Morgans Hotel 10Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2009


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: 001-33738

MORGANS HOTEL GROUP CO.

(Exact name of registrant as specified in its charter)


Delaware		16-1736884
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

475 Tenth Avenue
New York, New York		10018
(Address of principal executive offices)		(Zip Code)

212-277-4100
(Registrant’s 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. Yesþ Noo

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ Noo

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(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).Yeso Noþ

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of August 7, 2009 was 29,646,588.

TABLE OF CONTENTS


	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Morgans Hotel Group Co. Consolidated Balance Sheets		4

Morgans Hotel Group Co. Consolidated Statements of Operations and Comprehensive (Loss) Income		5

Morgans Hotel Group Co. Consolidated Statements of Cash Flows		6

Notes to Unaudited Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3. Quantitative and Qualitative Disclosures About Market Risk		48

Item 4. Controls and Procedures		49

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		50

Item 1A. Risk Factors		50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 3. Defaults Upon Senior Securities		50

Item 4. Submission of Matters to a Vote of Security Holders		51

Item 5. Other Information		51

Item 6. Exhibits		51

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides 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 and in reports to our stockholders. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ materially from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, 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, the risks discussed in the Company’s Annual Report on Form 10-K under the section titled “Risk Factors” and in this Quarterly Report on Form 10-Q under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; downturns in economic and market conditions, particularly levels of spending in the business, travel and leisure industries; hostilities, including future terrorist attacks, or fear of hostilities that affect travel; risks related to natural disasters, such as earthquakes and hurricanes; risks associated with the acquisition, development and integration of properties; the seasonal nature of the hospitality business; changes in the tastes of our customers; increases in real property tax rates; increases in interest rates and operating costs; the impact of any material litigation; the loss of key members of our senior management; general volatility of the capital markets and our ability to access the capital markets; and changes in the competitive environment in our industry and the markets where we invest.

We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Morgans Hotel Group Co.

Consolidated Balance Sheets
(in thousands)
(unaudited)


	June 30,			December 31,
	2009			2008
				(As Adjusted)
ASSETS
Property and equipment, net	$	546,879		$	555,645
Goodwill		73,698			73,698
Investments in and advances to unconsolidated joint ventures		59,582			56,754
Cash and cash equivalents		165,209			49,150
Restricted cash		16,628			21,484
Accounts receivable, net		5,724			6,673
Related party receivables		11,916			7,900
Prepaid expenses and other assets		11,218			9,192
Deferred tax asset		74,944			61,005
Other, net		13,032			13,963

Total assets	$	978,830		$	855,464


LIABILITIES AND EQUITY
Long-term debt and capital lease obligations, net	$	858,894		$	717,179
Accounts payable and accrued liabilities		26,622			26,711
Distributions and losses in excess of investment in unconsolidated joint ventures		16,190			14,563
Other liabilities		29,494			35,655

Total liabilities		931,200			794,108

Commitments and contingencies

Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares issued at June 30, 2009 and December 31, 2008, respectively		363			363
Additional paid-in capital		245,670			242,158
Treasury stock, at cost, 6,644,217 and 6,758,303 shares of common stock at June 30, 2009 and December 31, 2008, respectively		(100,445	)		(102,394	)
Comprehensive income		(11,574	)		(13,949	)
Accumulated deficit		(103,398	)		(82,755	)

Total Morgans Hotel Group Co. stockholders’ equity		30,616			43,423

Noncontrolling interest		17,014			17,933

Total equity		47,630			61,356


Total liabilities and equity	$	978,830		$	855,464

See accompanying notes to these consolidated financial statements.

Morgans Hotel Group Co.

Consolidated Statements of Operations and Comprehensive (Loss) Income
(in thousands, except share data)
(unaudited)


	Three Months			Three Months			Six Months			Six Months
	Ended June 30,			Ended June 30,			Ended June 30,			Ended June 30,
	2009			2008			2009			2008
				(As Adjusted)						(As Adjusted)
Revenues:
Rooms	$	30,885		$	46,867		$	59,480		$	93,021
Food and beverage		19,381			26,554			38,869			53,123
Other hotel		2,258			3,350			5,004			6,823

Total hotel revenues		52,524			76,771			103,353			152,967
Management fee-related parties and other income		3,863			4,552			7,312			9,088

Total revenues		56,387			81,323			110,665			162,055
Operating Costs and Expenses:
Rooms		10,328			11,896			20,542			25,065
Food and beverage		14,539			18,355			29,114			37,722
Other departmental		1,566			1,924			3,160			4,009
Hotel selling, general and administrative		12,095			14,599			24,105			30,372
Property taxes, insurance and other		4,185			3,729			8,510			7,782

Total hotel operating expenses		42,713			50,503			85,431			104,950
Corporate expenses, including stock compensation of $2.5 million, $4.4 million, $5.6 million, and $7.3 million, respectively		7,488			12,310			16,788			22,647
Depreciation and amortization		8,411			6,018			15,631			12,109
Restructuring, development and disposal costs		653			630			1,544			1,167

Total operating costs and expenses		59,265			69,461			119,394			140,873
Operating (loss) income		(2,878	)		11,862			(8,729	)		21,182
Interest expense, net		12,044			10,895			23,501			21,969
Equity in loss of unconsolidated joint ventures		1,895			865			2,438			8,910
Other non-operating expenses		496			776			1,065			1,301

Loss before income taxes		(17,313	)		(674	)		(35,733	)		(10,998	)
Income tax benefit		(7,371	)		(800	)		(15,508	)		(4,968	)

Net (loss) income		(9,942	)		126			(20,225	)		(6,030	)

Net income attributable to noncontrolling interest		(115	)		(1,187	)		(418	)		(2,342	)

Net loss attributable to common stockholders		(10,057	)		(1,061	)		(20,643	)		(8,372	)

Other comprehensive loss:
Unrealized gain on valuation of swap/cap agreements, net of tax		4,326			6,813			8,416			2,939
Realized loss on settlement of swap/cap agreements, net of tax		(2,587	)		(1,320	)		(4,997	)		(1,803	)
Foreign currency translation (loss) gain		(1,157	)		21			(1,044	)		35

Comprehensive (loss) income	$	(9,475	)	$	4,453		$	(18,268	)	$	(7,201	)

Loss per share attributable to common stockholders:
Basic and diluted	$	(0.34	)	$	(0.03	)	$	(0.69	)	$	(0.26	)
Weighted average number of common shares outstanding:
Basic and diluted		29,745			32,191			29,742			32,276

See accompanying notes to these consolidated financial statements.

Morgans Hotel Group Co.

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


	Six Months			Six Months
	Ended June 30,			Ended June 30,
	2009			2008
				(As Adjusted)
Cash flows from operating activities:
Net loss	$	(20,225	)	$	(6,030	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		15,226			11,775
Amortization of other costs		405			334
Amortization of deferred financing costs		1,333			1,440
Amortization of discount on convertible debt		1,140			1,138
Stock-based compensation		5,574			7,349
Accretion of interest on capital lease obligation		813			743
Equity in losses from unconsolidated joint ventures		2,438			8,910
Impairment loss and loss on disposal of assets		(20	)		117
Deferred income tax benefit		(15,508	)		(4,575	)
Changes in assets and liabilities:
Accounts receivable, net		949			(224	)
Related party receivables		(4,016	)		(1,078	)
Restricted cash		5,093			3,461
Prepaid expenses and other assets		(2,036	)		(963	)
Accounts payable and accrued liabilities		(686	)		(4,158	)
Other liabilities		(228	)		358

Net cash (used in) provided by operating activities		(9,748	)		18,597

Cash flows from investing activities:
Additions to property and equipment		(6,439	)		(33,349	)
(Deposits to) withdrawals from capital improvement escrows, net		(237	)		1,977
Distributions and reimbursements from unconsolidated joint ventures		4			667
Investment in unconsolidated joint ventures, net		(5,025	)		(16,049	)

Net cash used in investing activities		(11,697	)		(46,754	)

Cash flows from financing activities:
Proceeds from long-term debt		139,789			—
Payments for deferred costs		(807	)		—
Payments on long-term debt and capital lease obligations		(27	)		(176	)
Cash paid in connection with vesting of stock based awards		(114	)		(73	)
Distributions to holders of noncontrolling interests in consolidated subsidiaries		(1,337	)		(2,186	)
Financing costs		—			(28	)
Repurchase of Company’s common stock		—			(19,173	)

Net cash provided by (used in) financing activities		137,504			(21,636	)

Net increase (decrease) in cash and cash equivalents		116,059			(49,793	)
Cash and cash equivalents, beginning of period		49,150			122,712

Cash and cash equivalents, end of period	$	165,209		$	72,919

Supplemental disclosure of cash flow information:
Cash paid for interest	$	20,960		$	17,568

Cash paid for taxes	$	301		$	952

See accompanying notes to these consolidated financial statements.

Morgans Hotel Group Co.

Notes to Consolidated Financial Statements

1. Organization and Formation Transaction

Morgans Hotel Group Co. (the “Company”) was incorporated on October 19, 2005 as a Delaware corporation to complete an initial public offering (“IPO”) that was part of the formation and structuring transactions described below. The Company operates, owns, acquires and redevelops hotel properties.

At the time of the IPO, the Company was comprised of the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (“Former Parent”), to Morgans Group LLC, the Company’s operating company. At the time of the formation and structuring transactions, the Former Parent was owned approximately 85% by NorthStar Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp., and approximately 15% by RSA Associates, L.P.

In connection with the IPO, the Former Parent contributed the subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom to Morgans Group LLC in exchange for membership units. Simultaneously, Morgans Group LLC issued additional membership units to the Company in exchange for cash from the IPO. The Former Parent also contributed all the membership interests in its hotel management business to Morgans Group LLC in return for 1,000,000 membership units in Morgans Group LLC exchangeable for shares of the Company’s common stock. The Company is the managing member of Morgans Group LLC, and has full management control. On April 24, 2008, 45,935 outstanding membership units in Morgans Group LLC were redeemed in exchange for 45,935 shares of the Company’s common stock. As of June 30, 2009, 954,065 membership units in Morgans Group LLC remain outstanding.

On February 17, 2006, the Company completed its IPO. The Company issued 15,000,000 shares of common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after underwriters’ discounts and offering expenses.

These financial statements have been presented on a consolidated basis and reflect the Company’s assets, liabilities and results from operations. The equity method of accounting is utilized to account for investments in joint ventures over which the Company has significant influence, but not control.

The Company has one reportable operating segment; it operates, owns, acquires and redevelops boutique hotels.

Operating Hotels

The Company’s operating hotels as of June 30, 2009 are as follows:


		Number of
Hotel Name	Location	Rooms		Ownership
Delano Miami	Miami Beach, FL		194		(1	)
Hudson	New York, NY		807		(5	)
Mondrian Los Angeles	Los Angeles, CA		237		(1	)
Morgans	New York, NY		114		(1	)
Royalton	New York, NY		168		(1	)
Sanderson	London, England		150		(2	)
St Martins Lane	London, England		204		(2	)
Shore Club	Miami Beach, FL		309		(3	)
Clift	San Francisco, CA		366		(4	)
Mondrian Scottsdale	Scottsdale, AZ		189		(1	)
Hard Rock Hotel & Casino	Las Vegas, NV		646		(6	)
Mondrian South Beach	Miami Beach, FL		328		(2	)


(1)		Wholly-owned hotel.

(2)		Owned through a 50/50 unconsolidated joint venture.

(3)		Operated under a management contract, with an unconsolidated minority ownership interest of approximately 7%.

(4)		The hotel is operated under a long-term lease, which is accounted for as a financing.

(5)		The Company owns 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building.

(6)		Operated under a management contract and owned through an unconsolidated joint venture, of which the Company owned approximately 19.1% at June 30, 2009 based on cash contributions.

Restaurant Joint Ventures

The food and beverage operations of certain of the hotels are operated under 50/50 joint ventures with a third party restaurant operator.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company consolidates all wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in combination. We have evaluated all subsequent events through August 10, 2009, the date the financial statements were issued.

Financial Accounting Standards Board (“FASB”) Interpretation No. 46,Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as amended (“FIN 46R”), requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FIN 46R, the Company consolidates five ventures that provide food and beverage services at the Company’s hotels as the Company absorbs a majority of the ventures’ expected losses and residual returns. FIN 46R has been applied retroactively. These services include operating restaurants including room service at five hotels, banquet and catering services at four hotels and a bar at one hotel. No assets of the Company are collateral for the venturers’ obligations and creditors of the venturers’ have no recourse to the Company.

Management has evaluated the applicability of FIN 46R to its investments in certain joint ventures and determined that these joint ventures do not meet the requirements of a variable interest entity or the Company is not the primary beneficiary and, therefore, consolidation of these ventures is not required. Accordingly, these investments are accounted for using the equity method.

Derivative Instruments and Hedging Activities

As required by FASB Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS No.133”) and SFAS No. 161,Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133(“SFAS No. 161”), the Company records all derivatives on the balance sheet at fair value and provides qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. 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.

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

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 by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

The Company has interest rate caps that are not designated as hedges. These derivatives are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks, but the Company has elected not to designate these instruments in hedging relationships based on the provisions in SFAS No. 133. The changes in fair value of derivatives not designated in hedging relationships have been recognized in earnings.

A summary of the Company’s derivative and hedging instruments that have been recognized in earnings as of June 30, 2009 and December 31, 2008 is as follows (in thousands):


						Estimated			Estimated
						Fair Market			Fair Market
						Value at			Value at
	Type of	Maturity	Strike			June 30,			December 31,
Notional Amount	Instrument	Date	Rate			2009			2008
$285,000	Sold interest cap	July 9, 2010		4.25	%		(7	)		(15	)
285,000	Interest cap	July 9, 2010		4.25	%		8			17
85,000	Interest cap	July 15, 2010		7.00	%		—			—

85,000	Sold interest cap	July 15, 2010		7.00	%		—			—

Fair value of derivative instruments not designated as hedges						$	1		$	2

As of June 30, 2009 and December 31, 2008, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands):


						Estimated			Estimated
						Fair Market			Fair Market
						Value at			Value at
	Type of	Maturity	Strike			June 30,			December 31,
Notional Amount	Instrument	Date	Rate			2009			2008
$285,000	Interest swap	July 9, 2010		5.04	%	$	(12,338	)	$	(16,953	)
85,000	Interest swap	July 15, 2010		4.91	%		(3,632	)		(4,941	)

Fair value of derivative instruments designated as effective hedges						$	(15,970	)	$	(21,894	)

Total fair value of derivative instruments						$	(15,969	)	$	(21,892	)

Total fair value included in other assets						$	8		$	17

Total fair value included in other liabilities						$	(15,977	)	$	(21,909	)

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. It is estimated that approximately $16.2 million included in accumulated other comprehensive income related to derivatives will be reclassified to interest expense in the 2009 results of operations.

Fair Value Measurements

SFAS No. 157,Fair Value Measurements(“SFAS No. 157”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

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, 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 entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

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 entity’s 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 Company’s 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 and interest rate swaps 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 SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 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.

Stock-based Compensation

The Company accounts for stock based employee compensation using the fair value method of accounting described in SFAS No. 123R,Accounting for Stock-Based Compensation(“SFAS No. 123”) (as amended by SFAS No. 148 and SFAS No. 123(R)). For share grants, total compensation expense is based on the price of the Company’s stock at the grant date. For option grants, the total compensation expense is based on the estimated fair value using the Black-Scholes option-pricing model. Compensation expense is recorded ratably over the vesting period, if any. Stock compensation expense recognized for the three months ended June 30, 2009 and 2008 was $2.5 million and $4.4 million, respectively. Stock compensation expense recognized for the six months ended June 30, 2009 and 2008 was $5.6 million and $7.3 million, respectively.

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less any dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants.

Noncontrolling Interest

Effective January 1, 2009 the Company adopted SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulleting (ARB)No. 51 (“SFAS No. 160”). SFAS No. 160 amends the accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under SFAS No. 160, the Company now reports both noncontrolling interests in subsidiaries as a separate component of equity in the consolidated financial statements and reflects both net income attributable to the noncontrolling interests and net income attributable to the common stockholders on the face of the consolidated statement of operations. SFAS No. 160 applies prospectively, except for presentation and disclosure requirements, which are applied retrospectively.

The percentage of membership units in Morgans Group LLC, our operating company, owned by the Former Parent is presented as noncontrolling interest in Morgans Group LLC in the consolidated balance sheet and was approximately $15.9 million and $16.6 million as of June 30, 2009 and December 31, 2008, respectively. The noncontrolling interest in Morgans Group LLC is: (i) increased or decreased by the limited members’ pro rata share of Morgans Group LLC’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemptions of membership units for the Company’s common stock; and (iv) adjusted to equal the net equity of Morgans Group LLC multiplied by the limited members’ ownership percentage immediately after each issuance of units of Morgans Group LLC and/or shares of the Company’s common stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the noncontrolling interest in Morgans Group LLC is based on the weighted-average percentage ownership throughout the period.

Additionally, $1.1 million and $1.4 million was recorded as noncontrolling interest as of June 30, 2009 and December 31, 2008, respectively, which represents our third-party food and beverage joint venture partner’s interest in the restaurant ventures at certain of our hotels.

New Accounting Pronouncements

On February 15, 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). This statement permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS No. 159 must be applied prospectively, and the effect of the first re-measurement to fair value, if any, should be reported as a cumulative effect adjustment to the opening balance of retained earnings. The adoption of SFAS No. 159 had no material impact on the Company’s consolidated financial statements as the Company did not elect the fair value measurement option for any of its financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 141R,Business Combinations(“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity. Additionally, SFAS No. 141R requires that all transaction costs of a business acquisition will be expensed as incurred. The adoption of this Statement in the first quarter of 2009 will only have an impact on the accounting on future business combinations.

In February 2008, the FASB issued Staff Position No. FAS 157-2, which provided for a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of these provisions of SFAS No. 157 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, which requires enhanced disclosures related to derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosure related to: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS No.133, and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company adopted SFAS No. 161 as of January 1, 2009 and the applicable disclosures are detailed above inDerivative Instruments and Hedging Activities.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (“FSP APB 14-1”) which clarifies the accounting for convertible notes payable. FSP APB 14-1 requires the proceeds from the sale of convertible notes to be allocated between a liability component and an equity component. The resulting debt discount must be amortized over the period the debt is expected to remain outstanding as additional interest expense. FSP APB 14-1 requires retroactive application to all periods presented and is effective for fiscal years beginning after December 15, 2008. FSP APB 14-1 became effective for the Company as of January 1, 2009. The Company has adopted FSP APB 14-1 as of January 1, 2009. See Note 6 (g).

In June 2008, the FASB ratified EITF Issue 07-5,Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock, (“EITF 07-5”). Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of operations would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 is effective on January 1, 2009. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3 which clarifies the application of FASB Statement No. 157,Fair Value Measurements. Staff Position No. FAS 157-3 provides guidance in determining the fair value of a financial asset when the market for that financial asset is not active.

On April 1, 2009, the FASB issued three FASB Staff Positions intended to provide additional application guidance and enhance disclosures regarding the fair value of measurements and impairments of securities. FASB Staff Position No. FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FASB Staff Position No. FAS 107-1 (“SFAS No. 107-1”) and APB No. 28-1,Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FASB Staff Position No. FAS 115-2 and No. FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. These FSP’s are effective for reporting periods ending after June 15, 2009. The adoption of these statements did not have a material impact on the Company’s consolidated financial statements.

On May 28, 2009, the FASB issued SFAS No. 165,Subsequent Events(“SFAS No. 165”).The Company adopted SFAS No. 165 in the second quarter of 2009. SFAS No. 165 establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See above, “Basis of Presentation” for the related disclosures. The adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.

On June 12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 amends FIN 46R and changes the consolidation guidance applicable to a variable interest entity (a “VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance, and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, FIN 46R required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. Qualified special purpose entities, which were previously exempt from the application of this standard, will be subject to the provisions of this standard when it becomes effective. SFAS No. 167 also requires enhanced disclosures about an enterprise’s involvement with a VIE. SFAS No. 167 will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009. The Company is currently evaluating the impact that these standards will have on its consolidated financial statements.

Fair Value of Financial Instruments

As mentioned above, the Company adopted SFAS No. 107-1 and APB No. 28-1 during the second quarter of 2009. This guidance requires quarterly fair value disclosures for financial instruments rather than annual disclosure. Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold, or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and long-term debt. Substantially all of the Company’s long-term debt accrues interest at a floating rate, which re-prices frequently. Management believes the carrying amount of the aforementioned financial instruments is a reasonable estimate of fair value as of June 30, 2009 and December 31, 2008 due to the short-term maturity of these items or variable interest rate. The fair value of the Company’s fixed rate debt amounted to approximately $220.1 million and $242.0 million as of June 30, 2009 and December 31, 2008, respectively, using market interest rates ranging from 1.4% to 6.1%.

Reclassifications and Adoption of New Accounting Pronouncements

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.

The Company followed the guidance for a change in accounting principle under SFAS No. 154,Accounting Changes and Error Corrections,to reflect the impact of the adoption of FSP APB 14-1, which was effective January 1, 2009. As a result of these adoptions, the Company adjusted comparative consolidated financial statements of prior periods in this Quarterly Report on Form 10-Q.

The following consolidated balance sheet for the year ended December 31, 2008 and consolidated statement of operations and consolidated statement of cash flows for the three and six months ended June 30, 2008 were affected by the changes in accounting principles (in thousands, except per share data):


	December 31, 2008
	As Originally						Effect of
Consolidated Balance Sheet	Reported			As Adjusted			Change
Deferred tax asset	$	66,279		$	61,005		$	(5,274	)
Other, net		14,490			13,963			(527	)
Long term debt and capital lease obligations		730,365			717,179			(13,186	)
Additional paid-in capital		232,022			242,158			10,136
Accumulated deficit		(80,088	)		(82,755	)		(2,667	)
Noncontrolling interest		18,017			17,933			(84	)


	Three Months Ended June 30, 2008									Six Months Ended June 30, 2008
Consolidated Statement of	As Originally						Effect of			As Originally						Effect of
Operations	Reported			As Adjusted			Change			Reported			As Adjusted			Change

Interest expense, net	$	10,327		$	10,895		$	(568	)	$	20,831		$	21,969		$	(1,138	)
Income tax benefit		(572	)		(800	)		228			(4,512	)		(4,968	)		456
Net income (loss)		466			126			(340	)		(5,348	)		(6,030	)		(682	)
Net income attributable to noncontrolling interest		(1,197	)		(1,187	)		(10	)		(2,363	)		(2,342	)		(21	)
Net loss attributable to common stockholders		(731	)		(1,061	)		(330	)		(7,711	)		(8,372	)		(661	)
Loss per share attributable to common stockholders:
Basic and diluted		(0.02	)		(0.03	)		(0.01	)		(0.24	)		(0.26	)		(0.02	)


	Six Months Ended June 30, 2008
	As Originally						Effect of
Consolidated Statement of Cash Flows	Reported			As Adjusted			Change
Net loss	$	(5,348	)	$	(6,030	)	$	(682	)
Amortization of discount on convertible debt		—			1,138			1,138
Deferred tax benefit		(4,119	)		(4,575	)		(456	)

3. Income (Loss) Per Share

Basic earnings per share is calculated based on the weighted average number of common stock outstanding during the period. Diluted earnings per share include the effect of potential shares outstanding, including dilutive securities. Potential dilutive securities may include shares and options granted under the Company’s stock incentive plan and membership units in Morgans Group LLC, which may be exchanged for shares of the Company’s common stock under certain circumstances. The 954,065 outstanding Morgans Group LLC membership units (which may be converted to common stock) at June 30, 2009 have been excluded from the diluted net income (loss) per common share calculation, as there would be no effect on reported diluted net income (loss) per common share. All unvested restricted stock units, LTIP Units (as defined in Note 7), stock options and contingent Convertible Notes (as defined in Note 6) have been excluded from loss per share for the three months ended June 30, 2009 and the six months ended June 30, 2009 as they are anti-dilutive.

The table below details the components of the basic and diluted loss per share calculations (in thousands, except for per share data):


	Three Months Ended June 30, 2009								Six Months Ended June 30, 2009
				Weighted								Weighted
				Average		EPS						Average		EPS
	Loss			Shares		Amount			Loss			Shares		Amount
Basic and diluted loss per share	$	(10,057	)		29,745	$	(0.34	)	$	(20,643	)		29,742	$	(0.69	)

4. Investments in and Advances to Unconsolidated Joint Ventures

The Company’s investments in and advances to unconsolidated joint ventures and its equity in income (loss) of unconsolidated joint ventures are summarized as follows (in thousands):

Investments


	As of		As of
	June 30,		December 31,
Entity	2009		2008
Mondrian South Beach		22,698		24,785
Shore Club		57		57
Echelon Las Vegas		17,162		17,198
Mondrian SoHo		8,335		7,564
Ames Boston		11,229		7,049
Other		101		101

Total investments in and advances to unconsolidated joint ventures	$	59,582	$	56,754


	As of			As of
	June 30,			December 31,
Entity	2009			2008
Morgans Hotel Group Europe Ltd.	$	(3,899	)	$	(2,689	)
Restaurant Venture — SC London		(1,228	)		(811	)
Hard Rock Hotel & Casino		(11,063	)		(11,063	)

Total losses from and distributions in excess of investment in unconsolidated joint ventures	$	(16,190	)	$	(14,563	)

Equity in income (loss) from unconsolidated joint ventures


	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
Entity	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Morgans Hotel Group Europe Ltd.	$	505		$	3,434		$	173		$	3,424
Restaurant Venture — SC London		(258	)		135			(417	)		315
Mondrian South Beach		(2,101	)		(193	)		(2,087	)		(714	)
Hard Rock Hotel & Casino		—			(3,802	)		—			(11,328	)
Shore Club		—			—			—			—
Echelon Las Vegas		(44	)		(441	)		(111	)		(611	)
Other		3			2			4			4

Total	$	(1,895	)	$	(865	)	$	(2,438	)	$	(8,910	)

Morgans Hotel Group Europe Limited

As of June 30, 2009, the Company owned interests in two hotels in London, England, St Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel, through a 50/50 joint venture known as Morgans Hotel Group Europe Limited (“Morgans Europe”) with Walton MG London Investors V, L.L.C.

Under a management agreement with Morgans Europe, the Company earns management fees and a reimbursement for allocable chain service and technical service expenses. The Company is also entitled to an incentive management fee and a capital incentive fee. The Company did not earn any incentive fees during the six months ended June 30, 2009 or 2008.

Morgans Europe has outstanding mortgage debt of £102.0 million, or approximately $167.5 million, as of June 30, 2009 which matures on November 24, 2010. The joint venture is currently considering various options with respect to the refinancing of this mortgage obligation.

Net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. The Company accounts for this investment under the equity method of accounting.

Mondrian South Beach

On August 8, 2006, the Company entered into a 50/50 joint venture with an affiliate of Hudson Capital to renovate and convert an apartment building on Biscayne Bay in South Beach Miami into a condominium hotel, Mondrian South Beach, which opened in December 2008. The Company operates Mondrian South Beach under a long-term incentive management contract.

The joint venture acquired the existing building and land for a gross purchase price of $110.0 million. An initial equity investment of $15.0 million from each of the Company and Hudson Capital was funded at closing, and subsequently each member also contributed $8.0 million of additional equity. The Company and an affiliate of Hudson Capital provided additional mezzanine financing of approximately $22.5 million in total to the joint venture to fund completion of the construction at Mondrian South Beach in 2008. Additionally, the joint venture initially received mortgage loan financing of approximately $124.0 million at a rate of LIBOR, based on the rate set date, plus 300 basis points. A portion of this mortgage debt was paid down, prior to the amendment discussed below, with proceeds obtained from condominium sales. In April 2008, the Mondrian South Beach joint venture obtained a mezzanine loan of $28.0 million bearing interest at LIBOR, based on the rate set date, plus 600 basis points. The mezzanine loan was also amended in November 2008, as discussed below.

On November 25, 2008, together with its joint venture partner, the Company amended and restated the mortgage loan and mezzanine loan agreements related to the Mondrian South Beach to provide for, among other things, four one-year extension options of the third-party financing, totaling $96.8 million as of June 30, 2009. Under the amended agreements, the initial maturity date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual extension, repayment of the remainder of the A-Note, as defined in the agreements, by August 1, 2010 for the exercise of the second annual extension, achievement of defined debt service coverage ratios for the exercise of the third and fourth annual extensions, and achievement of a loan to value test for the fourth annual extension. The loans matured on August 1, 2009 and were not repaid. The Company is currently operating Mondrian South Beach. The joint venture is in discussions with the lenders to extend the maturity.

A standard non-recourse carve-out guaranty by Morgans Group LLC is in place for the Mondrian South Beach loans. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, the Company and affiliates of its partner may have continuing obligations under a construction completion guaranty. The Company and affiliates of its partner also have an agreement to purchase approximately $14 million each of condominium units under certain conditions.

The joint venture is in the process of selling units as condominiums, subject to market conditions, and unit buyers will have the opportunity to place their units into the hotel’s rental program. In addition to hotel management fees, the Company could also realize fees from the sale of condominium units.

Hard Rock Hotel & Casino

On May 11, 2006, the Company and its wholly-owned subsidiary, MHG HR Acquisition Corp. (“Acquisition Corp”), entered into an Agreement and Plan of Merger with Hard Rock Hotel, Inc. (“HRH”) pursuant to which the Acquisition Corp agreed to acquire HRH in an all cash merger (the “Merger”). Additionally, an affiliate of the Company entered into several asset purchase agreements with HRH or affiliates of HRH to acquire a development land parcel adjacent to the Hard Rock Hotel & Casino in Las Vegas (“Hard Rock”) and certain intellectual property rights related to the Hard Rock (such asset purchases, together with the Merger, the “Transactions”). The aggregate consideration for the Transactions was $770.0 million.

On November 7, 2006, the Company entered into a definitive agreement with an affiliate of DLJ Merchant Banking Partners (“DLJMB”), as amended in December 2006, under which DLJMB and the Company agreed to form a joint venture in connection with the acquisition and development of the Hard Rock. The joint venture agreement included certain affiliates of DLJMB and Morgans Group LLC as additional members. DLJMB and such affiliates are referred to as the DLJMB Parties. The Company and Morgans Group LLC are referred to as the Morgans Parties.

The closing of the Transactions and completion of the Merger occurred on February 2, 2007. The Morgans Parties funded one-third of the equity, or approximately $57.5 million, and the DLJMB Parties funded two-thirds of the equity, or approximately $115.0 million, through a joint venture. The remainder of the $770.0 million purchase price was financed with mortgage financing under a credit agreement entered into by the joint venture. The credit agreement provides for a secured term loan facility, which matures on February 9, 2010 with two one-year extension options subject to certain conditions, consisting of a $760.0 million loan for the acquisition and a loan for future expansion of the Hard Rock, as discussed further below. On November 6, 2007, the joint venture entered into an amended and restated credit agreement in which the lender exercised its right to split the loan made pursuant to the original credit agreement into a mortgage loan, which is comprised of a construction loan component and an acquisition loan component, and three mezzanine loans. The proceeds of the mezzanine loans were used to prepay the acquisition loan portion of the mortgage loan made pursuant to the original credit agreement. As of August 7, 2009, the Hard Rock joint venture has entered into a term sheet with the lenders of the outstanding debt to amend the terms of the loan agreements and is currently working with such lenders to complete due diligence and prepare definitive documentation. There can be no assurance that the Hard Rock joint venture will complete the amendment process with the lenders on a timely basis or at all.

On June 6, 2008, the joint venture closed the $620.0 million of construction financing for the expansion of the Hard Rock. The construction financing loan also matures on February 9, 2010, with two one-year extension options, subject to certain conditions.

The Company has entered into standard joint and several guarantees in connection with the acquisition and construction loans, including construction completion guarantees related to the Hard Rock expansion, which is scheduled to be completed in 2009. In its joint venture agreement with DLJMB, the Company has agreed to be responsible for the first $50.0 million of exposure on the completion guarantees, subject to certain conditions.

As of June 30, 2009, the Company has issued approximately $11.1 million of letters of credit toward the expansion, of which $1.1 million was funded in July 2009 and the remainder is expected to be funded later in 2009.

Also on June 6, 2008, the Morgans Parties and DLJMB Parties further amended their joint venture agreement to reflect DLJMB’s commitment to make additional capital contributions to the Hard Rock of up to $144.0 million for the expansion project and up to $110.0 million to satisfy the minimum sales price or amortization payment requirements under the loan facility relating to the approximately 15.0 acres of excess land held for sale by the Hard Rock.

On August 1, 2008, a subsidiary of the Hard Rock joint venture completed an intercompany land purchase with respect to an 11-acre parcel of land located adjacent to the Hard Rock. In connection with the intercompany land purchase a subsidiary entered into a $50.0 million land acquisition financing agreement with various lenders. The initial maturity date of August 9, 2009 was extended to September 4, 2009. The Hard Rock joint venture has entered into a term sheet with the lenders under the land acquisition financing to extend the maturity date to August 9, 2011 and are currently working with such lenders to complete due diligence and prepare definitive documentation. There can be no assurance that the joint venture will be able to extend the maturity date of the land acquisition financing on a timely basis or at all.

In connection with the loan, Morgans Group LLC, together with DLJMB, as guarantors, entered into a non-recourse carve-out guaranty agreement, which is only triggered in the event of certain “bad boy” clauses, in favor of Column Financial, Inc. In the joint venture agreement, DLJMB has agreed to be responsible for 100% of any liability under the guaranty, subject to certain conditions. NorthStar Realty Finance Corp. is a participant lender in the loan. See Note 8 to the consolidated financial statements.

As part of the August 1, 2008 intercompany land purchase, the DLJMB Parties contributed an aggregate of approximately $74.0 million to the Hard Rock joint venture to fund the remaining portion of the $110.0 million of proceeds necessary to complete the intercompany land purchase and to pay for all costs and expenses in connection with its closing and related financing. The proceeds from the financing, together with the equity contribution from the DLJMB Parties, were used to fully satisfy the $110.0 million amortization payment under the joint venture’s commercial mortgage backed securities loan facility.

Also on August 1, 2008, the DLJMB Parties and the Morgans Parties amended the joint venture agreement. Among other things, the amended joint venture agreement clarifies certain obligations of the parties in the event that capital contributions are required for additional costs and expenses relating to the 11-acre parcel. In general, any decision to call for such additional capital contributions will be in the discretion of the Hard Rock joint venture’s board of directors. Subject to certain terms and conditions, the DLJMB Parties could also cause the joint venture to seek such additional capital contributions from third parties. However, each member that is not in default under the joint venture agreement will be given an opportunity to participate in the funding. The amended joint venture agreement also clarifies certain provisions used to calculate each member’s percentage interest in the joint venture in the event that such additional capital contributions are funded.

As a result of additional cash contributions made by the DLJMB Parties, the Company held approximately a 19.1% ownership interest in the joint venture as of June 30, 2009. As of August 5, 2009, based on additional cash contributions by the DLJMB Parties of $17.7 million subsequent to June 30, 2009, the Company holds approximately a 16.7% ownership interest in the joint venture based on cash contributions.

Under an amended property management agreement, the Company operates the hotel, retail, food and beverage, entertainment and all other businesses related to the Hard Rock, excluding the casino prior to March 1, 2008, as discussed below. Under the terms of the agreement, the Company receives a management fee and a chain service expense reimbursement of all non-gaming revenue including casino rents and all other rental income. The Company can also earn an incentive management fee based on EBITDA, as defined, above certain levels. The term of the management contract is 20 years with two 10-year renewals. Beginning 12 months following completion of the expansion, the Company’s management agreement is subject to certain performance tests, namely achievement of an EBITDA hurdle, as defined in the amended property management agreement.

Effective March 1, 2008, the joint venture began operating the casino at Hard Rock. Prior to that date, the casino was operated by a third party subject to a lease.

Echelon Las Vegas

In January 2006, the Company entered into a 50/50 joint venture with a subsidiary of Boyd Gaming Corporation (“Boyd”), through which the joint venture plans to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project.

On August 1, 2008, Boyd announced that it will delay the entire Echelon project due to the current capital markets and economic conditions. On September 23, 2008, the Company and Boyd amended their joint venture agreement to, among other things, extend the deadline by which the joint venture must obtain construction financing for the development of Delano Las Vegas and Mondrian Las Vegas to December 31, 2009. The amended joint venture agreement also provided for the immediate return of the $30.0 million deposit the Company had provided for the project, plus interest, the elimination of the Company’s future funding obligations of approximately $41.0 million and the elimination of any obligation by the Company to provide a construction loan guaranty. The amended joint venture agreement also limits the amounts that the Company and Boyd are required to continue to fund for pre-development and related costs to approximately $0.4 million each, which are expected to be paid in 2009. Each partner has the right to terminate the joint venture for any reason prior to December 31, 2009. Additionally, the terms of the management agreement, which provide for the Company to operate the joint venture hotels upon their completion, remain unchanged. As of June 30, 2009, the Company concluded that the investment in Echelon Las Vegas was not impaired as the joint venture agreement is still in effect and although neither party is obligated to contribute additional equity, the partners’ intent is to continue with the project under the amended joint venture agreement assuming financing becomes available.

Mondrian SoHo

In June 2007, the Company entered into an agreement for an approximately 20% equity interest in a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo neighborhood of New York City. The Mondrian SoHo is currently expected to have approximately 270 rooms, a restaurant, bar, meeting rooms, exercise facility and a penthouse suite. The Company has contributed approximately $4.8 million in equity and $3.5 million in mezzanine loans to the joint venture through June 30, 2009. The Company has signed a 10-year management contract with two 10-year extension options to operate the hotel upon its completion, which is currently expected to occur in the middle of 2010.

Ames Boston

On June 17, 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered into a joint venture agreement as part of the development of the Ames Boston hotel in Boston, located near Government Center, Boston Common and Faneuil Hall. The Company has signed a long-term management contract to operate the hotel upon its completion. Ames Boston is expected to open in the fourth quarter of 2009 and to have approximately 115 guest rooms, a restaurant, bar and exercise facility.

The Company has contributed approximately $11.1 million in equity through June 30, 2009 for an approximately 35% interest in the joint venture. The project is expected to qualify for federal and state historic rehabilitation tax credits. Normandy Real Estate Partners has closed on a development loan from UBS for $46.5 million, which is outstanding as of June 30, 2009.

5. Other Liabilities

Other liabilities consist of the following (in thousands):


	As of		As of
	June 30,		December 31,
	2009		2008
Interest swap liability (Note 2)	$	15,977	$	21,909
Designer fee payable		13,517		13,175
Other		—		571

	$	29,494	$	35,655

Designer Fee Payable

The Former Parent had an exclusive service agreement with a hotel designer, pursuant to which the designer has initiated various claims related to the agreement. Although the Company is not a party to the agreement, it may have certain contractual obligations or liabilities to the Former Parent in connection with the agreement. While defenses and/or counter-claims may be available to the Company or the Former Parent in connection with any claims brought by the designer, a liability amount has been recorded in these consolidated financial statements. According to the agreement, the designer is owed a base fee for each designed hotel, plus 1% of Gross Revenues, as defined in the agreement, for a 10-year period from the opening of each hotel. The estimated costs of the design services were capitalized as a component of the applicable hotel and are being amortized over the five-year estimated life of the related design elements. Interest is accreted each year on the liability and charged to interest expense using a rate of 9%. Changes to the liability recorded in these consolidated financial statements are recorded as an adjustment to the capitalized design fee and amortized prospectively. Adjustments to the liability after the five-year life of the design asset will be charged directly to operations. In addition, the agreement also called for the designer to design a minimum number of projects for which the designer would be paid a minimum fee, which is recorded in the above liability. See further discussion in Note 9.

6. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consists of the following (in thousands):


	As of		As of		Interest rate at
	June 30,		December 31,		June 30,
Description	2009		2008		2009
Notes secured by Hudson and Mondrian(a)	$	370,000	$	370,000	LIBOR + 1.25%
Clift debt(b)		82,392		81,578		9.6	%
Promissory note(c)		10,500		10,000		11.0	%
Note secured by Mondrian Scottsdale(d)		40,000		40,000	LIBOR + 2.30%
Liability to subsidiary trust(e)		50,100		50,100		8.68	%
Revolving credit facility(f)		139,289		—			(f)
Convertible Notes — Face Value $172.5 million(g)		160,453		159,314		2.375	%
Capital lease obligations		6,160		6,187	various

Total long term debt	$	858,894	$	717,179

(a) Mortgage Agreement — Notes secured by Hudson and Mondrian Los Angeles

On October 6, 2006, subsidiaries of the Company entered into non-recourse mortgage financings with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and a mezzanine loan (collectively, the “Mortgages”). These loans, a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in the Company’s subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles all mature on July 15, 2010.

The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. The Company maintains swaps that effectively fix the LIBOR rate on the debt under the Mortgages at approximately 5.0% through the initial maturity date.

The Company has the option of extending the maturity date of the Mortgages to October 15, 2011 provided that certain extension requirements are achieved, including maintaining a debt service coverage ratio, as defined, at the subsidiary owning the relevant hotel for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater. A portion of the Mortgages may need to be repaid in order to meet this covenant, or the Company may consider refinancing these Mortgages.

The prepayment clause in the Mortgages permits the Company to prepay the Mortgages in whole or in part on any business day.

The Mortgages require the Company’s subsidiary borrowers (entities owning Hudson and Mondrian Los Angeles) to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. The subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations and certain other liabilities.

The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles. Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or partnership interest debt. In addition, the Mortgages do not permit (1) transfers of more than 49% of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (2) a change in control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself without, in each case, complying with various conditions or obtaining the prior written consent of the lender.

The Mortgages provide for events of default customary in mortgage financings, including, among others, failure to pay principal or interest when due, failure to comply with certain covenants, certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group LLC or the Company, and breach of the encumbrance and transfer provisions. In the event of a default under the Mortgages, the lender’s recourse is limited to the mortgaged property, unless the event of default results from insolvency, a voluntary bankruptcy filing or a breach of the encumbrance and transfer provisions, in which event the lender may also pursue remedies against Morgans Group LLC.

(b) Clift Debt

In October 2004, Clift Holdings LLC sold the hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. Under this lease, the Company is required to fund operating shortfalls including the lease payments and to fund all capital expenditures. This transaction did not qualify as a sale due to the Company’s continued involvement and therefore is treated as a financing.

The lease payment terms are as follows:


Years 1 and 2		$2.8 million per annum (completed in October 2006)
Years 3 to 10		$6.0 million per annum
Thereafter		Increased at 5-year intervals by a formula tied to increases in the Consumer Price Index. At year 10, the increase has a maximum of 40% and a minimum of 20%. At each payment date thereafter, the maximum increase is 20% and the minimum is 10%.

(c)Gale Promissory Note

The purchase of the Gale, the property across from the Delano Miami, was partially financed with the issuance of a $10.0 million three-year interest only non-recourse promissory note by the Company to the seller, with a scheduled maturity of January 24, 2009. In November 2008, the Company extended the maturity of the note until January 24, 2010 and agreed to pay 11.0% interest for the extension year which the Company was required to prepay in full at the time of the extension. The obligations under the note are secured by the property. Additionally, in January 2009, the Company borrowed an additional $0.5 million to obtain necessary permits. This $0.5 million promissory note matures on January 24, 2010 and bears interest at 11%. The obligations under this note are secured with a pledge of the equity interests in the Company’s subsidiary that owns the Gale.

(d) Mondrian Scottsdale Debt

In May 2006, the Company obtained non-recourse mortgage and mezzanine financing on Mondrian Scottsdale. The $40.0 million mortgage and mezzanine loans accrue interest at LIBOR plus 2.3%. The loans matured on June 1, 2009 and were not repaid. The Company is currently operating Mondrian Scottsdale and accruing interest. The Company is discussing various options with the lenders. The Company does not intend to commit significant monies toward the repayment of the loans or the funding of operating deficits.

(e) Liability to Subsidiary Trust Issuing Preferred Securities

On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the “Trust”), issued $50.0 million in trust preferred securities (the “Trust Securities”) in a private placement. The Company owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds of these transactions to purchase $50.1 million of junior subordinated notes issued by the Company’s operating company and guaranteed by the Company (the “Trust Notes”) which mature on October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The terms of the Trust Notes are substantially the same as the Trust Securities. The Trust Notes and the Trust Securities have a fixed interest rate of 8.68% per annum during the first 10 years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum. The Trust Notes are redeemable by the Trust, at the Company’s option, after five years at par. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a corresponding amount of Trust Securities. The Trust Note agreement requires that the Company does not fall below a fixed charge coverage ratio, defined generally as Consolidated EBITDA, excluding Clift’s EBITDA, over consolidated interest expense, excluding Clift’s interest expense, of 1.4 to 1.0 for four consecutive quarters. As of June 30, 2009, the Company’s fixed charge coverage ratio was 1.7 and the Company was in compliance with the covenants of the Trust Note agreement.

FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company has identified that the Trust is a variable interest entity under FIN 46R. Based on management’s analysis, the Company is not the primary beneficiary since it does not absorb a majority of the expected losses, nor is it entitled to a majority of the expected residual returns. Accordingly, the Trust is not consolidated into the Company’s financial statements. The Company accounts for the investment in the common stock of the Trust under the equity method of accounting.

(f) Revolving Credit Facility

On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving credit facility in the initial commitment amount of $225.0 million, which included a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the “Revolving Credit Facility”) with Wachovia Bank, National Association, as Administrative Agent, and the other lenders party thereto. In early 2009, the Company received notice that one of the lenders on the Revolving Credit Facility was taken over by the Federal Deposit Insurance Corporation. As such, the total initial commitment amount on the Revolving Credit Facility was reduced to approximately $220.0 million.

As of June 30, 2009, the Company had borrowed approximately $139.3 million under its Revolving Credit Facility at LIBOR plus 1.35% and retained the proceeds in cash and cash equivalents. The Company also had approximately $12.1 million of outstanding letters of credit issued pursuant to the Revolving Credit Facility as of June 30, 2009.

On August 5, 2009, the Company and certain of its subsidiaries entered into an amendment to the Revolving Credit Facility (the “Amended Revolving Credit Facility”).

Among other things, the Amended Revolving Credit Facility:

	•		deletes the financial covenant requiring the Company to maintain certain leverage ratios;

	•		revises the fixed charge coverage ratio (defined generally as the ratio of consolidated EBITDA excluding Mondrian Scottsdale’s EBITDA for the periods ending June 30, 2009 and September 30, 2009 and Clift’s EBITDA for all periods to consolidated interest expense excluding Mondrian Scottsdale’s interest expense for the periods ending June 30, 2009 and September 30, 2009 and Clift’s interest expense for all periods) that the Company is required to maintain for each four-quarter period to no less than 0.90 to 1.00 from the previous fixed charge coverage ratio of no less than 1.75 to 1.00;

	•		limits defaults relating to bankruptcy and judgment to certain events involving the Company, Morgans Group LLC and subsidiaries that are parties to the Amended Revolving Credit Facility;

	•		prohibits capital expenditures with respect to any hotels owned by the Company, the borrowers, as defined, or subsidiaries, other than maintenance capital expenditures for any hotel not exceeding 4% of the annual gross revenues of such hotel and certain other exceptions;

	•		revises certain provisions related to permitted indebtedness, including, among other things, deleting certain provisions permitting unsecured indebtedness and indebtedness for the acquisition or expansion of hotels;

	•		prohibits repurchase of the Company’s common equity interests by the Company or Morgans Group LLC;

	•		imposes certain limits on any secured swap agreements entered into after the effective date of the Amended Revolving Credit Facility: and

	•		provides for a waiver of any default or event of default, to the extent that a default or event of default existed for failure to comply with any financial covenant under the existing Revolving Credit Facility as of June 30, 2009 and/or for the four fiscal quarters ended June 30, 2009.

In addition to the provisions above, the Amended Revolving Credit Facility reduces the maximum aggregate amount of the commitments from $220.0 million to $125.0 million, which amount is available under two tranches: (i) a revolving credit facility in an amount equal to $90.0 million (the “New York Tranche”), which is secured by a mortgage on Morgans Hotel and Royalton Hotel (the “New York Properties”) and a mortgage on the Delano Hotel (the “Florida Property”); and (ii) a revolving credit facility in an amount equal to $35.0 million (the “Florida Tranche”), which is secured by the mortgage on the Florida Property (but not the New York Properties). The Amended Revolving Credit Facility also provides for a letter of credit facility in the amount of $25.0 million, which is secured by the mortgages on the New York Properties and the Florida Property. At any given time, the amount available for borrowings under the Amended Revolving Credit Facility is contingent upon the borrowing base valuation, which is calculated as the lesser of (i) 60% of appraised value and (ii) the implied debt service coverage value of certain collateral properties securing the Amended Revolving Credit Facility; provided that the portion of the borrowing base attributable to the New York Properties will never be less than 35% of the appraised value of the New York Properties. Total availability under the Amended Revolving Credit Facility as of August 5, 2009 was $125.0 million.

The interest rate per annum applicable to loans under the Amended Revolving Credit Facility is a fluctuating rate of interest measured by reference to, at the Company’s election, either LIBOR (subject to a LIBOR floor of 1%) or a base rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 3.75% per annum and base rate loans have a borrowing margin of 2.75% per annum. The Amended Revolving Credit Facility also provides for the payment of a quarterly unused facility fee equal to the average daily unused amount for each quarter multiplied by 0.25% before the effective date of the amendment and 0.5% after the effective date of the amendment.

As of August 5, 2009, the principal balance of the Amended Revolving Credit Facility was $23.9 million, and approximately $11.1 million of letters of credit were outstanding, all allocated to the Florida Tranche. The owners of the New York Properties, wholly-owned subsidiaries of the Company, have paid all mortgage recording and other taxes required for the mortgage on the New York Properties to secure in full the amount available under the New York Tranche. The commitments under the Amended Revolving Credit Facility terminate on October 5, 2011, at which time all outstanding amounts under the Amended Revolving Credit Facility will be due.

The Amended Revolving Credit Facility provides for customary events of default, including: failure to pay principal or interest when due; failure to comply with covenants; any representation proving to be incorrect; defaults relating to acceleration of, or defaults on, certain other indebtedness of at least $10.0 million in the aggregate; certain insolvency and bankruptcy events affecting the Company, Morgans Group LLC or certain subsidiaries of the Company that are party to the Amended Revolving Credit Facility; judgments in excess of $5.0 million in the aggregate affecting the Company, Morgans Group LLC and certain subsidiaries of the Company that are party to the Amended Revolving Credit Facility; the acquisition by any person of 40% or more of any outstanding class of capital stock having ordinary voting power in the election of directors of the Company; and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.

(g) October 2007 Convertible Notes Offering

On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes (the “Convertible Notes”) in a private offering. Net proceeds from the offering were approximately $166.8 million.

The Convertible Notes are senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by the Company’s operating company, Morgans Group LLC. The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances and upon the occurrence of specified events.

Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2008, and the Convertible Notes mature on October 15, 2014, unless previously repurchased by the Company or converted in accordance with their terms prior to such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is 37.1903 shares of the Company’s common stock, representing an initial conversion price of approximately $26.89 per share of common stock. The initial conversion rate is subject to adjustment under certain circumstances.

On January 1, 2009, the Company adopted FSP APB 14-1, which clarifies the accounting for convertible notes payable. FSP APB 14-1 requires the proceeds from the issuance of convertible notes to be allocated between a debt component and an equity component. The debt component is measured based on the fair value of similar debt without an equity conversion feature, and the equity component is determined as the residual of the fair value of the debt deducted from the original proceeds received. The resulting discount on the debt component is amortized over the period the debt is expected to be outstanding as additional interest expense. FSP APB 14-1 required retroactive application to all periods presented. The equity component, recorded as additional paid-in capital, was $10.1 million, which represents the difference between the proceeds from issuance of the Convertible Notes and the fair value of the liability, net of deferred taxes of $5.3 million as of the date of issuance of the Convertible Notes.

In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to the Company’s common stock (the “Call Options”) with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the “Hedge Providers”). The Call Options are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which the Company will receive shares of the Company’s common stock from the Hedge Providers equal to the number of shares issuable to the holders of the Convertible Notes upon conversion. The Company paid approximately $58.2 million for the Call Options.

In connection with the sale of the Convertible Notes, the Company also entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the Company issued warrants (the “Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The Company received approximately $34.1 million from the issuance of the Warrants.

The Company recorded the purchase of the Call Options, net of the related tax benefit of approximately $20.3 million, as a reduction of additional paid-in capital and the proceeds from the Warrants as an addition to additional paid-in capital in accordance with EITF Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to,and Potentially Settled In, a Company’s Own Stock, and other relevant literature.

In February 2008, the Company filed a registration statement with the Securities and Exchange Commission to cover the resale of shares of the Company’s common stock that may be issued from time to time upon the conversion of the Convertible Notes.

7. Omnibus Stock Incentive Plan

On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan (the “2006 Stock Incentive Plan”). The 2006 Stock Incentive Plan provided for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units (“RSUs”) and other equity-based awards, including membership units in Morgans Group LLC which are structured as profits interests (“LTIP Units”), or any combination of the foregoing. The eligible participants in the 2006 Stock Incentive Plan included Directors, officers and employees of the Company. An aggregate of 3,500,000 shares of common stock of the Company were reserved and authorized for issuance under the 2006 Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On April 23, 2007, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 22, 2007, the stockholders approved, the Company’s 2007 Omnibus Incentive Plan (the “2007 Incentive Plan”), which amended and restated the 2006 Stock Incentive Plan and increased the number of shares reserved for issuance under the plan by up to 3,250,000 shares to a total of 6,750,000 shares. Awards other than options and stock appreciation rights reduce the shares available for grant by 1.7 shares for each share subject to such an award. On April 10, 2008, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 20, 2008, the stockholders approved, an Amended and Restated 2007 Omnibus Incentive Plan (the “Amended 2007 Incentive Plan”) which, among other things, increased the number of shares reserved for issuance under the plan by 1,860,000 shares from 6,750,000 shares to 8,610,000 shares.

On April 9, 2009, the Board of Directors of the Company issued an aggregate of 465,232 LTIP units to the Company’s executive officers and other senior executives under the Amended 2007 Incentive Plan. All grants vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant, subject to accelerated vesting for two such grantees in the event their employment is terminated in certain circumstances. The fair value of each such LTIP unit granted was $3.81 at the grant date.

A summary of stock-based incentive awards as of June 30, 2009 is as follows (in units, or shares, as applicable):


	Restricted Stock
	Units			LTIP Units		Stock Options
Outstanding as of January 1, 2009		873,553			1,560,788		2,082,943
Granted during 2009		—			465,232		—
Distributed/exercised during 2009		(144,620	)		—		—
Forfeited during 2009		(79,659	)		—		(396,564	)

Outstanding as of June 30, 2009		649,274			2,026,020		1,686,379

Vested as of June 30, 2009		42,400			1,085,174		1,042,240

As of June 30, 2009 and December 31, 2008, there were approximately $16.2 million and $21.8 million, respectively, of total unrecognized compensation costs related to unvested share awards. As of June 30, 2009, the weighted-average period over which the unrecognized compensation expense will be recorded is approximately one year.

Total stock compensation expense, which is included in corporate expenses on the accompanying consolidated financial statements, was $2.5 million and $4.4 million for the three months ended June 30, 2009 and June 30, 2008, respectively, and $5.6 million and $7.3 million for the six months ended June 30, 2009 and June 30, 2008.

8. Related Party Transactions

The Company earned management fees, chain services fees and fees for certain technical services and has receivables from hotels it owns through investments in unconsolidated joint ventures as well as hotels owned by the Former Parent. These fees totaled approximately $3.4 million and $4.6 million for the three months ended June 30, 2009 and June 30, 2008, respectively, and $7.3 million and $9.1 million for the six months ended June 30, 2009 and 2008, respectively.

As of June 30, 2009 and December 31, 2008, the Company had receivables from these affiliates of approximately $11.9 million and $7.9 million, respectively, which are included in receivables from related parties on the accompanying consolidated balance sheets.

9. Litigation

Hard Rock Financial Advisory Agreement

In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (“Credit Suisse”) for $9.4 million related to the Financial Advisory Agreement the Company entered into with Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the acquisition of the Hard Rock and related assets on February 2007, was based upon an agreed upon percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The invoice received in July 2008 alleges that as a result of events subsequent to the closing of the Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.

Potential Litigation

The Company understands that Mr. Philippe Starck has attempted to initiate arbitration proceedings in the London Court of International Arbitration regarding an exclusive service agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in February 1998 regarding the design of certain hotels now owned by the Company. The Company is not a party to these proceedings at this time. See Note 5 of the consolidated financial statements.

Other Litigation

The Company is involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on the Company’s financial positions, results of operations or liquidity.

Item 2. Management’s 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 consolidated financial statements and related notes appearing elsewhere in this Quarterly Report onForm 10-Q for the six months ended June 30, 2009. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors” and elsewhere in our Annual Report onForm 10-K for the fiscal year ended December 31, 2008.

Overview

We are a fully integrated hospitality company that operates, owns, acquires, develops and redevelops boutique hotels, primarily in gateway cities and select resort markets in the United States and Europe. Over our 25-year history, we have gained experience operating in a variety of market conditions.

The historical financial data presented herein is the historical financial data for:

	•		our Owned Hotels, consisting of Morgans, Royalton and Hudson in New York, Delano Miami in Miami, Mondrian Los Angeles in Los Angeles, Clift in San Francisco, and Mondrian Scottsdale in Scottsdale;

	•		our Joint Venture Hotels, consisting of our London hotels (Sanderson and St Martins Lane), Shore Club, Hard Rock, and Mondrian South Beach;

	•		our investments in hotels under construction, such as Mondrian SoHo and Ames Boston, and our investment in other proposed properties;

	•		our investment in certain joint venture food and beverage operations at our Owned Hotels and Joint Venture Hotels, discussed further below;

	•		our management company subsidiary, Morgans Hotel Group Management LLC; and

	•		the rights and obligations contributed to Morgans Group LLC in the formation and structuring transactions described in Note 1 to the consolidated financial statements, included elsewhere in this report.

We consolidate the results of operations for all of our Owned Hotels and certain food and beverage operations at five of our Owned Hotels, which are operated under 50/50 joint ventures with restaurateur Jeffrey Chodorow. We consolidate the food and beverage joint ventures as we believe that we are the primary beneficiary of these entities. Our partner’s share of the results of operations of these food and beverage joint ventures is recorded as a noncontrolling interest in the accompanying consolidated financial statements. This noncontrolling interest is based upon 50% of the income of the applicable entity after giving effect to rent and other administrative charges payable to the hotel. The Asia de Cuba restaurant at Mondrian Scottsdale is operated under license and management agreements with China Grill Management, a company controlled by Jeffrey Chodorow.

We own partial interests in the Joint Venture Hotels and certain food and beverage operations at three of the Joint Venture Hotels, Sanderson, St Martins Lane and Mondrian South Beach. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net losses and distributions.

On February 2, 2007, we began managing the hotel operations at the Hard Rock. We also have signed agreements to manage Mondrian SoHo and Ames Boston once development is complete. We have signed agreements to manage Mondrian Las Vegas, Delano Las Vegas, and Mondrian Palm Springs, but we are unsure of the future of the development of these hotels as financing has not yet been obtained. Additionally, in September 2008, we signed an agreement to manage Delano Dubai. As of June 30, 2009, we operated the following Joint Venture Hotels under management agreements which expire as follows:

	•		Sanderson— June 2018 (with one 10-year extension at our option);

	•		St Martins Lane— June 2018 (with one 10-year extension at our option);

	•		Shore Club— July 2022;

	•		Hard Rock— February 2027 (with two 10-year extensions); and

	•		Mondrian South Beach— August 2026.

These agreements are subject to early termination in specified circumstances. For instance, beginning 12 months following completion of the expansion of the Hard Rock, our Hard Rock management agreement may be terminated if the Hard Rock fails to achieve an EBITDA hurdle, as defined in the management agreement. There can be no assurances that we will satisfy this or other performance tests in our management agreements, many of which may be beyond our control, or that our management agreements will not be subject to early termination. Several of our hotels are also subject to substantial mortgage and mezzanine debt, and in some instances our management fee is subordinated to the debt and our management agreements may be terminated by the lenders on foreclosure.

Factors Affecting Our Results of Operations

Revenues.Changes in our revenues are most easily explained by three performance indicators that are commonly used in the hospitality industry:

	•		occupancy;

	•		Average Daily Rate (“ADR”); and

	•		RevPAR, which is the product of ADR and average daily occupancy, but does not include food and beverage revenue, other hotel operating revenue such as telephone, parking and other guest services, or management fee revenue.

Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue consists of:

	•		Rooms revenue.Occupancy and ADR are the major drivers of rooms revenue.

	•		Food and beverage revenue.Most of our food and beverage revenue is earned by our 50/50 restaurant joint ventures and is driven by occupancy of our hotels and the popularity of our bars and restaurants with our local customers.

	•		Other hotel revenue.Other hotel revenue, which consists of ancillary revenue such as telephone, parking, spa, entertainment and other guest services, is principally driven by hotel occupancy.

	•		Management fee—related parties revenue and other income.We earn fees under our management agreements. These fees may include management fees as well as reimbursement for allocated chain services. Additionally, we earn branding fees related to the use of our Delano brand in connection with sales by our joint venture partner in our Delano Dubai development project of condominium units associated with the project.

Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are driven largely by general economic and local market conditions but can also be impacted by major events, such as terrorist attacks or natural disasters, which in turn affect levels of business and leisure travel.

The seasonal nature of the hospitality business can also impact revenues. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter. However, given the current economic environment, the impact of seasonality in 2009 may not be as significant as in prior periods.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key gateway cities is because these markets have significant barriers to entry for new competitive supply, including scarcity of available land for new development and extensive regulatory requirements resulting in a longer development lead time and additional expense for new competitors.

Finally, competition within the hospitality industry can affect revenues. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing, and range and quality of food services and amenities offered. In addition, all of our hotels, restaurants and bars are located in areas where there are numerous competitors, many of whom have substantially greater resources than us. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. If we are unable to compete effectively, we would lose market share, which could adversely affect our revenues.

Operating Costs and Expenses.Our operating costs and expenses consist of the costs to provide hotel services, costs to operate our management company, and costs associated with the ownership of our assets, including:

	•		Rooms expense.Rooms expense includes the payroll and benefits for the front office, housekeeping, concierge and reservations departments and related expenses, such as laundry, rooms supplies, travel agent commissions and reservation expense. Like rooms revenue, occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.

	•		Food and beverage expense.Similar to food and beverage revenue, occupancy of our hotels and the popularity of our restaurants and bars are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.

	•		Other departmental expense.Occupancy is the major driver of other departmental expense, which includes telephone and other expenses related to the generation of other hotel revenue.

	•		Hotel selling, general and administrative expense.Hotel selling, general and administrative expense consist of administrative and general expenses, such as payroll and related costs, travel expenses and office rent, advertising and promotion expenses, comprising the payroll of the hotel sales teams, the global sales team and advertising, marketing and promotion expenses for our hotel properties, utility expense and repairs and maintenance expenses, comprising the ongoing costs to repair and maintain our hotel properties.

	•		Property taxes, insurance and other.Property taxes, insurance and other consist primarily of insurance costs and property taxes.

	•		Corporate expenses, including stock compensation.Corporate expenses consist of the cost of our corporate office, net of any cost recoveries, which consists primarily of payroll and related costs, stock-based compensation expenses, office rent and legal and professional fees and costs associated with being a public company.

	•		Depreciation and amortization expense.Hotel properties are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and five years for furniture, fixtures and equipment.

	•		Restructuring, development and disposal costsinclude costs incurred related to our restructuring initiatives implemented in 2008 and 2009, costs of abandoned development projects and disposal of assets typically as a result of renovations. These items do not relate to the ongoing operating performance of our assets.

Other Items

	•		Interest expense, net.Interest expense, net includes interest on our debt and amortization of financing costs and is presented net of interest income and interest capitalized.

	•		Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of unconsolidated joint ventures constitutes our share of the net profits and losses of our Joint Venture Hotels and our investments in hotels under development.

	•		Other non-operating (income) expensesinclude gains and losses on sale of assets and asset restructurings, costs of financings, certain litigation costs, gain on early extinguishment of debt and other items that do not relate to the ongoing operating performance of our assets.

	•		Income tax (benefit) expense.One of our foreign subsidiaries is subject to United Kingdom corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented. We are subject to Federal and state income taxes. Income taxes for the three and six months ended June 30, 2009 and 2008 were computed using our calculated effective tax rate. We also recorded net deferred taxes related to cumulative differences in the basis recorded for certain assets and liabilities.

	•		Noncontrolling interest.Noncontrolling interest constitutes the third-party food and beverage joint venture partner’s interest in the profits of the restaurant ventures at certain of our hotels as well as the percentage of membership units in Morgans Group LLC, our operating company, owned by Residual Hotel Interest LLC, our Former Parent, as discussed in Note 2 of the consolidated financial statements.

Most categories of variable operating expenses, such as operating supplies and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in increases in limited categories of operating costs and expenses, primarily credit card and travel agent commissions. Thus, improvements in ADR have a more significant impact on improving our operating margins than occupancy.

Notwithstanding our efforts to reduce variable costs, there are limits to how much we can accomplish because we have significant costs that are relatively fixed costs, such as depreciation and amortization, labor costs and employee benefits, insurance, real estate taxes and other expenses associated with owning hotels that do not necessarily decrease when circumstances such as market factors cause a reduction in our hotel revenues.

Recent Trends and Developments

Recent Trends.During 2008 and continuing in 2009, the weakening U.S. and global economy resulted in considerable negative pressure on both consumer and business spending. As a result, lodging demand, which is primarily driven by growth in GDP, business investment and employment growth, weakened substantially, particularly in the fourth quarter and the first quarter of 2009, and we believe these trends will continue through much of 2009. We anticipate that lodging demand will not improve until the current economic trends, particularly the weakness in the overall economy and the lack of liquidity in the credit markets, reverse course.

To help mitigate the effects of these trends, we are actively managing costs and each of our properties and our corporate office has implemented certain cost reduction plans. Through our multi-phased contingency plan, we reduced hotel operating expenses and corporate expenses during 2008. Additionally, given the continuing declines in the market since December 2008, we implemented additional cost reduction plans during the first quarter of 2009, both at our corporate office and at the hotel properties, and we will continue to carefully monitor our costs with the objective of achieving all possible efficiencies throughout the remainder of the year. We believe that these cost reduction plans will result in significant savings in 2009 and that our experienced management team and dedicated employees have allowed us to implement these cost cuts without impacting overall quality of our guest experience.

Demand has diminished and is expected to continue to remain weak as a result of the current economic crisis. Although the pace of new lodging supply in various phases of development has increased over the past several quarters, we believe the timing of some of these projects may be affected by the current economic crisis and the reduced availability of financing. These factors may further dampen the pace of new supply development, including our own, during 2009. Nevertheless, we did witness new competitive luxury and boutique properties opening in 2008 and 2009 in some of our markets, particularly in Los Angeles, Scottsdale and Miami Beach, which have impacted our performance in these markets and may continue to do so.

For 2009, we believe that the economic forecasts for contraction of GDP, increasing unemployment and declines in business investment and profits, when combined with the turmoil in the credit markets, will continue to negatively affect both leisure and business travel and, accordingly, decrease lodging demand. As such, there can be no assurances that any increases in hotel revenues or earnings at our properties will occur or that any losses will not increase for these or any other reasons. Although the continuing uncertainty about the depth and duration of the economic crisis makes projections difficult, based on a review of hotel-specific and broad economic metrics, we believe that our results will be significantly weaker throughout 2009 as compared to the results of 2008.

Finally, global credit markets continue to tighten, with less credit available generally and on less favorable terms than were obtainable in the recent past. Given the current state of the credit markets, some of our joint venture projects, such as the Echelon project and Mondrian Palm Springs, may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the joint ventures or developers, as applicable, may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Recent Developments.

Amendment to the Revolving Credit FacilityOn August 5, 2009, the Company and certain of its subsidiaries amended the Revolving Credit Facility (the “Amended Revolving Credit Facility”) with Wells Fargo Securities, LLC (successor in interest to Wachovia Capital Markets, LLC) and Citigroup Global Markets Inc. For further discussion of the Amended Revolving Credit Facility, see Note 6 to our consolidated financial statements.

Operating Results

Comparison of Three Months Ended June 30, 2009 to Three Months Ended June 30, 2008

The following table presents our operating results for the three months ended June 30, 2009 and the three months ended June 30, 2008, including the amount and percentage change in these results between the two periods. The consolidated operating results for the three months ended June 30, 2009 is comparable to the consolidated operating results for the three months ended June 30, 2008, with the exception of Mondrian Los Angeles and Morgans, both of which were under renovation during 2008, the investment in the Hard Rock, which has been under renovation and expansion during 2008 and 2009, and the investment in Mondrian South Beach, which opened in December 2008. The consolidated operating results are as follows:


	Three Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
				As adjusted(2)
				(in thousands, except percentages)
Revenues:
Rooms	$	30,885		$	46,867		$	(15,982	)		(34.1	)%
Food and beverage		19,381			26,554			(7,173	)		(27.0	)%
Other hotel		2,258			3,350			(1,092	)		(32.6	)%

Total hotel revenues		52,524			76,771			(24,247	)		(31.6	)%
Management fee—related parties and other income		3,863			4,552			(689	)		(15.1	)%

Total revenues		56,387			81,323			(24,936	)		(30.7	)%

Operating Costs and Expenses:
Rooms		10,328			11,896			(1,568	)		(13.2	)%
Food and beverage		14,539			18,355			(3,816	)		(20.8	)%
Other departmental		1,566			1,924			(358	)		(18.6	)%
Hotel selling, general and administrative		12,095			14,599			(2,504	)		(17.2	)%
Property taxes, insurance and other		4,185			3,729			456			12.2	%

Total hotel operating expenses		42,713			50,503			(7,790	)		(15.4	)%
Corporate expenses, including stock compensation		7,488			12,310			(4,822	)		(39.2	)%
Depreciation and amortization		8,411			6,018			2,393			39.8	%
Restructuring, development and disposal costs		653			630			23			3.6	%

Total operating costs and expenses		59,265			69,461			(10,196	)		(14.7	)%

Operating (loss) income		(2,878	)		11,862			(14,740	)		(124.3	)%
Interest expense, net		12,044			10,895			1,149			10.5	%
Equity in loss of unconsolidated joint ventures		1,895			865			1,030			119.1	%
Other non-operating expense		496			776			(280	)		(36.1	)%

Loss before income taxes		(17,313	)		(674	)		(16,639	)			(1)
Income tax benefit		(7,371	)		(800	)		(6,571	)			(1)

Net (loss) income		(9,942	)		126			(10,068	)			(1)
Net income attributable to noncontrolling interest		(115	)		(1,187	)		1,072			(90.3	)%

Net loss attributable to Morgans Hotel Group Co.		(10,057	)		(1,061	)		(8,996	)			(1)

Other comprehensive income:
Unrealized gain on valuation of swap/cap agreements, net of tax		4,326			6,813			(2,487	)		(36.5	)%
Realized loss on settlement of swap/cap agreements, net of tax		(2,587	)		(1,320	)		(1,267	)		(96.0	)%
Foreign currency translation (loss) gain		(1,157	)		21			(1,178	)			(1)

Comprehensive (loss) income	$	(9,475	)	$	4,453		$	(13,928	)			(1)


(1)		Not meaningful.

(2)		Adjusted for change in accounting principle related to the Convertible Notes (defined below). See Note 6 to our consolidated financial statements for additional information and the effect of the change in accounting principle to our consolidated financial statements.

Total Hotel Revenues.Total hotel revenues decreased 31.6% to $52.5 million for the three months ended June 30, 2009 compared to $76.8 million for the three months ended June 30, 2008. The components of RevPAR from our comparable Owned Hotels for the three months ended June 30, 2009 and 2008, which includes Hudson, Delano, Clift, Mondrian Scottsdale, and Royalton, and excludes Mondrian Los Angeles and Morgans, which were under renovation during 2008, are summarized as follows:


	Three Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
Occupancy		74.6	%		84.4	%		—			(11.6	)%
ADR	$	214		$	315		$	(101	)		(32.1	)%
RevPAR	$	159		$	266		$	(107	)		(40.0	)%

RevPAR from our comparable Owned Hotels decreased 40.0% to $159 for the three months ended June 30, 2009 compared to $266 for the three months ended June 30, 2008.

Rooms revenuedecreased 34.1% to $30.9 million for the three months ended June 30, 2009 compared to $46.9 million for the three months ended June 30, 2008. The overall decrease was primarily attributable to the significant adverse impact on lodging demand as a result of the global economic downturn. All of our comparable Owned Hotels experienced a decline in rooms revenue in excess of 30% during the three months ended June 30, 2009 as compared to the same period in 2008.

Food and beverage revenuedecreased 27.0% to $19.4 million for the three months ended June 30, 2009 compared to $26.6 million for the three months ended June 30, 2008. The overall decrease was primarily attributable to the significant adverse impact on lodging demand, which negatively impacts the ancillary venues at our hotels, such as the bar and restaurant revenue, as a result of the global economic downturn. All of our comparable Owned Hotels experienced a decline in food and beverage revenue in excess of 20% during the three months ended June 30, 2009 as compared to the same period in 2008.

Other hotel revenuedecreased 32.6% to $2.3 million for the three months ended June 30, 2009 compared to $3.4 million for the three months ended June 30, 2009. The overall decrease was primarily attributable to the significant adverse impact on lodging demand, which negatively impacts the ancillary revenues at our hotels, as a result of the global economic downturn.

Management Fee — Related Parties and Other Incomedecreased by 15.1% to $3.9 million for the three months ended June 30, 2009 compared to $4.6 million for the three months ended June 30, 2008. This decrease is primarily attributable to the significant adverse impact on lodging demand as a result of the global economic downturn, especially at our London joint venture hotels and Shore Club. Slightly offsetting these decreases are management fees earned at Mondrian South Beach, which opened in December 2008.

Operating Costs and Expenses

Rooms expensedecreased 13.2% to $10.3 million for the three months ended June 30, 2009 compared to $11.9 million for the three months ended June 30, 2008. This decrease is a direct result of the decrease in rooms revenue. While we have implemented cost cutting initiatives at our hotels in 2008 and early 2009, our occupancy did not decrease as significantly as our ADR. Therefore certain variable expenses, such as housekeeping payroll costs, did not decrease in proportion to the decrease in rooms revenue noted above.

Food and beverage expensedecreased 20.8% to $14.5 million for the three months ended June 30, 2009 compared to $18.4 million for the three months ended June 30, 2008. This decrease is comparable to the decrease noted in food and beverage revenue above. All of our comparable Owned Hotels experienced a decline in food and beverage expense in excess of 15% during the three months ended June 30, 2009 as compared to the same period in 2008.

Other departmental expensedecreased 18.6% to $1.6 million for the three months ended June 30, 2009 compared to $1.9 million for the three months ended June 30, 2008. This decrease is comparable to the decrease noted in other hotel revenue above.

Hotel selling, general and administrative expensedecreased 17.2% to $12.1 million for the three months ended June 30, 2009 compared to $14.6 million for the three months ended June 30, 2008. This decrease was primarily due to the impact of cost cutting initiatives across all hotel properties, which were implemented in 2008 and in early 2009, resulting in decreased administrative and general costs and advertising and promotion expenses.

Property taxes, insurance and other expenseincreased 12.2% to $4.2 million for the three months ended June 30, 2009 compared to $3.7 million for the three months ended June 30, 2008. This increase was primarily due to increases in property taxes at Hudson as a result of the expiration of a property tax abatement, which will continue to be phased out over the next three years, fully expiring in 2012.

Corporate expenses, including stock compensationdecreased by 39.2% to $7.5 million for the three months ended June 30, 2009 compared to $12.3 million for the three months ended June 30, 2008. This decrease is due primarily to the impact of cost cutting initiatives at the corporate office which were implemented in late 2008 and early 2009.

Depreciation and amortizationincreased 39.8% to $8.4 million for the three months ended June 30, 2009 compared to $6.0 million for the three months ended June 30, 2008. This increase is a result of hotel renovations at Mondrian Los Angeles and Morgans, which both took place during 2008.

Restructuring, development and disposal costsincreased 3.6% to $0.7 million for the three months ended June 30, 2009 as compared to $0.6 million for the three months ended June 30, 2008. The increase in the expense is primarily related to severance expenses incurred during 2009 as part of our cost reduction plans.

Interest expense, netincreased 10.5% to $12.0 million for the three months ended June 30, 2009 compared to $10.9 million for the three months ended June 30, 2008. The increase in this expense is primarily due to less interest income recognized for the three months ended June 30, 2009 and interest expense recognized on the outstanding balance on the revolving credit facility during the three months ended June 30, 2009 for which there was no comparable interest expense in 2008.

Equity in loss of unconsolidated joint venturesincreased 119.1% to $1.9 million for the three months ended June 30, 2009 compared to $0.9 million for the three months ended June 30, 2008. This increase in loss was primarily due to our share of losses from Mondrian South Beach, which opened in December 2008, and a decrease in our share of income from the London hotels as a result of the global economic decline impacting our industry.

The components of RevPAR from our comparable Joint Venture Hotels for the three months ended June 30, 2009 and 2008, which includes Sanderson, St Martins Lane and Shore Club, but excludes the Hard Rock, which has been under renovation and expansion during 2008 and 2009, and Mondrian South Beach, which opened in December 2008, are summarized as follows:


	Three Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
Occupancy		61.9	%		72.4	%		—			(14.5	)%
ADR	$	312		$	374		$	(62	)		(16.7	)%
RevPAR	$	193		$	271		$	(78	)		(28.7	)%

The components of RevPAR from the Hard Rock for the three months ended June 30, 2009 and the three months ended June 30, 2008 are summarized as follows:


	Three Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
Occupancy		92.3	%		94.3	%		—			(2.1	)%
ADR	$	165		$	217		$	(52	)		(24.1	)%
RevPAR	$	152		$	205		$	(53	)		(25.6	)%

As is customary for companies in the gaming industry, the Hard Rock presents average occupancy rate and average daily rate including rooms provided on a complimentary basis. Like most operators of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels, where we present average occupancy rate and average daily rate net of rooms provided on a complimentary basis.

Other non-operating expensedecreased 36.1% to $0.5 million for the three months ended June 30, 2009 as compared to $0.8 million for the three months ended June 30, 2008. The decrease in the expense is primarily related to decreased legal costs.

Income tax benefitwas $7.4 million for the three months ended June 30, 2009 compared to $0.8 million for the three months ended June 30, 2008. The income tax benefit was due primarily to the recording of deferred tax assets from the net operating loss.

Comparison of Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008

The following table presents our operating results for the six months ended June 30, 2009 and the six months ended June 30, 2008, including the amount and percentage change in these results between the two periods. The consolidated operating results for the six months ended June 30, 2009 is comparable to the consolidated operating results for the six months ended June 30, 2008, with the exception of Mondrian Los Angeles and Morgans, both of which were under renovation during 2008, the investment in the Hard Rock, which has been under renovation and expansion during 2008 and 2009, and the investment in Mondrian South Beach, which opened in December 2008. The consolidated operating results are as follows:


	Six Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
				As adjusted(2)
				(in thousands, except percentages)
Revenues:
Rooms	$	59,480		$	93,021		$	(33,541	)		(36.1	)%
Food and beverage		38,869			53,123			(14,254	)		(26.8	)%
Other hotel		5,004			6,823			(1,819	)		(26.7	)%

Total hotel revenues		103,353			152,967			(49,614	)		(32.4	)%
Management fee—related parties and other income		7,312			9,088			(1,776	)		(19.5	)%

Total revenues		110,665			162,055			(51,390	)		(31.7	)%

Operating Costs and Expenses:
Rooms		20,542			25,065			(4,523	)		(18.0	)%
Food and beverage		29,114			37,722			(8,608	)		(22.8	)%
Other departmental		3,160			4,009			(849	)		(21.2	)%
Hotel selling, general and administrative		24,105			30,372			(6,267	)		(20.6	)%
Property taxes, insurance and other		8,510			7,782			728			9.4	%

Total hotel operating expenses		85,431			104,950			(19,519	)		(18.6	)%
Corporate expenses, including stock compensation		16,788			22,647			(5,859	)		(25.9	)%
Depreciation and amortization		15,631			12,109			3,522			29.1	%
Restructuring, development and disposal costs		1,544			1,167			377			32.3	%

Total operating costs and expenses		119,394			140,873			(21,479	)		(15.2	)%

Operating (loss) income		(8,729	)		21,182			(29,911	)		(141.2	)%
Interest expense, net		23,501			21,969			1,532			7.0	%
Equity in loss of unconsolidated joint ventures		2,438			8,910			(6,472	)		(72.6	)%
Other non-operating expense		1,065			1,301			(236	)		(18.1	)%

Loss before income taxes		(35,733	)		(10,998	)		(24,735	)			(1)
Income tax benefit		(15,508	)		(4,968	)		(10,540	)			(1)

Net loss		(20,225	)		(6,030	)		(14,195	)			(1)
Net income attributable to noncontrolling interest		(418	)		(2,342	)		1,924			(82.2	)%

Net loss attributable to Morgans Hotel Group Co.		(20,643	)		(8,372	)		(12,271	)			(1)

Other comprehensive income:
Unrealized gain on valuation of swap/cap agreements, net of tax		8,416			2,939			5,477				(1)
Realized loss on settlement of swap/cap agreements, net of tax		(4,997	)		(1,803	)		(3,194	)			(1)
Foreign currency translation (loss) gain		(1,044	)		35			(1,079	)			(1)

Comprehensive loss	$	(18,268	)	$	(7,201	)	$	(11,067	)			(1)


(1)		Not meaningful.

(2)		Adjusted for change in accounting principle related to the Convertible Notes (defined below). See Note 6 to our consolidated financial statements for additional information and the effect of the change in accounting principle to our consolidated financial statements.

Total Hotel Revenues.Total hotel revenues decreased 32.4% to $103.4 million for the six months ended June 30, 2009 compared to $153.0 million for the six months ended June 30, 2008. The components of RevPAR from our comparable Owned Hotels for the six months ended June 30, 2009 and 2008, which includes Hudson, Delano, Clift, Mondrian Scottsdale, and Royalton, and excludes Mondrian Los Angeles and Morgans, which were under renovation during 2008, are summarized as follows:


	Six Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
Occupancy		69.8	%		81.8	%		—			(14.6	)%
ADR	$	225		$	317		$	(92	)		(29.1	)%
RevPAR	$	157		$	259		$	(102	)		(39.5	)%

Rooms revenuedecreased 36.1% to $59.5 million for the six months ended June 30, 2009 compared to $93.0 million for the six months ended June 30, 2008. The overall decrease was primarily attributable to the significant adverse impact on lodging demand as a result of the global economic downturn. All of our comparable Owned Hotels experienced a decline in rooms revenue in excess of 30% during the six months ended June 30, 2009 as compared to the same period in 2008.

Food and beverage revenuedecreased 26.8% to $38.9 million for the six months ended June 30, 2009 compared to $53.1 million for the six months ended June 30, 2008. The overall decrease was primarily attributable to the significant adverse impact on lodging demand, which negatively impacts the ancillary venues at our hotels, such as the bar and restaurant revenue, as a result of the global economic downturn. All of our comparable Owned Hotels experienced a decline in food and beverage revenue in excess of 20% during the six months ended June 30, 2009 as compared to the same period in 2008.

Other hotel revenuedecreased 26.7% to $5.0 million for the six months ended June 30, 2009 compared to $6.8 million for the six months ended June 30, 2009. The overall decrease was primarily attributable to the significant adverse impact on lodging demand, which negatively impacts the ancillary revenues at our hotels, as a result of the global economic downturn.

Management Fee — Related Parties and Other Incomedecreased by 19.5% to $7.3 million for the six months ended June 30, 2009 compared to $9.1 million for the six months ended June 30, 2008. This decrease is primarily attributable to the significant adverse impact on lodging demand as a result of the global economic downturn, especially at our London hotels and Shore Club. Additionally, management fees earned at Hard Rock decreased as a result of reduced revenues due to disruption from the expansion and renovations currently underway. Slightly offsetting these decreases are management fees earned at Mondrian South Beach, which opened in December 2008.

Operating Costs and Expenses

Rooms expensedecreased 18.0% to $20.5 million for the three six months ended June 30, 2009 compared to $25.1 million for the six months ended June 30, 2008. This decrease is a direct result of the decrease in rooms revenue. While we have implemented cost cutting initiatives at our hotels in 2008 and early 2009, our occupancy did not decrease as significantly as our ADR. Therefore certain variable expenses, such as housekeeping payroll costs did not decrease in proportion to the decrease in rooms revenue noted above.

Food and beverage expensedecreased 22.8% to $29.1 million for the six months ended June 30, 2009 compared to $37.7 million for the six months ended June 30, 2008. This decrease is comparable to the decrease noted in food and beverage revenue above. All of our comparable Owned Hotels experienced a decline in food and beverage expense in excess of 20% during the six months ended June 30, 2009 as compared to the same period in 2008, with the exception of Morgans, which experienced a decrease in food and beverage expenses of approximately 10% as a result of the unionization of the restaurant and a phased-in union pay scale, which was implemented in April 2008 and increased again in April 2009.

Other departmental expensedecreased 21.2% to $3.2 million for the six months ended June 30, 2009 compared to $4.0 million for the six months ended June 30, 2008. This decrease is comparable to the decrease noted in other hotel revenue above.

Hotel selling, general and administrative expensedecreased 20.6% to $24.1 million for the six months ended June 30, 2009 compared to $30.4 million for the six months ended June 30, 2008. This decrease was primarily due to the impact of cost cutting initiatives across all hotel properties, which were implemented in 2008 and in early 2009, resulting in decreased administrative and general costs and advertising and promotion expenses.

Property taxes, insurance and other expenseincreased 9.4% to $8.5 million for the six months ended June 30, 2009 compared to $7.8 million for the six months ended June 30, 2008. This increase was primarily due to increases in property taxes at Hudson as a result of the expiration of a property tax abatement, which will continue to be phased out over the next three years, fully expiring in 2012.

Corporate expenses, including stock compensationdecreased by 25.9% to $16.8 million for the six months ended June 30, 2009 compared to $22.6 million for the six months ended June 30, 2008. This decrease is due primarily to the impact of cost cutting initiatives at the corporate office which were implemented in late 2008 and early 2009.

Depreciation and amortizationincreased 29.1% to $15.6 million for the six months ended June 30, 2009 compared to $12.1 million for the six months ended June 30, 2008. This increase is a result of hotel renovations at Mondrian Los Angeles and Morgans, which both took place during 2008.

Restructuring, development and disposal costsincreased 32.3% to $1.5 million for the six months ended June 30, 2009 as compared to $1.2 million for the six months ended June 30, 2008. The increase in the expense is primarily related to severance expenses incurred during 2009 as part of our cost reduction plans.

Interest expense, netincreased 7.0% to $23.5 million for the six months ended June 30, 2009 compared to $22.0 million for the six months ended June 30, 2008. The increase in this expense is primarily due to less interest income recognized for the six months ended June 30, 2009 and interest expense recognized on the outstanding balance on our revolving credit facility during the six months ended June 30, 2009 for which there was no comparable interest expense in 2008.

Equity in loss of unconsolidated joint venturesdecreased 72.6% to $2.4 million for the six months ended June 30, 2009 compared to $8.9 million for the six months ended June 30, 2008. This decrease is primarily due to a reduction in our share of losses from the Hard Rock. We did not record our proportionate share of loss from our investment in the Hard Rock for the six months ended June 30, 2009 because our book investment balance has been reduced to zero as of December 31, 2008. Slightly offsetting this decrease was our share of losses from Mondrian South Beach, which opened in December 2008, and a decrease in income from our share of the London hotels as a result of the global economic decline impacting our industry.

The components of RevPAR from our comparable Joint Venture Hotels for the six months ended June 30, 2009 and 2008, which includes Sanderson, St Martins Lane and Shore Club, but excludes the Hard Rock, which has been under renovation and expansion during 2008 and 2009, and Mondrian South Beach, which opened in December 2008, are summarized as follows:


	Six Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
Occupancy		61.5	%		73.0	%		—			(15.7	)%
ADR	$	331		$	393		$	(62	)		(15.9	)%
RevPAR	$	203		$	287		$	(84	)		(29.1	)%

The components of RevPAR from the Hard Rock for the six months ended June 30, 2009 and the six months ended June 30, 2008 are summarized as follows:


	Six Months Ended
	June 30,			June 30,
	2009			2008			Change ($)			Change (%)
Occupancy		90.8	%		94.2	%		—			(3.6	)%
ADR	$	150		$	201		$	(51	)		(25.1	)%
RevPAR	$	137		$	189		$	(52	)		(27.8	)%

Other non-operating expensedecreased 18.1% to $1.1 million for the six months ended June 30, 2009 as compared to $1.3 million for the six months ended June 30, 2008. The decrease in this expense is primarily related to legal costs incurred during 2008 related to the Shore Club litigation settlement for which there was no comparable expense incurred during 2009.

Income tax benefitwas $15.5 million for the six months ended June 30, 2009 compared to $5.0 million for the six months ended June 30, 2008. The income tax benefit was due primarily to the recording of deferred tax assets from the net operating loss.

Liquidity and Capital Resources

As of June 30, 2009, we had approximately $165.2 million in cash and cash equivalents. This amount includes the approximately $139.3 million of outstanding borrowings under our Revolving Credit Facility, defined below.

On August 5, 2009, we and certain of our subsidiaries amended our Revolving Credit Facility with the lenders. In accordance with such amendment, at any given time, the amount available for borrowings under the Amended Revolving Credit Facility is contingent upon the borrowing base, which is calculated by reference to the appraised value and implied debt service coverage value of certain collateral properties securing the Amended Revolving Credit Facility. In addition, the Company is required to maintain a fixed charge coverage ratio for each four-quarter period of 0.90 to 1.00. We cannot provide assurance that the full amount of the Amended Revolving Credit Facility will be available at any time. See “Debt — Revolving Credit Facility.” The maximum amount of borrowings under the Amended Credit Facility is $125.0 million, all of which was available to be borrowed at closing.

On August 5, 2009, in connection with the closing of our Amended Revolving Credit Facility, we paid down approximately $115.4, million of borrowings resulting in $23.9 million outstanding under our Amended Revolving Credit Facility. We also have approximately $11.1 million of outstanding letters of credit associated with facility.

We have both short-term and long-term liquidity requirements as described in more detail below.

Liquidity Requirements

Short-Term Liquidity Requirements.We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next 12 months and believe those requirements currently consist primarily of funds necessary to pay operating expenses and other expenditures directly associated with our properties, including the funding of our reserve accounts, capital commitments associated with certain of our development projects, and payment of scheduled debt maturities, unless otherwise extended or refinanced.

We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as determined pursuant to our debt and lease agreements related to such hotels, with the exception of Delano Miami, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar obligations under debt agreements related to such hotels, or under our management agreements. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to 4% of the hotel’s revenues and require the funds to be set aside in restricted cash. In addition, our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. Our Owned Hotels that were not subject to these reserve funding obligations — Delano Miami, Royalton, and Morgans — underwent significant room and common area renovations during 2006, 2007 and 2008, and as such, are not expected to require a substantial amount of capital spending during 2009 or 2010.

In addition to reserve funds for capital expenditures, our debt and lease agreements also require us to deposit cash into escrow accounts for taxes, insurance and debt service payments. As of June 30, 2009 total restricted cash was $16.6 million.

Further, as of June 30, 2009, we had aggregate capital commitments or plans to fund development projects of approximately $13.0 million, including approximately $11.1 million of letters of credit posted in February 2008 to fund the expansion of the Hard Rock, of which $1.1 million was paid in July 2009, with payment of the remaining $10.0 million anticipated later in 2009.

Our $10.5 million interest-only, non-recourse promissory note relating to the Gale in South Beach is due in January 2010. Management does not intend to commence development of this hotel unless financing is available and will evaluate its options prior to maturity of the non-recourse promissory note.

We expect to meet our short-term liquidity needs for the next 12 months through existing cash balances and cash provided by our operations; if necessary, we may also access additional borrowings under our Amended Revolving Credit Facility. See also “—Potential Capital Expenditures and Liquidity Requirements” below for additional liquidity that may be required in the short-term, depending on market and other circumstances, including our ability to refinance or extend existing debt.

Long-Term Liquidity Requirements.We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next 12 months and believe these requirements consist primarily of funds necessary to pay scheduled debt maturities, renovations and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions and development of properties under contract and new acquisitions and development projects that we may pursue.

Our non-recourse mortgage financing on Hudson and Mondrian Los Angeles, discussed below in “Debt—Mortgage Agreement,” consisting of a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles (collectively, the “Mortgages”), all mature on July 15, 2010. We have the option of extending the maturity date of the Mortgages to October 15, 2011 provided that certain extension requirements are achieved, including maintaining a debt service coverage ratio, as defined in the Mortgages, for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater. A portion of the Mortgages may need to be repaid in order to meet this covenant, or alternatively, we may consider refinancing the Mortgages.

Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including borrowings under our Revolving Credit Facility, our existing working capital, cash provided by operations, equity and debt offerings, and long-term mortgages on our properties. Other sources may include cash generated through asset dispositions and joint venture transactions. Additionally, we may secure other financing opportunities. Given the current economic environment and turmoil in the credit markets, however, we may not be able to obtain such financings on terms acceptable to us or at all. We may require additional borrowings, including additional borrowings under our Amended Revolving Credit Facility if they become and remain available as discussed above, to satisfy our long-term liquidity requirements.

Although the credit and equity markets are currently in economic turmoil, we believe that these sources of capital will become available to us in the future to fund our long-term liquidity requirements. However, our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, borrowing restrictions imposed by existing lenders and general market conditions. We will continue to analyze which source of capital is most advantageous to us at any particular point in time.

Potential Capital Expenditures and Liquidity Requirements

In addition to our expected short-term and long-term liquidity requirements, our liquidity requirements could also be affected by possible required expenditures or liquidity requirements at certain of our Owned Hotels or Joint Venture Hotels, as discussed below.

Mondrian Scottsdale Mortgage and Mezzanine Agreements. Mondrian Scottsdale is subject to $40.0 million of non-recourse mortgage and mezzanine financing, for which Morgans Group LLC has provided a standard non-recourse carve-out guaranty. The $40.0 million mortgage and mezzanine loans accrue interest at LIBOR plus 2.3%. The loans matured on June 1, 2009 and were not repaid. We are currently operating Mondrian Scottsdale and accruing interest. We are discussing various options with the lenders. We do not intend to commit significant monies toward the repayment of the loans or the funding of operating deficits.

Potential Litigation. We may have potential liability in connection with certain claims by a designer for which we have accrued $13.5 million as of June 30, 2009, as discussed in Note 5 of our consolidated financial statements.

Mondrian South Beach Mortgage and Mezzanine Agreements. On November 25, 2008, together with our joint venture partner, we amended and restated the non-recourse mortgage loan and mezzanine loan agreements related to the Mondrian South Beach to provide for, among other things, four one-year extension options of the third-party financing totaling $96.8 million as of June 30, 2009. Under the amended agreements, the initial maturity date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual extension. The loans matured on August 1, 2009 and were not repaid. We are currently operating Mondrian South Beach. The joint venture is in discussions with the lenders to extend the maturity.

A standard non-recourse carve-out guaranty by Morgans Group LLC is in place for the Mondrian South Beach loans. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, we and affiliates of our partner may have continuing obligations under a construction completion guaranty. We and affiliates of our partner also have an agreement to purchase approximately $14 million each of condominium units under certain conditions.

Hard Rock Construction and Acquisition Loans. On February 2, 2007, the Hard Rock joint venture closed on $760.0 million of acquisition financing in connection with the acquisition of the Hard Rock, and on June 6, 2008, the Hard Rock joint venture closed on $620.0 million of the construction financing for the expansion of the Hard Rock. Both loans mature on February 9, 2010, with two one-year extension options, subject to certain conditions. As of August 7, 2009, the Hard Rock joint venture has entered into a term sheet with the lenders of the outstanding debt to amend the terms of the loan agreements and is currently working with such lenders to complete due diligence and prepare definitive documentation. There can be no assurance that the Hard Rock joint venture will complete the amendment process with the lenders on a timely basis or at all.

We have entered into standard joint and several guarantees in connection with these loans, including construction completion guarantees, in connection with the Hard Rock expansion, which is scheduled to be completed in 2009. In our joint venture agreement with DLJMB, we have agreed to be responsible for the first $50.0 million of exposure on the completion guarantees, subject to certain conditions.

Hard Rock Land Loan. On August 1, 2008, a subsidiary of the Hard Rock joint venture completed an intercompany land purchase with respect to an 11-acre parcel of land located adjacent to the Hard Rock. In connection with the intercompany land purchase a subsidiary entered into a $50.0 million land acquisition financing agreement with various lenders. The initial maturity date of August 9, 2009 was extended to September 4, 2009. The Hard Rock joint venture has entered into a term sheet with the lenders under the land acquisition financing to extend the maturity date to August 9, 2011 and are currently working with such lenders to complete due diligence and prepare definitive documentation. There can be no assurance that the joint venture will be able to extend the maturity date of the land acquisition financing on a timely basis or at all. We have entered into a standard joint and several non-recourse carve-out guaranty in connection with this financing agreement, although under the joint venture agreement, DLJMB has agreed to be responsible for 100% of any liability under the guaranty, subject to certain conditions.

Morgans Europe Mortgage Agreement. Morgans Europe, the 50/50 joint venture through which we own interests in two hotels located in London, England, St Martins Lane and Sanderson, has outstanding mortgage debt of £102.0 million, or approximately $167.5 million, as of June 30, 2009, which matures on November 24, 2010. The joint venture is currently considering various options with respect to the refinancing of this mortgage obligation.

Other Possible Uses of Capital.We have a number of owned expansion and development projects under consideration at our discretion, including the Gale in South Beach and the development of the lower level at Hudson. We also have two joint venture projects, Mondrian SoHo and Ames Boston, under development which may require additional equity investments and/or credit support to complete.

Comparison of Cash Flows for the Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008

Given the current economic downturn, we have implemented various cost-saving initiatives in 2008 and 2009, which we believe will help prepare us for the anticipated continuing economic challenges during 2009.

Operating Activities.Net cash used in operating activities was $9.7 million for the six months ended June 30, 2009 as compared to net cash provided by operating activities of $18.6 million for the six months ended June 30, 2008. The increase in cash used in operating activities is primarily due to changes in working capital and lower operating cash flow due to the impact of the current economic downturn.

Investing Activities.Net cash used in investing activities amounted to $11.7 million for the six months ended June 30, 2009 as compared to $46.8 million for the six months ended June 30, 2008. The decrease in cash used in investing activities primarily relates to a decrease in our capital expenditures. During the first six months of 2008, Mondrian Los Angeles and Morgans were under renovation and no comparable renovations are underway during 2009.

Financing Activities.Net cash provided by financing activities amounted to $137.5 million for the six months ended June 30, 2009 as compared to net cash used in financing activities of $21.6 million for the six months ended June 30, 2008. In March 2009 and May 2009, the Company borrowed an aggregate of approximately $139.3 million under its Revolving Credit Facility for general corporate purposes, for which there were no comparable borrowings during the same period in 2008. Additionally, during the six months ended June 30, 2008, the Company repurchased approximately $19.2 million of its common stock, for which there were no comparable stock repurchases during the same period in 2009.

Debt

Amended Revolving Credit Facility.On October 6, 2006, we and certain of our subsidiaries entered into a revolving credit facility in the initial commitment amount of $225.0 million, which included a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the “Revolving Credit Facility”) with Wachovia Bank, National Association, as Administrative Agent, and the lenders thereto. In 2009, we received notice that one of the lenders on the Revolving Credit Facility was taken over by the Federal Deposit Insurance Corporation. As such, the total initial commitment amount on the Revolving Credit Facility was reduced to approximately $220.0 million.

As of June 30, 2009, we had borrowed approximately $139.3 million under our Revolving Credit Facility at LIBOR plus 1.35% and retained the proceeds in cash and cash equivalents. We also had approximately $12.1 million of outstanding letters of credit issued pursuant to the Revolving Credit Facility as of June 30, 2009.

On August 5, 2009, we and certain of our subsidiaries entered into an amendment to the Revolving Credit Facility (the “Amended Revolving Credit Facility”).

Among other things, the Amended Revolving Credit Facility:

	•		deletes the financial covenant requiring us to maintain certain leverage ratios;

	•		revises the fixed charge coverage ratio (defined generally as the ratio of consolidated EBITDA excluding Mondrian Scottsdale’s EBITDA for the periods ending June 30, 2009 and September 30, 2009 and Clift’s EBITDA for all periods to consolidated interest expense excluding Mondrian Scottsdale’s interest expense for the periods ending June 30, 2009 and September 30, 2009 and Clift’s interest expense for all periods) that we are required to maintain for each four-quarter period to no less than 0.90 to 1.00 from the previous fixed charge coverage ratio of no less than 1.75 to 1.00;

	•		limits defaults relating to bankruptcy and judgment to certain events involving us, Morgans Group LLC and subsidiaries that are parties to the Amended Revolving Credit Facility;

	•		prohibits capital expenditures with respect to any hotels owned by us, the borrowers, as defined, or our subsidiaries, other than maintenance capital expenditures for any hotel not exceeding 4% of the annual gross revenues of such hotel and certain other exceptions;

	•		revises certain provisions related to permitted indebtedness, including, among other things, deleting certain provisions permitting unsecured indebtedness and indebtedness for the acquisition or expansion of hotels;

	•		prohibits repurchase of our common equity interests by the Company or Morgans Group LLC;

	•		imposes certain limits on any secured swap agreements entered into after the effective date of the Amended Revolving Credit Facility; and

	•		provides for a waiver of any default or event of default, to the extent that a default or event of default existed for failure to comply with any financial covenant under the existing Revolving Credit Facility as of June 30, 2009 and/or for the four fiscal quarters ended June 30, 2009.

As of August 5, 2009, the principal balance of the Amended Revolving Credit Facility was $23.9 million, and approximately $11.1 million of letters of credit were outstanding, all allocated to the Florida Tranche. The owners of the New York Properties, our wholly-owned subsidiaries, have paid all mortgage recording and other taxes required for the mortgage on the New York Properties to secure in full the amount available under the New York Tranche. The commitments under the Amended Revolving Credit Facility terminate on October 5, 2011, at which time all outstanding amounts under the Amended Revolving Credit Facility will be due.

Mortgage Agreements.On October 6, 2006, our subsidiaries that own Hudson and Mondrian Los Angeles entered into non-recourse mortgage financings with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and a mezzanine loan. These loans, a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles, all mature on July 15, 2010.

The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. We have the option of extending the maturity date of the Mortgages to October 15, 2011 provided that certain extension requirements are achieved, including maintaining a debt service coverage ratio, as defined, at the subsidiary owning the relevant hotel for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater. A portion of the Mortgages may need to be repaid in order to meet this covenant, or we may consider refinancing these Mortgages. We maintain swaps that effectively fix the LIBOR rate on the debt under the Mortgages at approximately 5.0% through the initial maturity date.

The prepayment clause in the Mortgages permits us to prepay the Mortgages in whole or in part on any business day.

The Mortgages require our subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. Our subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations and certain other liabilities.

The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles. Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or partnership interest debt. In addition, the Mortgages do not permit (i) transfers of more than 49% of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (ii) a change in control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself without, in each case, complying with various conditions or obtaining the prior written consent of the lender.

Notes to a Subsidiary Trust Issuing Preferred Securities.In August 2006, we formed a trust, MHG Capital Trust I (the “Trust”), to issue $50.0 million of trust preferred securities in a private placement. The sole assets of the Trust consist of the trust notes (the “Trust Notes”) due October 30, 2036 issued by Morgans Group LLC and guaranteed by Morgans Hotel Group Co. The Trust Notes have a 30-year term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for the first 10 years, ending October 2016, and thereafter will bear interest at a floating rate based on the three-month LIBOR plus 3.25%. These securities are redeemable by the Trust at par beginning on October 30, 2011.

The Trust Notes agreement requires that we do not fall below a fixed charge coverage ratio, defined generally as the ratio of consolidated EBITDA, excluding Clift’s EBITDA, over consolidated interest expense, excluding Clift’s interest expense, of 1.4 to 1.0 for four consecutive quarters. As of June 30, 2009, our fixed charge coverage ratio under this financial covenant was 1.7 and we were in compliance with the covenants of the Trust Note agreement.

Clift.We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease is accounted for as a financing with a balance of $82.4 million at June 30, 2009. The lease payments are $6.0 million per year through October 2014 with inflationary increases at five-year intervals thereafter beginning in October 2014.

Hudson.We lease two condominium units at Hudson which are reflected as capital leases with balances of $6.2 million at June 30, 2009. Currently annual lease payments total approximately $800,000 and are subject to increases in line with inflation. The leases expire in 2096 and 2098.

Promissory Note.The purchase of the Gale, the property across from the Delano Miami, was partially financed with the issuance of a $10.0 million three-year interest only non-recourse promissory note by us to the seller, with a scheduled maturity of January 24, 2009. In November 2008, we extended the maturity of the note until January 24, 2010 and agreed to pay 11.0% interest for the extension year which we were required to prepay in full at the time of the extension. The obligations under the note are secured by the property. Additionally, in January 2009, we borrowed an additional $0.5 million to obtain necessary permits. This $0.5 million promissory note matures on January 24, 2010 and bears interest at 11%. The obligations under this note are secured with a pledge of the equity interests in our subsidiary that owns the Gale.

Mondrian Scottsdale Debt.Mondrian Scottsdale is subject to $40.0 million of non-recourse mortgage and mezzanine financing, for which Morgans Group LLC has provided a standard non-recourse carve-out guaranty. The $40.0 million mortgage and mezzanine loans accrue interest at LIBOR plus 2.3%. The loans matured on June 1, 2009 and were not repaid. We are currently operating Mondrian Scottsdale and accruing interest. We are discussing various options with the lenders. We do not intend to commit significant monies toward the repayment of the loans or the funding of operating deficits.

Convertible Notes.On October 17, 2007, we completed an offering of $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes (“Convertible Notes”) in a private offering, which included an additional issuance of $22.5 million in aggregate principal amount of Convertible Notes as a result of the initial purchasers’ exercise in full of their overallotment option. The Convertible Notes are senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by our operating company, Morgans Group LLC. The Convertible Notes are convertible into shares of our common stock under certain circumstances and upon the occurrence of specified events.

On January 1, 2009, the Company adopted FASB Staff Position No. APB 14-1 (“FSP APB 14-1”), which clarifies the accounting for the Convertible Notes payable. FSP APB 14-1 requires the proceeds from the sale of the Convertible Notes to be allocated between a liability component and an equity component. The resulting debt discount must be amortized over the period the debt is expected to remain outstanding as additional interest expense. FSP APB 14-1 required retroactive application to all periods presented. The equity component, recorded as additional paid-in capital, was $10.1 million, which represents the difference between the proceeds from issuance of the Convertible Notes and the fair value of the liability, net of deferred taxes of $5.3 million, as of the date of issuance of the Convertible Notes.

In connection with the private offering, the Company entered into certain Convertible Note hedge and warrant transactions. These transactions are intended to reduce the potential dilution to the holders of our common stock upon conversion of the Convertible Notes and will generally have the effect of increasing the conversion price of the Convertible Notes to approximately $40.00 per share, representing a 82.23% premium based on the closing sale price of our common stock of $21.95 per share on October 11, 2007. The net proceeds to us from the sale of the Convertible Notes were approximately $166.8 million (of which approximately $24.1 million was used to fund the Convertible Note call options and warrant transactions).

Seasonality

The hospitality business is seasonal in nature. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as the current recession, extreme weather conditions, terrorist attacks or alerts, natural disasters, airline strikes, and other considerations affecting travel. Given the current economic environment, the impact of seasonality may not be as significant as in prior periods.

To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term borrowings or increase our borrowings, if available, on our Amended Revolving Credit Facility to meet cash requirements.

Capital Expenditures and Reserve Funds

We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as determined pursuant to our debt and lease agreements related to such hotels, with the exception of Delano Miami, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar obligations under debt agreements related to such hotels, or under our management agreements. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to 4% of the hotel’s revenues and require the funds to be set aside in restricted cash. In addition, our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. As of June 30, 2009, $4.6 million was available in restricted cash reserves for future capital expenditures under these obligations related to our Owned Hotels.

The lenders under the Mortgages require the Company’s subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. The Company’s subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations, and certain other liabilities.

During 2006, 2007 and 2008, our Owned Hotels that were not subject to these reserve funding obligations — Delano Miami, Royalton, and Morgans — underwent significant room and common area renovations, and as such, are not expected to require a substantial amount of capital spending during 2009. Management will evaluate the capital spent at these properties on an individual basis and ensure that such decisions do not impact the overall quality of our hotels or our guests’ experience.

Derivative Financial Instruments

We use derivative financial instruments to manage our exposure to the interest rate risks related to our variable 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. We determine the fair value of our derivative financial instruments using models which 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 22, 2006, we entered into an interest rate forward starting swap that effectively fixes the interest rate on $285.0 million of mortgage debt at approximately 4.25% on Mondrian Los Angeles and Hudson with an effective date of July 9, 2007 and a maturity date of July 15, 2010. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In connection with the Mortgages, the Company also entered into an $85.0 million interest rate swap that effectively fixes the LIBOR rate on $85.0 million of the debt at approximately 5.0% with an effective date of July 9, 2007 and a maturity date of July 15, 2010. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In May 2006, we entered into an interest rate cap agreement with a notional amount of $40.0 million, the expected full amount of debt secured by Mondrian Scottsdale, with a LIBOR cap of 6.00% through June 1, 2009. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In connection with the sale of the Convertible Notes (discussed above) we entered into call options which are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which we will receive shares of our common stock from counterparties equal to the number of shares of our common stock, or other property, deliverable by us to the holders of the Convertible Notes upon conversion of the Convertible Notes, in excess of an amount of shares or other property with a value, at then current prices, equal to the principal amount of the converted Convertible Notes. Simultaneously, we also entered into warrant transactions, whereby we sold warrants to purchase in the aggregate 6,415,327 shares of our common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The warrants may be exercised over a 90-day trading period commencing January 15, 2015. The call options and the warrants are separate contracts and are not part of the terms of the Convertible Notes and will not affect the holders’ rights under the Convertible Notes. The call options are intended to offset potential dilution upon conversion of the Convertible Notes in the event that the market value per share of the common stock at the time of exercise is greater than the exercise price of the call options, which is equal to the initial conversion price of the Convertible Notes and is subject to certain customary adjustments.

Off-Balance Sheet Arrangements

Morgans Europe.We own interests in two hotels through a 50/50 joint venture known as Morgans Europe. Morgans Europe owns two hotels located in London, England, St Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel. Under a management agreement with Morgans Europe, we earn management fees and a reimbursement for allocable chain service and technical service expenses.

Morgans Europe’s net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. At June 30, 2009, we had a negative investment in Morgans Europe of $3.9 million. We account for this investment under the equity method of accounting. Our equity in income of the joint venture amounted to $0.2 million and $3.4 million for the six months ended June 30, 2009 and 2008, respectively.

Mondrian South Beach.We own a 50% interest in Mondrian South Beach, a recently renovated apartment building which was converted into a condominium and hotel. Mondrian South Beach opened in December 2008, at which time we began operating the property under a long-term management contract.

We account for this investment under the equity method of accounting. At June 30, 2009, our investment in Mondrian South Beach was $22.7 million. Our equity in loss of Mondrian South Beach amounted to $2.1 million and $0.7 million for the six months ended June 30, 2009 and 2008.

Hard Rock.As of June 30, 2009, we owned a 19.1% interest in the Hard Rock, based on cash contributions, through a joint venture with DLJMB. We also manage the Hard Rock under a management agreement, for which we receive a management fee and a chain service expense reimbursement based on a percentage of all non-gaming revenue including rental income, and a fixed annual gaming facilities support fee. We can also earn an incentive management fee based on EBITDA, as defined, above certain levels. We account for this investment under the equity method of accounting. For the six months ended June 30, 2008, our equity in loss from the Hard Rock joint venture was $11.3 million. This amount was not recognized in our consolidated financial statements for the six months ended June 30, 2009, as our investment balance was negative. At June 30, 2009, we had a negative investment in the Hard Rock of $11.1 million.

Echelon Las Vegas.In January 2006, we entered into a 50/50 joint venture agreement with a subsidiary of Boyd to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project. We account for this investment under the equity method of accounting. As of June 30, 2009, our investment in the joint venture was $17.2 million.

Mondrian SoHo.In June 2007, we contributed approximately $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. which is developing a Mondrian hotel in the SoHo neighborhood of New York City. Upon completion, we expect to operate the hotel under a 10-year management contract with two 10-year extension options. As of June 30, 2009, our investment in the Mondrian SoHo venture was $8.3 million.

Ames Boston.On June 17, 2008 the Company, Normandy Real Estate Partners, and local partner Ames Hotel Partners, entered into a joint venture to develop the Ames Boston hotel in Boston. Upon completion, we expect to operate Ames Boston under a 20-year management contract. Ames Boston is currently expected to open in late 2009. We expect to have an approximately 35% economic interest in the joint venture. As of June 30, 2009, our investment in the Ames Boston joint venture was $11.1 million, which includes additional fundings totaling $4.2 million made during the six months ended June 30, 2009. The project is expected to qualify for federal and state historic rehabilitation tax credits.

Convertible Note Call and Warrant Options. In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions with respect to our common stock (the “Call Options”) with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the “Hedge Providers”). The Call Options are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which we will receive shares of our common stock from the Hedge Providers equal to the number of shares issuable to the holders of the Convertible Notes upon conversion. We paid approximately $58.2 million for the Call Options.

In connection with the sale of the Convertible Notes, we also entered into separate warrant transactions whereby we issued warrants (the “Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti- dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. We received approximately $34.1 million from the issuance of the Warrants.

For further information regarding our off balance sheet arrangements, see Notes 4 and 6 to our consolidated financial statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires 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. No material changes to our critical accounting policies have occurred since December 31, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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. Some of our outstanding debt has a variable interest rate. As described in “Management’s Discussion and Analysis of Financial Results of Operations — Derivative Financial Instruments” above, we use some derivative financial instruments, primarily interest rate caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. As of June 30, 2009, our total outstanding consolidated debt, including capitalized lease obligations, was approximately $858.9 million, of which approximately $549.3 million, or 64.0%, was variable rate debt.

We entered into hedging arrangements on $285.0 million of variable rate debt in connection with the mortgage debt on Hudson and Mondrian Los Angeles, which matures on July 9, 2010 and effectively fixes LIBOR at approximately 4.25%. At June 30, 2009, the one month LIBOR rate was 0.3%. If market rates of interest on this variable rate debt increase by 1.0%, or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $2.9 million annually and the maximum annual amount the interest expense would increase on this variable rate debt is $13.5 million due to our interest rate cap agreement, which would reduce future pre-tax earnings and cash flows by the same amount annually. If market rates of interest on this variable rate decrease by 0.3%, or 30 basis points, the decrease in interest expense would increase pre-tax earnings and cash flow by approximately $0.9 million annually.

In connection with the Mortgages, we also entered into an $85.0 million interest rate swap that effectively fixes the LIBOR rate on $85.0 million of the debt at approximately 5.0% with an effective date of July 9, 2007 and a maturity date of July 15, 2010. If market rates of interest on this variable rate debt increase by 1.0%, or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $0.9 million annually and the maximum annual amount the interest expense would increase on this variable rate debt is $3.9 million due to our interest rate cap agreement, which would reduce future pre-tax earnings and cash flows by the same amount annually. If market rates of interest on this variable rate decrease by 0.3%, or 30 basis points, the decrease in interest expense would increase pre-tax earnings and cash flow by approximately $0.3 million annually.

Our variable rate debt also consisted of $139.3 million outstanding under the Revolving Credit Facility at a rate of LIBOR plus 1.35% as of June 30, 2009. If market rates of interest on this variable rate debt increase by 1.0% or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $1.4 million annually. If market rates of interest on this variable rate debt decrease by 0.3%, or 30 basis points, the decrease in interest expense would increase pre-tax earnings and cash flow by approximately $0.4 million.

Our fixed rate debt consists of Trust Notes, the Convertible Notes, the promissory note on Gale, and the Clift lease. The fair value of some of this debt is greater than the book value. As such, if market rates of interest increase by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt would decrease by approximately $18.0 million. If market rates of interest decrease by 1.0%, or 100 basis points, the fair value of our fixed rate debt would increase by $52.5 million.

Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments and future cash flows. These analyses do not consider the effect of a reduced level of overall economic activity. If overall economic activity is significantly reduced, we may take actions to further mitigate our exposure. However, because we cannot determine the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

Currency Exchange Risk

As we have international operations with our two London hotels, currency exchange risk between the U.S. dollar and the British pound arises as a normal part of our business. We reduce this risk by transacting this business in British pounds. A change in prevailing rates would have, however, an impact on the value of our equity in Morgans Europe. The U.S. dollar/British pound currency exchange is currently the only currency exchange rate to which we are directly exposed. Generally, we do not enter into forward or option contracts to manage our exposure applicable to net operating cash flows. We do not foresee any significant changes in either our exposure to fluctuations in foreign exchange rates or how such exposure is managed in the future.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and the chief financial officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15 of the Securities and Exchange Act of 1934, as amended) that occurred during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Litigation

Potential Litigation

We understand that Mr. Philippe Starck has attempted to initiate arbitration proceedings in the London Court of International Arbitration regarding an exclusive service agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in February 1998 regarding the design of certain hotels now owned by us. We are not a party to these proceedings at this time. See Note 5 of our consolidated financial statements.

Hard Rock Financial Advisory Agreement

In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (“Credit Suisse”) for $9.4 million related to the Financial Advisory Agreement the Company entered into with Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the acquisition of the Hard Rock and related assets in February 2007, was based upon an agreed upon percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The invoice received in July 2008 alleges that as a result of events subsequent to the closing of the Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.

Other Litigation

We are involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on our financial position, results of operations or liquidity.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

On June 1, 2009, the $40.0 million mortgage and mezzanine financing on Mondrian Scottsdale matured and were not repaid. We are currently operating Mondrian Scottsdale and accruing interest. As of August 10, 2009, the $40.0 million mortgage and mezzanine loans remained outstanding and we have accrued $0.3 million in interest. See “Debt — Mondrian Scottsdale” in the section of this Quarterly Report on Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition, for information concerning the Amended Revolving Credit Facility, see “Debt — Amended Revolving Credit Facility” in the section of this Quarterly Report on Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Submission of Matters to a Vote of Security Holders.

At the Company’s Annual Meeting of Stockholder held on May 19, 2009, two proposals were submitted to a vote of our stockholders.

Election of Directors—Ten directors were elected to service on our Board of Directors for a term that ends at the 2010 Annual Meeting of Stockholders. The number of votes cast in favor and withheld for each nominee were as follows:


Nominee	In Favor		Withheld
David T. Hamamoto		19,444,913		8,083,412
Fred J. Kleisner		19,275,547		8,252,778
Dr. Deepak Chopra		19,855,696		7,672,629
Robert Friedman		18,856,274		8,672,051
Jeffrey M. Gault		18,857,344		8,670,981
Marc Gordon		19,663,389		7,864,936
Thomas L. Harrison		18,515,037		9,013,288
Edwin L. Knetzger, III		19,470,894		8,057,431
Michael D. Malone		19,518,155		8,010,170
David J. Moore		19,261,567		8,266,758

Ratification of Auditors—The stockholders ratified the appointment of BDO Seidman, LLP as our independent registered public accounting firm for 2009. The number of votes cast in favor and against the proposal, as well as the number of abstentions were as follows:


In Favor	Against	Abstained
25,460,784	2,851,532	17,009

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits listed in the accompanying Exhibit Index are filed as part of this report.

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 hereunto duly authorized.


		Morgans Hotel Group Co.

August 10, 2009		/s/Fred J. Kleisner

		Fred J. Kleisner
		President and Chief Executive Officer

		/s/ Richard Szymanski

		Richard Szymanski
		Chief Financial Officer and Secretary

EXHIBIT INDEX


Exhibit
Number		Description
	2.1	Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and Peter Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 17, 2006)

	2.2	First Amendment to Agreement and Plan of Merger, dated as of January 31, 2007, by and between Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc., (solely with respect to Section 1.6 and Section 1.8 thereof) 510 Development Corporation and (solely with respect to Section 1.7 thereof) Peter A. Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 6, 2007)

	3.1	Amended and Restated Certificate of Incorporation of Morgans Hotel Group Co.(incorporated by reference to Exhibit 3.1 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 6, 2006)

	3.2	Amended and Restated By-laws of Morgans Hotel Group Co. (incorporated by reference to Exhibit 3.2 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 6, 2006)

	4.1	Specimen Certificate of Common Stock of Morgans Hotel Group Co. (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on January 17, 2006)

	4.2	Junior Subordinated Indenture, dated as of August 4, 2006, between Morgans Hotel Group Co., Morgans Group LLC and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 11, 2006)

	4.3	Amended and Restated Trust Agreement of MHG Capital Trust I, dated as of August 4, 2006, among Morgans Group LLC, JPMorgan Chase Bank, National Association, Chase Bank USA, National Association, and the Administrative Trustees Named Therein (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 11, 2006)

	4.4	Stockholder Protection Rights Agreement, dated as of October 9, 2007, between Morgans Hotel Group Co. and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 10, 2007)

	4.5	Amendment to the Stockholder Protection Rights Agreement, dated July 25, 2008, between the Company and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on July 30, 2008)

	4.6	Indenture related to the Senior Subordinated Convertible Notes due 2014, dated as of October 17, 2007, by and among Morgans Hotel Group Co., Morgans Group LLC and The Bank of New York, as trustee (including form of 2.375% Senior Subordinated Convertible Note due 2014) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 17, 2007)

	4.7	Registration Rights Agreement, dated as of October 17, 2007, between Morgans Hotel Group Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on October 17, 2007)

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

	32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002*

	32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002*


*		Filed herewith.

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Morgans Hotel (MHGC) Inactive 10-Q2009 Q2 Quarterly report

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