10-Q 1 bref-20120630x10q.htm 10-Q BREF-2012.06.30-10Q


 
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 quarter ended June 30, 2012
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-54532
BREF HR, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
27-4938906
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification no.)
 
 
 
Three World Financial Center 
 
 
250 Vesey Street, 11th Floor New York, NY
 
10281
(Address of principal executive office)
 
(Zip Code)

(Registrant’s telephone number, including area code): (212) 417-7265

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 




TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
 
 
BREF HR, LLC Condensed Consolidated Balance Sheets (unaudited)
 
 
BREF HR, LLC and Hard Rock Hotel Holdings, LLC Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
 
 
BREF HR, LLC and Hard Rock Hotel Holdings, LLC Condensed Consolidated Statements of Cash Flows (unaudited)
 
 
Notes To Condensed Consolidated Financial Statements (unaudited)
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II—OTHER INFORMATION
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3. Defaults Upon Senior Securities
 
 
Item 4. Submission of Matters to a Vote of Security Holders
 
 
Item 5. Other Information
 
 
Item 6. Exhibits


1



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
BREF HR, LLC
Condensed Consolidated Balance Sheets
(Unaudited)
($ in thousands)
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and Cash equivalents
$
14,443

 
$
16,818

Accounts receivable, net
7,721

 
8,054

Inventories
2,566

 
2,569

Prepaid expenses and other current assets
4,472

 
3,311

Investment in joint venture
2,104

 

Related party receivable
533

 
759

Restricted cash
3,696

 
4,632

Total current assets
35,535

 
36,143

Property and equipment, net of accumulated depreciation and amortization
505,781

 
511,351

Intangible assets, net
97,415

 
104,000

Restricted cash
25,538

 
28,958

Total assets
$
664,269

 
$
680,452

 
 
 
 
Liabilities and Members' Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,564

 
$
3,430

Construction related payables
219

 
235

Accrued expenses
24,458

 
26,939

Total current liabilities
32,241

 
30,604

Long term accrued expenses
797

 
1,170

Long term interest payable
31,650

 
19,590

Long term debt
608,978

 
594,897

Long term debt - due to affiliate
14,369

 
13,802

Total long term liabilities
655,794

 
629,459

Total liabilities
688,035

 
660,063

 
 
 
 
Members' equity (deficit):
 
 
 
Paid-in capital
86,673

 
86,673

Accumulated other comprehensive loss

 
(203
)
Accumulated deficit
(110,439
)
 
(66,081
)
Total members' equity (deficit)
(23,766
)
 
20,389

Total liabilities and members equity (deficit)
$
664,269

 
$
680,452


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2



BREF HR, LLC
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(Unaudited)
 
Company
 
 
HRH Holdings, LLC
 
 
 
AS RESTATED - SEE NOTE 13
 
 
 
AS RESTATED - SEE NOTE 13

 
 
 
($ in thousands)
Three months ended June 30, 2012
 
Three months ended June 30, 2011
 
Six months ended June 30, 2012
 
Period from
Mar 1, 2011 to
June 30, 2011
 
 
Period from Jan 1,
2011 to Feb 28,
2011
Revenue:

 

 

 

 
 

Casino
$
10,530

 
$
10,896

 
$
22,121

 
$
14,795

 
 
$
5,973

Lodging
17,035

 
15,906

 
33,196

 
21,040

 
 
9,222

Food and beverage
24,605

 
26,313

 
43,270

 
33,250

 
 
12,390

Retail
637

 
843

 
1,422

 
1,043

 
 
426

Other
6,688

 
7,816

 
16,227

 
9,643

 
 
4,591

Gross revenues
59,495

 
61,774

 
116,236

 
79,771

 
 
32,602

Less: Promotional allowances
(5,193
)
 
(4,527
)
 
(10,686
)
 
(6,073
)
 
 
(3,345
)
Net revenues
54,302

 
57,247

 
105,550

 
73,698

 
 
29,257

 

 

 

 

 
 

Costs and Expenses:

 

 

 

 
 

Casino
8,975

 
8,814

 
18,288

 
11,993

 
 
5,666

Lodging
5,486

 
5,066

 
10,569

 
6,770

 
 
3,122

Food and beverage
13,603

 
13,092

 
23,303

 
16,592

 
 
5,748

Retail
424

 
518

 
951

 
658

 
 
273

Other
3,785

 
4,915

 
9,695

 
5,829

 
 
2,877

Marketing
2,574

 
1,480

 
4,771

 
1,955

 
 
843

Fee and expense reimbursements - related party
450

 
884

 
1,234

 
1,157

 
 
932

General and administrative
9,117

 
9,360

 
17,960

 
12,521

 
 
6,389

Depreciation and amortization
7,597

 
7,446

 
16,017

 
9,927

 
 
10,858

Pre-opening
88

 

 
170

 

 
 

Impairment of intangible assets
3,000

 

 
3,000

 

 
 

Total costs and expenses
55,099

 
51,575

 
105,958

 
67,402

 
 
36,708

(Loss) income from operations
(797
)
 
5,672

 
(408
)
 
6,296

 
 
(7,451
)
Interest income
9

 
24

 
27

 
23

 
 
8

Interest expense
(21,893
)
 
(19,785
)
 
(43,977
)
 
(26,219
)
 
 
(14,870
)
Gain on forgiveness of debt

 

 

 

 
 
32,460

(Loss) income before income tax expense
(22,681
)
 
(14,089
)
 
(44,358
)
 
(19,900
)
 
 
10,147

Income tax expense

 

 

 

 
 
141

Net (Loss) income
$
(22,681
)
 
$
(14,089
)
 
$
(44,358
)
 
$
(19,900
)
 
 
$
10,006

Other Comprehensive (loss) income:

 

 

 

 
 

Interest rate cap fair market value adjustment, net of tax

 
(70
)
 
203

 
(333
)
 
 
335

Comprehensive (loss) income
$
(22,681
)
 
$
(14,159
)
 
$
(44,155
)
 
$
(20,233
)
 
 
$
10,341


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3



BREF HR, LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
Company
 
 
HRH Holdings, LLC
 
 
 
AS RESTATED - SEE NOTE 13
 
 
 
 
Six Months Ended 
 June 30, 2012
 
Period from
Mar 1, 2011 to
June 30, 2011
 
 
Period from
Jan 1, 2011 to
Feb 28, 2011
($ in thousands)
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
 
Net income (loss)
$
(44,358
)
 
$
(19,900
)
 
 
$
10,006

Adjustment to reconcile net income (loss) to net cash
 
 
 
 
 
 
provided by operating activities:
 
 
 
 
 
 
Depreciation
12,432

 
6,818

 
 
10,307

Gain on forgiveness of debt

 

 
 
(32,460
)
Provision for (recovery of) doubtful accounts
(435
)
 
715

 
 
5

Amortization of loan fees and costs

 

 
 
2,200

Impairment of intangible assets
3,000

 

 
 

Amortization of intangible assets
3,585

 
3,109

 
 
551

Amortization of debt discount
13,742

 
6,685

 
 
 
Accrued non-cash interest applied to principal
1,906

 
972

 
 
 
Change in value of interest rate caps net of
 
 
 
 
 
 
premium amortization
340

 
1

 
 
335

Loss on sale of assets
8

 

 
 

Deferred income taxes

 

 
 
141

(Increase) decrease in assets:
 
 
 
 
 
 
Accounts receivable
768

 
426

 
 
(1,065
)
Inventories
3

 
(515
)
 
 
508

Prepaid expenses
(1,156
)
 
(1,663
)
 
 
33

Related party receivable
226

 

 
 
4

Increase (decrease) in liabilities:
 
 
 
 
 
 
Accounts payable
4,134

 
(1,416
)
 
 
66

Related party payable

 
557

 
 
945

Other accrued liabilities
(2,000
)
 
(300
)
 
 
6,916

Accrued interest payable
12,060

 
7,352

 
 
5,529

Net cash provided by operating activities
4,255

 
2,841

 
 
4,021

Cash flows from investing activities
 
 
 
 
 
 
Purchases of property and equipment
(6,865
)
 
(1,938
)
 
 
(137
)
Payments on construction related payables
(16
)
 
(53
)
 
 
(44
)
Reduction (increase) in restricted cash

 

 
 
16,527

Restricted cash contributions
(5,097
)
 
(34,743
)
 
 

Restricted cash withdrawals
9,453

 
9,304

 
 

Purchase of joint venture investment
(2,104
)
 

 
 

Proceeds from sale of operating assets
(5
)
 

 
 

Net cash (used in) provided by investing activities
(4,634
)
 
(27,430
)
 
 
16,346

Cash flows from financing activities
 
 
 
 
 
 
Proceeds from borrowings

 
13,000

 
 

Proceeds from members' equity contribution

 
18,627

 
 

Repayments on borrowings
(1,000
)
 
(972
)
 
 
(15,199
)
Purchase of interest rate caps
(142
)
 
(372
)
 
 

Principal payments on capital leases
(854
)
 
(1,034
)
 
 


Continued on next page
4



 
Company
 
 
HRH Holdings, LLC
 
 
 
AS RESTATED - SEE NOTE 13
 
 
 
 
Six Months Ended 
 June 30, 2012
 
Period from
Mar 1, 2011 to
June 30, 2011
 
 
Period from
Jan 1, 2011 to
Feb 28, 2011
($ in thousands)
 
 
 
 
 
 
Net cash (used in) provided by financing activities
(1,996
)
 
29,249

 
 
(15,199
)
Net (decrease) increase in cash and cash equivalents
(2,375
)
 
4,660

 
 
5,168

Cash and cash equivalents, beginning of period
16,818

 
20,191

 
 
15,023

Cash and cash equivalents, end of period
$
14,443

 
$
24,851

 
 
$
20,191

 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
Cash paid during the period for interest, net
 
 
 
 
 
 
of amounts capitalized
$
16,820

 

 
 
$
8,245

 
 
 
 
 
 
 
Supplemental Disclosure Non-cash Investing
 
 
 
 
 
 
 and Financing Activities
 
 
 
 
 
 
Construction related payables
$
219

 
$
528

 
 
$
2,450

Long-term debt in exchange for land

 

 
 
(52,158
)
Land provided in exchange for forgiveness of debt

 

 
 
22,000

Deferred financing cost

 

 
 
276

Forgiveness of accrued interest in exchange for land

 

 
 
(2,578
)
Gain on forgiveness of debt in exchange for land

 

 
 
(32,460
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5



BREF HR, LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.    Company Structure
Organization
BREF HR, LLC is a Delaware limited liability company that was formed on February 11, 2011. The affairs of the Company are governed by a Limited Liability Company Agreement dated as of March 1, 2011 (the “LLC Agreement”). Unless otherwise specified, the terms the “Company,” “we,” “us” or “our” refer to BREF HR, LLC and its consolidated subsidiaries, or any one or more of them, as the context may require. We own and operate the Hard Rock Hotel & Casino Las Vegas. Commencing operations in 1995, the Hard Rock Hotel & Casino Las Vegas is modeled after the highly successful Hard Rock Cafe restaurant chain and is decorated with an extensive collection of rare rock and roll memorabilia. The original Hard Rock Cafe was co-founded in 1971 by Peter Morton, and the “Hard Rock” name has grown to become widely recognized throughout the world.
The Company was formed by certain affiliates of Brookfield Financial, LLC (“Brookfield Financial”) to acquire the limited liability company interests of HRHH JV Junior Mezz, LLC (“HRHH JV Junior Mezz”) and HRHH Gaming Junior Mezz, LLC (“HRHH Gaming Junior Mezz”), which indirectly owned the Hard Rock Hotel & Casino Las Vegas and certain related assets. These assets were acquired pursuant to the assignment from Hard Rock Hotel Holdings, LLC (“HRH Holdings”) in connection with the default by HRH Holdings and its subsidiaries on the real estate financing facility (the “Facility”), and the resulting settlement agreement, as described below. Brookfield Financial is managed by Brookfield Real Estate Financial Partners LLC (together with its affiliates, “Brookfield”).
On March 1, 2011, HRH Holdings, Vegas HR Private Limited (the “Mortgage Lender”), Brookfield Financial, NRFC WA Holdings, LLC, Morgans Hotel Group Co. (“Morgans” and together with an affiliated entity, the “Morgans Parties”) and certain affiliates of DLJ Merchant Banking Partners (“DLJMBP”), as well as other interested parties entered into the Agreement to Transfer in Lieu of Foreclosure and Settlement Agreement (the “Settlement Agreement”) pursuant to which the membership interests of HRHH JV Junior Mezz and HRHH Gaming Junior Mezz were transferred and assigned to the Company. The transactions contemplated by the Settlement Agreement are referred to as the “Assignment.” The Assignment was accounted for as a business combination.
The Assignment provided for, among other things:
the transfer by HRH Holdings to an affiliate of Brookfield Financial of 100% of the indirect equity interests in the Hard Rock Hotel & Casino Las Vegas and other related assets, namely HHRH JV Junior Mezz and HRHH Gaming Junior Mezz;
release of the non-recourse carve-out guaranties provided by HRH Holdings with respect to the loans made by the Mortgage Lender, Brookfield Financial and NRFC WA Holdings, LLC to the direct and indirect owners of the Hard Rock Hotel & Casino Las Vegas; and
termination of the Morgans management agreement, dated as of February 2, 2007 and May 30, 2008, (the “Morgans Management Agreement”) with Morgans Hotel Group Management LLC (“Morgans Management”), pursuant to which Morgans Management was engaged by HRH Holdings as (i) the exclusive operator and manager of the Hard Rock and (ii) the asset manager of the approximately 23-acre parcel adjacent to the Hard Rock and the land on which the Hard Rock Cafe restaurant is situated (which is subject to a lease between our subsidiary, HRHH Cafe, LLC, as landlord, and Hard Rock Cafe International (USA), Inc., as tenant).

6



In connection with agreements entered into in relation to the Assignment, the Company and specified affiliates are contingently liable to distribute certain excess cash flows to specified former lenders and owners of HRH Holdings. These amounts are payable pursuant to the terms of these agreements only in the event that the existing lenders under the Amended Facility and the Second Mortgage agreements (as defined elsewhere) are paid specified values in full. See Note 10, Debt, for a description of the Amended Facility and Second Mortgage agreements. After considering the forecasted future performance of the Hard Rock Hotel & Casino Las Vegas and the cash distribution structure specified in the Amended Facility and the Second Mortgage, the Company has determined that the probability that any amounts will be distributed is remote and therefore no value has been attributed to these commitments.
The following footnotes cover periods both prior and subsequent to the Assignment. HRH Holdings’ historical condensed consolidated financial statements included herein for the two month period from January 1, 2011 to February 28, 2011 represent the results of operations and cash flows of HRH Holdings prior to the closing of the Assignment. Our historical condensed consolidated financial statements included herein for the periods following the closing of the Assignment represent our financial condition, results of operation and liquidity after the Assignment. As a result of various factors, the financial condition, results of operations and liquidity for the periods beginning on or after March 1, 2011 may not be comparable to the information prior to that date.
The Company's Going Concern
The Company incurred a loss of $44.4 million for the six months ended June 30, 2012, and has a net members' deficit of $23.8 million as of June 30, 2012. The Amended Facility allows the Company to accrue 'payable in kind' interest ("PIK interest"), representing the difference between interest accruing under the Amended Facility and the amounts paid. The PIK interest becomes due and payable on March 1, 2014, dependent upon whether the operating performance of the Company has met a defined threshold ("debt yield threshold") for the twelve month period ending March 1, 2014. The outstanding PIK interest as of June 30, 2012 and December 31, 2011 was $9.1 million and $8.2 million, respectively. The outstanding PIK interest as of December 31, 2012, was $18.5 million and, subsequent to December 31, 2012, the outstanding PIK interest has increased to approximately $31.7 million as of September 30, 2013. The Company does not currently believe that the operating performance will meet the debt yield threshold as defined in the Amended Facility. Accordingly, the accrued PIK interest payment is expected to be due and payable on March 1, 2014. We currently do not believe the Company will have sufficient funds to satisfy the expected PIK interest payment on March 1, 2014. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently assessing its options, including negotiating a waiver of this requirement from the lender, seeking approval from the lender to use cash reserves to satisfy a portion of this potential obligation, selling off a portion of existing collateral or attempting to obtain additional borrowings from other sources. The Company's ability to continue as a going concern depends upon its ability to restructure its indebtedness, obtain alternative financing on acceptable terms, obtain approval from the lender to use available cash reserves to satisfy a portion of this potential obligation, or a combination thereof. However, there can be no assurance these actions will be successful. We have placed mortgages on our hotel casino property to secure our indebtedness. In the event these actions are unsuccessful, among other lesser remedies, the lender may declare all unpaid principal and accrued interest under the Amended Facility due and payable immediately. To the extent we cannot meet our accelerated demand to meet our debt service obligations, we risk losing some or all of our property to foreclosure. If this occurs, our business and results of operations would be materially adversely affected.
The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties, including the possibility that the Company loses some or substantially all of its assets to foreclosure as a result of these uncertainties.


7



2.    Basis of Presentation, Principles of Consolidation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”) in accordance with the instruction to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and footnotes necessary for complete financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). These condensed consolidated financial statements should be read in conjunction with the Company’s 2012 annual consolidated financial statements and notes thereto on Form 10-K for the year ended December 31, 2012.
The results for the periods indicated reflect all adjustments (consisting primarily of normal recurring adjustments) that management considers necessary for a fair presentation of financial position, results of operations, and cash flows. The results for such periods are not necessarily indicative of the results to be expected for the full year.
The preparation of the condensed consolidated financial statements in conformity with GAAP management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, and those differences could be material.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries as of and for the six months ended June 30, 2012, the period from March 1, 2011 through June 30, 2011, as of June 30, 2012 and December 31, 2011. The information for the period from January 1, 2011 through February 28, 2011 includes the accounts of HRH Holdings.
Investment in Joint Venture
In June 2012, CDO Restaurant Associates LLC (“CDO”), a Delaware limited liability company, was formed between the Company and Fox Restaurant Concepts, LLC (“Fox”) to operate a restaurant, Culinary Dropout, using leased space at the Hard Rock Hotel and Casino Las Vegas. The Company contributed 80% of the initial construction and pre-opening budget, or $2.1 million, and also loaned CDO $100,000 to cover preopening costs in excess of initial budgeted amounts. The Company determined that the investment in CDO should be accounted for as an equity method investment. The loan bears interest at the greater of 8% or the reference rate publicly announced by Bank of America N.T. & S.A (3.25% at June 30, 2012) plus 4 percent. Loans are required to be repaid before any other distributions of net cash flow. Net cash flow is then distributed in proportion to the Members’ initial capital contributions, plus an 8% preferred return, and, once paid in full, in accordance with the 50% membership interest. The Company accounts for its investment in CDO under the equity method based on applicable accounting guidance as the Company does not hold a controlling financial interest in CDO. For the six months ended June 30, 2012, the Company did not record a gain or loss related to its equity in CDO. At June 30, 2012, the Company’s net investment in CDO is an asset of $2.1 million. The balance is included in other assets in the accompanying consolidated balance sheets at June 30, 2012. There were no distributions to the members for the six months ended June 30, 2012.
CDO leases space from the Company under a ten-year operating lease expiring in August 2022. The lease has one five-year renewal option. Rent is paid monthly at 6% of sales, as defined in the agreement. CDO also pays a management fee of 6% of gross sales to Fox. Both the lease and the management agreement expire in August of 2022.
Consolidations of Variable Interest Entity
Prior to obtaining the necessary gaming approvals on June 15, 2012, we were prohibited from receiving any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, we entered into the Casino Lease (as defined below) with LVHR, a licensed third party casino operator, and the Resort Management Agreement (as defined at Note 9, Agreements with Related Parties) with WG-Harmon (as defined below) under which WG-Harmon conducts the gaming and other operations at the casino. The Casino Lease provided for base rent equal to $1.25 million per month. In addition to the base rent, LVHR paid for certain rent-related costs.

8



During the period from March 1, 2011 through June 14, 2012, LVHR Casino, Inc. ("LVHR") was the third party operator of all gaming operations at the Hard Rock Hotel & Casino Las Vegas and the Company did not own any interest in LVHR or its affiliated entities, WG-Harmon, LLC (“WG-Harmon”) and Warner Gaming, LLC. However, the Company, through one of its subsidiaries, entered into a Casino Lease Agreement (“Casino Lease”) with LVHR, pursuant to which it leased the casino premises in exchange for a monthly rent payment. The Casino Lease provided that the Company may terminate the lease upon 30 days prior written notice to LVHR, without payment of any termination fee. In addition, as part of the Casino Lease, the Company was obligated to make available to LVHR a revolving line of credit to be used solely for working capital purposes, specifically to fund any cash flow shortfalls in the casino operations. In addition to the Casino Lease, LVHR and the Company, entered into the Existing Gaming Assets Acquisition Agreement dated as of March 1, 2011, pursuant to which LVHR acquired all of the then existing casino assets used in the gaming operations at the Hard Rock Hotel & Casino Las Vegas. In addition, upon the exercise of the option to acquire the equity of LVHR, the agreement provides for the forgiveness of any accrued rent owed.
HRH Holdings and the Company each evaluate our variable interests to determine if they are variable interests in variable interest entities. LVHR became one of our indirect subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas on June 15, 2012.
Prior to June 15, 2012, when LVHR became a wholly-owned consolidated subsidiary of the Company, LVHR was consolidated as a variable interest entity as the Company was deemed the primary beneficiary of LVHR as the Company had both (1) the power to direct the activities significantly impacting LVHR's economic performance and (2) the obligation to absorb LVHR's losses. Prior to June 15, 2012, the Company did not own any interest in LVHR or its affiliated entities, WG-Harmon and Warner Gaming, LLC, and LVHR was the third party operator of all gaming operations at the Hard Rock Hotel & Casino Las Vegas.
Due to the consolidation of variable interest entities the following summarized balances of LVHR have been included in our consolidated balance sheets for the periods indicated:
($ in thousands)
December 31,
2011
Assets
 
Current assets
$
16,453

Long-term assets
12,629

Total assets
$
29,082

 
 
Liabilities & Members' Equity
 
Current liabilities
$
38,818

Long term debt
156

Total liabilities
38,974

 
 
Members' equity
(9,892
)
 
 
Total liabilities & members' equity
$
29,082

Recently Issued Accounting Pronouncements
In June 2011, FASB issued new guidance for the presentation of comprehensive income. The new guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This makes the presentation of items within OCI more prominent. Upon adoption of this standard, companies will no longer be allowed to present OCI in the statement of stockholders' equity. The effective date for this update is for years, and the interim periods within those years, beginning after December 15, 2011. As this is a presentation and disclosure requirement, there was no impact on our consolidated financial position, results of operations, or cash flows upon adoption.


9



3.    Accounts Receivable, Net
Components of accounts receivable, net consist of the following:
($ in thousands)
June 30, 2012
 
December 31, 2011
Casino
$
2,322

 
$
3,862

Hotel
4,242

 
3,277

Other
2,086

 
2,235

 
8,650

 
9,374

Less: allowance for doubtful accounts
(929
)
 
(1,320
)
Total accounts receivable, net
$
7,721

 
$
8,054

Activity in the allowance for doubtful accounts was as follows:
($ in thousands)
 
Balance at December 31, 2010
$
591

Additions - bad debt expense
2,476

Deductions - write off net of collections
(2,472
)
Balance at February 28, 2011 (HRH Holdings)
$
595

 
 
 
 
Balance at March 1, 2011 (Company)
$

Additions - bad debt expense
715

Deductions - write off net of collections
407

Balance at June 30, 2011 (Company)
$
1,122

 
 
Balance at December 31, 2011 (Company)
$
1,320

Additions - bad debt expense
(435
)
Deductions - write off net of collections
44

Balance at June 30, 2012 (Company)
$
929


4.    Restricted Cash
Certain of our subsidiaries are obligated to maintain cash reserve funds for a variety of purposes as determined pursuant to the Amended Facility, discussed at Note 10, Debt, including a requirement for the subsidiaries to deposit funds into a replacements and refurbishments reserve fund at amounts equal to three percent of the Hard Rock Hotel & Casino Las Vegas’ gross revenues. Restricted cash consists of the following:
($ in thousands)
June 30, 2012
 
December 31, 2011
Current
 
 
 
Tax reserves
$
2,013

 
$
1,921

Insurance reserves
1,091

 
1,222

Other reserves
360

 
1,260

Workers' compensation reserves
232

 
229

Total current restricted cash
3,696

 
4,632

 
 
 
 
Long-term
 
 
 
Working capital reserves
23,011

 
26,554

Available restricted cash reserves for future capital expenditures
2,527

 
2,404

Total long-term restricted cash
25,538

 
28,958

Total restricted cash
$
29,234

 
$
33,590


10




5.    Inventories
Inventories are stated at the lower of cost (determined using the first-in, first-out method), or market. Inventories consist of the following:
($ in thousands)
June 30, 2012
 
December 31, 2011
Restaurants and bars
$
1,866

 
$
1,892

Retail merchandise
623

 
593

Other inventory and operating supplies
77

 
84

Total inventories
$
2,566

 
$
2,569


6.     Property and Equipment, Net
Property and equipment, net consists of the following:
($ in thousands)
June 30, 2012
 
December 31, 2011
Land
$
115,600

 
$
115,600

Buildings and land and building improvements
338,763

 
337,314

Furniture, fixtures and equipment
73,795

 
69,182

Memorabilia
6,003

 
5,953

 
534,161

 
528,049

Less: accumulated depreciation and amortization
(29,468
)
 
(17,038
)
Construction in progress
1,088

 
340

Total property and equipment, net
$
505,781

 
$
511,351

Depreciation relating to property and equipment for the Company was $6.1 million and $5.1 million for the three months ended June 30, 2012 and 2011, respectively. Depreciation relating to property and equipment for the Company was $12.4 million for the six months ended June 30, 2012 and $6.8 million for the four month period ended June 30, 2011.
Depreciation relating to property and equipment for HRH Holdings was $10.3 million for the two month period ended February 28, 2011.    


11



7.     Intangible Assets, Net
Intangible assets, net consist of the following:
 
December 31, 2011
 
June 30, 2012
($ in thousands)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Accumulated Amortization
 
Ending
 
Remaining life (years)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-amortizing intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hard Rock Licensing
$
55,000

 
$

 
$
55,000

 
$
55,000

 
$
(3,000
)
 
$

 
$
52,000

 
 Indefinite

Future Trademark Licensing
7,000

 

 
7,000

 
7,000

 

 

 
7,000

 
 Indefinite

 
62,000

 

 
62,000

 
62,000

 
(3,000
)
 

 
59,000

 
 
Amortizing intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In-place contracts
29,000

 
(2,417
)
 
26,583

 
29,000

 

 
(3,867
)
 
25,133

 
 Varies

Monster TM Licensing
2,537

 
(551
)
 
1,986

 
2,537

 

 
(882
)
 
1,655

 
2.5

Customer Relationships
3,000

 
(2,500
)
 
500

 
3,000

 

 
(3,000
)
 

 

Sponsorship Agreements
1,300

 
(541
)
 
759

 
1,300

 

 
(866
)
 
434

 
0.8

Market leases
1,736

 
(270
)
 
1,466

 
1,736

 

 
(432
)
 
1,304

 
1.4 - 8.5

Player relationships
10,000

 
(1,310
)
 
8,690

 
10,000

 

 
(2,017
)
 
7,983

 
8.6

Other
2,200

 
(184
)
 
2,016

 
2,200

 

 
(294
)
 
1,906

 
8.6

 
49,773

 
(7,773
)
 
42,000

 
49,773

 

 
(11,358
)
 
38,415

 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
intangibles, net
$
111,773

 
$
(7,773
)
 
$
104,000

 
$
111,773

 
$
(3,000
)
 
$
(11,358
)
 
$
97,415

 
 
The Hard Rock Trademark and future licensing rights are not subject to amortization as they have an indefinite useful life. The in-place contacts, trade names, Customer Relationships, Sponsorship Agreements, Market leases and other amortizing intangible assets are being ratably amortized on a straight-line basis over the estimated useful life which ranges from one to nine years. Player Relationships are amortized on an accelerated basis consistent with the expected timing of the Company’s realization of the economic benefits of such relationships.
For the three months ended June 30, 2012 and 2011, the Company recorded amortization expense of $1.5 million and $2.3 million respectively. For the six months ended June 30, 2012 and the four month ended June 30, 2011, the Company recorded amortization expense of $3.6 million and $3.1 million, respectively.
Subsequent to June 30, 2012 - Pueblo of Isleta Impairment. On October 13, 2009, HRH Holdings executed a license agreement with the Pueblo of Isleta. Pursuant to the Isleta license agreement, the Company sublicensed certain intellectual property, including the “Hard Rock Hotel” and “Hard Rock Casino” trademarks, to Isleta in connection with a hotel and a casino that Isleta opened in Albuquerque, New Mexico. Under the terms of the Isleta license agreement, Isleta agreed to pay us a certain percentage of its annual gross revenues based on the performance of its Hard Rock Hotel/Casino as well as certain other license fees. On December 24, 2012, Isleta and the Company mutually agreed to terminate the Isleta license agreement. The termination of the Isleta license agreement occurred on June 30, 2013. As part of such termination, the Company recorded an impairment of the Isleta intangible asset included in other licenses of $6.2 million in December 2012. The $6.2 million impairment charge represented discounted future licensing fees included in the March 1, 2011 fair value related to the agreement which were anticipated at that time had the agreement continued after June 30, 2013.
Hard Rock Licensing Impairment. During the second quarter of 2012, with forecasted net revenues differing from expectations, the Company performed an interim impairment analysis of the Hard Rock trademark. This analysis resulted in an impairment charge of $3.0 million for the second quarter of 2012. The fair value of Hard Rock Licensing at June 30, 2012 was determined using the discounted cash flow of forecasted net revenues.

12



Subsequent to June 30, 2012 - Hard Rock Licensing Impairment. During the fourth quarter of 2012, the Company completed its annual impairment analysis of the Hard Rock trademark, which resulted in an additional impairment charge of $12.0 million due to updated forecasts and market conditions. The fair value of Hard Rock Licensing at December 31, 2012 was determined using the discounted cash flow of forecasted net revenues.
The impairment charges to Hard Rock Licensing were the result of reductions in the projected revenue due to the weak market environment and are included within Impairment of intangible assets reflected in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

8.     Accrued Expenses
Accrued expenses consist of the following:
($ in thousands)
June 30, 2012
 
December 31, 2011
Current
 
 
 
Deferred income
$
3,999

 
$
3,202

Capital leases, current
1,247

 
1,727

Advance room, convention and customer deposits
4,328

 
7,709

Accrued salaries, payroll taxes and other employee benefits
3,245

 
2,929

Accrued miscellaneous taxes
2,517

 
1,683

Outstanding gaming chips and tokens
976

 
1,468

Accrued progressive jackpot and slot club payouts and other liabilities
941

 
465

Reserve for legal liability claims
3,933

 
1,927

Advance entertainment sales
402

 
726

Other accrued liabilities
2,870

 
5,103

Total current accrued expenses
24,458

 
26,939

Long term
 
 
 
Capital leases, long term
797

 
1,170

Total long term accrued expenses
797

 
1,170

Total accrued expenses
$
25,255

 
$
28,109

Certain reclassifications in the above table have been made to prior year amounts to conform to the current year presentation.

9.     Agreements with Related Parties
WG-Harmon
During the three months ended June 30, 2012 and 2011, the Company incurred $0.4 million and $0.8 million, respectively in management fees payable to WG-Harmon under the Management Agreement (Gaming Operations), Resort Management Agreement and Liquor Management and Employee Services Agreement, collectively ("WG-Harmon Agreements"), as defined below which is included in general and administrative on the consolidated statement of operations. During the six months ended June 30, 2012 and the four month ended June 30, 2011, the Company incurred $0.9 million and $1.0 million, respectively, in management fees payable under the WG-Harmon Agreements. There were no amounts payable to WG-Harmon as of June 30, 2012 and December 31, 2011.

13



Gaming Operations
On March 1, 2011, LVHR entered into the Management Agreement (Gaming Operations) (the “Management Agreement”) with WG-Harmon, pursuant to which WG-Harmon agreed to manage the gaming operations at the Hard Rock Hotel & Casino Las Vegas for LVHR. The term of the Management Agreement began on March 1, 2011 and terminated on June 15, 2012. During the term of the Management Agreement, LVHR paid to WG-Harmon a base fee in the amount of $37,500 per month. LVHR also reimbursed WG-Harmon for reasonable fees and expenses incurred in connection with the performance of WG-Harmon’s duties under such agreement.
On December 22, 2011, the Company received a license from the Nevada Gaming Commission to serve as the operator of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas and we were approved to acquire and own the equity securities of LVHR, subject to the Registration Statement becoming effective. Under Section 12(g)(1) of the Exchange Act, the Registration Statement became effective on December 22, 2011. LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas on June 15, 2012. On or about the same date that LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas, we restructured and converted LVHR from a Nevada corporation to a Nevada limited liability company known as LVHR Casino, LLC. Upon consummation of the restructure and conversion of LVHR: (i) LVHR Casino, LLC became a mortgage borrower under the Amended Facility and the Second Mortgage; (ii) LVHR Casino, LLC continued to own all of the assets that LVHR acquired on March 2, 2011 that are used at the Hard Rock Hotel & Casino Las Vegas gaming operations, and (iii) the revolving line of credit HRHH Gaming was obligated to make available to LVHR terminated. The Management Agreement terminated on June 15, 2012 without payment of any termination fee.
Non-Gaming Operations
On March 1, 2011, the Company and WG-Harmon entered in a Resort Management Agreement (the “Resort Management Agreement”), pursuant to which WG-Harmon managed the Hard Rock Hotel & Casino Las Vegas, other than the gaming operations and the liquor operations. The term of the Resort Management Agreement began on March 1, 2011 and continued until June 15, 2012, the date upon which LVHR became one of our subsidiaries and we assumed the operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas. During the term of the Resort Management Agreement, the Company paid to WG-Harmon a base fee in the amount of $122,500 per month. In addition to such base fee, WG-Harmon has an incentive management fee based on performance of the adjusted EBITDA of the Hard Rock Hotel & Casino Las Vegas as set forth in the Resort Management Agreement.
On June 15, 2012, the Resort Management Agreement was replaced by the Amended and Restated Management Agreement (the “Amended Resort Management Agreement”). On June 15, 2012, the Company and WG-Harmon entered into the Amended Resort Management Agreement, pursuant to which WG-Harmon will manage the Hard Rock Hotel & Casino Las Vegas, including the gaming operations and the liquor operations. WG-Harmon is required to use commercially reasonable efforts to operate the Hard Rock Hotel & Casino Las Vegas, and has complete discretion and control in all matters related to the management and operation of the Hard Rock Hotel & Casino Las Vegas. The term of the Amended Resort Management Agreement began on June 15, 2012 and will continue until March 31, 2016. During the term of the Amended Resort Management Agreement, the Company will pay WG-Harmon a base fee in the amount of $160,000 per month, payable monthly, which base fee may be decreased to $150,000 per month if WG-Harmon is no longer providing certain construction services to the Company. In addition to such base fee, the Owner will pay WG-Harmon an incentive management fee based on the performance of the adjusted EBITDA of the Hard Rock Hotel & Casino Las Vegas, as set forth in the Amended Resort Management Agreement.
Liquor Management
On March 1, 2011 the Company and WG-Harmon entered into a Liquor Management and Employee Services Agreement (the “Liquor Management Agreement”), relating to non-gaming operations at the Hard Rock Hotel & Casino Las Vegas. The term of the Liquor Management Agreement will terminate concurrently with the termination of the Resort Management Agreement. During the term of the Liquor Management Agreement WG-Harmon will pay to the Company monthly rent of $25,000 and deposit all liquor revenue into a lockbox account maintained by the Company pursuant to the Facility.

14



Effective December 23, 2011, the Clark County Liquor and Gaming Licensing Board (the “Clark County Board”) approved temporary liquor licenses for the Company to operate the liquor operations at the Hard Rock Hotel & Casino Las Vegas. On April 1, 2012, the Clark County Board approved an extension for the Company to operate the liquor operations at the Hard Rock Hotel & Casino Las Vegas. The Liquor Management Agreement terminated on June 15, 2012, and such responsibilities were absorbed by WG-Harmon under the Amended Resort Management Agreement.
Second Mortgage Loan Agreement
On March 1, 2011, as part of the Assignment, the Company entered into a second mortgage loan agreement with Brookfield Financial (the “Second Mortgage”), a related party. See Note 10, Debt, for further discussion. During the three months ended June 30, 2012 and 2011, the Company accrued interest of $1.2 million and $0.9 million, respectively under the Second Mortgage. During the six months ended June 30, 2012 and the four month ended June 30, 2011, the Company accrued interest of $2.2 million and $1.2 million, respectively under the Second Mortgage.

10.     Debt
The following table presents debt outstanding as of June 30, 2012 and December 31, 2011:
($ in thousands)
 
Final
 
 Face value
 
 Book value
 
Face value
 
 Book value
Project name/lender
 
maturity
 
June 30, 2012
 
June 30, 2012
 
December 31, 2011
 
December 31, 2011
Amended facility -Note A/Vegas HR Private Limited
 
March 1, 2018
 
$
544,460

 
$
458,631

 
$
543,554

 
$
456,658

 
 
 
 
 
 
 
 
 
 
 
Amended facility -Note B/Vegas HR Private Limited
 
March 1, 2018
 
327,290

 
150,347

 
327,290

 
138,239

 
 
 
 
 
 
 
 
 
 
 
Second Mortgage - Brookfield Financial
 
March 1, 2018
 
30,000

 
14,369

 
30,000

 
13,802

Total debt
 
 
 
901,750

 
623,347

 
900,844

 
608,699

Current portion of long-term debt
 
 
 

 

 

 

 
 
 
 
$
901,750

 
$
623,347

 
$
900,844

 
$
608,699

The difference between the face and book value of the debt represents debt discounts that are amortized to interest expense using the effective interest method over the term of the debt.
Amended Facility – Note A and Note B
On March 1, 2011, as part of the Assignment, the Company assumed the obligations under the Facility and entered into an amendment thereof (as amended, the “Amended Facility”) pursuant to which the land, building and improvements, equipment, fixtures and all personal properties were pledged as security and collateral.
The Amended Facility has a maturity date of March 1, 2018 and provides for interest only at The London InterBank Offered Rate (LIBOR) plus 2.5% with a 1.5% LIBOR floor (total of 4% at June 30, 2012). In addition, under the Amended Facility supplemental interest is accrued at a rate sufficient to provide for the greater of 6.5% or LIBOR + 4% effective interest rate at maturity after consideration of all prior payments of principal and interest. The rates of accrual are dependent on fluctuations in the applicable LIBOR rate. The Amended Facility has a provision whereby if the cash available for debt service is less than the current interest due, the PIK Interest will be automatically added to the outstanding principal balance of the Amended Facility and shall thereafter accrue interest. In addition, excess cash in the cash management account will be applied to the outstanding PIK interest, supplemental interest and principal according to the terms of the Amended Facility.

15



Second Mortgage
On March 1, 2011, as part of the Assignment, the Company entered into a Second Mortgage loan agreement with Brookfield Financial in the amount of $30.0 million pursuant to which certain land, building and improvements, equipment, fixtures and personal properties were pledged as security and collateral. The Second Mortgage is subordinate in right of payment to the Amended Facility. The maturity date of the Second Mortgage is March 1, 2018 and provides for an effective interest rate of 15% payable at maturity.
The Amended Facility and Second Mortgage include customary affirmative and negative covenants for similar financings, including, among others, restrictive covenants regarding incurrence of liens, sales or assets, distributions to affiliates, changes in business, cancellation of indebtedness, dissolutions, mergers and consolidations, as well as limitations on security issuances, transfers of any of the Company’s real property and removal of any material article of furniture, fixture or equipment from the Company’s real property. As of June 30, 2012, the Company was in compliance with all covenants.
The outstanding PIK interest related to the Amended Facility as of June 30, 2012 and December 31, 2011 was $9.1 million and $8.2 million, respectively. During the six months ended June 30, 2012 and the four months ended June 30, 2011, the Company recorded PIK interest in the amount of $1.0 million and $1.0 million, respectively. See discussion in Note 1 regarding the potential acceleration of PIK interest on March 1, 2014 and the Company's ability to meet such obligation.
The fair value of our total debt as of June 30, 2012 and December 31, 2011 was approximately $563.2 million and $622.9 million, respectively, which was determined utilizing a discounted cash flow model. The Company has determined that the fair value of its long-term debt is determined utilizing Level 3 inputs. The discount rate was determined utilizing historical market-based equity returns which are adjusted, as necessary, for entity specific factors.

11.     Derivative Instruments
Derivative Instruments – Interest Rate Cap Agreements
All derivative instruments are recorded at fair value included in other current assets. The accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative and the resulting designation. Derivative instruments 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. Derivative instruments used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivative instruments designated as cash flow hedges, the effective portion of changes in the fair value of the derivative instrument 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 instrument is recognized directly in earnings. The effectiveness of each hedging relationship is assessed under the hypothetical derivative method, whereby the cumulative change in fair value of the actual derivative instrument is compared to the cumulative change in fair value of a hypothetical derivative instrument having terms that exactly match the critical terms of the hedged transaction. For derivative instruments that do not qualify for hedge accounting or when hedge accounting is discontinued, the changes in fair value of the derivative instrument are recognized directly in earnings.
The objective in using derivative instruments is to add stability to its interest expense and to manage exposure to interest rate movements or other identified risks. Interest rate caps are used as part of a cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate payments in exchange for variable-rate amounts over the life of the agreements without exchange of the underlying principal amount.
 Effective March 28, 2012, the Company purchased two interest rate cap agreements with an aggregate notional amount of $871.8 million and a LIBOR cap of 1.24025% for $0.1 million. These interest rate cap agreements matured April 1, 2013. The Company did not designate these interest rate caps for hedge accounting.

16



Effective March 1, 2011, the Company purchased 2 interest rate cap agreements with an aggregate notional amount of $868.5 million and a LIBOR cap of 1.26575% for $0.4 million. These interest rate cap agreements matured on March 1, 2012. The Company has designated these 2 interest rate caps for hedge accounting as cash flow hedges. Accordingly, the effective portion of the change in fair value of these derivative instruments is recognized in other comprehensive income (loss).
Derivative Instruments – Fair Value
The Company has determined that its derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. To determine the fair value of our interest rate caps the Company utilized the forward yield curve and the market for similar securities. As of June 30, 2012, the fair value of the two interest rate cap agreements was zero included in prepaid expenses and other current assets. As of December 31, 2011, the fair value of the two interest rate cap agreements was zero.

12.     Commitments and Contingencies
Legal and Regulatory Proceedings
Our subsidiary HRHH IP was one of a number of defendants (“Defendants”) in an action ("Hard Rock IP Action") commenced by Hard Rock Cafe International (USA), Inc. (“HRCI”) on September 21, 2010 in the United States District Court for the Southern District of New York, captioned Hard Rock Cafe International (USA), Inc. v. Hard Rock Hotel Holdings, LLC, et al. asserting certain failures to comply with the terms and requirements of the intellectual property licensure agreements to which the Company was a party. HRCI also commenced a separate arbitration proceeding before the American Arbitration Association with respect to certain claims, originally brought in the Hard Rock IP Action, that were deemed arbitrable by the judge in that action (“HRCI Arbitration”). The HRCI Arbitration arose from the same underlying facts as the Hard Rock IP Action. On June 13, 2013, the parties reached a settlement of both the Hard Rock IP Action and the HRCI Arbitration (“HRCI Settlement”), and the court entered the order of dismissal of the Hard Rock IP Action on June 13, 2013. The terms of the HRCI Settlement do not have a material effect on our business, or the results of operations or financial condition of the Company.
S&H Projects (“S&H”) filed a lawsuit against Hard Rock Hotel, Inc. (“HRHI”) on December 3, 2010 with regard to the closure of the Wasted Space lounge in October 2010, (“S&H Matter”). On August 12, 2013, the parties reached a settlement of the S&H Matter. The terms of the S&H Matter settlement do not have a material effect on our business, or the results of operations or financial condition of the Company.
The Company and affiliates Brookfield Real Estate Financial Partners, LLC, Brookfield Financial, LLC - Series B, and Brookfield Asset Management (US), Inc. are currently amongst a number of defendants (“Defendants”) in an action commenced by Mace Management Group, LLC (“Mace) and Mandown, LLC (“Mandown”) on June 12, 2012 in Nevada’s Eighth Judicial District Court in Clark County, Nevada (the “Mace/Mandown Action”).  The Mace/Mandown Action relates to investments made by Mace/Mandown in Wasted Space Lounge, Rare 120 restaurant, the Johnny Smalls restaurant and Vanity nightclub (collectively, the “Venues”) at the Hard Rock Hotel and Casino Las Vegas. In general, all claims assert that actions taken by Defendants allegedly deprived Mace/Mandown of their initial investment and/or their share of profits from the Venues. The Mace/Mandown Action is in the preliminary stages and management has determined that based on the proceedings to date it does not believe the outcome of this matter will have a material effect on our business, or results of operations or financial condition of the Company.
Dolce Group Vegas, LLC filed a complaint against the Company, and affiliates Brookfield Asset Management (US), Inc., and Brookfield Financial, LLC - Series B, in Nevada’s Eighth Judicial District Court, Clark County, Nevada on July 13, 2011 (“Dolce Matter”). The plaintiff alleges breach of contract with respect to plaintiff’s contract to develop the “Rare 120” steakhouse concept for Hard Rock Hotel. On July 12, 2013, the parties reached a settlement of the Dolce Matter. The terms of the Dolce Matter settlement do not have a material effect on our business, or the results of operations or financial condition of the Company.
On July 27, 2012, the Company received notice of a Demand for Arbitration being filed by Monster Beverage Company (“Monster”) against the Company’s subsidiaries HRHH Hotel/Casino, LLC and HRHH IP, LLC (together the “HRHH Entities”) before the Judicial Arbitration and Mediation Service, or JAMS (the “Monster Beverage Action”).  Monster executed a Binding Letter of Intent with HRHH Hotel/Casino, LLC on November 6, 2009 with an effective date of December 31, 2009 (the "LOI") and a Supplement to The Binding Letter of Intent: Acquisition of Rights in Rehab Recovery Supplement Beverage with HRHH IP, LLC, the intellectual property rights holder dated as of December 31, 2009 (the "Supplement," and together with the LOI and Supplement

17



collectively the “Monster Agreement”). The gravamen of the Monster Beverage Action was a dispute between the HRHH Entities and Monster over rights to the “Rehab” beverage marks and brand.  On August 16, 2013, the arbitrator issued a final arbitration award in favor of Monster which is currently pending appeal. Based upon the terms of the final arbitration award, the outcome of the Monster Beverage Action will not have a material effect on our business, or the results of operations or financial condition of the Company.
We are also subject to a variety of other claims and lawsuits that arise in the ordinary course of our business. We do not believe the outcome of these and the other matters disclosed above will have a material effect on our business, results of operations or financial condition. As of June 30, 2012, the Company accrued $3.5 million for all loss contingency matters and our best estimate of reasonably possible losses in excess of the amount accrued is not material to the financial statements.


18



13.     Restatement to the 2011 Condensed Consolidated Financial Statements
The previously issued unaudited condensed consolidated financial statements for the three months and four months ended June 30, 2011 have been restated to correct errors in the accounting for the acquisition of the Hard Rock Hotel & Casino Las Vegas and other identified immaterial errors. Subsequent to the issuance of the September 30, 2011 interim unaudited condensed consolidated financial statements of the Company, an error from an oversight and misuse of facts was identified in forecasts which had been used to estimate the fair values of the assets acquired and liabilities assumed in the acquisition of the Hard Rock Hotel & Casino Las Vegas as of March 1, 2011. As a result, the Company has corrected the fair values of the assets acquired and liabilities assumed, which as of March 1, 2011 are in aggregate approximately $707.5 million and $622.5 million, respectively. The previously recorded fair values of the assets and liabilities had been $894.8 million and $767.2 million, respectively.
Specifically, the Company determined that certain cash flow forecasts and discount rates used in the initial determination of fair values did not reflect market conditions at March 1, 2011. The key assumptions that were corrected and their effect on the valuation are as follows:
The Company has reduced estimated debt free net cash flow for the base year from $41.5 million to $35.8 million and reduced estimated terminal year debt free net cash flow from $90.8 million to $85.5 million. Utilizing an appropriate multiple the estimated terminal value was reduced from $908 million to $760 million. The discount rate used was increased from 13% to 14%. These changes decreased business enterprise value (“BEV”) by approximately $110 million.
The Company has determined that there was value as of the March 1, 2011 acquisition date related to certain specific new initiatives, specifically the addition of or planned changes to the clubs and restaurants at Hard Rock Hotel & Casino Las Vegas, as well as additional expected trademark licensing fee agreements. Due to the valuation and the purchase price accounting errors identified, management corrected certain of the assumptions in the valuation of the planned new initiatives to reflect the market conditions and the risk associated with uncertainty in the forecasted net revenues from the new initiatives, reducing the estimated net cash flows and increasing the discount rates used from 17% to 35%. These changes decreased BEV by approximately $80 million.
The Company has changed the discount rates used to fair value the assumed mortgage debt to reflect the market conditions and the risk associated with the arrangements. Based on the reduced business enterprise value, management determined that the face amount of the mortgage significantly exceeded fair value of the assets of Hard Rock Hotel & Casino Las Vegas and adjusted the discount rates to reflect the risk associated with the arrangements. These changes decreased the fair value of the mortgage by approximately $170 million.
The effects of the restatement on the estimated fair value of the assets and liabilities acquired are as follows as of March 1, 2011:
($ in thousands)
As Previously Reported
 
Adjustment
 
As Restated
Land, buildings and equipment
$
659,330

 
$
(135,399
)
 
$
523,931

Intangible assets
185,265

 
(73,492
)
 
111,773

Other assets
50,236

 
21,589

 
71,825

Total assets
$
894,831

 
$
(187,302
)
 
$
707,529

 
 
 

 
 
Long term debt
$
722,282

 
$
(139,500
)
 
$
582,782

Other liabilities
44,966

 
(5,265
)
 
39,701

Total liabilities
$
767,248

 
$
(144,765
)
 
$
622,483

As a result of the restatement of the accounting for the initial acquisition, amounts that had been recognized in the interim unaudited condensed consolidated statement of operations related to the amortization or depreciation of assets acquired have also been restated. In addition, the interim information referred to above has been restated to correct other immaterial misstatements, both individually and in the aggregate, including the recording of depreciation for memorabilia and management fee estimates identified during the preparation of our consolidated financial statements of the period from March 1, 2011 to December 31, 2011 that were not related to the accounting for the acquisition of the Hard Rock Hotel & Casino Las Vegas.

19



In addition to the restatement noted above, the Company corrected errors due to the oversight of underlying information in the preparation of the consolidated statement of cash flows from operating activities for the period from March 1, 2011 to June 30, 2011:
Principal payments on capital leases had been incorrectly included in cash flows from operating activities in other accrued liabilities. Such amounts should have been included in cash flows used in financing activities.
Changes in restricted cash accounts had been incorrectly reported on a net basis in investing activities rather than separately as gross inflows and outflows in cash flows from investing activities.
The table below reflects the restated and previously reported Condensed Consolidated Statement of Operations:
 
Period from March 1, 2011 to June 30, 2011
($ in thousands)
As Previously reported
 
Adjustment
 
As Restated
Revenue:
 
 
 
 
 
Casino
$
14,742

 
$
53

 
$
14,795

Lodging
21,289

 
(249
)
 
21,040

Food and beverage
33,001

 
249

 
33,250

Retail
1,043

 

 
1,043

Other
9,892

 
(249
)
 
9,643

Gross revenues
79,967

 
(196
)
 
79,771

Less: Promotional allowances
(6,073
)
 

 
(6,073
)
Net revenues
73,894

 
(196
)
 
73,698

 
 
 

 
 
Costs and Expenses:
 
 

 
 
Casino
11,608

 
385

 
11,993

Lodging
6,778

 
(8
)
 
6,770

Food and beverage
16,325

 
267

 
16,592

Retail
658

 

 
658

Other
5,829

 

 
5,829

Marketing
1,954

 
1

 
1,955

Fee and expense reimbursements - related party
1,348

 
(191
)
 
1,157

General and administrative
12,657

 
(136
)
 
12,521

Depreciation and amortization
10,975

 
(1,048
)
 
9,927

Total costs and expenses
68,132

 
(730
)
 
67,402

Income from operations
5,762

 
534

 
6,296

Interest income
23

 

 
23

Interest expense
(25,056
)
 
(1,163
)
 
(26,219
)
Net loss
(19,271
)
 
(629
)
 
(19,900
)
Other Comprehensive loss:
 
 

 
 
Interest rate cap fair market value adjustment, net of tax
(333
)
 

 
(333
)
Comprehensive loss
$
(19,604
)
 
$
(629
)
 
$
(20,233
)

20



The table below reflects the restated and previously reported Condensed Consolidated Statement of Operations:
 
Period from April 1, 2011 to June 30, 2011
($ in thousands)
As Previously reported
 
Adjustment
 
As Restated
Revenue:
 
 
 
 
 
Casino
$
10,826

 
$
70

 
$
10,896

Lodging
16,155

 
(249
)
 
15,906

Food and beverage
26,063

 
250

 
26,313

Retail
843

 

 
843

Other
8,077

 
(261
)
 
7,816

Gross revenues
61,964

 
(190
)
 
61,774

Less: Promotional allowances
(4,527
)
 

 
(4,527
)
Net revenues
57,437

 
(190
)
 
57,247

 
 
 

 
 
Costs and Expenses:
 
 

 
 
Casino
8,687

 
127

 
8,814

Lodging
5,069

 
(3
)
 
5,066

Food and beverage
12,846

 
246

 
13,092

Retail
515

 
3

 
518

Other
4,916

 
(1
)
 
4,915

Marketing
1,478

 
2

 
1,480

Fee and expense reimbursements - related party
1,198

 
(314
)
 
884

General and administrative
9,251

 
109

 
9,360

Depreciation and amortization
8,232

 
(786
)
 
7,446

Total costs and expenses
52,192

 
(617
)
 
51,575

Income from operations
5,245

 
427

 
5,672

Interest income
24

 

 
24

Interest expense
(18,823
)
 
(962
)
 
(19,785
)
Net loss
(13,554
)
 
(535
)
 
(14,089
)
Other Comprehensive loss:
 
 

 
 
Interest rate cap fair market value adjustment, net of tax
2

 
(72
)
 
(70
)
Comprehensive loss
$
(13,552
)
 
$
(607
)
 
$
(14,159
)


21



The table below reflects the restated and previously reported Condensed Consolidated Statement of Cash Flows:
 
Period from March 1, 2011 to June 30, 2011
($ in thousands)
As Previously reported
 
Adjustment
 
As Restated
Cash flows from operating activities
 
 
 
 
 
Net loss
$
(19,271
)
 
$
(629
)
 
$
(19,900
)
Adjustment to reconcile net loss to net cash
 
 
 
 
 
provided by operating activities:
 
 
 
 
 
Depreciation
9,161

 
(2,343
)
 
6,818

Gain on forgiveness of debt

 

 

Provision for (write off of) doubtful accounts
527

 
188

 
715

Amortization of intangibles
1,814

 
1,295

 
3,109

Amortization of fair value adjustments of debt
5,849

 
836

 
6,685

Accrued non-cash interest applied to principal

 
972

 
972

Change in value of interest rate caps net of
 
 
 
 
 
premium amortization
1

 

 
1

(Increase) decrease in assets:
 
 

 
 
Accounts receivable
630

 
(204
)
 
426

Inventories
(515
)
 

 
(515
)
Prepaid expenses
(1,692
)
 
29

 
(1,663
)
Increase (decrease) in liabilities:
 
 

 
 
Accounts payable
(1,801
)
 
385

 
(1,416
)
Related party payable
765

 
(208
)
 
557

Other accrued liabilities
(174
)
 
(126
)
 
(300
)
Accrued long term interest payable
7,023

 
329

 
7,352

Net cash provide by operating activities
2,317

 
524

 
2,841

Cash flows from investing activities
 
 

 
 
Purchases of property and equipment
(1,627
)
 
(311
)
 
(1,938
)
Payments on construction related payables
(53
)
 

 
(53
)
Restricted cash contributions

 
(34,743
)
 
(34,743
)
Restricted cash withdrawals

 
9,304

 
9,304

Increase (reduction) in restricted cash
(25,211
)
 
25,211

 

Net cash used in investing activities
(26,891
)
 
(539
)
 
(27,430
)
Cash flows from financing activities
 
 

 
 
Proceeds from borrowings
30,000

 
(17,000
)
 
13,000

Proceeds from members' equity contribution

 
18,627

 
18,627

Repayments on borrowings

 
(972
)
 
(972
)
Purchase of interest rate caps
(372
)
 

 
(372
)
Principal payments on capital leases

 
(1,034
)
 
(1,034
)
Net cash provided by financing activities
29,628

 
(379
)
 
29,249

Net increase in cash and cash equivalents
5,054

 
(394
)
 
4,660

Cash and cash equivalents, beginning of period
20,191

 

 
20,191

Cash and cash equivalents, end of period
$
25,245

 
$
(394
)
 
$
24,851

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Cash paid during the period for interest, net
 
 
 
 
 
of amounts capitalized
$
12,035

 
$
(12,035
)
 
$

 
 
 
 
 
 
Supplemental Disclosure Non-cash Investing
 
 
 
 
 
 and Financing Activities
 
 
 
 
 
Construction related payables
1,247

 
(719
)
 
528


22



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for “forward-looking statements” made by or on behalf of a company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”), which represent our expectations or beliefs concerning future events. Statements containing expressions such as “believes,” “anticipates,” “expects” or other similar words or expressions are intended to identify forward-looking statements. We caution that these and similar statements are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Although we believe our expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. Important risks and factors that could cause our actual results to differ materially from any forward-looking statements include, but are not limited to, continued adverse economic and market conditions, particularly in levels of spending in the hotel, resort and casino industry in Las Vegas, Nevada; the seasonal nature of the hotel, casino and resort industry; the use of the “Hard Rock” brand name by entities other than us; costs associated with compliance with extensive regulatory requirements; increases in interest rates and operating costs; increases in uninsured and underinsured losses; risks associated with conflicts of interest with entities which control us; the loss of key members of our senior management; the impact of any material litigation; risks related to natural disasters; changes in the competitive environment in our industry; hostilities, including future terrorist attacks, or fear of hostilities that affect travel; and other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 and subsequently filed Quarterly Reports on Form 10-Q in the section entitled “Risk Factors” and in this report in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.
Overview
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 and our consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of certain factors, including but not limited to, those factors set forth in the section entitled “Forward-Looking Statements” and elsewhere in this report and in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 and subsequently filed Quarterly Reports on Form 10-Q.
Within this management’s discussion and analysis of financial condition and results of operation for the period from March 1, 2011 to June 30, 2011 and for the six months ended June 30, 2012, references to the “Company,” “we,” “us,” or “our” refer to BREF HR, LLC, and references to “HRH Holdings” for the period from January 1, 2011 to February 28, 2011 refer to Hard Rock Hotel Holdings, LLC.
The following discussion and analysis covers periods both prior and subsequent to the Assignment as discussed in Item 1. HRH Holdings’ historical consolidated financial statements included herein represent the financial condition, results of operations and liquidity of the Hard Rock Hotel & Casino during the period prior to March 1, 2011. Our historical consolidated financial statements included herein for the period following the closing of the Assignment represent our financial condition, results of operation and liquidity after the Assignment. As a result of various factors, the financial condition, results of operations and liquidity for the periods beginning on or after March 1, 2011 may not be comparable to the information prior to that date. For comparative purposes, below we have included the combined results of operations for the quarter ended June 30, 2011, which include periods of operation by HRH Holdings and the Company. While the Company believes that a comparison of the results of operations for this period provides useful information regarding the changes in operating data between the periods, not all of the data is comparable due to the impact that the Assignment has had on the amount of interest expense and depreciation and amortization we incur.

23



As is customary for companies in the gaming industry, we present average occupancy rate and average daily rate for the Hard Rock Hotel & Casino Las Vegas including rooms provided on a complimentary basis. Operators of hotels in the lodging industry generally may not follow this practice, as they may present average occupancy rate and average daily rate net of rooms provided on a complimentary basis. We calculate (a) average daily rate by dividing total daily lodging revenue by total daily rooms rented and (b) average occupancy rate by dividing total rooms occupied by total number of rooms available. We account for lodging revenue on a daily basis. Rooms provided on a complimentary basis include rooms provided free of charge or at a discount to the rate normally charged to customers as an incentive to use the casino. Complimentary rooms reduce average daily rate for a given period to the extent the provision of such rooms reduces the amount of revenue we would otherwise receive.
The following are key gaming industry-specific measurements we use to evaluate casino revenues. “Table game drop,” “slot machine handle” and “race and sports book write” are used to identify the amount wagered by patrons for a casino table game, slot machine or racing events and sports games, respectively. “Drop” and “Handle” are abbreviations for table game drop and slot machine handle. “Table game hold percentage,” “slot machine hold percentage” and “race and sports book hold percentage” represent the percentage of the total amount wagered by patrons that the casino has won. Such hold percentages are derived by dividing the amount won by the casino by the amount wagered by patrons. Based on historical experience, in the normal course of business we expect table games net hold percentage for any period to be within the range of 12% to 16% and slot machine hold percentage for any period to be within the range of 4% to 7%. For the period beginning on March 1, 2011 the Company is beneficiary of rental payments under the Casino Lease, which includes results relating to the sports book and other operations at the Hard Rock Hotel & Casino Las Vegas for which LVHR receives certain rental payments.
The previously reported amounts for the period from March 1, 2011 to June 30, 2011 and April 1, 2011 to June 30, 2011 have been adjusted to reflect the restatement discussed at Note 13 to our condensed consolidated financial statements.


24



Results of Operations of the Company for the Three Months Ended June 30, 2012 Compared to the Results of Operations of the Company for the Three Months Ended June 30, 2011
 
 
 
 
 
$ Change
 
% Change
($ in thousands)
Three months ended June 30, 2012
 
Three months ended June 30, 2011
 
2012 vs
2011
Statement of Operations Data:
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Casino
$
10,530

 
$
10,896

 
$
(366
)
 
(3.4
)%
Lodging
17,035

 
15,906

 
1,129

 
7.1

Food and beverage
24,605

 
26,313

 
(1,708
)
 
(6.5
)
Retail
637

 
843

 
(206
)
 
(24.4
)
Other
6,688

 
7,816

 
(1,128
)
 
(14.4
)
Gross revenues
59,495

 
61,774

 
(2,279
)
 
(3.7
)
Less: Promotional allowances
(5,193
)
 
(4,527
)
 
(666
)
 
(14.7
)
Net revenues
54,302

 
57,247

 
(2,945
)
 
(5.1
)
 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Casino
8,975

 
8,814

 
161

 
1.8

Lodging
5,486

 
5,066

 
420

 
8.3

Food and beverage
13,603

 
13,092

 
511

 
3.9

Retail
424

 
518

 
(94
)
 
(18.1
)
Other
3,785

 
4,915

 
(1,130
)
 
(23.0
)
Marketing
2,574

 
1,480

 
1,094

 
73.9

Fee and expense reimbursements
450

 
884

 
(434
)
 
(49.1
)
General and administrative
9,117

 
9,360

 
(243
)
 
(2.6
)
Depreciation and amortization
7,597

 
7,446

 
151

 
2.0

Pre-opening
88

 

 
88

 
100.0

Impairment of licenses and trademarks
3,000

 

 
3,000

 
100.0

Total costs and expenses
55,099

 
51,575

 
3,524

 
6.8

(Loss) income from operations
(797
)
 
5,672

 
(6,469
)
 
(114.1
)
Interest income
9

 
24

 
(15
)
 
(62.5
)
Interest expense
(21,893
)
 
(19,785
)
 
(2,108
)
 
(10.7
)
Net (Loss) income
$
(22,681
)
 
$
(14,089
)
 
$
(8,592
)
 
(61.0
)%
Casino Revenues. The Company did not directly earn any casino revenues, for the period from March 1, 2011 to June 30, 2011 and until June 15, 2012. However, the Company has included revenues earned by LVHR during such period in its consolidated financial statements in accordance with applicable guidance relating to variable interest entities.
Casino revenues for the three months ended June 30, 2012 decreased $0.4 million to $10.5 million when compared to the same period in 2011. The decrease in casino revenues was primarily due to a $0.8 million or 11.3% decrease in table games, offset in part by a $0.4 million or 12.1% increase in slot revenue.
Slot. Slot machine revenues for the three months ended June 30, 2012 increased $0.4 million to $4.1 million when compared to the same period in 2011. Slot machine handle decreased $4.8 million from $79.1 million to $74.2 million. Slot machine hold percentage increased to 5.5% from 4.6%. The number of slot machines in operation decreased to 584 from 623, a decrease of 40 machines. The net result of these changes in handle, hold percentage and average number of slot machines in operation was an increase in net win per slot machine per day to $79.96 from $64.28, an increase of $12.68 or 19.7%. Management believes the decrease in slot handle was due to increased competition coupled with ongoing construction projects on the casino floor.

25



Table Games. Table games revenues for the three months ended June 30, 2012 decreased $0.8 million to $6.3 million when compared to the same period in 2011. Table games drop decreased $12.5 million or 20.6% to $48.2 million. Table games hold percentage increased 1.4% to 13.1% from 11.7%. The average number of table games in operations decreased to 79 from 95 tables. The net result of these changes in drop and hold percentage was an increase in win per table game per day to $881 from $820, or 7.5%. We have historically reported table games hold percentage using the gross method, while casinos on the Las Vegas Strip report hold percentage using the net method (which reduces the table game drop by marker repayments made in the gaming pit area). For the purpose of comparison to properties on the Las Vegas Strip, our net hold percentage for the three months ended June 30, 2012 was 15.1% compared to 14.9% for the three months ended June 30, 2011. Management believes the decrease in table games drop was due to increased competition coupled with ongoing construction projects on the casino floor.
Lodging Revenues. Lodging revenues for the three months ended June 30, 2012 increased $1.1 million to $17.0 million when compared to the same period in 2011. The increase in lodging revenues was primarily due to a 6.1% increase in total occupied rooms to 119,809 from 112,949 and an increase in the average daily rate of $0.25 to $139.66 or 0.2%.
Food and Beverage Revenues. Food and beverage revenues for the three months ended June 30, 2012 decreased $1.7 million to $24.6 million when compared to the same period in 2011. The $1.7 million decrease in food and beverage revenues was primarily due to a change in night club operations and the timing of banquet events. The decrease was partially offset by an increase in revenues due to the increase in hotel occupancy.
Retail Revenues. Retail revenues for the three months ended June 30, 2012 decreased $0.2 million to $0.6 million when compared to the same period in 2011. The decrease in retail revenues was primarily the result of ongoing construction within the property and a store relocation.
Other Revenues. Other revenues for the three months ended June 30, 2012 decreased $1.1 million to $6.7 million when compared to the same period in 2011 due to the entertainment calendar and fewer performances in The Joint in 2012.
Promotional Allowances. Promotional allowances furnished to customers on a complimentary basis for the three months ended June 30, 2012 decreased $0.7 million or 14.7% to $5.2 million when compared to the same period in 2011. As a percentage of gross revenues, promotional allowances increased to 8.7% compared to 7.3% for the three months ended June 30, 2011.
Casino Expenses. Casino expenses for the three months ended June 30, 2012 increased $0.2 million or 1.8% to $9.0 million when compared to the same period in 2011. The increase was primarily due to an increase in the estimated cost incurred by the Company to provide complementaries to casino customers and were partially offset by a decrease in returned markers.
Lodging Expenses. Lodging expenses for the three months ended June 30, 2012 increased $0.4 million or 8.3% to $5.5 million when compared to the same period in 2011. Lodging expenses in relation to lodging revenues increased to 32.2% for the three months ended June 30, 2012. The increase in lodging expenses was primarily due to operating cost associated with the increase in occupied rooms.
Food and Beverage Expenses. Food and beverage expenses for the three months ended June 30, 2012 increased $0.5 million to $13.6 million or 4.2% when compared to the same period in 2011. Food and beverage expenses in relation to food and beverage revenues increased to 55.3% from 49.8% in the prior period. The increase in food and beverage expense was primarily the result of increased costs associated with nightclub operations.
Retail Expenses. Retail expenses for the three months ended June 30, 2012 decreased $0.1 million or 18.1% to $0.4 million when compared to the same period in 2011. Retail expenses in relation to retail revenues increased to 66.6% from 61.4%, primarily due to an increase in the cost of retail merchandise.
Other Expenses. Other expenses for the three months ended June 30, 2012 decreased $1.1 million or 23.0% to $3.8 million compared to the same period in 2011. This decrease was primarily due to a decrease in artist fees and related production costs.
Marketing. Marketing expenses for the three months ended June 30, 2012 increased $1.1 million or 73.9% to $2.6 million when compared to the same period in 2011. Marketing in relation to gross revenues increased to 4.3% from 2.4%. The increase in marketing expenses was primarily due to an increase in advertising and personnel in an effort to drive brand awareness in our competitive market.

26



General and Administrative. General and administrative expenses for the three months ended June 30, 2012 decreased $0.2 million or 2.6% to $9.1 million when compared to the same period in 2011. General and administrative expenses in relation to gross revenues increased to 15.3% from 15.2%. The decrease in general and administrative was primarily due to a decrease in contract services.
Depreciation and Amortization. Depreciation and amortization expense for the three months ended June 30, 2012 increased $0.2 million or 2.0% to $7.6 million when compared to the same period in 2011. The increase in depreciation and amortization expense is a result of the addition of assets during 2012.
Interest Expense. Interest expense for the three months ended June 30, 2012 increased $2.1 million or 10.7% to $21.9 million when compared to the same period in 2011. The increase in interest expense is primarily the result of amounts paid in kind during the period. In addition, a total of $6.8 million of interest expense is a result of debt discount amortization under the Amended Facility and Second Mortgage during the three months ended June 30, 2012 compared to $5.0 million during the three months ended June 30, 2011.

Results of Operations of the Company for the Six Months Ended June 30, 2012 Compared to the Combined Results of Operations of the Company and HRH Holdings for the Six Months Ended June 30, 2011
The following table presents results of operations data as reported in the Company’s and HRH Holdings’ consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires that we separately present the Company and HRH Holdings results. Management believes reviewing the operating results for the six months ended June 30, 2012 by combining the results of the HRH Holdings and Company periods is more useful in identifying any trends in, or reaching conclusions regarding, our overall operating performance. Accordingly, the table below presents the non-GAAP combined results for the six months ended June 30, 2011, which is also the period we compare when computing percentage change from prior year, as we believe this presentation provides the most meaningful basis for comparison of our results and it is how management reviews operating performance. The combined operating results may not reflect the actual results we would have achieved had the Assignment closed prior to March 1, 2011 and may not be predictive of future results of operations.

27



 
Company
 
 
 
Company
 
HRH
Holdings
 
$ Change
 
% Change
($ in thousands)
Six Months Ended June 30, 2012
 
Six Months Ended June 30, 2011 (Combined)
 
Period from Mar 1, 2011 to
June 30, 2011
 
Period from
Jan 1, 2011
to
Feb 28, 2011
 
2012 vs
2011
Statement of Operations Data: