||||||||||
Retail |
2,283 | 2,304 | 21 | 0.9 | % | |||||||||||
Other |
18,136 | 15,790 | (2,346 | ) | -14.9 | % | ||||||||||
Marketing |
6,515 | 3,335 | (3,180 | ) | -95.4 | % | ||||||||||
Fees and expense reimbursements related
party |
7,505 | 5,599 | (1,906 | ) | -34.0 | % | ||||||||||
General and administrative |
39,016 | 20,760 | (18,256 | ) | -87.9 | % | ||||||||||
Depreciation and amortization |
39,047 | 16,646 | (22,401 | ) | -134.6 | % | ||||||||||
Loss on disposal of assets |
2 | 89 | 87 | 97.8 | % | |||||||||||
Pre-opening |
726 | 8,006 | 7,280 | 90.9 | % | |||||||||||
Total costs and expenses |
207,036 | 137,066 | (69,970 | ) | -51.0 | % | ||||||||||
LOSS FROM OPERATIONS |
(27,697 | ) | (11,003 | ) | (16,694 | ) | 151.7 | % | ||||||||
Interest income |
24 | 330 | (306 | ) | -92.7 | % | ||||||||||
Interest expense, net of capitalized interest |
(51,990 | ) | (59,401 | ) | 7,411 | -12.5 | % | |||||||||
Loss before income tax expense |
(79,663 | ) | (70,074 | ) | (9,589 | ) | 13.7 | % | ||||||||
Income tax expense |
359 | | (359 | ) | -100.0 | |||||||||||
Net loss |
(80,022 | ) | (70,074 | ) | (9,948 | ) | 14.2 | % | ||||||||
Other comprehensive loss: |
||||||||||||||||
Interest rate cap fair market value
adjustment, net of tax |
1,550 | 10,062 | (8,512 | ) | -84.6 | % | ||||||||||
Comprehensive loss |
$ | (78,472 | ) | $ | (60,012 | ) | $ | (18,460 | ) | 30.8 | % | |||||
21
Table of Contents
Net Revenues. Net revenues increased 42.3% for the nine month period ended September 30, 2010
to $179.3 million compared to $126.0 million for the nine month period ended September 30, 2009.
The $53.3 million increase in net revenues was primarily attributable to a $13.8 million or 39.8%
increase in casino revenue, a $17.2 million or 65.5% increase in lodging revenue, a $20.4 million
or 34.6% increase in food and beverage revenue, a $2.1 million increase in other revenues and a
$0.3 million decrease in promotional allowances related to items furnished to customers on a
complimentary basis. These increases were slightly offset by a $0.5 million decrease in retail
revenues.
Casino Revenues. The $13.8 million increase in casino revenues to $48.4 million was primarily
due to a $12.5 million or 56.4% increase in table games revenue and a $1.5 million or 14.7%
increase in slot revenue, which was slightly offset by a $0.1 million decrease in poker revenue and
a $0.2 million decrease in race and sports revenue. The increase in table games revenue was due to
an increase in table games drop and hold percentage. Management believes that table games drop
increased because of an increase in visitation to the casino at the Hard Rock, resulting from the
completion of the expansion project and an increase in hosted play (i.e., players attracted to
the Hard Rocks casino by our casino hosts) and a change in the rules for the use of promotional
chips, which allows the promotional chips to be played until lost versus only played for one hand,
similar to other properties on the Las Vegas strip. Table games hold percentage increased 240
basis points to 13.6% from 11.2%, which was within the expected range of 12% to 16% for the current
nine month period. Table games drop increased $56 million or 28.1% to $255 million from
$199 million. The average number of table games in operations was increased from 83 tables in 2009
to 117 tables in 2010. The net result of these changes in drop and average number of table games in
operation was an increase in win per table game per day to $1,088 from $977, an increase of $111 or
11.4%. We have historically reported table games 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 nine month period ended
September 30, 2010 was 17.4% compared to 13.9% for the nine month period ended September 30, 2009.
Slot machine revenues increased $1.5 million from $10.3 million to $11.8 million. Slot machine
handle increased $9 million from $246 million to $255 million. Slot machine hold percentage
increased 40 basis points from 4.2% to 4.6%, which was within the expected range of 4% to 7%. The
average number of slot machines in operation increased to 764 from 522, an increase of 242 machines
or 46.4%. 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 from $72.74 to $56.93, a
decrease of $15.81 or 21.7%. Race and sports book revenue decreased $0.2 million due to a decrease
in hold percentage. The race and sports book write increased $3.6 million to $18.6 million in the
nine month period ended September 30, 2010 from $15.0 million in the nine month period ended
September 30, 2009. Race and sports book hold percentage decreased 200 basis points to 4.0% from
6.0%, which was within the expected range of 4% to 9%.
22
Table of Contents
Lodging Revenues. Lodging revenues increased $17.2 million to $43.4 million for the nine month
period ended September 30, 2010, compared to $26.2 million for the nine month period ended
September 30, 2009. The increase in lodging revenues was primarily due to an increase in occupied
rooms to 326,035 from 177,838, an increase of 148,197 or 83.3%. The increase in occupied rooms was
a result of completing the expansion project which added approximately 865 additional guest rooms.
Hotel occupancy decreased to 80.2% from 90.0% between periods and average daily rate decreased to
$133 from $147, a decrease of 9.7% between periods.
Food and Beverage Revenues. The $20.4 million increase in food and beverage revenues was due
primarily to a $8.8 million increase in Vanity over Body English (which closed on January 1, 2010),
a $2.5 million increase in banquets, a $1.5 million increase in Rare 120, a $1.4 million increase
in Mr. Luckys, a $1.2 million increase in room service, a $0.4 million increase in Pink Taco and a
$0.2 million increase in Starbucks. In addition to these increases, there was $2.6 million in
revenue from West Pool, $1.5 million in revenue from Luxe Bar, $0.8 million in revenue from Sky
Bar, $0.6 million in revenue from Midway Bar, $0.6 million in revenue from Johnny Smalls (which
opened as a result of completing the expansion project in late December 2009), $0.4 million in
revenue from Espumoso and $0.3 million in revenue from Sports Deluxe. The increase in food and
beverage revenue was offset by a $0.8 million decrease in Beach Club, a $0.8 million decrease in
Wasted Space (which closed late September 2010), a $0.3 million decrease in Center Bar, a $0.2
million decrease in Joint Bar, a $0.1 million decrease in AGO, a $0.1 million decrease in service
bar and a $0.1 million decrease in Poker Lounge. Management believes the overall increase in food
and beverage revenue was due to higher customer volumes as a result of completing the expansion
project.
Retail Revenues. Retail revenues decreased $0.5 million to $3.5 million for the nine month
period ended September 30, 2010, compared to $4.0 million for the nine month period ended
September 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 at the Hard Rock and in Las Vegas and poor market conditions,
has caused the retail revenue to decline year over year.
Other Revenues. Other revenue increased approximately $2.1 million primarily due to
entertainment revenue as a result of a $0.5 million increase in sundries revenue, a $0.5 million
increase in Reliquary, a $0.1 million increase in Brannon Hair and a $2.7 million increase in other
revenue including tenant rent and sponsorship income. These increases were offset by a $1.7 million
decrease in entertainment revenue.
Promotional Allowances. Promotional allowances decreased $0.3 million or 1.4% over the nine
month period ended September 30, 2010. Promotional allowances decreased as a percentage of total
revenues to 9.6% from 13.3% between periods. This decrease is due to fewer promotional allowances
offered by Vanity and less promotional activity by Casino Marketing.
Casino Expenses. Casino expenses increased $7.4 million or 24.6% to $37.6 million from $30.2
million. The increase was primarily due to a $2.3 million increase in payroll and related expenses,
a $1.9 million increase in complimentary expenses, a $1.3 million increase in bad debt expense, a
$1.2 million increase in taxes and licenses, a $0.3 million increase in miscellaneous operating
supplies, a $0.2 million increase in customer discounts and a $0.2 million increase in contract
services. 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 170.5% or $8.8 million to $14.0 million
for the nine month period ended September 30, 2010. Lodging expenses in relation to lodging
revenues increased to 32.3% from 19.8% in the prior period due primarily to an approximately $4.7
million increase in payroll and related expenses, a $1.5 million increase in laundry expense, a
$0.9 million increase in contract maintenance, a $0.7 million increase in travel agent commissions,
a $0.5 million increase in credit card fees, a $0.4 million increase in miscellaneous operating
supplies and a $0.1 million increase in contract services.
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Food and Beverage Costs And Expenses. Food and beverage costs and expenses increased by 44.5%
or $13.0 million over the nine month period ended September 30, 2010. Food and beverage costs and
expenses in relation to food and beverage revenues increased to 53.2% from 49.5% in the prior year
due primarily to increases in food and beverage revenues of 34.6% to $79.3 million from
$59.0 million. Management believes these revenue increases were primarily derived from additional
customer visitation from the completion of the expansion project. The $13.0 million increase was
primarily due to a $4.6 million increase in payroll and related expenses, a $3.3 million increase
in food and beverage product costs, a $1.8 million increase in management and related fees, a $1.5
million increase in professional services for disc jockeys and special events, a $1.4 million
increase in advertising, a $0.2 million increase in laundry expense, a $0.1 million increase in
contract maintenance and a $0.1 million increase in repairs and maintenance expense.
Retail Costs and Expenses. Retail costs and expenses remained constant at $2.3 million from
the prior period for the nine month period ended September 30, 2010. Retail costs and expenses in
relation to retail revenues increased to 63.9% from 57.1% in the prior period.
Other Costs and Expenses. Other costs and expenses increased 14.9% or $2.3 million over the
prior period for the nine month period ended September 30, 2010. Other costs and expenses in
relation to other income increased to 76.7% from 73.3%. The increase was primarily due to a $1.0
million increase in payroll and related expenses, a $0.9 million increase in complimentary
expenses, a $0.2 million increase in sundries cost of goods sold, a $0.1 million increase in
concert expense and a $0.1 million increase in repairs and maintenance.
Marketing, General and Administrative. Marketing, general and administrative expenses
increased 89.0% or $21.4 million over the prior period for the nine month period ended
September 30, 2010. Marketing, general and administrative expenses in relation to gross revenues
increased to 23.0% from 16.6%. The $21.4 million increase in these expenses was primarily due to a
$6.4 million increase in payroll and related expenses as a result of completing the expansion
project, a $3.5 million increase in DLJMBP monitoring fees, a $3.1 million increase in utilities, a
$2.6 million increase in contract maintenance, a $2.5 million increase in reimbursable expenditures
to DLJMBP, a $1.7 million increase in advertising and promotional activity, a $1.7 million increase
in property tax, a $1.0 million increase in property insurance, a $0.7 million increase in contract
services, a $0.7 million increase in judgments and settlements, a $0.7 million increase in
complimentary expenses, a $0.7 million increase in miscellaneous operating
expenses, a $0.4 million increase in use tax and a $0.2 million increase in legal. These
increases were offset by a $4.5 million decrease in legal and professional services associated with
the protection and development of our intellectual property, Sarbanes Oxley compliance work and
joint venture costs.
Fees and Expense Reimbursements Related Party. Management feerelated party expenses
increased $1.9 million or 34.0% to $7.5 million from $5.6 million. 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, which reimbursement is subject to a cap of one and one half percent of defined
non-gaming revenues and all other income.
Depreciation and Amortization. Depreciation and amortization expense increased by
$22.4 million to $39.0 million for the nine month period ended September 30, 2010 from
$16.6 million for the nine month period ended September 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 $7.4 million or 12.5% to $52.0 million for the
nine month period ended September 30, 2010, compared to $59.4 million for the nine month period
ended September 30, 2009. The decrease in interest expense reflects a reduction of $13.5 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 $6.1 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 Credit 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 $7.3 million to $0.7 million for the nine
month period ended September 30, 2010 from $8.0 million for the nine month period ended September
30, 2009. The decrease in pre-opening expenses was due to completing the expansion project.
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Income Taxes. The Company reported income tax expense of $359,000 for the nine month period
ended September 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 nine month period ended September 30, 2010, the total fair
value of derivative instruments that qualify for hedge accounting changed by $8.5 million and is
included in other comprehensive loss. Amounts reported in accumulated other comprehensive loss
related to derivatives 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 $78.5 million for the nine month period ended
September 30, 2010 compared to a comprehensive loss of $60.0 million during the nine month period
ended September 30, 2009. The increase in comprehensive loss was due to the factors described
above.
Cash Flows for the Nine Month Period ended September 30, 2010 Compared to Cash Flows for the
Nine Month Period ended September 30, 2009
Operating Activities. Net cash used by operating activities amounted to $14.1 million for the
nine month period ended September 30, 2010, compared to $21.2 million for the nine month period
ended September 30, 2009. The decrease in net cash used in operating activities was primarily due
to a decline in interest expense on the junior mezzanine loans under the Credit 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 $71.4 million for the
nine month period ended September 30, 2010, compared to $255.2 million for the nine month period
ended September 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 Credit Facility. The decrease in net cash used in investing activities primarily results from
the completion of the expansion project, utilizing restricted cash construction reserves for the
project and the resulting reduction in the investment in new assets.
Financing Activities. Net cash provided by financing activities amounted to $93.8 million for
the nine month period ended September 30, 2010, compared to $276.4 million for the nine month
period ended September 30, 2009. The net cash provided by financing activities for the nine month
period ended September 30, 2010 represents an additional $95.0 million of borrowings under the
Credit Facility, offset by a $1.3 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 Credit Facility.
Liquidity and Capital Resources
As of September 30, 2010, we had total current assets of approximately $70.6 million,
including approximately $20.5 million in available cash and cash equivalents and $32.9 million of
restricted cash reserves held in accordance with certain of our subsidiaries loan agreements and gaming regulatory
requirements. As of September 30, 2010, we had total current liabilities of approximately $126.3
million. As of September 30, 2010, our total long-term debt, was approximately $1.3 billion and our
total members deficit was approximately $143.3 million. During the next 12 months, we expect our
liquidity requirements to consist primarily of funds necessary to pay operating expenses associated
with our subsidiaries hotel and casino operations, interest,
amortization payments, fees and expenses under certain of our
subsidiaries loan agreements (including required deposits into reserve accounts) and capital expenditures
associated with the Hard Rock.
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Our long-term debt is comprised of a senior mortgage loan
and three mezzanine loans incurred by certain of our subsidiaries (collectively, the “Credit
Facility”). As of September 30, 2010, no additional borrowings were available under the Credit
Facility. Under the Credit Facility, the subsidiaries established a cash management account to hold the cash that
they generate from their operations. This account is under the sole control of the lenders under the Credit
Facility, which have a first priority security interest in the account and any amounts on deposit therein. The
terms of the Credit Facility govern the use of amounts on deposit in the account, and the subsidiaries’
ability to apply such amounts to the operating expenses associated with their hotel and casino operations is
conditioned upon the satisfaction of certain payments required by the Credit Facility.
The current maturity date of the $1.3 billion
outstanding under the Credit Facility is February 9, 2011, with three one-year options to extend the maturity
date provided that the subsidiaries party to the Credit Facility satisfy certain conditions, including that no
events of default or monetary defaults have occurred under the mortgage loan or any mezzanine loan, payment of all
unpaid interest and other amounts due and payable to the mortgage and mezzanine lenders at such time, deposits
into certain reserves if required, simultaneous extension of the mortgage and all mezzanine loans, and payment of
a .25% extension fee to the mortgage lender. In the event of default under the Credit Facility, we may be required
to reclassify the Credit Facility as a current liability.
Anticipated sources of our liquidity needs during the next
12 months include our subsidiaries’ existing working capital, cash
provided by our subsidiaries’ operations and our subsidiaries’
restricted cash reserves. Due to the downturn in the Las Vegas economy, our
high degree of leverage and seasonality, the operating cash flows of our
subsidiaries were not sufficient to fully cover debt service under the
subsidiaries’ Credit Facility for the nine month period ended
September 30, 2010. However, the subsidiaries used funds from the reserves
they had established under the Credit Facility to meet their liquidity needs.
We anticipate that our subsidiaries may not be able to fully fund both their
operating expenses and debt service under their Credit Facility solely from
their revenues until the economic conditions affecting Las Vegas have improved
from their current conditions. If there is an event of default under the Credit
Facility, the lenders could take certain actions that would have a significant
negative impact on us. The consolidated financial statements in this report do
not contain any adjustments as a result of such uncertainties.
We are reviewing our options to identify the best
possible resolution to our liquidity position, including pursuing discussions with our subsidiaries’
lenders. Additional potential sources of liquidity may include licensing or sale of our intellectual property or
additional debt or equity financing. However, our ability to raise funds through additional financings is
dependent upon a number of factors, many of which are outside of our control. Our high levels of indebtedness
substantially limit our ability to borrow more money. Global market and economic conditions have also continued to
be challenging and the cost and availability of capital have been and may continue to be adversely affected.
Moreover, in order to incur additional indebtedness or restructure our subsidiaries’ existing indebtedness,
the subsidiaries generally would need to obtain the consent of the lenders under their loan agreements.
As a result, we cannot assure you that these subsidiaries would be able to refinance or restructure maturing
liabilities or to meet liquidity needs by accessing capital markets or other sources of liquidity.
Capital Expenditures, Interest
Expense and Reserve Funds
Certain of our subsidiaries are obligated to maintain
reserve funds for capital expenditures at the Hard Rock as determined pursuant to the Credit Facility. These
capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and
equipment. The Credit Facility requires the subsidiaries to deposit funds into a replacements and refurbishments
reserve fund at amounts equal to three percent of the Hard Rock’s gross revenues and requires that the funds
be set aside in restricted cash. As of September 30, 2010, $1.8 million was available in restricted cash
reserves for future capital expenditures in the replacements and refurbishments reserve fund.
Certain of our subsidiaries also have funded a general
reserve account and an equity/accrual subaccount, as required under the Credit Facility. As of September 30,
2010, $11.7 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. In addition, pursuant to gaming requirements certain of
our subsidiaries maintain up to $10 million in reserve for their gaming operations, which in accordance with
the Credit Facility is not deposited into the cash management account described above.
One of our subsidiaries is also obligated to maintain
reserve funds for interest expense and insurance and property tax pursuant to the land acquisition loan it has
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 insurance and property tax reserve funds upon the
subsidiary’s satisfaction of conditions to disbursement under the land acquisition loan. As of
September 30, 2010, $2.1 million and $0.6 million were available in restricted cash reserves in the
interest and insurance and property tax reserve funds, respectively. On December 9, 2010, the subsidiary will
be required to either deposit an additional estimated $3.5 million into the interest reserve account or
convey the land securing the loan to the lenders in accordance with arrangements pre-negotiated with the lenders.
It is anticipated that the reserve payment will not be made. As
a result, we have reclassified the land acquisition loan as a current liability. We do not expect any other
material negative consequences from not making the payment.
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Derivative Financial Instruments
We use derivative financial instruments to manage
exposure to the interest rate risks related to the variable rate debt under the Credit 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, changes in financial condition,
revenue or 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 nine month period ended September 30,
2010, there were no material changes outside the ordinary course of our business in such
contractual obligations.
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.
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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 Goodwill, 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 September 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 September 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 subsidiaries hotel
casino or any of its assets. Substantially all property and equipment is pledged as collateral for
long-term debt.
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.
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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 September 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.
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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.
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
September 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 September 30, 2010, the total value of the
interest rate caps valued under FASB ASC 820-10 (SFAS No. 157) included in other assets was
approximately $1,000.
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 September 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 September 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 September 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.
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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 September 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 September 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.
Allowance for Uncollectible Receivables
Substantially all of our accounts receivable are unsecured and are due primarily from our
subsidiaries 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 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.
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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 subsidiaries 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 subsidiaries 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 September 30, 2010, our subsidiaries 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 subsidiaries Credit Facility with an aggregate notional amount of $1.285 billion and
with a LIBOR cap of 1.23313%. At September 30, 2010, the LIBOR index rate applicable to us was
0.26% thereby making the caps for the Credit Facility out of the money. Subject to the caps, as of
September 30, 2010, an increase in market rates of interest by 0.125% would have increased our
annual interest expense by $1.5 million, and a decrease in market interest rates by 0.125% would
have decreased our annual interest expense by $1.5 million.
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 September 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.
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(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 September 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.
On September 21, 2010, Hard Rock Café International (USA), Inc. filed a lawsuit, Hard Rock
Café International (USA), Inc. v. Hard Rock Hotel Holdings, LLC et al., against the Company, its
subsidiaries Hard Rock Hotel, Inc. and HRHH IP, LLC and other entities in the United States
District Court for the Southern District of New York. Plaintiff asserts claims for trademark
infringement, trademark dilution, unfair competition and breach of contract. The gravamen of the
claims is that defendants allegedly have caused injury to plaintiff through (i) the reality
television show Rehab: Party at the Hard Rock Hotel and (ii) various ventures in which the
Company or its affiliates are alleged to have used or sublicensed the Hard Rock marks in an
unauthorized manner, including the Hard Rock Hotel & Casino Tulsa, the Hard Rock Hotel & Casino
Albuquerque, certain facilities branded HRH, and the registration of certain domain names. We
believe the claims are without merit, among other reasons, because we are entitled to use and
sublicense the Hard Rock marks pursuant to a 1996 license agreement. We intend to vigorously
defend the suit.
We are a defendant in various other lawsuits relating to routine matters incidental to our
business. Management provides an accrual for estimated losses that may occur and does not believe
that the outcome of these other pending claims or litigation, individually or in the aggregate,
will have a material adverse effect on our financial position, results of operations or liquidity
beyond the amounts recorded in the accompanying balance sheet as of September 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 and 2011. 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. (Removed and Reserved).
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
EXHIBIT INDEX
EXHIBIT NUMBER | DESCRIPTION | |||
3.1 | Certificate of Formation of Hard Rock Hotel
Holdings, LLC, dated as of January 16, 2007
(incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on Form 10 filed on
December 20, 2007) |
|||
3.2 | Second Amended and Restated Limited Liability
Company Agreement of Hard Rock Hotel Holdings, LLC,
dated as of May 30, 2008 (incorporated by reference
to Exhibit 3.1 to the Companys Current Report on
Form 8-K filed on June 4, 2008) |
|||
3.3 | Amendment Agreement, dated as of August 1, 2008,
among DLJ MB IV HRH, LLC, DLJ Merchant Banking
Partners IV, L.P., DLJMB HRH VoteCo, LLC, Morgans
Hotel Group Co. and Morgans Group LLC (incorporated
by reference to Exhibit 3.1 to the Companys Current
Report on Form 8-K filed on August 7, 2008) |
|||
31.1 | * | Certification of the Companys Chief Operating
Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, 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, as amended, 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, as amended, 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, as amended, 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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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 |
||||
November 8, 2010 | By: | /S/ JOSEPH A. MAGLIARDITI | ||
Name: | Joseph A. Magliarditi | |||
Title: | Chief Operating Officer | |||
November 8, 2010 | By: | /S/ ARNOLD D. BOSWELL | ||
Name: | Arnold D. Boswell | |||
Title: | Chief Financial Officer of HRHI |
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