10-K 1 bref-20121231x10k.htm 10-K BREF-2012.12.31-10K



 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, 15th Floor New York, NY
 
10281
(Address of principal executive office)
 
(Zip Code)
(212) 417-7265
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Units
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Securities Exchange Act of 1934.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
There is no aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012. There currently is no established public trading market for our Class A Units. 
 




INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I
Explanatory Note
On March 1, 2011, Hard Rock Hotel Holdings, LLC, Vegas HR Private Limited, Brookfield Real Estate Financial Partners LLC, NRFC WA Holdings, LLC, Morgans Hotel Group Co. and certain affiliates of DLJ Merchant Banking Partners, as well as other interested parties entered into the Agreement to Transfer in Lieu of Foreclosure and Settlement Agreement, pursuant to which the membership interests of HRHH JV Junior Mezz, LLC and HRHH Gaming Junior Mezz, LLC, which collectively indirectly owned the assets comprising the Hard Rock Hotel & Casino Las Vegas, were transferred and assigned to BREF HR, LLC (the “Company”). The transactions contemplated by such agreement are referred to as the “Assignment”, as described more fully herein.
On October 24, 2011, the Company voluntarily filed a registration statement on Form 10 (as amended, the “Registration Statement”) in order to register its Class A Units pursuant to Section 12(g) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company was not required to file this Registration Statement pursuant to the Exchange Act, but did so in order to comply with certain gaming regulatory requirements of the Nevada Gaming Control Act relating to the Company’s ownership of the Hard Rock Hotel & Casino Las Vegas. Pursuant to Section 12(g)(1) of the Exchange Act, the Registration Statement became effective on December 22, 2011, such date being 60 days after filing of the Registration Statement with the Securities and Exchange Commission (the “SEC”). Subsequent to filing the Registration Statement, the Company worked to resolve SEC comment letters on the Registration Statement. There are currently no unresolved SEC staff comments.
As a result of the complex nature of the transaction and the detailed analysis required to complete the valuation of the assets and liabilities comprising the Hard Rock Hotel & Casino Las Vegas, to reflect the fair value of the tangible and intangible assets and liabilities at the time of the Assignment, as well as the related material weaknesses in our internal controls for the accounting and disclosure for business acquisitions, the Company did not timely complete the process of preparing its consolidated financial statements for the years ended December 31, 2012 and 2011. In addition, the Company has included information in this Annual Report on 10-K subsequent to December 31, 2012 where applicable in order to provide a more complete understanding of the Company’s business.
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.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains certain “forward-looking statements”, 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 included in this Annual Report on Form 10-K 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. The factors that could cause actual results to differ materially from expected results include changes in economic, business, competitive market and regulatory conditions. 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 state of the U.S. economy, particularly as it relates to the levels of spending in the Las Vegas hotel, resort and casino industry;
•
reliance on a single property to attract local residents in the Las Vegas market;
•
significant reliance on Northern and Southern California markets;
•
changes in the competitive environment in our industry, particularly in the Las Vegas market;
•
volatility of and access to capital markets and increases in interest rates;
•
damage to our brand through the use of the “Hard Rock” brand name by entities other than us;
•
hostilities, including future terrorist attacks, or fear of hostilities that affect travel;

1


•
the seasonal nature of the hotel, resort and casino industry;
•
costs associated with compliance with extensive regulatory requirements;
•
increases in uninsured and underinsured losses;
•
the impact of any material litigation; and
•
the other risks discussed in this Annual Report on Form 10-K in the section entitled “Risk Factors.”
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. We undertake no obligation, and are under no duty, to update any of the forward-looking statements to conform these statements to reflect events or circumstances after the date hereof.

Item 1
Business
THE COMPANY
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”).
The Company was formed by certain affiliates of Brookfield Financial, LLC (“Brookfield Financial”) as to its Series B 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 own 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, and the resulting settlement agreement, as described below. Brookfield Financial is managed by Brookfield Real Estate Financial Partners LLC (together with its affiliates, “Brookfield”).
Prior Acquisition of HRH Holdings by Morgans and DLJMBP and entering into the Facility
HRH Holdings was formed by DLJ Merchant Banking Partners (“DLJMBP”) and Morgans Hotel Group Co. (“Morgans” and together with an affiliated entity, the “Morgans Parties”) to acquire Hard Rock Hotel, Inc. (“HRHI”). HRHI was the subsidiary of HRH Holdings that owned the Hard Rock Hotel & Casino Las Vegas during the period from February 2, 2007 to February 28, 2011 prior to the Assignment.
On May 11, 2006, Morgans, MHG HR Acquisition Corp., HRHI and Peter A. Morton entered into an Agreement and Plan of Merger pursuant to which Morgans would acquire the Hard Rock Hotel & Casino Las Vegas, which acquisition closed on February 2, 2007. Additionally, Morgans Group LLC, an affiliate of Morgans, entered into purchase and sale agreements with affiliates of Mr. Morton to acquire an approximately 23–acre parcel of land adjacent to the Hard Rock Hotel & Casino Las Vegas. In connection with such acquisition, certain of HRH Holdings’ subsidiaries entered into a real estate financing facility (the “Facility”), which was secured by HRH Holdings’ assets. As of March 1, 2011, immediately prior to the Assignment, there was approximately $1.3 billion in outstanding debt, all of which was variable rate debt.
In January 2011, HRH Holdings received a notice of acceleration from its lenders under the Facility, and also from NRFC WA Holdings, LLC (“NRFC”), the second mezzanine lender pursuant to the First Amended and Restated Second Mezzanine Loan Agreement, dated as of December 24, 2009 (the “Second Mezzanine Loan Agreement”), declaring all unpaid principal and accrued interest immediately due and payable. On February 1, 2011 NRFC commenced an action in the Supreme Court of New York, and on February 2, 2011 Brookfield Financial and Vegas HR Private Limited (the “Mortgage Lender”) commenced an action in the Supreme Court of New York. Following filing of such actions, subsidiaries of HRH Holdings, the Mortgage Lender, Brookfield Financial, NRFC, Morgans, certain affiliates of DLJMBP, and certain other related parties entered into a Standstill and Forbearance Agreement, dated as of February 6, 2011. Pursuant to such agreement, among other things, until February 28, 2011, the Mortgage Lender, Brookfield

2


Financial and NRFC agreed not to take any action or assert any right or remedy arising with respect to any of the applicable loan documents or the collateral pledged under such loan documents. In addition, pursuant to the Standstill and Forbearance Agreement, NRFC agreed to withdraw its foreclosure notice, and the parties agreed to jointly request a stay of all action on the pending motions that had been filed by various parties to enjoin such foreclosure proceedings.
The Assignment
On March 1, 2011, HRH Holdings, the Mortgage Lender, Brookfield Financial, NRFC, the Morgans Parties and certain affiliates of 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 description of the Settlement Agreement set forth below discusses all of the terms of the Settlement Agreement that are material to the Company’s ongoing business and operations.
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 to the direct and indirect owners of the Hard Rock Hotel & Casino Las Vegas; and
•
termination of the Morgans management agreement.
Corporate Structure
Until June 15, 2012, gaming operations at the Hard Rock Hotel & Casino Las Vegas were operated by LVHR Casino, Inc. (“LVHR”), a third party operator, pursuant to the Casino Lease dated as of March 1, 2011 between LVHR, as Tenant, and HRHH Hotel/Casino, as Landlord (the “Casino Lease”). 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.
On or about June 15, 2012, we also restructured and converted LVHR from a Nevada corporation to a Nevada limited liability company known as LVHR Casino, LLC. Upon consummation of the conversion of LVHR into LVHR Casino, LLC: (i) LVHR Casino, LLC became a mortgage borrower under the Amended Facility (as defined below) and the Second Mortgage (as defined below); (ii) LVHR Casino, LLC continued to own all of the assets that are used at the Hard Rock Hotel & Casino Las Vegas gaming operations (which assets LVHR acquired on March 2, 2011); and (iii) the revolving line of credit HRHH Gaming was obligated to make available to LVHR was terminated. See Item 1, Business – Nevada Gaming Regulation and Licensing and Item 1, Business – Agreements Governing the Operation of the Hard Rock Hotel & Casino Las Vegas for additional information.
Amendment to the Facility and Entering into the Second Mortgage
As part of the Assignment, the Company assumed the obligations under the Facility and entered into an amendment thereof (as amended, the “Amended Facility”) among Vegas HR Private Limited and the Company, pursuant to the Amended Facility, the land, building and improvements, equipment, fixtures and all personal properties relating to the Hard Rock Hotel & Casino Las Vegas were pledged as security and collateral. As of March 1, 2011, approximately $862.8 million of principal amount was outstanding under the Amended Facility. Also on March 1, 2011, the Company entered into a second mortgage loan agreement with Brookfield Financial, as lender, (the “Second Mortgage”) 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. See Note 8, Debt, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.


3


OVERVIEW OF HARD ROCK HOTEL & CASINO LAS VEGAS
We operate the Hard Rock Hotel & Casino Las Vegas, which we believe is a premier destination entertainment resort with a rock music theme. 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. Outlets in the Hard Rock Hotel & Casino Las Vegas continued to receive accolades in 2012 including the following:
•
The Joint Las Vegas concert venue being named “#1 Hottest Club in America” by Billboard Magazine and “Best of Las Vegas – Best Concert Venue” by the Las Vegas Review-Journal;
•
Center Bar named one of the best 50 bars in the city by Vegas Seven; and
•
Summer Camp Fridays pool party receiving “Best Party to Beat the Heat” by Las Vegas Weekly.
The property continues to retain a strong following among its target customer base, now ranging generally between the ages of 25 and 54, who seek a vibrant, energetic entertainment and gaming experience with the services and amenities associated with a boutique luxury resort hotel.
The Hard Rock Hotel & Casino Las Vegas currently consists of:
•
three hotel towers with approximately 1,500 stylishly furnished hotel rooms averaging approximately 500 square feet in size (including 450 suites, nine penthouses, 10 pool villas and eight multi-level spa villas);
•
an approximately 60,000 square-foot uniquely styled casino with approximately 600 slot machines, 75 table games and five poker tables where rock music is played continuously to provide the casino with an energetic and entertaining, club-like atmosphere;
•
an approximately 1,100 square-foot “Hard Rock” retail store, a jewelry store, two clothing stores, a lingerie store, an art photography shop and a tattoo parlor;
•
an approximately 15,400 square-foot special events facility, offered in the former Vanity night club space, with a capacity of 1,400 persons;
•
an approximately 8,500 square-foot nightclub, called “Body English”, with a capacity of 800 persons;
•
an approximately 80,000 square feet of banquet and meeting facilities;
•
a live music concert hall, called “The Joint,” with a capacity of 4,100 persons; and a live entertainment venue, called “Vinyl”, with a capacity of 650 persons;
•
a pool and beach area encompassing nearly five acres, including Paradise Beach pools, Nirvana, Breathe Pool and Lounge;
•
six full service restaurants at multiple price points - Nobu Las Vegas, 35 Steaks + Martinis, Pink Taco, Mr. Lucky’s, Culinary Dropout (which replaced LTO in August 2012), and Fú (which replaced Johnny Smalls in November 2012), and three coffee/juice bars - Fuel Cafe, a Fuel Express (which replaced Starbucks in May 2012), and Juice Bar;
•
seven cocktail lounges, including two circular lounges, called “Luxe Bar” and “Center Bar” that are surrounded by the gaming floor, a sports bar called “The Ainsworth” (which replaced “Blitzed” in August 2012), Lounge Bar (formerly known as Poker Lounge Bar) and the Midway Bar; and
•
an approximately 21,000 square-foot spa, salon and fitness center, called “Reliquary,” and an approximately 8,000 square-foot fitness center.


4


BUSINESS STRATEGY
We aim to position uniquely the Hard Rock Hotel & Casino Las Vegas within the Las Vegas hotel, resort and casino industry. Our primary business and marketing strategies center on creating a vibrant and energetic entertainment and gaming environment that appeals to a customer base of youthful and “hip” individuals. We leverage certain of our strengths, including a theme consistent with the “Hard Rock” brand and our vibrant atmosphere and personalized service, to differentiate the Hard Rock Hotel & Casino Las Vegas from the substantially larger “mega resorts” approximately one mile west on the Las Vegas Strip. Key elements of our business strategy include the following.
Target Clientele
We believe that we have successfully differentiated the Hard Rock Hotel & Casino Las Vegas in the Las Vegas market by targeting a predominantly youthful and “hip” customer base that consists primarily of rock music fans and youthful individuals, as well as actors, musicians and other members of the entertainment industry. To attract this target audience, we promote the Hard Rock Hotel & Casino Las Vegas as “the place to be” in Las Vegas. The “Hard Rock Hotel” and “Hard Rock Casino” trademarks, along with an extensive network of contacts in the music and entertainment industry, have helped to attract a number of famous actors, musicians and celebrities to the Hard Rock Hotel & Casino Las Vegas. We believe this customer base is comprised of demographic groups that remain underserved by competing facilities despite recent competition from other properties in Las Vegas.
Entertainment
We believe that The Joint’s concerts and the Hard Rock Hotel & Casino Las Vegas’ special events generate significant worldwide publicity and reinforce the Hard Rock Hotel & Casino Las Vegas’ marquee image and unique position in the Las Vegas marketplace and provide an added source of visitors for the hotel, casino, retail and food and beverage operations.
Gaming Mix Targeted To Customer Base
Our target gaming customer has a higher propensity to play table games and we strive to create a fun and enthusiastic gaming environment through the use of music themed gaming chips and playing surfaces and by promoting interaction between table game dealers and customers. The casino also features the latest slot machines, some of which reflect the Hard Rock Hotel & Casino Las Vegas’ rock music theme, as well as more traditional machines.
Significant Revenues from Non-Gaming Operations
We derive significant revenues from non-gaming operations. Our hotel, beach clubs, retail, food and beverage, and other operations allow us to market the Hard Rock Hotel & Casino Las Vegas as a full-service destination. We believe our diversified revenue base allows us to be less dependent on the casino as a source of revenues and profits and may result in less volatility in our earnings.
Emphasis on Customer Service
We believe that one of the cornerstones of our business strategy is providing our customers with a high level of personal service. Our employees are trained to interact with guests and continually strive to instill in our employees a dedication to superior service designed to exceed guests’ expectations. We regularly gather and respond to feedback regarding customer satisfaction.

LOCATION
The Hard Rock Hotel & Casino Las Vegas occupies what we believe is one of the most highly visible and easily accessible sites in Las Vegas. The Hard Rock Hotel & Casino Las Vegas is located on approximately 30 acres of land near the intersection of Paradise Road and Harmon Avenue, approximately two miles from McCarran International Airport and approximately one mile east of the Las Vegas Strip, the main tourist area in Las Vegas. We believe the Hard Rock Hotel & Casino Las Vegas represents an attractive alternative for tourists, business travelers and locals who wish to maintain close and easy access to the Las Vegas Strip, while avoiding its crowds and congestion. We believe the Hard Rock Hotel & Casino Las Vegas’ location is particularly attractive due to its proximity to:
•
a high concentration of popular Las Vegas restaurants and nightclubs;

5


•
the Las Vegas Convention Center;
•
the Thomas & Mack Center at the University of Nevada Las Vegas, Las Vegas’ primary sporting and special events arena; and
•
a number of non-gaming hotels, which have an aggregate of more than 1,000 guest rooms.

THE HARD ROCK HOTEL & CASINO LAS VEGAS
The Hard Rock Hotel & Casino Las Vegas currently consists of the hotel, casino, retail stores, nightclubs, banquet and meeting facilities, The Joint, a pool and beach area, six full service restaurants, three coffee/juice bars, seven cocktail lounges, Reliquary Spa, and fitness center.
The Hotel
The Hard Rock Hotel & Casino Las Vegas’ three towers consist of approximately 1,500 hotel rooms, 450 or approximately 30% of which are suites, including nine penthouses, 10 pool villas and eight multi-level spa villas. The hotel rooms average approximately 500 square feet, which is larger than the average Las Vegas hotel room. Consistent with the Hard Rock Hotel & Casino Las Vegas’ distinctive decor, the hotel rooms are stylishly furnished, with oversized bathrooms, pedestal beds with leather headboards and photos of famous rock musicians. The rooms also include special amenities such as large 40-plus inch flat screen televisions with high speed internet access, stereo systems and, in certain cases, French doors that open to the outdoors, and personal iPod compatible sound systems. A full-service concierge and 24-hour room service are available to all guests of the hotel.
The following table illustrates certain historical information relating to our hotel for the years ended December 31, 2012, 2011, and 2010:
 
For the year ended December 31,
 
2012
 
2011
 
2010
Average number of hotel rooms
1,505

 
1,505

 
1,492

Average occupancy rate (1)
83
%
 
80
%
 
78
%
Average daily rate (1)
$
133

 
$
132

 
$
128

Revenues per available room (2)
$
112

 
$
105

 
$
100

(1)
The Company calculates (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 average number of hotel rooms. The Company accounts for lodging revenue on a daily basis. As is customary for companies in the gaming industry, average occupancy rate and average daily rate include rooms provided on a complimentary 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 reduces average daily rate for a given period to the extent the provision of such rooms reduces the amount of revenue the Company would otherwise receive.
(2)
The Company calculates revenues per available room by dividing total lodging revenue by the average number of hotel rooms.
The Casino
The casino is designed with an innovative layout around two lounges, Luxe Bar and Center Bar, which allows the casino’s patrons to see and be seen from nearly every area of the casino. Rock music is played continuously to provide an energetic and entertaining club-like atmosphere. In addition, the casino promotes a friendly, intimate atmosphere by encouraging its employees to smile at and interact with casino players. Dealers, for example, are encouraged to “High Five” winning players.

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The casino houses approximately 75 table games including Blackjack tables, Craps tables, Roulette tables, Midi-Baccarat table, Mini-Baccarat table, Three Card Poker tables, Let-it-Ride table, Big 6 table, Ultimate Texas Holdem table, Switch Blackjack tables, Pai Gow Poker tables, 7-14-21 tables, 600 slot machines, Poker tables, and a state of the art up to 5,836 square-foot race and sports book. The race and sports book is operated by Cantor G&W (Nevada), L.P. under a lease arrangement. Some of the casino’s gaming tables are themed to coincide with current concerts and the casino also offers patrons other attractions, such as cutting edge slot technology, proprietary slot graphics and distinctive slot signage.
Retail
The Hard Rock Hotel & Casino Las Vegas’ retail operations consist of a 1,100 square-foot “Hard Rock Store” retail shop, which replaced a 3,600 square-foot retail shop on April 9, 2012, an approximately 700 square-foot sundries shop, and an approximately 700 square-foot “Love Jones” lingerie store. Visitors may purchase clothing and other accessories, including merchandise displaying the popular “Hard Rock Hotel”, from the retail and sundries shops. Our retail operations offer a convenient and inexpensive outlet to market and advertise the “Hard Rock Hotel” trademark and attract other Las Vegas visitors to the Hard Rock Hotel & Casino Las Vegas. Our in-house design team is responsible for maintaining the consistency of the Hard Rock Hotel & Casino Las Vegas’ image while creating new merchandise to expand and diversify the retail selection. Additionally, the following independently operated stores are located at the property: “Rocks the Jewelers” jewelry store, “Hart & Huntington Tattoo” tattoo shop, “John Varvatos” and “Affliction” clothing stores, and “Rock Paper Photo” art photography shop.
Vanity
Vanity is a 15,400 square-foot venue featuring two marble bars, a sunken dance floor, 50 intimate VIP booths, an outdoor terrace, including five cabanas, and a women’s lounge. Since January 1, 2013, Vanity has limited its operations exclusively to special events.
Body English
On December 28, 2012, the Company re-opened the 8,500 square-foot nightclub Body English. Body English had been closed since January 1, 2010. The venue, which is located underground, features intimate lighting, elegant leather booths, multiple bars and dance floors, and sound equipment featuring popular and innovative DJs from all around the country.
Banquet and Meeting Facilities
Our 80,000 square-foot conference center and entertainment areas have capacity to accommodate groups of up to 3,000 persons. Depending upon the size of the event, customers can choose to host their functions, conventions and banquets indoors at The Joint or Ballrooms, or outdoors around the pools.
The Joint
The Joint is a live music venue with a capacity of 4,100 that draws audiences from both visitors to Las Vegas as well as local residents.
Vinyl
Vinyl, which opened August 2012, is a live music entertainment venue, with a capacity of 650, featuring up-and-coming and local rock, jazz, blues and comedy acts.

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The Pools
The nearly five acre pool area is comprised of various diverse pool areas including Paradise Beach, Nirvana Pool and the Breathe Pool and Lounge (collectively the “Pools”). The Pools feature, among other things, a 300-foot long, sand bottomed pool with a water slide, a water fall, a running stream and underwater rock music. The Pools also feature beaches with white sand imported from Monterey, California, rock outcroppings and whirlpools.
Paradise Beach features a swim-up blackjack, a bar and grill, 42 Tahitian-style private cabanas, and a removable dance floor that extends from one of the beach areas. The private cabanas include water misters, a refrigerator, a safe, a television and (for an additional fee) an on-site massage service. We also host Rehab at Paradise Beach, which is a beach pool party hosting an assortment of entertainers including celebrity hosts and world-renowned DJs.
Nirvana Pool features an expansive pool area, sandy beach, 17 daybeds and 24 luxury cabanas, a unique island pool, eight luxurious Spa Villas, swim-up blackjack and a lounge area.
Breathe Pool and Lounge serves as a poolside escape for guests seeking more privacy.
Food and Beverage
The Hard Rock Hotel & Casino Las Vegas offers its patrons a selection of high-quality food and beverages at multiple price points. The Hard Rock Hotel & Casino Las Vegas’ food and beverage operations include six full service restaurants (35 Steaks + Martinis, Pink Taco, Mr. Lucky’s, Nobu Las Vegas, Culinary Dropout and Fú), three coffee/juice bars (Fuel Café, Fuel Express and Juice Bar), seven bars (Luxe Bar, Lounge Bar, Midway Bar, The Ainsworth, Race and Sports Bar, High Limit Bar and Center Bar), four bars in The Joint, two bars at the Paradise Beach, a bar at Nirvana Pool, two bars at Breathe Pool and Lounge and catering service for corporate events, conventions, banquets and parties. 35 Steaks + Martinis, with seating capacity of approximately 167 persons, is a unique marriage of traditional steakhouse cuisine and libations, complemented with clean, classic yet cutting edge design. Pink Taco, with seating capacity of approximately 214 persons, is a stylish, authentic Mexican eatery with seasonal outside dining. Mr. Lucky’s, a 24-hour restaurant with seating capacity for approximately 200 persons, specializes in high-quality, moderately priced American cuisine. Nobu Las Vegas, with seating capacity of approximately 300 persons, is an upscale Japanese restaurant created by renowned chef Nobu Matsuhisa and serves traditional Japanese cuisine infused with South American and Western flavors. Nobu Las Vegas is owned and operated independently of the Hard Rock Hotel & Casino Las Vegas. Culinary Dropout, with a seating capacity of approximately 320 persons, is a gastropub serving unique and simple pub fare. Fú, which means “luck” in Chinese, is an Asian restaurant, with a seating capacity of approximately 200 persons, offering a modern twist on Chinese cuisine. Fú features a unique fusion of Asian fare such as noodle dishes and the popular dim sum, and offers authentic Chinese cuisine with additional regional inspirations including Korean, Vietnamese and Thai. Fuel Express offers a diverse array of coffees, teas, pastries and freshly-blended smoothies and juices. Juice Bar offers an array of coffees, teas, freshly-blended smoothies, fresh squeezed juices, and a full service bar.
Reliquary
Our spa, salon and fitness center features a 1,500 square-foot Roman bath, 21 treatment rooms, including couples facilities and hydro therapy rooms.
Fitness Center
Our health club facility features amenities such as treadmills, stair-masters, stationary bicycles, CYBEX machines and a variety of free weights.

MARKETING
Our marketing efforts are targeted at both the visitor market (tourists and business travelers) as well as local patrons. Our marketing department uses both traditional and innovative marketing strategies to promote the “Hard Rock Hotel” and “Hard Rock Casino” trademarks. The Hard Rock Hotel & Casino Las Vegas is marketed aggressively through domestic and international public relations activities, direct mail, online, print, outdoor and broadcast advertising, and through special arrangements with various members of the entertainment industry.

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Casino marketing also includes the Backstage Pass loyalty program, formerly known as Rockstar Player’s Club, for casino guests. The Backstage Pass loyalty program was implemented in March 2012 and utilizes a casino player tracking card. The program, which is available to all casino visitors, tracks each patron’s record, and based upon the level of gaming and nongaming activity, members may become eligible for discounted or complimentary services, invitations to special events and merchandise at the Hard Rock Hotel & Casino Las Vegas.

TRADEMARKS
“Hard Rock Hotel” and “Hard Rock Casino” are registered trademarks owned by Hard Rock Cafe International (USA), Inc. (“HRCI”), which we understand is controlled by the Seminole Tribe of Florida. We are successors in interest to a license agreement obtained from HRCI’s predecessors (the “Hard Rock License”) that, in substance, grants us the exclusive, royalty-free and perpetual right to use and exploit these trademarks in connection with hotel/casino operations or casino operations in certain geographic areas, defined in the Hard Rock License as the “Morton Territories.” The Morton Territories include the State of Illinois and all states and possessions of the United States that are located west of the Mississippi River, including the entire state of Louisiana, but excluding Texas, except for the Greater Houston Area. The Morton Territories also include the nations of Australia, Brazil, Israel and Venezuela, and the Greater Vancouver Area, British Columbia, Canada. In addition, under the Hard Rock License we have the right to sell licensed merchandise bearing the geographic location where it is sold in stores located in or contiguous to a Hard Rock Hotel/Casino or a Hard Rock Casino. The Hard Rock License further provides that we may sublicense and franchise our rights under the Hard Rock License.
On November 11, 2008, HRH Holdings executed a license agreement with Cherokee Nation Enterprises, LLC (“CNE”), an entity indirectly wholly owned by the Cherokee Nation. Pursuant to the license agreement, we have agreed to sublicense certain intellectual property, including the “Hard Rock Hotel” and “Hard Rock Casino” trademarks, to CNE in connection with a hotel and a casino that CNE opened in Catoosa, Oklahoma. Under the terms of the license agreement, CNE has 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 February 17, 2009, HRH Holdings received notice from the National Indian Gaming Commission (the “NIGC”) that the CNE license agreement (i) is not a management agreement requiring the NIGC Chairman’s approval under the Indian Gaming Regulatory Act, and (ii) does not provide us or any other party with an impermissible proprietary interest in Indian gaming. The CNE license agreement became effective upon receipt of this NIGC notice.
On October 13, 2009, HRH Holdings executed a license agreement with the Pueblo of Isleta (“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. Similar to the CNE license agreement, the effectiveness of the Isleta license agreement was conditioned upon receipt of confirmation from the NIGC that the Isleta license agreement did not require its approval. On December 9, 2009, HRH Holdings received notice from the NIGC that the Isleta license agreement did not constitute a management contract and did not need to be approved by the NIGC Chairman. The Isleta license agreement became effective upon receipt of this NIGC notice. 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. 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 represented amounts 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. See further discussion at Note 9, Intangible Assets, to our consolidated financial statements, included in Item 15 of this Annual Report on Form 10-K.
On November 11, 2013, the Company executed a definitive license agreement with SCE Partners, LLC (“SCE”), pursuant to which certain intellectual property, including the “Hard Rock Hotel” and “Hard Rock Casino” trademarks, was licensed to SCE in connection with an approximately 30,000 square-foot land based casino and adjacent hotel in downtown Sioux City, Iowa. SCE together with the Missouri River Historical Development, Inc. (MRHD) was awarded the land-based casino license on April 18, 2013 through the request for proposal process conducted by Iowa Racing and Gaming Commission (“IRGC”).  Hard Rock Hotel & Casino Sioux City is expected to have an approximately 30,000 square foot casino with 700 machines and 18 table games along with an approximately 50 room hotel.  Hard Rock Hotel and Casino Sioux City was expected to open sometime mid-late 2014, however this schedule may be delayed as a result of a court ordered stay in favor of Penn National Gaming (“Penn”) against the

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IRGC that prevents the IRGC from issuing the casino license to SCE until such time that the IRGC resolves the litigation with Penn.  Trial in the IRGC/Penn litigation matter is currently scheduled for December 2014.
On June 28, 2013, the Company executed a license agreement with Great Canadian Casinos, Inc., an affiliate of Great Canadian Gaming Corporation, for the Hard Rock Casino Vancouver, to rebrand and renovate the Boulevard Casino, situated in the city of Coquitlam, British Columbia in Metro Vancouver.  With an expected grand opening of December 20, 2013, the Hard Rock Casino Vancouver is anticipated to present table games including blackjack, roulette, pai gow, poker, baccarat, craps, VIP high-limit salons and more than 950 state-of-the-art interactive slot machines spread across an 80,000 square foot casino floor.  The Hard Rock Casino Vancouver will also be home to a 1,000 seat theater featuring music, comedy, performance arts, and multi-cultural programming. The British Columbia Lottery Corporation and the British Columbia Gaming Policy Enforcement Branch (“GPEB”) must review, approve and complete background checks on HRHH IP, LLC as a condition of effectiveness to the license agreement.  GPEB determined that HRHH was an “associate” of Great Canadian Gaming Casinos, Inc. within the meaning of the Gaming Control Act of British Columbia and as such must submit to background investigations. Accordingly HRHH IP, LLC submitted the required information GPEB and was approved as an associate company on November 26, 2013.
We also own a number of trademarks we consider important to our business. We intend to take all steps necessary to protect our trademark rights against unauthorized use throughout the world. Risks related to the protection and exploitation of intellectual property rights are set forth in Item 1A, Risk Factors.

LAS VEGAS MARKET
During 2012, according to the Las Vegas Convention and Visitors Authority (the “LVCVA”), gaming revenues in Clark County increased 1.9% to approximately $9.4 billion from $9.2 billion in 2011. In addition, according to the LVCVA:
•
the number of visitors traveling to Las Vegas was approximately 39.8 million in 2012, representing an increase of 0.8 million or 2.0%; and
•
the number of hotel and motel rooms in Las Vegas was 150,481 in 2012, representing an increase of 320 rooms or 0.2%.
The following table sets forth certain statistical information for the Las Vegas market for the years 2008 through 2012, as reported by the LVCVA.
 
For the year ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Visitor Volume (in thousands)
39,727

 
38,929

 
37,335

 
36,351

 
37,482

Clark County Gaming Revenues (in millions)
$
9,400

 
$
9,223

 
$
8,908

 
$
8,838

 
$
9,797

Hotel/Motel Rooms
150,481

 
150,161

 
148,935

 
148,941

 
140,529

Airport Passenger Traffic (in thousands)
41,668

 
41,480

 
39,757

 
40,469

 
44,075

Convention Attendance (in thousands)
4,944

 
4,865

 
4,473

 
4,492

 
5,900


COMPETITION
The hotel and casino industry in general, and the markets in which we compete in particular, are highly competitive. The Hard Rock Hotel & Casino Las Vegas, located less than one mile east of the Las Vegas Strip, competes with other high-quality Las Vegas resorts and other Las Vegas hotel casinos, including those located on the Las Vegas Strip, on the basis of overall atmosphere, range of amenities, price, location, entertainment offered, theme and size. Many of these Las Vegas resorts seek to attract customers to their properties by not only offering casino gaming, but also by providing hotel accommodations, food and beverage outlets, retail stores and other related amenities. To the extent that the Hard Rock Hotel & Casino Las Vegas seeks to enhance its revenue base by offering its own various resort amenities, it competes with the service offerings provided by these Las Vegas resorts. Some of these hotel casinos are operated by companies that have more than one operating facility and may have greater name recognition

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and financial and marketing resources than we do and market to the same target demographic group. There can be no assurance the Las Vegas market will show future growth or that hotel casinos will continue to be popular. In the event that we lose market share due to competition or there is a continued decline or sustained leveling off of the growth or popularity of gaming facilities generally, our financial condition and results of operations would be adversely affected.
We face additional competition from HRCI, which pursuant to the Hard Rock License may open competing “Hard Rock” hotels in jurisdictions other than Nevada and may open “Hard Rock” hotel/casinos in jurisdictions other than the Morton Territories. For example, HRCI uses or licenses the use of the “Hard Rock” name in connection with its Seminole Hard Rock Hotels in Hollywood and Tampa, Florida and a number of other Hard Rock Hotels or hotel/casinos. There can be no assurance that our business and results of operations will not be adversely affected by the management or the enforcement of the “Hard Rock” brand name by parties outside of our control.
The Hard Rock Hotel & Casino Las Vegas also competes with hotel casinos in the Mesquite, Laughlin, Reno and Lake Tahoe areas of Nevada, and in a growing number of other jurisdictions in which gaming is now permitted. The Hard Rock Hotel & Casino Las Vegas also competes with state-sponsored lotteries, on- and off-track wagering, card parlors, riverboat and Native American gaming ventures, and other forms of legalized gaming in the United States, as well as with gaming on cruise ships, Internet gaming ventures and international gaming operations. In 1998, California enacted The Tribal Government Gaming and Economic Self-Sufficiency Act (the “Tribal Act”). The Tribal Act provides a mechanism for federally recognized Native American tribes to conduct certain types of gaming on their land. The California electorate approved Proposition 1A on March 7, 2000. Proposition 1A gives all California Indian tribes the right to operate a limited number of certain kinds of gaming machines and other forms of casino wagering on California Indian reservations. In February 2008, additional propositions were approved in California permitting certain Indian tribes to increase the number of slot machines on their properties. Continued proliferation of gaming activities permitted by Proposition 1A may have a materially adverse impact on the Nevada gaming markets and our financial position and results of operations. We are currently unable, however, to assess the magnitude of the specific impact on us. See Item 1A, Risk Factors—Risks Related to Our Business.

SEASONALITY
The Las Vegas hotel, resort and casino industry is seasonal in nature. This seasonality can tend to cause quarterly fluctuations in revenues at our hotel casino. For instance, our revenues generally peak in the second quarter. Our quarterly earnings may also be adversely affected by other related factors outside our control, including weather conditions and poor economic conditions. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these quarterly fluctuations in our revenues.

 EMPLOYEES
As of December 31, 2012, we had 1,441 full-time employees and 671 on-call and seasonal employees who are employed on an as-needed basis. Except as set out below, none of our employees are represented by unions.
On November 6, 2009 the National Labor Relations Board conducted an election to determine whether approximately 35 valet employees wished to be represented by the Teamsters Union Local 995. The National Labor Relations Board (“NLRB”) ruled that a majority of the voters chose the union and the Company petitioned for review to the District of Columbia Circuit Court of Appeals (“DC Circuit”). The DC Circuit denied the Company’s petition for review on March 23, 2012 and ordered enforcement of the ruling of the NLRB. The Company commenced bargaining with the Teamsters in May 2012 and such bargaining has continued through the date of this filing. We have been approached by other unions on various occasions and cannot be certain that one or more unions will not approach our employees. We consider our relations with our employees to be good and have never experienced an organized work stoppage, strike or labor dispute.


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NEVADA GAMING REGULATION AND LICENSING
Introduction
The gaming industry is highly regulated. Gaming registrations, licenses and approvals, once obtained, can be suspended or revoked for a variety of reasons. We cannot be certain that our registrations, findings of suitability, licenses and approvals will not be suspended, conditioned, limited or revoked. The ownership and operation of casino gaming facilities in the State of Nevada are subject to the Nevada Gaming Control Act and the regulations made under such Act, as well as to various local ordinances (collectively, the “Nevada Gaming Control Act”). The Company is subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board and the Clark County Liquor and Gaming Licensing Board (the “Clark County Board”), which we collectively refer to in this document as the “Nevada Gaming Authorities.” The Nevada Gaming Authorities have broad authority with respect to licensing and registration of our business entities and individuals investing in or otherwise involved with us. The Nevada Gaming Authorities may, among other things, revoke the gaming license of any corporate entity or the registration of a registered corporation or any entity registered as a holding company of a corporate licensee for violations of gaming regulations. In addition, the Nevada Gaming Authorities may, under certain conditions, revoke the license or finding of suitability of any officer, director, controlling person, stockholder, note-holder or key employee of a licensed or registered entity.
Policy Concerns of Gaming Laws
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy. Such public policy concerns include, among other things:
•
preventing unsavory or unsuitable persons from being directly or indirectly involved with gaming at any time or in any capacity;
•
establishing and maintaining responsible accounting practices and procedures;
•
maintaining effective controls over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding assets and revenue, providing reliable recordkeeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;
•
preventing cheating and fraudulent practices; and
•
providing a source of state and local revenue through taxation and licensing fees.
Changes in applicable laws, regulations and procedures could have significant negative effects on the Company’s gaming operations and our financial condition and results of operations.
Owner and Operator Licensing Requirements
The Company, as the indirect owner of the Hard Rock Hotel & Casino Las Vegas, has been approved by the Nevada Gaming Authorities as a publicly-traded company (referred to as a registered company for purposes of the Nevada Gaming Control Act). Nevada Gaming Authorities’ approval also grants LVHR a license to conduct non-restricted gaming operations at the Hard Rock Hotel & Casino Las Vegas, and grants LVHR an approval to share in gaming revenue with the third party operator of the race and sports book operation at the Hard Rock Hotel & Casino Las Vegas. The gaming license requires the periodic payment of fees and taxes and is not transferable.
Company Registration Requirements
In connection with our obtaining approvals and licenses to acquire and own the equity securities of LVHR, our Class A members were found suitable by, the Nevada Commission as the beneficial owners and controlling beneficial owners of the Company.
As a consequence of its registration with the Nevada Commission, the Company is required to submit detailed financial and operating reports to the Nevada Commission and provide any other information that the Nevada Commission may require. Substantially all of our material loans, leases, sales of securities and similar financing transactions must be reported to, or approved by, the Nevada Commission.

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 Individual Licensing Requirements
No person may become a stockholder or member of, or receive any percentage of the profits of, a registered intermediary company or company licensee without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Nevada Gaming Authorities may investigate any individual who has a material relationship to or material involvement with us to determine whether the individual is suitable or should be licensed as a business associate of a gaming licensee. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or an applicant for a finding of suitability must pay or must cause to be paid all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada Gaming Authorities have the jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer or director or a member or manager of BREF HR Management, LLC (“BREF HR Management”), as applicable, or a key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada.
Consequences of Violating Gaming Laws
If the Nevada Commission decides that we have violated the Nevada Gaming Control Act or any of its regulations, it could limit, condition, suspend or revoke our applications, or registrations and gaming license. In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Nevada Gaming Control Act at the discretion of the Nevada Commission. Further, the Nevada Commission could appoint a supervisor to operate the gaming-related activities at the Hard Rock Hotel & Casino Las Vegas and, under specified circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of the premises) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming licenses obtained and the appointment of a supervisor could, and revocation of any such gaming license would, have a significant negative effect on our gaming operations.
Requirements for Security Holders
Regardless of the number of shares or other interests held, any beneficial holder of the voting or non-voting securities of a registered company may be required to file an application, be investigated and have that person’s suitability as a beneficial holder of voting or non-voting securities evaluated if the Nevada Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the beneficial holder of such securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information including a list of its beneficial owners. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation.
The Nevada Gaming Control Act requires any person who acquires more than 5% of the voting securities of a registered company to report the acquisition to the Nevada Commission. The Nevada Gaming Control Act requires beneficial owners of more than 10% of a registered company’s voting securities to apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing. However, an “institutional investor,” as defined in the Nevada Gaming Control Act, which beneficially owns more than 10% but not more than 11% of a registered company’s voting securities as a result of a stock repurchase by the registered company may not be required to file such an application. Further, an institutional investor which acquires more than 10%, but not more than 25%, of the registered company’s voting securities may apply to the Nevada Commission for a waiver of a finding of suitability if the institutional investor holds the voting securities for investment purposes only. An institutional investor that has obtained a waiver may own more than 25% but not more than 29% of the voting securities of a registered company and maintain the waiver where the additional ownership results from a stock repurchase by the registered company. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered company, a change in the corporate charter, bylaws, management, policies or operations of the registered company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the registered

13


company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
•
voting on all matters voted on by stockholders or interest holders;
•
making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and
•
other activities that the Nevada Commission may determine to be consistent with such investment intent.
Consequences of Being Found Unsuitable
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or by the Chairman of the Nevada Board, or who refuses or fails to pay the investigative costs incurred by the Nevada Gaming Authorities in connection with the investigation of its application, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of any security of a registered company beyond the period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest or to have any other relationship with, we:
•
pay that person any dividend or interest upon any voting securities;
•
allow that person to exercise, directly or indirectly, any voting right held by that person relating to the Company;
•
pay remuneration in any form to that person for services rendered or otherwise; or
•
fail to pursue all lawful efforts to require the unsuitable person to relinquish such person’s voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.
Approval of Public Offerings
A registered company may not make a public offering of its securities without the prior approval of the Nevada Commission if it intends to use the proceeds from the offering to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or for similar transactions. Any approval that we might receive in the future relating to future offerings will not constitute a finding, recommendation or approval by any of the Nevada Board or the Nevada Commission as to the accuracy or adequacy of the offering memorandum or the investment merits of the securities. Any representation to the contrary is unlawful.
The regulations of the Nevada Commission also provide that any entity which is not an “affiliated company,” as that term is defined in the Nevada Gaming Control Act, or which is not otherwise subject to the provisions of the Nevada Gaming Control Act, such as the Company, that plans to make a public offering of securities intending to use such securities, or the proceeds from the sale thereof, for the construction or operation of gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes, may apply to the Nevada Commission for prior approval of such offering. The Nevada Commission may find an applicant unsuitable based solely on the fact that it did not submit such an application, unless upon a written request for a ruling, referred to as a Ruling Request, the Chairman of the Nevada Board has ruled that it is not necessary to submit an application.
Approval of Changes in Control
We must obtain prior approval of the Nevada Commission with respect to a change in control through merger, consolidation, stock or asset acquisitions, management or consulting agreements or any act or conduct by a person by which the person obtains control of us. Entities seeking to acquire control of a registered company must satisfy the Nevada Board and Nevada Commission with respect to a variety of stringent standards before assuming control of the registered company. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.

14


Approval of Defensive Tactics
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licenses or affecting registered companies that are affiliated with the operations permitted by Nevada gaming licenses may be harmful to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to reduce the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:
•
assure the financial stability of corporate gaming operators and their affiliates;
•
preserve the beneficial aspects of conducting business in the corporate form; and
•
promote a neutral environment for the orderly governance of corporate affairs.
Approvals may be required from the Nevada Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Gaming Control Act also requires prior approval of a plan of recapitalization proposed by a registered company’s board of directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control.
Fees and Taxes
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the licensed subsidiaries respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable monthly, quarterly or annually and are based upon:
•
a percentage of the gross revenue received;
•
the number of gaming devices operated; or
•
the number of table games operated.
A live entertainment tax is also paid by gaming operations where live entertainment is furnished in connection with admission fees, the selling or serving of food or refreshments or the selling of merchandise.
Foreign Gaming Investigations
From time to time, the Company and its affiliates may become involved in gaming activities outside of Nevada through sublicensing and franchising our rights under the Hard Rock License, as described more fully in Item 1, Business – Trademarks. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with those persons (collectively, “licensees”), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of the licensee’s or registrant’s participation in such foreign gaming. The revolving fund is subject to increase or decrease at the discretion of the Nevada Commission. Licensees and registrants are required to comply with the reporting requirements imposed by the Nevada Gaming Control Act. A licensee or registrant is also subject to disciplinary action by the Nevada Commission if it:
•
knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation;
•
fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations;
•
engages in any activity or enters into any association that is unsuitable because it poses an unreasonable threat to the control of gaming in Nevada, reflects or tends to reflect, discredit or disrepute upon the State of Nevada or gaming in Nevada, or is contrary to the gaming policies of Nevada;
•
engages in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees; or

15


•
employs, contracts with or associates with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of unsuitability.
License for Conduct of Gaming and Sale of Alcoholic Beverages
The conduct of gaming activities and the service and sale of alcoholic beverages at the Hard Rock Hotel & Casino Las Vegas are subject to licensing, control and regulation by the Clark County Board. In addition to approving the licensee, the Clark County Board has the authority to approve all persons owning or controlling the stock of any business entity controlling a gaming or liquor license. All licenses are revocable and are not transferable. The Clark County Board has full power to limit, condition, suspend or revoke any license. Any disciplinary action could, and revocation of a license would, have a substantial negative impact upon the operations of the Hard Rock Hotel & Casino Las Vegas.

AGREEMENTS GOVERNING THE OPERATION OF THE HARD ROCK HOTEL & CASINO LAS VEGAS
Until June 15, 2012, gaming operations at the Hard Rock Hotel & Casino Las Vegas were operated by LVHR pursuant to the Casino Lease. Pursuant to the Management Agreement (Gaming Operations) dated as of March 1, 2011 between LVHR and WG-Harmon (the “Management Agreement”), WG-Harmon managed the gaming operations at the Hard Rock Hotel & Casino Las Vegas for LVHR.
In April, 2011, the Company applied to the Nevada Gaming Authorities for all required approvals and licenses to assume the gaming operations at the Hard Rock Hotel & Casino Las Vegas. On December 22, 2011, we received all approvals, licenses and findings of suitability from the Nevada Commission necessary 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. Prior to obtaining the necessary gaming approvals, we were prohibited from receiving any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, we entered into a definitive lease agreement with a third party casino operator, LVHR, for all gaming and related activities at the casino and management agreements related to the Hard Rock Hotel & Casino Las Vegas with WG-Harmon, an affiliate of LVHR. 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 Lease
Lease of Casino Premises. On March 1, 2011, the Company entered into the Casino Lease, pursuant to which the Company leased to LVHR (i) a portion of the Hard Rock Hotel & Casino Las Vegas in which gaming operations presently are being conducted, comprising approximately 60,000 square feet of floor space, as well as other gaming areas located in and around the Hard Rock Hotel & Casino Las Vegas’ swimming pool including, without limitation, areas containing the front of the house casino-related slot machines, table games and sports book, all areas in the Hard Rock Hotel & Casino Las Vegas used for gaming purposes and (ii) the associated offices, back of the house count rooms, casino cages and all surveillance areas within the Hard Rock Hotel & Casino Las Vegas (collectively, the “Casino Premises”).
Term. The term of the Casino Lease began on March 1, 2011 and was amended pursuant to the Amended Casino Lease, which commenced on June 15, 2012 with an initial term of 10 years. On such date, LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas. The Amended Casino Lease contains terms that are reflective of a lease agreement between related parties, including a provision for the payment of nominal rent.
Rent. During the term of the Casino Lease, LVHR agreed to pay rent to the Company in the amount of $1.25 million per month, paid in arrears on the last day of each month under the Amended Resort Management Agreement.
Sale of Gaming Assets and Working Capital Line. 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 assets of the Company used in the Hard Rock Hotel & Casino Las Vegas’ gaming operations. 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. On December 22, 2011, we received all approvals, licenses and findings of suitability from the Nevada Commission necessary 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. LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock

16


Hotel & Casino Las Vegas on June 15, 2012. On or about the same date LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas, and we restructured and converted LVHR from a Nevada corporation to a Nevada limited liability company known as LVHR Casino, LLC. Upon consummation of the 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 are used at the Hard Rock Hotel & Casino Las Vegas gaming operations (which assets LVHR acquired on March 2, 2011), and (iii) the revolving line of credit was terminated.
Casino Management Agreement
Engagement of WG-Harmon. On March 1, 2011 LVHR entered into a Management Agreement (the “Management Agreement”) pursuant to which WG-Harmon agreed to manage the gaming operations at the Hard Rock Hotel & Casino Las Vegas for LVHR. During the term of the Management Agreement, WG-Harmon (as agent and key employee for LVHR) had the exclusive authority to conduct and direct all business and affairs in connection with the gaming operations at the Hard Rock Hotel & Casino Las Vegas (except with respect to the matters that are expressly the responsibility of LVHR). All duties performed by WG-Harmon were funded from operating capital provided by LVHR, and none of the duties were to be performed at WG-Harmon’s expense.
Term. The term of the 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. The Management Agreement was terminated without payment of any termination fee.
Management Fee. 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, including any fees, charges or expenses incurred in connection with obtaining any regulatory approvals, as well as any taxes that may be imposed on WG-Harmon or LVHR in fulfillment of their duties. The Company was not obligated to reimburse LVHR for any payment of fees to WG-Harmon in connection with the Management Agreement.
Resort Management Agreement
Management of Premises. On March 1, 2011 the Company and WG-Harmon entered in a Resort Management Agreement, which agreement was subsequently amended on June 15, 2012 (as amended, the “Amended Resort Management Agreement”), pursuant to which WG-Harmon manages 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, subject to certain ownership approval rights and consents, has complete discretion and control in all matters relating to the management and operation of the Hard Rock Hotel & Casino Las Vegas. WG-Harmon is required to act at all times with the standard of skill, care and expertise that would be customary and reasonably expected from a prudent manager of comparable resorts, and WG-Harmon shall cause the Hard Rock Hotel & Casino Las Vegas to be operated, serviced, maintained, furnished, equipped and refurbished in a manner reasonably expected to enhance the financial performance of the Hard Rock Hotel & Casino Las Vegas’ operations.
Term. The term of the Amended Resort Management Agreement began on June 15, 2012 and will continue until March 31, 2016. The Amended Resort Management Agreement may be terminated by the Owner (as defined below), at any time during the term, by providing WG-Harmon with thirty days prior notice and payment of a termination fee as described in the Amended and Restated Resort Management Agreement.
Management Fees. During the term of the Amended Resort Management Agreement, the Company is required to pay WG-Harmon a base fee in the amount of $160,000 per month, payable monthly. Under the Amended Resort Management Agreement, the base fee may be reduced to $150,000 per month if WG-Harmon is no longer providing certain construction services to the Owner. In April 2013, the $10,000 reduction to the base fee was put in place. In addition to such base fee, the Owner is required to 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.
Termination. Upon the occurrence of any Event of Default (as defined below), the non-defaulting party has a right to terminate the Amended Resort Management Agreement upon written notice given to the other parties. Additionally, the Owner has the right

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to terminate the Amended Resort Management Agreement following (i) any failed drug test by the senior officers of Warner Gaming or WG-Harmon and the failure of Warner Gaming or WG-Harmon to promptly take remedial action in connection with such senior officer, (ii) any failed drug test of William W. Warner and (iii) if Warner Gaming or WG-Harmon is no longer controlled by William W. Warner (including in connection with his death or disability) or (iv) if William W. Warner is convicted of or pleads nolo contendere to any felony.
For the purposes of the Amended Resort Management Agreement:
“Event of Default” includes:
•
the failure of any party to make any required monetary payment, which failure is not cured within 10 days after written notice;
•
the failure of a party to perform any of its other material obligations under the Amended Resort Management Agreement, which failure is not cured upon 30 days’ notice from the non-defaulting party;
•
the filing of a voluntary petition in bankruptcy or insolvency or a petition for liquidation or reorganization under any bankruptcy law by a party, or a party consenting to, acquiescing in, or failing to timely controvert, an involuntary petition in bankruptcy, insolvency or an involuntary petition for liquidation or reorganization filed against it; or
•
the filing against a party of a petition seeking adjudication of a party as insolvent or seeking liquidation or reorganization or appointment of a receiver, trustee or liquidator of all or a substantial part of a party’s assets, if such petition is not dismissed within 90 days.
Additionally, an “Event of Default” of WG-Harmon under the Amended Resort Management Agreement includes:
•
a default or material breach by WG-Harmon under the Amended Resort Management Agreement, or the Amended and Restated IP License Agreement between Owner and WG-Harmon dated as of June 15, 2012 (the “IP License”), in each case where a remedy of termination is exercised;
•
WG-Harmon fails to maintain any necessary regulatory approvals;
•
WG-Harmon fails to comply with the IP License or the intellectual property provisions of the Amended Resort Management Agreement; and
•
WG-Harmon misapplies or misappropriates any funds from the Hard Rock Hotel & Casino Las Vegas operations, the Owner or any reserve funds, which is not cured within two days’ written notice.
Change of Control Provisions. WG-Harmon may not assign the Amended Resort Management Agreement without the Owner’s prior written approval, which may be withheld in the Owner’s sole discretion. The Owner may not assign the Amended Resort Management Agreement, other than to a mortgagee or to an affiliate succeeding in ownership of the Hard Rock Hotel & Casino Las Vegas, without WG-Harmon’s prior written approval, which may be withheld in WG-Harmon’s sole discretion.
Liquor Management Agreement
Liquor Management Agreement. 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. Pursuant to the Liquor Management Agreement, WG-Harmon was required to perform its duties in a good faith and highly professional manner and act with the standard of skill, care and expertise that would be customary and reasonably expected from a prudent manager of comparable liquor operations. The Liquor Management Agreement terminated on June 15, 2012.


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Item  1A
Risk Factors
Set forth below are risks and uncertainties that we believe are material to the Company. You should consider carefully the following risks and uncertainties, together with the other information contained in and incorporated by reference in this Annual Report on Form 10-K, and the descriptions included in our consolidated financial statements and accompanying notes.
Risks Related to Our Business
The Company’s consolidated results of operations, financial position and cash flows can be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this Annual Report on Form 10-K. All of these risks should be carefully considered.
The downturn in the U.S. economy, the volatility and disruption of the capital and credit markets and adverse changes in the global economy could negatively impact our financial performance.
The Las Vegas market is beginning to show some signs of a recovery with visitor volumes reaching 39.8 million in 2012 and 38.9 million in 2011, an increase of approximately 2.0% over 2011. Gaming revenues in Clark County are also recovering reaching approximately $9.4 billion in 2012 and $9.2 billion in 2011, an increase of approximately 1.9% over 2011 (Both visitor volume and gaming statistics noted above are released by the Las Vegas Convention and Visitors Authority). However, due to a number of factors affecting consumers, including the lingering effects of a slowdown in global economies, contracting credit markets and reduced consumer spending, the outlook for the gaming, travel, and entertainment industries remains uncertain. These factors have and could continue to result in fewer customers visiting, or customers spending less, in Las Vegas, as compared to prior periods. Gaming and other leisure activities represent discretionary expenditures and participation in such activities tends to decline during economic downturns, during which consumers generally have less disposable income. As a result, customer demand for the luxury amenities and leisure activities that we offer may continue to be depressed. Furthermore, during periods of economic contraction, revenues may decrease while some of our costs remain fixed or even increase, resulting in decreased earnings.
We operate a single property located in Las Vegas and rely on the Las Vegas and Southern California markets. Changes adversely impacting these markets could have a material effect on our business, financial condition and results of operations.
Our business has a limited base of operations and substantially all of our revenues are currently generated by the Hard Rock Hotel & Casino Las Vegas. Accordingly, we are subject to greater risks than a more diversified hotel and casino resort operator and the profitability of our operations is linked to local economic conditions in Las Vegas and, indirectly, Southern California (including Palm Springs), where many of our hotel casino’s targeted customers reside. The combination of a decline in the local economies of Las Vegas or Southern California, reliance on a single location and the significant investment associated with it may cause our operating results to fluctuate significantly and may adversely affect us and materially affect our total profitability.
We face intense local and increasingly national competition which could impact our operations and adversely affect our business and results of operations.
We operate in the highly-competitive Las Vegas hotel, resort and casino industry. Our hotel casino, located less than one mile east of the Las Vegas Strip, competes with other high-quality Las Vegas resorts and other Las Vegas hotel casinos, including those located on the Las Vegas Strip. Many of these Las Vegas resorts seek to attract customers to their properties by not only offering casino gaming, but also by providing hotel accommodations, food and beverage outlets, retail stores and other related amenities. To the extent that we seek to enhance our revenue base by offering our own various resort amenities, we compete with the service offerings provided by these Las Vegas resorts.
Many of the competing properties have themes and attractions which draw a significant number of visitors and directly compete with our operations. Some of these properties are operated by subsidiaries or divisions of large public companies that may have greater name recognition and financial and marketing resources than we do and market to the same target demographic group as we do. Various competitors are expanding and renovating their existing facilities. We believe that competition in the Las Vegas hotel, resort and casino industry is based on certain property-specific factors, including overall atmosphere, range of amenities, price, location, entertainment attractions, theme and size. Any market perception that we do not excel with respect to such property-

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specific factors could adversely affect our ability to compete effectively. If we are unable to compete effectively, we could lose market share, which could adversely affect our business and results of operations.
We also compete with hotel casinos in the Mesquite, Laughlin, Reno and Lake Tahoe areas of Nevada, Atlantic City, New Jersey and gambling destinations elsewhere in the United States as well as with state-sponsored lotteries, on- and off-track wagering, card parlors, riverboat gaming ventures, and other forms of legalized gaming in the United States, gaming on cruise ships, Internet gaming ventures and international gaming operations. Continued proliferation of gaming activities could significantly and adversely affect our business and results of operations.
Another area of competition is legalized gaming from casinos located on Native American tribal lands. Native American tribes in California are permitted to operate casinos with video slot machines, black jack and house-banked card games. The State of California has entered into compacts with numerous tribes in California, and the federal government has approved numerous compacts in California and casino-style gaming is now legal on those tribal lands. While the competitive impact on our operations in Las Vegas from the continued growth of Native American gaming establishments in California remains uncertain, the proliferation of gaming in California and other areas located near the Hard Rock Hotel & Casino Las Vegas could have an adverse effect on our results of operations.
In addition, many states have legalized, and others may legalize, casino gaming in specific areas, including metropolitan areas from which we traditionally attract customers, such as New York, Philadelphia, Los Angeles, San Francisco and Boston. The current global trend toward liberalization of gaming restrictions and resulting proliferation of gaming venues could result in a decrease in the number of visitors to the Hard Rock Hotel & Casino Las Vegas by attracting customers close to home and away from Las Vegas, which could adversely affect our business and results of operations.
The Las Vegas hotel, resort and casino industry is capital intensive; financing our renovations and future capital improvements could reduce our cash flow and adversely affect our financial performance.
Our hotel casino has an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We will also need to make capital expenditures to comply with applicable laws and regulations.
Renovations and other capital improvements of hotel casinos require significant capital expenditures. In addition, renovations and capital improvements of hotel casinos usually generate little or no cash flow until the project’s completion. We may not be able to fund such projects solely from cash provided from our operating activities. Consequently, we will rely upon the availability of debt or equity capital and reserve funds to fund renovations and capital improvements and our ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. No assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.
Renovations and other capital improvements may give rise to the following additional risks, among others:
•
construction cost overruns and delays;
•
temporary closures of all or a portion of the hotel casino to customers;
•
disruption in service and room availability causing reduced demand, occupancy and rates;
•
disruption in gaming operations; and
•
possible environmental issues.
As a result, renovations and any other future capital improvement projects may increase our expenses and reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.
The Hard Rock Hotel & Casino Las Vegas has incurred substantial losses, and due to the current economic environment, may continue to incur losses in the future.

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We reported pre-tax net losses of $115.6 million and $66.1 million for the year ended December 31, 2012 and for the period from March 1, 2011 to December 31, 2011, respectively. HRH Holdings reported pre-tax net losses $129.1 million for the year ended December 31, 2010. There can be no assurance that we will attain profitability in the near term or at all.
We have paid in kind interest that may be required to be paid in cash on March 1, 2014 and our inability to pay in full could harm our business and operations.
The Amended Facility requires that the Company repay in full all “paid in kind” interest outstanding on March 1, 2014, in the event the Company has not made sufficient payments to the lender to provide a specified debt yield, on the terms specified in the Amended Facility. 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 December 31, 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 that the current interest due, the interest shortfall (“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.
The outstanding PIK interest as of September 30, 2013, December 31, 2012 and 2011 was $31.7 million, $18.5 million and $8.2 million, respectively. Using our best estimates based on reasonable and supportable assumptions and projections, we believe the Company will not meet the specified debt yield threshold. 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. If we are unable to restructure our indebtedness, find alternative financing sources on acceptable terms, or obtain approval from the lender to use our cash reserves to satisfy a portion this potential obligation, we risk losing some or all of our property to foreclosure. If prevailing interest rates or other factors at the time of any restructuring of our indebtedness or at the time we obtain borrowings from other sources results in higher interest rates, our interest expense would increase, which would harm our business and results of operations.
We incurred a pre-tax net loss for the year ended December 31, 2012 and for the period from March 1, 2011 to December 31, 2011. HRH Holdings reported pre-tax net losses for the year ended December 31, 2010.
As a result of these factors, there is substantial doubt about our ability to continue as a going concern. The accompanying financial statements, included in Item 15, 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 financial statements do not include any adjustments that might result from these uncertainties, including the possibility that we may lose some or all of our property to foreclosure.
Our business model involves high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in our revenues.
The costs associated with owning and operating hotel casinos are significant. Some of these costs (such as property taxes and insurance costs) are fixed, meaning that such costs may not be altered in a timely manner in response to changes in demand for services. Failure to adjust our expenses may adversely affect our business and results of operations. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by tax authorities. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.
Insurance premiums for the Las Vegas hotel, resort and casino industry have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of our hotel casino. If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.
In the future, our property may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and adversely affect our financial performance. If our revenues decline and we are unable to reduce our expenses in a timely manner, our business and results of operations could be adversely affected.

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We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.
We have substantial debt service obligations, and as of December 31, 2012 the book value of our total debt was approximately $647.9 million, with a face amount of $911.1 million. In addition, as of December 31, 2012, the Company has outstanding $38.0 million in supplemental interest under the Amended Facility. 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.
Our substantial debt may negatively affect our business and operations in several ways, including:
•
requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes;
•
making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions;
•
limiting our flexibility in planning for, or reacting to, changes in the business and the industry in which we operate;
•
placing us at a competitive disadvantage compared to our competitors that have less debt;
•
limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and
•
requiring us to dispose of portions of the hotel casino property, if needed, in order to make required payments of interest and principal.
A majority of our debt is secured by first deeds of trust on our property. If we were to default on our secured debt, the loss of property securing the debt would adversely impact our ability to satisfy other obligations. Using our property as collateral increases our risk of property losses because defaults on indebtedness secured by property may result in foreclosure and ultimately our loss of the property that secures any loans for which we are in default. For tax purposes, a foreclosure on our property would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. Our working capital and liquidity reserves may not be adequate to cover all of our cash needs and we may have to obtain additional debt financing. Sufficient financing may not be available or, if available, may not be available on terms acceptable to us. Additional borrowings for working capital purposes will increase our interest expense and, therefore, may harm our business and results of operations.
The Company's ability to continue as a going concern depends upon its ability to restructure its indebtedness, obtain alternative financing on acceptable terms, selling off a portion of existing collateral, 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.
We anticipate that we will refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could harm our business and operations.
Since we anticipate that our internally generated cash will be inadequate to repay our indebtedness prior to maturity, we expect that we will be required to repay debt from time to time through refinancing of our indebtedness and/or offerings of equity or debt. The amount of our existing indebtedness may harm our ability to repay our debt through refinancing. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to sell portions of our property on disadvantageous terms, which might result in losses to us. We have placed mortgages on our hotel casino property to secure our indebtedness. To the extent we cannot meet our debt service obligations, we risk losing some or all of our property to foreclosures. If prevailing interest rates or other factors at the time of any refinancing result in higher interest rates on any refinancing, our interest expense would increase, which would harm our business and results of operations.

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Our success depends on the value of our name, image and brand. If demand for, or the value of, our name, image or brand diminishes, our business and results of operations would be adversely affected.
Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by maintaining our name, image and brand. We may not be successful in this regard and we may not be able to anticipate and react to changing consumer tastes and demands in a timely manner.
Furthermore, a high media profile is an integral part of our ability to shape and stimulate demand for our hotel casino with our target customers. A key aspect of our marketing strategy is to focus on attracting media coverage. If we fail to attract that media coverage, we may need to substantially increase our advertising and marketing costs, which would adversely affect our business and results of operations. In addition, other types of marketing tools, such as traditional advertising and marketing, may not be successful in attracting our target customers.
Our business would be adversely affected if our public image or reputation were to be diminished. Our brand names and trademarks are integral to our marketing efforts. If the value of our name, image or brands were diminished, our business and operations would be adversely affected.
Use of the “Hard Rock” brand name by entities other than us could damage the brand and our operations and adversely affect our business and results of operations.
Our operations benefit from the global name recognition and reputation generated by the Hard Rock Cafes, Hotels and Hotel-Casinos that are operated, licensed or franchised directly or indirectly by the Seminole Tribe of Florida. However, the Seminole Tribe of Florida is under no obligation to continue to own, operate or franchise such businesses, and it may decide to sell, change the focus of, or manage such businesses in a manner that would adversely affect our business and results of operations.
Our business and results of operations may be adversely affected by the management or the enforcement of the “Hard Rock” brand name by parties outside of our control. HRCI owns the “Hard Rock Cafe,” “Hard Rock Hotel” and “Hard Rock Casino” trademarks. HRCI, or its licensee, can use and exploit these and related marks in various ways that we cannot control, including by the establishment and operation of Hard Rock Hotels and Hard Rock Cafes within or without the Morton Territories (except that HRCI may not establish or operate Hard Rock Hotels within Nevada), and by the establishment and operation of Hard Rock hotel-casinos outside of the Morton Territories. HRCI also may exploit the Hard Rock marks in other ways that we cannot control, including by establishing Hard Rock Cafes or marketing “Hard Rock” merchandise anywhere in the world. For example, HRCI has licensed the use of the “Hard Rock” name in connection with its Seminole Hard Rock Hotels in Hollywood and Tampa, Florida.
We may have disputes with third parties for infringement or misappropriation of their proprietary rights, which could have a negative impact on our business.
Other parties may assert trademark, copyright or other intellectual property rights that have a negative impact on our business. We cannot be certain that others will not seek to block our use of certain marks or seek monetary damages or other remedies for the prior use of our brand names or other intellectual property or the sale of our products or services as a violation of their trademark, copyright or other proprietary rights. Defending any claims, even claims without merit, could divert our employees' attention, be time-consuming, result in costly settlements, litigation or restrictions on our business and damage our reputation.
Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration or our registration may be vulnerable to attack on various grounds. In addition, there may be prior registrations or use of trademarks in the United States or foreign countries for similar or competing marks or other proprietary rights of which we are not aware. In all such countries it may be possible for any third-party owner of a national trademark registration or other proprietary right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in such countries. In the event a claim against us is successful and we could not obtain a license to the relevant intellectual property or redesign or rename our products or operations to avoid infringement, our business, financial condition or results of operations could be harmed.

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Litigation and legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.
We are a party, from time to time, to various litigation claims and legal proceedings, government and regulatory inquiries and/or proceedings, including, but not limited to, intellectual property, premises liability and breach of contract claims. Material legal proceedings are described more fully in Note 9, Commitments and Contingencies, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.
Litigation is inherently unpredictable, and defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability.
Specifically with respect to the Hard Rock IP Action, although we believe we have good defenses (including the related arbitration), it is possible that the dispute could be resolved in a manner that has a material effect on our operations, cash flow and financial condition (for example, due to an adverse judgment, costs of defense or distraction to employees). Remedies being sought by HRCI in the Hard Rock IP Action include termination of the Hard Rock License and with it our valuable right to utilize the Hard Rock trademarks, a significant damages award, an injunction that could prevent us from continuing with certain trademark usages on signage, merchandise, facilities and elsewhere, and an injunction that could effectively require the investment of significant funds to improve the quality of our sublicensed facilities. The Hard Rock IP Action may also expose us to negative publicity, which could adversely affect our business reputation and customer preference for our brand.
The threat of terrorism could adversely affect the number of customer visits to our hotel casino.
The threat of terrorism has caused, and may in the future cause, a significant decrease in customer visits to Las Vegas due to disruptions in commercial and leisure travel patterns and concerns about travel safety. The attacks of September 11, 2001 had a dramatic adverse impact on commercial and leisure travel. We cannot predict the extent to which disruptions in air or other forms of travel as a result of any further terrorist act, outbreak of hostilities or escalation of war would adversely affect our financial condition, results of operations or cash flows. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.
We depend on BREF HR Management for the future success of our business and the loss of one or more of their key personnel could have an adverse effect on our ability to manage our business and operate successfully and competitively, or could be negatively perceived in the capital markets.
The Company is managed by BREF HR Management in compliance with the gaming laws of the State of Nevada. BREF HR Management’s ability to manage the Company’s business and operate successfully and competitively is dependent, in part, upon the efforts and continued service of BREF HR Management’s managers. The departure of key personnel of BREF HR Management could have an adverse effect on our business and our ability to operate successfully and competitively, and it could be difficult for BREF HR Management to find replacements for these key personnel, as competition for such personnel is intense.
The members and managers of BREF HR Management are required to file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny any application for any cause that they deem reasonable. In the event the Nevada Gaming Authorities were to find any person unsuitable for licensing or unsuitable to continue having a relationship with us, we would be required to sever all relationships with such person. We cannot be certain that any such person will be able to obtain or maintain any requisite license or finding of suitability by the Nevada Gaming Authorities.
Seasonality and other related factors such as weather can be expected to cause quarterly fluctuations in revenue at our hotel casino.
The Las Vegas hotel, resort and casino industry is seasonal in nature. This seasonality can tend to cause quarterly fluctuations in revenues at our hotel casino. For instance, our revenues generally peak in the second quarter. Our quarterly earnings may also be adversely affected by other related factors outside our control, including weather conditions and poor economic conditions. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these quarterly fluctuations in our revenues.

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The gaming industry is heavily regulated and failure to comply with extensive regulatory requirements may result in an adverse effect on our business.
The gaming operations and the ownership of our securities are subject to extensive regulation by the Nevada Gaming Authorities and the Hard Rock Hotel & Casino Las Vegas must maintain its licenses and pay gaming taxes to continue operations. The Nevada Gaming Authorities have broad authority with respect to licensing and registration of entities and individuals involved with the Company. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws could result in, among other things, disciplinary action. If we fail to comply with regulatory requirements, this may result in an adverse effect on our business.
Our property is subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our property may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our property. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Furthermore, compliance costs associated with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.
The Nevada Gaming Authorities may, upon any future violation of a gaming law or regulation and after disciplinary complaint and public hearing, among other things, revoke, suspend, limit or condition the gaming license of any corporate entity, which we will refer to as a corporate licensee, or the registration of a registered company or any entity registered as a holding company of a corporate licensee or fine each person or entity or both up to $250,000 for each violation. In addition, the Nevada Gaming Authorities may revoke the license or finding of suitability of any officer, director, controlling person, shareholder, noteholder or key employee of a licensed or registered entity. If our gaming licenses and/or registrations were ever revoked for any reason, the Nevada Gaming Authorities could require the closing of our gaming operations, which would result in a material effect on our business. See Item 1, Business – Nevada Gaming Regulation and Licensing for more information.
Uninsured and underinsured losses could adversely affect our financial condition and results of operations.
We are responsible for insuring our hotel casino and for obtaining the appropriate insurance coverage to reasonably protect our interests in the ordinary course of business. Additionally, the instruments governing our current indebtedness typically specify that comprehensive insurance be maintained on our hotel casino, including liability, fire and extended coverage. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to our hotel casino or to persons at our hotel casino. Claims, whether or not they have merit, could harm the reputation of our hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.
In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in our hotel casino, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel casino. In the event of a significant loss, our deductible may be high and we may be required to pay for all such repairs and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate our hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

25


It has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our property at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (for example, earthquake, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on our hotel casino for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require us to maintain adequate insurance on our hotel casino to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our hotel casino experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of our hotel casino.
In addition, insurance coverage for our hotel casino and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

Risks Related to Our Organization and Corporate Structure
We are a holding company and conduct all of our operations through our subsidiaries.
We do not generally have, apart from our ownership of HRHH JV Junior Mezz and HRHH Gaming Junior Mezz, any independent operations. As a result, we would rely on dividends and other payments or distributions from our subsidiaries to pay distributions. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results, and the terms of our current and future financing agreements, which may preclude dividends, distributions or other payments.
In addition, because we are a holding company, claims of our security holders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be able to satisfy the claims of our members only after all of our and our subsidiaries’ liabilities and obligations have been paid in full.
We may experience conflicts of interest with entities which control the Company.
All of our membership interests are controlled by investment funds affiliated with Brookfield. Brookfield and its other affiliates may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Some of the members and managers of BREF HR Management may also serve as officers or directors of Brookfield and may have conflicts of interest because they may own equity interests in Brookfield or its affiliates or they may receive cash or equity-based awards based on the performance of Brookfield. Andrea Balkan, Barry Blattman, Theresa Hoyt and William Powell are managers, directors and/or officers of other affiliates of Brookfield. See Item 10 and Item 13.

Item 1B
Unresolved Staff Comments
None.

Item 2
Properties
We own approximately 30 acres of land where the Hard Rock Hotel & Casino Las Vegas is located.


26


Item 3
Legal Proceedings
For discussions of legal proceedings, refer to Note 9, Commitments and Contingencies, to our consolidated financial statements, included in Item 15 of this Annual Report on Form 10-K.

Item 4      Mine Safety Disclosures
Not applicable.


27


PART II
Item 5
Market for Common Equity Related Stockholder Matters And Issuer Purchases of Equity Securities
HOLDERS
The sole holder of our Class A Units is BREF HR Management and the sole holder of our Class B Units is Brookfield Financial.
MARKET INFORMATION
There currently is no established public trading market for our membership interests. None of our membership interests are subject to any outstanding options or warrants, and we have not issued any securities convertible into our membership interests. None of our membership interests may currently be sold under Rule 144 of the Securities Act of 1933, as amended. There were no Class A Units or Class B Units sold during the past fiscal year.
DIVIDENDS
We have not in the past paid cash distributions on our membership interests. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash distributions in the foreseeable future. The terms of our current financing agreements currently preclude us, and any future financing agreements may preclude us, from paying any distributions. To the extent not prohibited by the terms of any financing agreement, applicable law or to the extent there is excess cash available, we may distribute cash to our members in accordance with our financing agreements.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We do not currently maintain any equity compensation plans pursuant to which equity securities of the Company may be issued.
Recent Sales of Unregistered Securities
At the closing of the Assignment on March 1, 2011, we issued to each of our members Class A Units or Class B Units in consideration of the initial contributions they made to us (or were deemed to make to us). Upon the closing and as of December 31, 2012, BREF HR Management held all of our outstanding Class A Units and Brookfield Financial held all of our outstanding Class B Units. The issuances of the membership interests were made in reliance upon the exemption from registration requirements under Section 4(2) of the Securities Act of 1933, as amended. There were no underwriters employed in connection with the issuance of the membership interests. See Item1, Business—The Company—The Assignment.

Item 6
Selected Financial Information
SELECTED FINANCIAL DATA
Since March 1, 2011, the Hard Rock Hotel & Casino Las Vegas and related assets have been owned by the Company pursuant to the Assignment thereof from HRH Holdings. The Hard Rock Hotel & Casino Las Vegas was owned by HRH Holdings during the period from February 2, 2007 to February 28, 2011. Prior to such period the Hard Rock Hotel & Casino Las Vegas was owned by HRHI.
The selected financial data of HRH Holdings presented in the table below has been derived from the audited consolidated financial statements of HRH Holdings. The selected historical income statement data of the Company for the year ended December 31, 2012 and for the period from March 1, 2011 to December 31, 2011 have been derived from the audited consolidated financial statements of the Company.

28


In the opinion of management, the audited information set forth below contains all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial data at the relevant date and the operating data for the relevant periods. Historical results are not necessarily indicative of the results of operations to be expected for future periods. The selected financial and operating data set forth below should be read in conjunction with the Company’s and HRH Holdings‘ consolidated financial statements and notes thereto and with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Company
 
 
HRH Holdings
 
As of and for the year ended December 31, 2012
 
As of and for the period from Mar 1, 2011 to December 31, 2011
 
 
As of and for the period from Jan 1, 2011 to Feb 28, 2011
As of and for the year ended As of and for the year ended December 31,
($ in thousands)
 
 
 
 
2010
 
2009
 
2008
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
198,541

 
$
164,653

 
 
$
29,257

 
$
223,971

 
$
161,554

 
$
164,345

Income (loss) from operations (1) (2) (3)(4)
$
(25,456
)
 
$
1,527

 
 
$
(7,451
)
 
$
(60,937
)
 
$
(132,624
)
 
$
(205,607
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
13,658

 
$
16,818

 
 
$
20,191

 
$
15,023

 
$
12,277

 
$
10,148

Total assets
$
627,841

 
$
680,452

 
 
$
1,191,539

 
$
1,237,579

 
$
1,301,082

 
$
1,162,954

Long term debt
$
647,885

 
$
608,699

 
 
$
1,238,553

 
$
1,305,910

 
$
1,210,874

 
$
1,033,813

Total debt
$
647,885

 
$
608,699

 
 
$
1,305,910

 
$
1,305,910

 
$
1,201,874

 
$
1,083,813

Shareholders/Members equity (deficit)
$
(95,012
)
 
$
20,389

 
 
$
(182,173
)
 
$
(192,514
)
 
$
(64,873
)
 
$
(61,514
)
(1)    HRH Holdings recognized a non-cash impairment charge of approximately $181.3 million related to goodwill and $10.0 million related to certain indefinite-lived intangible assets in the fourth quarter of 2008. The impairment charge represents all of the goodwill recognized at the time of the Assignment and a portion of the value of the Hard Rock license. The impairment charge resulted from factors impacted by current market conditions including: (i) lower market valuation multiples for gaming assets; (ii) higher discount rates resulting from turmoil in the credit and equity markets; and (iii) current cash flow forecasts for HRH Holdings.
(2)    HRH Holdings recognized a non-cash impairment charge of approximately $108.7 million related to the land intended for sale in the fourth quarter of 2009. The impairment charge resulted from factors impacted by current market conditions including: (i) lower market valuation multiples for gaming assets; (ii) higher discount rates resulting from turmoil in the credit and equity markets; and (iii) current cash flow forecasts for HRH Holdings.
(3)    HRH Holdings recognized a non-cash impairment charge of approximately $16.2 million related to the adjacent land in the fourth quarter of 2009. The impairment charge resulted from factors impacted by current market conditions including: (i) lower market valuation multiples for gaming assets; (ii) higher discount rates resulting from turmoil in the credit and equity markets; and (iii) current cash flow forecasts for HRH Holdings.
(4)    The Company recognized a non-cash impairment charge of approximately $6.2 million, relating to the Isleta license agreement and $15.0 million, relating to the Hard Rock trademark during 2012. 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 other licenses of $6.2 million. The $6.2 million impairment represented amounts included in the March 1, 2011 fair value related to the Isleta licenses agreement which were anticipated at that time had the agreement continued after June 30, 2013. During the second quarter of 2012, due to weak economic conditions, 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. During the fourth quarter of 2012, the Company completed its annual impairment analysis of the Hard Rock trademark, which resulted in an impairment charge of $12.0 million. These impairment charges 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 Consolidated Statement of Operations and Comprehensive (Loss) Income.

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
Within this management’s discussion and analysis of financial condition and results of operation for the period from March 1, 2011 to December 31, 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, 2009 to February 28, 2011 refer to Hard Rock Hotel Holdings, LLC.

29


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 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 audited results of operations for the year ended December 31, 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.
Substantially all of our current business is comprised of the operation of the Hard Rock Hotel & Casino Las Vegas. For the year ended December 31, 2012, Hard Rock Hotel & Casino Las Vegas’ gross revenues were derived 19.9% from gaming operations, 36.3% from food and beverage, 28.1% from lodging and 15.7% from retail and other sales. Our business strategy is to provide our guests with an energetic and exciting gaming and entertainment environment with the services and amenities of a luxury boutique hotel.
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 with LVHR, a licensed third party casino operator, and the Resort Management Agreement with WG-Harmon 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. See Item 1, Business—Agreements Governing the Operation of the Hard Rock Hotel & Casino Las Vegas—Resort Management Agreement.
HRH Holdings and the Company each evaluate our variable interests to determine if they are variable interests in variable interest entities. Certain variable interest entities must 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. During the period from March 1, 2011 through June 15, 2012, LVHR was the third party operator of all gaming operations at the Hard Rock Hotel & Casino Las Vegas. 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.
During the period from March 1, 2011 through June 15, 2012, the Company did not own any interest in LVHR or its affiliated entities, WG-Harmon and Warner Gaming. The Company consolidated LVHR since it was the primary beneficiary of the gaming operations and had the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entities that could potentially be significant to the variable interest entity.
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

30


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%.

Results of Operations
The following table presents consolidated statement of operations data for each of the periods indicated as a percentage of net revenues.
 
Company
 
 
 
Company
 
 
HRH Holdings
 
For the year ended
December 31, 2012
 
2011
Combined
 
Period from Mar 1, 2011 to
December 31, 2011
 
 
Period from Jan 1, 2011 to Feb 28, 2011
 
For the year ended
December 31, 2010
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
Casino
22
 %
 
21
 %
 
21
 %
 
 
20
 %
 
27
 %
Lodging
31
 %
 
30
 %
 
30
 %
 
 
32
 %
 
25
 %
Food and beverage
40
 %
 
42
 %
 
42
 %
 
 
42
 %
 
43
 %
Retail
1
 %
 
2
 %
 
2
 %
 
 
1
 %
 
2
 %
Other
16
 %
 
15
 %
 
15
 %
 
 
16
 %
 
14
 %
Gross revenues
110
 %
 
110
 %
 
109
 %
 
 
111
 %
 
110
 %
Less: Promotional allowances
(10
)%
 
(10
)%
 
(9
)%
 
 
(11
)%
 
(10
)%
Net revenues
100
 %
 
100
 %
 
100
 %
 
 
100
 %
 
100
 %
 
 
 
 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Casino
18
 %
 
18
 %
 
18
 %
 
 
19
 %
 
21
 %
Lodging
10
 %
 
10
 %
 
10
 %
 
 
11
 %
 
8
 %
Food and beverage
23
 %
 
22
 %
 
22
 %
 
 
20
 %
 
23
 %
Retail
1
 %
 
1
 %
 
1
 %
 
 
1
 %
 
1
 %
Other
10
 %
 
9
 %
 
8
 %
 
 
10
 %
 
10
 %
Marketing
4
 %
 
3
 %
 
4
 %
 
 
3
 %
 
4
 %
Fee and expense reimbursements - related party
1
 %
 
1
 %
 
1
 %
 
 
3
 %
 
4
 %
General and administrative
19
 %
 
20
 %
 
19
 %
 
 
22
 %
 
21
 %
Depreciation and amortization
16
 %
 
18
 %
 
15
 %
 
 
37
 %
 
25
 %
Loss on disposal of assets
—
 %
 
—
 %
 
—
 %
 
 
—
 %
 
1
 %
Pre-opening
—
 %
 
—
 %
 
—
 %
 
 
—
 %
 
—
 %
Impairment of land
—
 %
 
—
 %
 
—
 %
 
 
—
 %
 
7
 %
Impairment of licenses and trademarks

11
 %
 
—
 %
 
—
 %
 
 
—
 %
 
—
 %
Total costs and expenses
113
 %
 
103
 %
 
99
 %
 
 
125
 %
 
127
 %
(Loss) income from operations
(13
)%
 
(3
)%
 
1
 %
 
 
(25
)%
 
(27
)%
Interest income
—
 %
 
—
 %
 
—
 %
 
 
—
 %
 
—
 %
Interest expense
(45
)%
 
(43
)%
 
(41
)%
 
 
(51
)%
 
(30
)%
Gain on forgiveness of debt
—
 %
 
17
 %
 
—
 %
 
 
111
 %
 
—
 %
Loss on joint venture investment
—
 %
 
—
 %
 
—
 %
 
 
—
 %
 
—
 %
(Loss) income before income tax expense
(58
)%
 
(29
)%
 
(40
)%
 
 
35
 %
 
(58
)%
Income tax expense
—
 %
 
—
 %
 
—
 %
 
 
—
 %
 
—
 %
Net (Loss) income
(58
)%
 
(29
)%
 
(40
)%
 
 
35
 %
 
(58
)%
Minor differences may exist due to rounding.
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. As noted above, management believes reviewing the operating results for the year ended December 31, 2011 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.

31


 
Company
 
 
 
Company
 
 
HRH Holdings
 
Percent Change
($ in thousands)
For the year ended
December 31, 2012
 
2011 Combined
 
Period from Mar 1, 2011 to
December 31, 2011
 
 
Period from Jan 1, 2011 to Feb 28, 2011
 
For the year ended
December 31, 2010
 
2012 vs
2011
 
2011 vs
2010
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Casino
$
43,572

 
$
40,614

 
$
34,641

 
 
$
5,973

 
$
59,703

 
7.3
 %
 
(32
)%
Lodging
61,356

 
57,947

 
48,725

 
 
9,222

 
55,405

 
5.9
 %
 
4.6
 %
Food and beverage
79,348

 
82,298

 
69,908

 
 
12,390

 
96,669

 
(3.6
)%
 
(14.9
)%
Retail
2,789

 
3,014

 
2,588

 
 
426

 
4,452

 
(7.5
)%
 
(32.3
)%
Other
31,469

 
28,602

 
24,011

 
 
4,591

 
31,242

 
10.0
 %
 
(8.5
)%
Gross revenues
218,534

 
212,475

 
179,873

 
 
32,602

 
247,471

 
2.9
 %
 
(14.1
)%
Less: Promotional allowances
(19,993
)
 
(18,565
)
 
(15,220
)
 
 
(3,345
)
 
(23,500
)
 
7.7
 %
 
21
 %
Net revenues
198,541

 
193,910

 
164,653

 
 
29,257

 
223,971

 
2.4
 %
 
(13.4
)%
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 

 
 
Casino
35,444

 
35,383

 
29,717

 
 
5,666

 
48,067

 
0.2
 %
 
(26.4
)%
Lodging
20,472

 
19,443

 
16,321

 
 
3,122

 
18,617

 
5.3
 %
 
4.4
 %
Food and beverage
44,747

 
42,753

 
37,005

 
 
5,748

 
51,612

 
4.7
 %
 
(17.2
)%
Retail
1,682

 
1,969

 
1,696

 
 
273

 
2,872

 
(14.6
)%
 
(31.4
)%
Other
20,495

 
16,807

 
13,930

 
 
2,877

 
22,320

 
21.9
 %
 
(24.7
)%
Marketing
8,650

 
6,710

 
5,867

 
 
843

 
8,656

 
28.9
 %
 
(22.5
)%
Fee and expense reimbursements
2,206

 
2,605

 
1,673

 
 
932

 
9,444

 
(15.3
)%
 
(72.4
)%
General and administrative
36,832

 
38,295

 
31,906

 
 
6,389

 
47,701

 
(3.8
)%
 
(19.7
)%
Depreciation and amortization
31,360

 
35,673

 
24,815

 
 
10,858

 
55,575

 
(12.1
)%
 
(35.8
)%
Loss on disposal of assets
501

 
50

 
50

 
 
—

 
3,138

 
902.0
 %
 
(98.4
)%
Pre-opening
433

 
146

 
146

 
 
—

 
726

 
196.6
 %
 
(79.9
)%
Impairment of land
—

 
—

 
—

 
 
—

 
16,180

 
—
 %
 
(100
)%
Impairment of licenses and trademarks

21,175

 
—

 
—

 
 
—

 
—

 
100.0
 %
 
—
 %
Total costs and expenses
223,997

 
199,834

 
163,126

 
 
36,708

 
284,908

 
12.1
 %
 
(29.9
)%
(Loss) income from operations
(25,456
)
 
(5,924
)
 
1,527

 
 
(7,451
)
 
(60,937
)
 
329.7
 %
 
90.3
 %
Interest income
36

 
74

 
66

 
 
8

 
38

 
(51.4
)%
 
94.7
 %
Interest expense
(89,554
)
 
(82,544
)
 
(67,674
)
 
 
(14,870
)
 
(68,251
)
 
8.5
 %
 
(20.9
)%
Gain on forgiveness of debt
—

 
32,460

 
—

 
 
32,460

 
—

 
(100.0
)%
 
100
 %
Loss on joint venture investment
(630
)
 
—

 
—

 
 
—

 
—

 
100.0
 %
 
—
 %
(Loss) income before income tax expense
(115,604
)
 
(55,934
)
 
(66,081
)
 
 
10,147

 
(129,150
)
 
106.7
 %
 
56.7
 %
Income tax expense
—

 
141

 
—

 
 
141

 
467

 
(100.0
)%
 
(69.8
)%
Net (loss) income
$
(115,604
)
 
$
(56,075
)
 
$
(66,081
)
 
 
$
10,006

 
$
(129,617
)
 
106.2
 %
 
56.7
 %

Results of Operations of the Company for the Year Ended December 31, 2012 Compared to the Combined Results of Operations of the Company and HRH Holdings for the Year Ended December 31, 2011
In the following discussion references to the year ended December 31, 2011 refer to combining the results of HRH Holdings for the period from January 1, 2011 to February 28, 2011 with the results of the Company for the period from March 1, 2011 to December 31, 2011.
Casino Revenues. Until June 15, 2012, we did not receive any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, the Company did not directly earn any casino revenues, for the period from March 1, 2011 to June 14, 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.

32


Casino revenues increased $3.0 million to $43.6 million for the year ended December 31, 2012 from $40.6 million for the year ended December 31, 2011.
Slot. Slot machine revenues increased $1.6 million to $17.2 million for the year ended December 31, 2012 from $15.5 million for the year ended December 31, 2011. Slot machine handle decreased $9.5 million from $328.2 million to $318.7 million. Slot machine hold percentage increased to 5.4% from 4.7%. The number of slot machines in operation decreased to 628 from 631. 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 $74.72 from $67.40, an increase of $7.32 or 10.9%. Management believes the decrease in slot handle was due to the construction projects under way in 2012 and also increased competition from other hotel/casinos on the Las Vegas strip.
Table Games. Table games revenues increased $1.4 million to $25.9 million for the year ended December 31, 2012 from $24.5 million for the year ended December 31, 2011. Table games drop decreased $24.1 million or 10% to $218.3 million. Table games hold percentage increased 1.7% to 11.9% from 10.1%. The average number of table games in operations decreased to 75 from 86 tables. The net result of these changes in drop and hold percentage was an increase in win per table game per day to $943 from $778, an increase of $165 or 21.2%. 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 year ended December 31, 2012 was 14.3% compared to 13.0% for the year ended December 31, 2011. The increase in table games revenues was due to an increase in the table games hold percentage. Management believes the decrease in table games drop was due to increased competition from other hotel/casinos on the Las Vegas strip.
Lodging Revenues. Lodging revenues increased $3.4 million to $61.4 million for the year ended December 31, 2012 from $57.9 million for the year ended December 31, 2011. The increase in lodging revenues was primarily due to a 3.9% increase in total occupied rooms to 454,044 from 436,976 and an increase in the average daily rate of $1.51 to $133.08 or 1.1%. Revenue per available room increased $5.94 to $112.35 from $106.42 or 5.6%.
Food and Beverage Revenues. Food and beverage revenues decreased $3.0 million to $79.3 million for the year ended December 31, 2012 from $82.3 million for the year ended December 31, 2011. The $3.0 million decrease in food and beverage revenues was primarily due to the closure of venues during construction of four new food and beverage outlets, including, Culinary Dropout, Ainsworth, Fú and Fuel Express, and a decline in nightclub revenue from Vanity due to the competitive nightclub market in Las Vegas during 2012. Due to the significant decline in revenue at Vanity, Body English was reopened on December 28, 2012 after being closed since January 1, 2010. Vanity has limited its operations exclusively to special events since January 1, 2013.
Retail Revenues. Retail revenues decrease $0.2 million to $2.8 million for the year ended December 31, 2012 from $3.0 million for the year ended December 31, 2011. The decrease in retail revenues was due to the relocation of the Hard Rock retail store into a smaller footprint and a decline in the number of transactions during 2012.
Other Revenues. Other revenues increased $2.9 million to $31.5 million for the year ended December 31, 2012 from $28.6 million for the year ended December 31, 2011. The increase in other revenues was primarily the result of having 23 more events in 2012 compared to 2011.
Promotional Allowances. Promotional allowances increased $1.4 million or 7.7% to $20.0 million for the year ended December 31, 2012. As a percentage of gross revenues, promotional allowances increased to 9.1% from 8.7%. The increase in promotional allowances was primarily attributable to increased marketing efforts to attract casino customers by providing rooms on a complimentary basis.
Casino Expenses. Casino expenses remained flat at $35.4 million for the year ended December 31, 2012.
Lodging Expenses. Lodging expenses increased $1.0 million or 5.3% to $20.5 million for the year ended December 31, 2012 from $19.4 million for the year ended December 31, 2011. Lodging expenses in relation to lodging revenues decreased to 33.4% from 33.6% in the prior period. The increase in lodging expenses was primarily due to operating costs associated with the increase in occupancy.
Food and Beverage Expenses. Food and beverage expenses increased $2.0 million or 4.7% to $44.7 million for the year ended December 31, 2012 from $42.8 million for the year ended December 31, 2011. Food and beverage expenses in relation to food and beverage revenues increased to 56.4% from 51.9% in the prior period. The increase in food and beverage expense was primarily

33


the result of an increase in the number of pool and nightclub events and an increase in advertising in order to promote the respective venues.
Retail Expenses. Retail expenses decreased $0.3 million or 14.6% to $1.7 million for the year ended December 31, 2012 from $2.0 million for the year ended December 31, 2011. Retail expenses in relation to retail revenues decreased to 60.3% from 65.3% in the prior period. The decrease in retail expenses was primarily the result of a decrease in cost of goods sold included in retail costs and expenses..
Other Expenses. Other expenses increased $3.7 million or 21.9% to $20.5 million for the year ended December 31, 2012 from $16.8 million for the year ended December 31, 2011. This increase was primarily due to a $2.8 million increase in concert expense (artist fees) as a result of having 23 more concerts.
Marketing. Marketing expenses increased $1.9 million or 28.9% to $8.7 million for the year ended December 31, 2012 from $6.7 million for the year ended December 31, 2011. Marketing expenses in relation to gross revenues increased to 3.9% from 3.1% in the prior period. 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.
General and Administrative. General and administrative expenses decreased $1.5 million or 3.8% to $36.8 million for the year ended December 31, 2012 from $38.3 million for the year ended December 31, 2011. General and administrative expenses in relation to gross revenues decreased to 16.9% from 18.0%. The decrease in these expenses was primarily due to a decrease in property taxes due to a decline in assessed property values and a decline in professional fees related to the Assignment.
Depreciation and Amortization. Depreciation and amortization expense decreased by $4.3 million or 12.1% to $31.4 million for the year ended December 31, 2012 from $35.7 million for the year ended December 31, 2011. The decrease in depreciation and amortization expense is a result of the decreased values at the time of the Assignment coupled with an intangible asset that became fully depreciated during the first quarter of 2012.
Interest Expense. Interest expense increased $6.9 million or 8.5% to $89.6 million for the year ended December 31, 2012 from $82.5 million for the year ended December 31, 2011. The increase in interest expense is primarily due to debt discount amortization as part of the Assignment. A total of $28.9 million of interest expense is a result of debt discount amortization under the Amended Facility and Second Mortgage in 2012 compared to $17.9 million in 2011. The increase in debt discount amortization is partially offset by a decrease in the interest rate of debt after the Assignment.
Combined Results of Operations of the Company and HRH Holdings for the Year Ended December 31, 2011 Compared to the Results of Operations for the Year Ended December 31, 2010 of HRH Holdings
In the following discussion, references to the year ended December 31, 2011 refer to combining the results of HRH Holdings for the period from January 1, 2011 to February 28, 2011 with the results of the Company for the period from March 1, 2011 to December 31, 2011.
Since March 1, 2011 the Hard Rock Hotel & Casino Las Vegas and related assets have been owned by the Company pursuant to the Assignment thereof from HRH Holdings. The Hard Rock Hotel & Casino Las Vegas was owned by HRH Holdings during the period from February 2, 2007 to February 28, 2011. The following management’s discussion and analysis of financial condition and results of operation includes a summary of the combined periods of ownership of the Hard Rock Hotel & Casino Las Vegas by HRH Holdings and the Company, respectively, during the year ended December 31, 2011.
Casino Revenues. Until June 15, 2012, we did not receive any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, the Company did not directly earn any casino revenues, for the period from March 1, 2011 to June 14, 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.
For the year ended December 31, 2011, the $19.1 million decrease in casino revenues was primarily due to a $13.6 million or 35.6% decrease in table games revenue and a $1.6 million or 9.5% decrease in slot revenue.
Table Games. The decrease in table games revenues was due to a decrease in table games drop. Management believes the decrease in table games drop was due to increased competition from other hotel/casinos on the Las Vegas strip. Table games drop decreased

34


$66.1 million or 21.4% to $242.4 million. Table games hold percentage decreased 2.2% to 10.1% from 12.3%. The average number of table games in operations decreased to 86 from 110 tables. The net result of these changes in drop and hold percentage was a decrease in win per table game per day to $778 from $950, a decrease of $172 or 18.1%. 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 year ended December 31, 2011 was 13.0% compared to 15.8% for the year ended December 31, 2010.
Slot. Slot machine revenues decreased $1.6 million to $15.5 million. Slot machine handle decreased $9.2 million from $337.4 million to $328.2 million. Slot machine hold percentage decreased to 4.7% from 5.1%. The number of slot machines in operation decreased to 631 from 744, a decrease of 113 machines or 15.2%. 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 $67.40 from $63.20, an increase of $4.20 or 6.6%.
Race and Sports Book. Race and sports book revenue decreased $0.8 million due to the race and sports book operation of the Company being taken over by Cantor G&W (Nevada), L.P. under a lease arrangement. The monthly lease payments are recorded as “Other” revenues.
Poker. Poker revenue decreased $0.7 million or 54.8% to $0.6 million from $1.3 million as a result of reducing the number tables when the poker lounge was relocated.
Lodging Revenues. The $2.5 million increase in lodging revenues to $57.9 million was primarily due to a 2.5% increase in total occupied rooms to 436,976 from 426,400. Average daily rate increased $3.15 to $131.57 or 2.4%. The increase in average daily rate was a result of yielding opportunities from a strong convention base in the first three months of 2011. Hotel occupancy increased to 79.6% from 78.3% between periods. Management believes occupancy increased as a result of group room night growth and shifts in marketing strategies for Transient and Leisure segments. Revenue per available room increased $4.70 to $106.42 from $101.72 or 4.7%.
Food and Beverage Revenues. Food and beverage revenues declined $14.4 million to $ 82.3 million. Management believes that the overall decrease in food and beverage revenues was due to fewer non-hotel guests visiting the resort as a result of having 17 fewer events during the year ended December 31, 2011 as compared to the year ended December 31, 2010, and also a result of additional daylife/nightlife venues within the Las Vegas market.
Retail Revenues. We believe the $1.4 million decrease in retail revenues was due to fewer non-hotel guests visiting the resort for the same reasons as described in the previous paragraph.
Other Revenues. Other revenue decreased $2.6 million primarily due to a decrease in entertainment revenue as a result of having 17 fewer events in 2011 compared to 2010.
Promotional Allowances. Promotional allowances decreased $4.9 million or 21.0% over the prior period for the year ended December 31, 2011. Promotional allowances decreased as a percentage of gross revenues to 8.7% from 9.5% between periods. The decrease in promotional allowances primarily relates to the decrease in gross revenues during 2012.
Casino Expenses. Casino expenses decreased $12.7 million or 26.4% to $35.4 million. The decrease was primarily due to a decrease in the cost incurred by the Company to provide complementaries to casino customers and a decrease in payroll as a result of a decline in table games drop and a decline in returned markers.
Lodging Expenses. Lodging costs and expenses increased 4.4% or $0.8 million to $19.4 million for the year ended December 31, 2011. Lodging expenses in relation to lodging revenues were consistent with prior year, at 33.6%. The overall increase in expenses was due to a higher occupancy rates resulting from strong convention base and group room night growth.
Food and Beverage Costs and Expenses. Food and beverage costs and expenses decreased 17.2% or $8.9 million to $42.8 million. Food and beverage expenses in relation to food and beverage revenues decreased to 51.9% from 53.4% in the prior period due primarily to a $3.3 million decrease in cost of sales, a $4.8 million decrease in payroll related expenses, and a $1.0 million decrease in advertising expenses. These decreases were partially offset by a $0.9 million increase in contract services and a $2.3 million decrease in allocated promotional allowance costs to casino expenses.

35


Retail Costs and Expenses. Retail costs and expenses decreased 31.4% or $0.9 million to $2.0 million. Retail costs and expenses in relation to retail revenues increased to 65.3% from 64.5% in the prior period due to lower revenues and a lack of logo merchandise available. The logo merchandise carries a lower cost compared to the fashion items available in the store.
Other Costs and Expenses. Other costs and expenses decreased 24.7% or $5.5 million over the prior period for the year ended December 31, 2011. Other costs and expenses in relation to other income decreased to 58.8% from 71.4%. This decrease was primarily due to a $4.5 million decrease in concert expense (artist fees) as a result of having 17 fewer concerts, a $0.8 million decrease in payroll related expenses and a $0.2 million decrease in cost of goods sold.
Marketing, General and Administrative. Marketing and general and administrative expenses decreased 20.2% or $11.4 million over the prior period for the year ended December 31, 2011. Marketing, general and administrative expenses in relation to gross revenues decreased to 21.2% from 22.8%. The decrease in these expenses was primarily due to a $2.7 million decrease in payroll, a $6.9 million decrease in non-recurring joint venture costs, a $1.3 million decrease in property taxes, a $0.6 million decrease in property insurance, a $0.3 million decrease in contract services and maintenance, and a $0.6 million decrease in utilities. These decreases were offset by a $0.6 million increase in legal fees, a $0.6 million increase in guest claim expenses, a $0.5 million increase in professional marketing services and contracted facilities maintenance, and $0.5 million increase in gaming license acquisition fees.
Depreciation and Amortization. Depreciation and amortization expense decreased by $19.9 million to $35.7 million for the year ended December 31, 2011 from $55.6 million for the year ended December 31, 2010. The decrease in depreciation and amortization expense is a result of revaluation of the assets at the time of the Assignment.
Interest Expense. Interest expense increased $14.3 million or 20.9% to $82.5 million for the year ended December 31, 2011, compared to $68.2 million for the year ended December 31, 2010. The increase in interest expense is primarily due to an increase in debt discount amortization. A total of $17.9 million of interest expense is a result of debt discount amortization under the Amended Facility and Second Mortgage. The increase in debt discount amortization is partially offset by a decrease in the interest rate of debt after the Assignment.

LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2012, we had total current assets of approximately $34.7 million, including approximately $13.7 million in available cash and cash equivalents and $4.0 million in restricted cash classified as current assets. Additionally, we had approximately $17.8 million of restricted cash reserves classified as non-current assets. As of December 31, 2012, we had total current liabilities of approximately $30.4 million. As of December 31, 2012, the face amount of our total debt was approximately $911.1 million, which had a carrying value of $647.9 million, and our total members' deficit was approximately $95.0 million.
For the year ended December 31, 2012 the Company incurred cash interest payments of $25.4 million. For the period March 1, 2011 to December 31, 2011, the Company incurred cash interest payments, of $21.4 million. For the period from January 1, 2011 to February 28, 2011, HRH Holdings incurred cash interest payments of $8.2 million.
For the year ended December 31, 2012 the Company incurred capital expenditures of $13.0 million. For the period March 1, 2011 to December 31, 2011, the Company incurred capital expenditures of $4.8 million. For the period from January 1, 2011 to February 28, 2011, HRH Holdings incurred capital expenditures of $0.1 million.
The Amended Facility. On March 1, 2011, HRH Holdings, the Mortgage Lender, Brookfield, NRFC, the Morgans Parties and certain affiliates of DLJMBP, as well as other interested parties entered into the Settlement Agreement pursuant to which it was agreed that the membership interests of HRHH JV Junior Mezz and HRHH Gaming Junior Mezz were to be transferred to the Company.
As part of the Assignment, the Company assumed the obligations under the Facility and entered into the Amended Facility pursuant to which the land, building and improvements, equipment, fixtures and all personal properties relating to the Hard Rock Hotel & Casino were pledged as security and collateral. As of March 1, 2011, approximately $862.8 million of principal amount was outstanding under the Amended Facility. Also on March 1, 2011, the Company entered into the Second Mortgage in the amount

36


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.
Equity Contributions. During the year ended December 31, 2012, there were no equity contributions made to the Company. During the ten-month period ended December 31, 2011, certain parties related to BREF HR Management and Brookfield Financial contributed $30.0 million as part of the Second Mortgage during the Assignment. The fair value of the debt as of the Assignment date was $13.0 million with the remaining $17.0 million accounted for as an equity contribution. In addition, Brookfield Financial made a $1.6 million cash contribution during the ten-month period ended December 31, 2011.
During the two-month period ended February 28, 2011, the parties related to DLJMBP and Morgans did not contribute any cash to HRH Holdings.
Liquidity Requirements
Short-Term Liquidity Requirements. Our liquidity requirements for 2013 consisted primarily of funds necessary to pay operating expenses associated with our subsidiaries’ hotel and casino operations, interest, payment of principal, fees and expenses under certain of our subsidiaries’ loan agreements (including required deposits into reserve accounts) and capital expenditures associated with the Hard Rock Hotel & Casino Las Vegas. Anticipated sources of our liquidity needs include our subsidiaries’ existing working capital, cash provided by our subsidiaries’ operations and our subsidiaries’ non-restricted cash reserves. Our material cash requirements for 2013 included interest payments of $36.0 million related to our Amended Facility, which has a PIK option as discussed below and capital expenditures of $9.1 million. For the nine months ended September 31, 2013, the Company has exercised the PIK option on $13.2 million in interest.
Long-Term Liquidity Requirements. Our long-term liquidity requirements include funds necessary to pay debt under the Amended Facility and Second Mortgage. The Amended Facility requires that the Company repay in full all PIK interest outstanding on March 1, 2014 and on February 29, 2016, in the event the Company has not made sufficient payments to the lender to provide a specified debt yield, according to the terms specified in the Amended Facility and as discussed below.
The outstanding PIK interest as of September 30, 2013, December 31, 2012, and 2011 was $31.7 million, $18.5 million and $8.2 million, respectively. Using our best estimates and projections, we currently believe the Company will not meet the specified debt yield threshold. As of the date of this filing, we have begun to assess 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. If we are unable to restructure our indebtedness, find alternative financing sources on acceptable terms, or obtain approval from the lender to use our cash reserves to satisfy a portion of this potential obligation, we risk losing some or all of our property to foreclosure. If prevailing interest rates or other factors at the time of any restructuring of our indebtedness or at the time we obtain borrowings from other sources results in higher interest rates, our interest expense would increase, which would harm our business and results of operations.
The Amended Facility has a maturity date of March 1, 2018 and provides for interest only at LIBOR plus 2.5% with a 1.5% LIBOR floor (total of 4% at December 31, 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 interest shortfall will be automatically added to the outstanding principal balance of the Amended Facility and shall thereafter accrue interest, as PIK 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.
The maturity date of the Second Mortgage is March 1, 2018 and provides for an effective interest rate of 15% payable at maturity.
Cash Flows for the Year Ended December 31, 2012 for the Company
Amounts within operating, investing and financing activities are updated to reflect the effect of the 2011 restatement described at Note 12, Restatement to the 2011 Cash Flows of the Company, to our consolidated financial statements, included in Item 15 of this Annual Report on Form 10-K.

37


Operating Activities. Our operating cash flows primarily consist of our operating income (excluding non-cash charges), interest paid and changes in working capital accounts such as receivables, inventories, prepaid expenses and payables. Net cash provided by operating activities amounted to $3.0 million for the year ended December 31, 2012, compared to $4.8 million provided by operating activities for year ended December 31, 2011. The $1.8 million decrease in net cash provided by operating activities primarily relates to a change in working capital, offset by a $2.5 million increase in accrued interest payable.
Investing Activities. Net cash used in investing activities amounted to $3.3 million for the year ended December 31, 2012, compared to $14.9 million net cash used in investing activities for the year ended December 31, 2011. The decrease in net cash used in investing activities was primarily due to a decrease in the net amounts contributed to restricted cash and an increase in purchases of property and equipment during the year ended December 31, 2012.
Financing Activities. Net cash used in financing activities amounted to $2.9 million for the year ended December 31, 2012, as compared to $11.8 million net cash provided by financing activities for the year ended December 31, 2011. The decrease in net cash provided by financing activities was primarily attributable to $13.0 million of additional borrowings and $18.6 million of equity contributions from our Second Mortgage holder during the ten-month period ended December 31, 2011.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments as of December 31, 2012, and assumes that the principal balance on the debt is repaid on the maturity date:
 
Payments due by
 
 
($ in thousands)
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
 
Total
Long term debt
—

 
3,701

 
59,742

 
872,821

 
936,264

Estimated interest payments on long term debt
21,510

 
62,287

 
71,180

 
230,193

 
385,170

Capital leases
602

 
568

 
—

 
—

 
1,170

WG-Harmon Resort Management Agreement (1)
1,830

 
2,250

 
—

 
—

 
4,080

Total
23,942

 
68,806

 
130,922

 
1,103,014

 
1,326,684

(1) Excludes any incentive fees potential earned by WG-Harmon under the Amended Resort Management Agreement as such amounts are based on actual Company performance.
We have excluded the PIK interest payment due on March 1, 2014, which as of September 30, 2013 was $31.7 million, from the contractual obligations table above as we are currently assessing 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. See further discussion above under Long-Term Liquidity Requirements and at Note 8, Debt, to our consolidated financial statements, included in Item 15 of this Annual Report on Form 10-K.
The Company made cash interest payments on its long-term debt of $25.4 million for the year ended December 31, 2012 and $21.4 million for the period from March 1, 2011 to December 31, 2011. HRH Holdings made cash interest payments on its long-term debt of $8.2 million for the two-month period ended February 28, 2011 and $41.3 million for the year ended December 31, 2010.
Our ability to service our contractual obligations and commitments will be dependent on availability of operating cash and on our future performance, which will be affected by, among other things, prevailing economic conditions and financial, business and other factors, certain of which are beyond our control.
We are a defendant in various lawsuits relating to routine matters in the normal course of our business. Management provides an accrual for estimated losses that may occur to the extent the loss is probable and estimable. We do not believe that the outcome of the disclosed litigation, in the aggregate, will have a material effect on our business, or results of operations or financial condition of the Company. See Item 3, Legal Proceedings and Note 9, Commitments and Contingencies, to our consolidated financial statements, included in Item 15 of this Annual Report on Form 10-K.

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Capital Expenditures, Interest Expense and Reserve Funds
We are obligated to maintain reserve funds for capital expenditures at the Hard Rock Hotel & Casino Las Vegas as determined pursuant to the Amended Facility. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. The Amended Facility requires 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 and requires that the funds be set aside in restricted cash.
We also have funded a general reserve account and an equity/accrual subaccount, as required under the Amended Facility. In addition, pursuant to the Amended Facility, we are required to maintain up to $8.0 million in reserve for their gaming operations.
The following restricted cash can be used as a source of liquidity for its respective restricted purposes:
($ in thousands)
December 31, 2012
 
December 31, 2011
Current
 
 
 
Tax reserves
$
2,072

 
$
1,921

Insurance reserves
1,327

 
1,222

Other reserves
363

 
1,260

Workers' compensation reserves
233

 
229

Total current restricted cash
3,995

 
4,632

Long-term
 
 
 
Working capital reserves
16,148

 
26,554

Available restricted cash reserves for future capital expenditures
1,633

 
2,404

Total long-term restricted cash
17,781

 
28,958

Total restricted cash
$
21,776

 
$
33,590

Derivative Financial Instruments
We use or may use derivative financial instruments to manage exposure to the interest rate risks related to the variable rate debt under the Amended Facility. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. The fair value of our derivative financial instruments is determined by our management incorporating 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.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness under the hypothetical derivative method where the cumulative change in fair value of the actual cap is compared to the cumulative change in fair value of a hypothetical cap having terms that exactly match the critical terms of the hedged transaction. For derivatives that do not qualify for hedge accounting or when hedge accounting is discontinued, the changes in fair value of the derivative instrument is recognized directly in earnings.
Off-Balance-Sheet Arrangements
We do not have any off-balance-sheet arrangements, guarantees, such as performance guarantees, keep-well agreements or indemnities in favor of third parties that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation
Although we cannot accurately determine the precise effect of inflation on our operations, we believe inflation has not had a material effect on the Company and HRH Holdings’ results of operations in the last three years.

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CRITICAL ACCOUNTING POLICIES
Critical accounting policies and estimates are those that are both important to the presentation of our financial condition and results of operations and requires our most difficult, complex or subjective judgments and that have the most significant impact on our financial condition and results of operations.
The preparation of our consolidated financial statements is made in accordance with GAAP which 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. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Valuation of Land and Other Long-lived Assets
We review the carrying values of all land and other long-lived assets on an annual basis and between annual dates when indicators exists for possible impairment. For assets to be disposed of, we recognize the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For assets to be held and used, we review for impairment whenever indicators of impairment exist.
Inherent in reviewing the carrying amounts of the above assets is the use of various estimates. First, our management must determine the usage of the asset. Impairment of an asset is more likely to be recognized where and to the extent our management decides that such asset may be disposed of or sold. Assets must be tested at the lowest level for which identifiable cash flows exist. This testing means that some assets must be grouped and our management exercises some discretion in grouping those assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory, social and economic climates where we conduct our operations as well as recent operating information and budgets for our business. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to our hotel casino.
Valuation of Intangible Assets
For indefinite-life intangible assets, we review the carrying values on an annual basis and on a quarterly basis when indicators exist. We perform our annual impairment test for indefinite-lived intangible assets at December 31 of each year, or more frequently if impairment indicators exist.
For finite life intangible assets, we evaluate the remaining useful life on an annual basis to determine whether events or circumstances warrant a revision to the remaining period of amortization. If the estimate of a finite intangible asset’s remaining useful life is changed, the remaining carrying amount of the finite intangible asset shall be amortized prospectively other that revised remaining useful life. We review the carrying value of the finite life intangible assets whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
See Note 5, Intangible Assets, to our consolidated financial statements, included in Item 15 of this Annual Report on Form 10-K for impairments to intangible assets recorded during 2012.
Depreciation and Amortization Policies
Depreciation expense is based on the estimated useful life of our assets. The respective lives of the assets are based on a number of assumptions made by us, including the cost and timing of capital expenditures to maintain and refurbish our hotel casino, as well as specific market and economic conditions. Depreciation and amortization are computed using the straight-line method over the estimated useful lives for financial reporting purposes and accelerated methods for income tax purposes.

40


While our management believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of our subsidiaries’ hotel casino or any of its assets.
Valuation of Debt
As of December 31, 2012 and 2011, the fair value of the Company’s debt was estimated to be $603.1 million and $622.9 million, respectively. The valuation of the fair value of our debt utilizes Level 3 unobservable inputs utilizing a discounted cash flow model. Level 3 inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Level 3 valuation techniques typically include discounted cash flow models, and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, fair value measurement is determined based on assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy is used to distinguish between market participant assumptions based on market data obtained from sources independent of the reporting entity as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Allowance for Uncollectible Receivables
Substantially all of our accounts receivable are unsecured and are due primarily from our subsidiaries’ casino and hotel patrons and convention functions. Financial instruments that potentially subject us to concentrations of credit risk consist principally of casino accounts receivable. We issue credit in the form of “markers” to approved casino customers following investigations of creditworthiness. Non-performance by these parties would result in losses up to the recorded amount of the related receivables. Business or economic conditions or other significant events could also affect the collectability of such receivables.
Accounts receivable, including casino and hotel receivables, are typically non-interest bearing and are initially recorded at cost. Accounts are written off when management deems them to be uncollectible. Recoveries of accounts previously written off are recorded when received. An estimated allowance for doubtful accounts is maintained to reduce our receivables to their carrying amount, which approximates fair value. The allowance is estimated based on specific review of customer accounts as well as our management’s experience with collection trends in the casino industry and current economic and business conditions. Our management’s estimates consider, among other factors, the age of the receivables, the type or source of the receivables, and the results of collection efforts to date, especially with regard to significant accounts. Change in customer liquidity or financial condition could affect the collectability of that account, resulting in the adjustment upward or downward in the provision for bad debts, with a corresponding impact to our results of operations.
Recently Issued and Adopted Accounting Pronouncements
For discussions of the adoption and potential impacts of recently issued accounting standards, refer to Note 1, Recently Issued and Adopted Accounting Pronouncements, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.


41


CRITICAL ACCOUNTING POLICIES RELATED TO THE ASSIGNMENT
The following critical accounting policies specifically relate to the Assignment and the associated purchase accounting of the business combination. See discussion related to the Assignment at Note 1, Company Structure and Significant Accounting Policies, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.
Valuation of Fixed Assets
Land
Land, both operating and non-operating parcels, was valued under the market approach. We analyzed recent comparable transactions of vacant land parcels, listings of land parcels in the surrounding areas and held discussions with real estate brokers active in the Las Vegas market. Adjustments to the per acre pricing of comparable transactions were made for such factors as size, location, accessibility, frontage, development potential and market conditions at the time of the sale.
Buildings and improvements, and furniture fixtures and equipment (“FF&E”)
Value indications for buildings and improvements, and FF&E were estimated using almost exclusively cost approach methodologies. Certain minor information technology assets with liquid secondary markets were valued under the market approach. Under the cost approach, the replacement cost of buildings and site improvement assets were first estimated using published construction pricing guides. The replacement costs for FF&E assets were generally computed by inflating recorded original costs by trend factors provided in published pricing guides for specific asset categories. Deductions for physical and functional obsolescence were made from replacement cost based on the age, condition and utilization of the asset class. To the net result, a pro rata adjustment for economic obsolescence was made to all of these asset classes based on income and market approach analysis of the Company’s overall business enterprise. From a reasonably computed enterprise value for the Company, deductions were made for working capital items and intangible assets valued on in-exchange basis, to establish the maximum value that was allocable to fixed asset classes, regardless of the historic level of capital investment made to acquire them.
Lease Related Assets
The Company has active leases with seven third party retailers or food and beverage operators. Based on market conditions at the time of their execution, certain of the leases were considered to be at above-market terms on or about March 1, 2011 while others were deemed to be at below market terms. The income approach was used to compute the present value of the net, annual above market lease payments over the remaining terms of the subject leases. Other analyses under the cost approach were performed to estimate lease-in-place value, prepaid legal, marketing and commission fees as well as certain tenant improvement not reflected within the FF&E classes. Because they are so interrelated to other fixed asset classes, these preliminary indications were then subject to the economic obsolescence penalty factor noted above to determine values.
Valuation of Intangible Assets
Hard Rock Trade Name
The valuation of the Hard Rock trade name licensing intangible was conducted using certain variations of the income approach. This asset has two components with differing risk characteristics: (i) the use of the licensed Hard Rock brand at the Hard Rock Hotel & Casino Las Vegas; and (ii) the right to enter into future sub-licenses agreements to use the Hard Rock trademarks in connection with hotel/casino operations or casino operations in the Morton Territories.
For component (i), we imputed an estimated arm’s length royalty rate that would be paid for use if its current license was not royalty-free. This estimated royalty rate was selected based on our observations of brand licensing fees in the hospitality industry as well as the actual agreed Isleta and CNE contractual royalty fee structures. The hypothetical royalties saved by the Company are estimated by multiplying the estimated rate by projected revenues over a five-year explicit forecast horizon and a growth assumption into perpetuity. The resultant annual royalty savings are then discounted to present value. For component (ii), a direct application of the income approach was employed, based on the present value of the projected future royalty streams using a risk adjusted discount rate.

42


In-Place Trademark Licensing
In addition to the value associated with the Hard Rock trade name licensing intangible described above, we determined that there was in-place contract value associated with the sub-license agreements with the Isleta and CNE casinos as of March 1, 2011 (the “Assignment Date”). This value was determined using a direct application of the income approach, based on the present value of the estimated future royalty streams using a risk adjusted discount rate.
Future Trademark Licensing
Our valuation of the future trademark licensing was conducted based on facts and circumstances reasonably known as of the Assignment Date. Our belief as of the Assignment Date was that the litigation involving HRHH IP, a subsidiary of the Company, commenced by HRCI on September 2010 would not have a material adverse effect on the value of the Hard Rock trade name or on our overall financial position. The matter was settled on June 13, 2013, and the agreement did not have a material effect on our business, or results of operations or financial condition of the Company. See further discussion at Note 9, Commitments and Contingencies, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.
Sponsorship Agreements
HRH Holdings had previously entered into multiple sponsorship agreements with third-parties to strategically align and emphasize the Hard Rock brand at specific venues. We used the income approach to determine values for these sponsorship agreements, with scheduled future monthly payments from these third parties were discounted to their present value equivalents as of March 1, 2011.
Player Relationships
The Company has a customer relationship management system that facilitates the collection of data on its rated “Players.” Players enroll in the Company’s loyalty program, swipe magnetic cards while gambling at the Hard Rock Hotel & Casino Las Vegas, and are rewarded with complimentary lodging, meals, entertainment, and other perks proportionate to their level of gaming spend. While the income approach is often employed to value customer-based intangibles, the Company’s financial performance and high fixed asset base dictated the use of a variation of the cost approach to value this asset. Under this method, management estimated the average cost incurred to solicit and sign-on each new Player in 2010. The cost factor was multiplied by the total number of active Players to estimate the estimate total cost that would hypothetically be incurred to replicate the rated Player database on or about March 1, 2011 to determine values.
Customer Relationships
Guests at the Hard Rock Hotel & Casino Las Vegas, particularly corporate groups, make reservations well in advance of their scheduled visits. These guests have been “pre-sold” as of the valuation date. The Company’s financial performance and high fixed asset base dictated the use of cost-savings variation of the income approach to value this asset. To apply this approach, we compiled reports of pre-booked room revenue streams to the Company resulting from the reservation backlog from March 1, 2011 through the end of 2012, segregated between “definite” and “tentative” guests. After adjusting for historical probabilities of cancellation, we also estimated a level of casino, food, beverage and other revenue that would likely expected to be generated from the out-of-town guests of the Hard Rock Hotel & Casino Las Vegas. To these total likely revenues stream, we estimated the annual sales, marketing and other related expenses as a percent of revenue to quantify the cost-savings associated with pre-sold guests. Assuming these savings should be recognized at the time of the guest stay, they were discounted back to present value to determine values.
Vanity, Rehab and The Joint Trade Names
The fair values of the Vanity, Rehab and The Joint trade names were estimated by applying a form of the income approach known as the relief-from-royalty method. The underlying premise of this method is that the fair value of an intangible asset is equal to the future cost savings resulting from its ownership when compared to rent or royalty charges that would otherwise be paid to a third party for its use. Assumptions for these valuation models include: revenue growth projections for each venue through an assumed ten-year remaining economic life for the brands, a hypothetical arm’s-length royalty rate applied to the revenue stream, and an discount rate used to compute the present value of the hypothetical royalties avoided. These discounted royalty savings are then summed to estimate fair value.

43


Long Term Debt
We have estimated the FV of the Debt using a combination of Income and Market Approach techniques. Upon assessing the market to identify yields appropriate for the Debt’s risk level, the debt service amounts (computed using stated coupon rates) were discounted back to present value at this market yield rate.
We used market approach concepts to ascertain whether the interest rates and other terms of the Amended Facility were reflective above or below prevailing market rates. Our estimation of an appropriate market yield rates entailed (i) the assignment of a quasi-rating to the Amended Facility using our understanding of ratings criteria and other key data primarily published by Standard & Poor’s (“S&P”) and other recognized sources (ii) the identification of prevailing market yields for arm’s-length borrowers having similar debt ratings. The quasi-rating assignment relied primarily upon the comparison and correlation of certain key financial metrics of the Company to comparable financial ratios recently observed for S&P rated issuances. Market yields by rating were compiled from the research of both new debt issuances primarily within the hospitality sector and general industrial publicly traded S&P rated bond composite yields.
We used income approach models to determine the fair value of the Amended Facility and the Second Mortgage Facility. Projected debt service requirements were estimated based on contractually agreed interest rates, forward LIBOR index curves and the seven year principal repayment schedule. These debt service amounts were discounted to present value at appropriate market yield rates. The sum of the present value of debt service payments provided an estimate of fair value for the Amended Facility and the Second Mortgage.

Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The outstanding debt under the Amended Facility has a variable interest rate. 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 December 31, 2012, our total outstanding variable rate debt had a face value of approximately $881.1 million.
Effective March 28, 2012, the Company has entered into two cash flow hedges which cap LIBOR at 1.24025%. At December 31, 2012, the LIBOR rate was 0.209% on the total outstanding debt, thereby making our caps out of the money. Due to a LIBOR floor of 1.5% currently in place under the Amended Facility, the LIBOR rate would have to exceed the LIBOR floor for our interest expense to be affected and any decrease in interest rates would not decrease interest expense. Subject to the caps and the LIBOR floor, as of December 31, 2012, a change in market rates would only have an impact on interest expense for market rates between the LIBOR caps and the LIBOR floor, as at this level the interest rate cap becomes “in the money” and will at that point begin to reduce the Company’s interest expense. Due to the LIBOR floor, a decrease in market interest rates would not decrease our annual interest expense.

Item 8
Financial Statements and Supplementary Data
See the Index to Financial Statements beginning on page F1.

Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.


44


Item 9A
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of our principal executive and financial officers, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2012. Based on that evaluation, management has identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures, as described below. As a result of those material weaknesses, our principal executive and financial officers have concluded that, as of December 31, 2012, our disclosure controls and procedures were not effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and financial officers and effectuated by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made in accordance with authorization of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2012, because of material weaknesses in internal controls as described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statement will not be prevented, or detected and corrected on a timely basis. We identified the following deficiencies that constituted individually, or in the aggregate, material weaknesses in our internal controls over financial reporting at December 31, 2012:
•
We identified errors in the presentation of the statement of cash flows resulting in a restatement of the 2011 consolidated statement of cash flows. This represents a deficiency in the operating effectiveness of our internal controls over the preparation and review of the consolidated statement of cash flows.
•
Deficiencies in the operating effectiveness of the Company’s internal controls related to significant and unusual contracts and transactions such as the accounting and disclosure for business acquisitions.

45


Remediation Plans for Material Weakness in Internal Control over Financial Reporting
The Company hired a new Chief Financial Officer in the third quarter of 2012 and additional financial accounting resources in 2013 to remediate the material weaknesses describe above. The Company has developed a plan to file the delinquent financial reports and to become current with its filings in 2014. This plan includes improvements in the design and effectiveness of internal control over financial reporting.
Changes in Internal Control Over Financial Reporting during the Quarter Ended December 31, 2012
There were no changes in our internal control over financial reporting that occurred in the three months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B     Other Information
None.

PART III

Item 10 Directors, Executive Officers and Corporate Governance
The Company does not have a board of directors, or maintain a separately designated audit, compensation or nominating committee. The Company is managed by BREF HR Management in compliance with the gaming laws of the State of Nevada. The following table sets forth the name, age and position of each of the members and managers of BREF HR Management and executive officers of the Company:
Name
Age
 
Position
Andrea Balkan
49
 
Authorized Representative
Barry S. Blattman
51
 
Authorized Representative
Theresa Hoyt
51
 
Authorized Representative
William M. Powell
54
 
Authorized Representative
William W. Warner
49
 
Authorized Representative, Principal Executive Officer
Marlo Vandemore
40
 
Authorized Representative, Principal Financial Officer
Andrea Balkan. Ms. Balkan is a Managing Partner of Brookfield Real Estate Financial Partners, based in New York. She has held several senior management positions at Brookfield and is responsible for the overall management of the activities of the Fund. Ms. Balkan has over 25 years of experience in real estate finance and capital markets. Prior to joining Brookfield in 2002, Ms. Balkan was a Director at Merrill Lynch in New York in the Investment Banking and Debt Capital Markets groups (1998 to 2002), where she was responsible for conduit and large loan origination business, and before that, a Managing Director at Chase Manhattan Bank where she was a member of the management team that developed Chase Manhattan Bank’s top tier CMBS business. Ms. Balkan holds a B.A. from Wesleyan University and successfully completed Chemical Bank’s credit training program in 1987.
Barry S. Blattman. Mr. Blattman is a Senior Managing Partner of Brookfield Real Estate Financial Partners and is responsible for business development, relationship management and strategic transactions. Prior to joining Brookfield in 2002, Mr. Blattman held the title of Managing Director at Merrill Lynch with responsibility at different points in time for numerous businesses including the commercial real estate debt group, the Latin American debt capital markets group and the structured finance group. Mr. Blattman also served as a senior investment banking relationship manager for the office property client group and for financial institutions, specialty finance companies and opportunity funds focused on real estate at Merrill Lynch. Mr. Blattman holds a B.A. from the University of Michigan and an MBA from New York University.

46


Theresa Hoyt. Ms. Hoyt is a Senior Vice President of Brookfield Real Estate Financial Partners, based in New York. She has held several senior management positions at Brookfield and is responsible for the structuring, closing and asset management of transactions. Ms. Hoyt has over 22 years of experience in closing real estate transactions, including nine years of experience in real estate finance and capital markets at Merrill Lynch and JP Morgan. Prior to joining Brookfield in 2003, Ms. Hoyt was at Merrill Lynch and was responsible for the closing and securitization of all large loan transactions. Ms. Hoyt holds a B.A. from Monmouth University.
 William M. Powell. Mr. Powell is a Senior Managing Partner of Brookfield Asset Management and currently serves as Brookfield’s Corporate Treasurer and oversees Brookfield’s Australian operations. Prior to joining Brookfield in 2002, Mr. Powell has held various senior management positions within the real estate capital markets groups at several investment management firms. Mr. Powell has a diverse background as a structured real estate investor having considerable experience in subordinate CMBS, investment grade CMBS, and REIT debt transactions, as well as in privately negotiated structured transactions. Mr. Powell holds a B.S. from the University of Richmond and an M.B.A. from the Darden School of the University of Virginia.
William W. Warner. Mr. Warner is the Chief Executive Officer of Warner Gaming, the parent company of WG-Harmon, LLC, which is the management company for gaming and non-gaming operations under the WG-Harmon Management Agreement and is currently acting as the principal executive officer of the Company. Prior to founding Warner Gaming in 2008, Mr. Warner served as Chief Operating Officer of Station Casinos, overseeing all aspects of gaming and non-gaming operations (as well as development) for more than a dozen gaming properties. Mr. Warner also held several senior management positions at Station, including Vice President of Finance, where he negotiated with banks and underwriters in structuring a variety of bank, bond and equity financings during Station’s fast-growing early years as a public company and Chief Development Officer, where he oversaw design, construction, pre-opening and opening of new properties. Mr. Warner received a bachelor's degree in accounting from Miami University of Ohio in 1986.
Marlo Vandemore. Ms. Vandemore joined a subsidiary of the Company as Chief Financial Officer, in August 2012. Ms. Vandemore has over 15 years of financial experience and has worked at the Los Angeles Dodgers, Navigant Consulting, FTI Consulting, and PricewaterhouseCoopers. Prior to joining the Company, Ms.Vandemore served as Vice President of Finance and Accounting at the Los Angeles Dodgers, where she was responsible for the day to day finance operations. Ms. Vandemore holds a B.S. in Accounting from the University of Southern California and is a certified public accountant.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to each of the executive officers and employees.

Item  11
Executive Compensation
The Company is managed by BREF HR Management in compliance with the gaming laws of the State of Nevada. We do not, and do not intend in the future to, compensate the members and managers of BREF HR Management for the management services they provide the Company. All of the members and managers of BREF HR Management are currently directors and/or officers of Brookfield, and their compensation is set and paid by Brookfield.
The Company is managed under the Management Agreement with WG Harmon as discussed in Part 1, Item 1 - Business, Agreements Governing the Operations of the Hard Rock Hotel & Casino Las Vegas. William W. Warner became the Company’s effective Chief Executive Officer on March 1, 2011, and is responsible for the conduct of the Company's day-to-day operations under the supervision of BREF HR Management. WG Harmon receives base fees in addition to an incentive management fee based on the performance of the adjusted EBITDA of the Hard Rock Hotel & Casino Las Vegas. Compensation of Mr. Warner, who we consider to be the Company’s principal executive officer, is not paid by the Company.

47


COMPENSATION DISCUSSION AND ANALYSIS
Overview
The executive compensation program of the Company is designed to provide compensation that is competitive in the marketplace and to reward and incentivize executive officers to increase our revenues and maximize value to our members. Specifically, the primary tenets of our executive compensation philosophy, similar to other companies in the Las Vegas hotel and casino industry, are the following:
•
Attract, retain and motivate qualified, high-performing executives. The compensation packages we provide to our executive officers are designed to attract them to the Company. Since our formation in 2011, our executive compensation focus has been on retaining the services of our executive officers to continue to build on our operational success. In addition, we continually evaluate our executive officer compensation packages to ensure that our executive compensation program is competitive and attractive to qualified executives with the level of industry experience that we generally seek.
•
Provide rewards commensurate with performance by emphasizing variable, at-risk compensation that is dependent on both Company and individual achievements and continued service. The main elements of our executive compensation program include a base salary and an annual cash bonus. The annual cash bonus is based on the achievement of pre-determined performance targets by the Company.
Compensation Philosophy and Objectives
As companies in the Las Vegas hotel and casino market are likely to compete with us in the marketplace for recruiting and retaining key executives, we have created what we believe is an attractive executive compensation program. In setting the compensation of our named executive officers, we evaluate the scope of the named executive officers responsibilities and our general knowledge of compensation practices in the Las Vegas hotel and casino market. The amount and form of compensation paid or granted to our named executive officers is also determined by the seniority of his or her position and his or her anticipated roles and responsibilities within the organization. In general, executive officers with higher levels of responsibility and a greater ability to influence results have a greater percentage of their total compensation based on variable compensation.
Summary Compensation Table
The following table sets forth the compensation awarded to, paid to or earned by our principal financial officer for the year ended December 31, 2012 and prior to that, as applicable. We consider Mr. Warner, the Company’s effective Chief Executive Officer, as our principal executive officer. Compensation of Mr. Warner is not paid by the Company, and therefore we have not provided his compensation information.
Name and Principle Position
 
Year
 
Salary
 
Annual Bonus
 
All Other Compensation
 
Total
Marlo Vandemore (1)
 
2012
 
$
100,000

(2)
$
10,000

 
$
—

 
$
110,000

Authorized Representative, Principal Financial Officer
 
 
 
 
 
 
 
 
 
 
Brent Zatezalo (3)
 
2012
 
95,112

(4)
—

 
5,769

 
100,881

Authorized Representative, Principal Financial Officer
 
2011
 
95,769

(4)
15,103

 
—

 
110,872

(1)    Ms. Vandemore became the Chief Financial Officer of a subsidiary on July 30, 2012.
(2)    Based on an annual salary of $260,000.
(3)    Mr. Zatezalo served as the Chief Financial Officer of a subsidiary from May 1, 2011 to August 3, 2012.
(4)    Based on an annual salary of $150,000.
Compensation Committee Report
The Company does not have a compensation committee. The members and managers of BREF HR Management have reviewed, discussed and approved the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K in this report.

48



Item  12
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with regard to the beneficial ownership of our membership interests for (i) each person who owned beneficially more than 5% of our Class A Units, (ii) each person who owned beneficially more than 5% of our Class B Units, which comprise our outstanding voting securities, (iii) each of the members and managers of BREF HR Management, (iv) each of the persons determined to be “named executive officers” and (v) all members and managers of BREF HR Management as a group as of the date hereof. Except as otherwise indicated, each such person has sole voting and dispositive power with respect to the membership interests shown as beneficially owned by it.
Name of Beneficial Owner
Percentage Ownership of Class A Units
 
Percentage Ownership of Class B Units
BREF HR Management, LLC (1) (2)
100
%
 
—

Brookfield Financial, LLC as to its Series B (1) (3)
—

 
100
%
Andrea Balkan (1)
—

 
—

Barry S. Blattman (1)
—

 
—

Theresa Hoyt (1)
—

 
—

William M. Powell (1)
—

 
—

William W. Warner (4)
—

 
—

Marlo Vandemore (5)
—

 
—

All members and managers of BREF Management as a group (4 persons)
—

 
—

(1)
The business address for each of Brookfield Financial, BREF HR Management, Mesdames Balkan and Hoyt and Messrs. Blattman and Powell is Three World Financial Center, 250 Vesey Street, 15th Floor New York, NY 10281.
(2)
Mesdames Balkan and Hoyt and Messrs. Blattman and Powell have dispositive power over the Class A Units held by BREF HR Management.
(3)
The Company does not have a board of directors. The Company is managed by BREF HR Management in compliance with the gaming laws of the State of Nevada. Brookfield Financial will not participate in the management or control of the business of, and will not have any rights or powers with respect to, the Company except that BREF HR Management is permitted to transfer, assign, convey or otherwise dispose of any assets of the Company only with the written consent of Brookfield Financial. In addition, Brookfield Financial may cause BREF HR Management to resign and forfeit its interest in the Company and admit a new Class A member (subject to the approval of the Nevada Commission). Subject to the approval of the Nevada Commission, all distributions of the Company are made to Brookfield Financial.
(4)
The business address for William W. Warner, an authorized representative and principal executive officer, is 3883 Howard Hughes Parkway, Suite 800, Las Vegas, NV 89169.
(5)
The business address for Marlo Vandemore, an authorized representative, principal financial officer and Chief Financial Officer of a subsidiary, is 4455 Paradise Road, Las Vegas, NV 89169.

Item  13
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
We are an affiliate of Brookfield. While we believe that our ongoing relationship with Brookfield provides us with a strong competitive advantage as well as access to opportunities that would otherwise not be available to us, we operate very differently from an independent, stand-alone entity. In particular, conflicts of interest could arise, among other reasons, because:

49


•
Brookfield has significant discretion to determine the suitability of opportunities for us and to allocate such opportunities to us or to itself or third parties;
•
there may be circumstances where Brookfield will determine that an acquisition opportunity is not suitable for us because of limits arising due to regulatory or tax considerations or limits on our financial capacity or because of the immaturity of the target assets or the fit with our acquisition strategy and Brookfield is entitled to pursue the acquisition on its own behalf rather than offering us the opportunity to make the acquisition and, as a result, Brookfield may initially or ultimately make the acquisition;
•
where Brookfield has made an acquisition, it may transfer it to us at a later date after the assets have been developed or we have obtained sufficient financing;
•
Brookfield is permitted to pursue other business activities and provide services to third parties that compete directly with our business and activities without providing us with an opportunity to participate, which could result in the allocation of Brookfield’s resources, personnel and acquisition opportunities to others who compete with us; and
•
Brookfield does not owe the Company any fiduciary duties, which may limit our recourse against it.
Until June 15, 2012, LVHR was the third party operator of all gaming operations at the Hard Rock Hotel & Casino Las Vegas. Until June 15, 2012 the Company did not own any interest in LVHR or its affiliated entities, WG-Harmon and Warner Gaming, LLC. However, the Company, through one of its subsidiaries, entered into the 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. 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. 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, and we restructured and converted LVHR from a Nevada corporation to a Nevada limited liability company known as LVHR Casino, LLC. Upon consummation of the conversion of LVHR into LVHR Casino, LLC: (i) LVHR Casino, LLC became a mortgage borrower under the Amended Facility and the Second Mortgage (as such terms are defined herein); (ii) LVHR Casino, LLC continued to own all of the assets that are used at the Hard Rock Hotel & Casino Las Vegas gaming operations, (which assets LVHR acquired on March 2, 2011); and (iii) the revolving line of credit HRHH Gaming was obligated to make available to LVHR terminated. The Casino Lease that was entered into between LVHR and HRHH Hotel/Casino was amended and restated into the Amended Casino Lease. See further discussion at Note 7, Agreement with Related Parties, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.
In addition to the Casino Lease, LVHR and HRHH Gaming, a subsidiary of 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 and LVHR entered into a promissory note with HRHH Gaming which is eliminated during consolidation. 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.
Second Mortgage Loan Agreement
The Company is a party to the Second Mortgage with Brookfield Financial. See Note 8, Debt, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.

50


Director Independence
The Company does not have a board of directors. The Company is managed by BREF HR Management. Although the Company and BREF HR Management are not subject to the rules promulgated by the New York Stock Exchange, the Company has used the independence requirements set forth in these rules as a benchmark to determine whether the members and managers of BREF HR Management are independent. None of the members or managers of BREF HR Management meet the independence requirements set forth in the rules promulgated by the New York Stock Exchange because each of its members and managers is also a director and/or officer of another affiliate of Brookfield. However, given that each of our members has direct control over us, we do not believe it is necessary to elect independent directors at this time. The Company does not currently maintain a separately designated audit, compensation or nominating committee.

Item 14
Principal Accounting Fees and Services
Audit Fees
Audit fees and expenses billed to the Company by Deloitte & Touche LLP (“Deloitte”) for the year ended December 31, 2012 for the audit of our consolidated annual financial statements totaled approximately $905,000. Audit fees and expenses billed to the Company by Deloitte for the year ended December 31, 2011 for the audit of our consolidated annual financial statements and for the review of the financial statements included in the filed Registration Statements totaled approximately $472,000. Audit fees and expenses billed to the Company or HRH Holdings by BDO USA, LLP (“BDO”) for the two-month period ended February 28, 2011 and the year ended December 31, 2010 for the audit of HRH Holdings financial statements and for reviews of financial statements to be included in HRH Holdings Form 10-Qs totaled approximately $246,000 and $298,000, respectively.
Audit-Related Fees
Audit-related fees and expenses billed to the Company by Deloitte for the year ended December 31, 2012 for audit related accounting services totaled approximately $22,000. There were no audit-related fees or expenses billed the Company By Deloitte for the years ended December 31, 2011 and 2010. Audit-related fees and expenses billed to the Company or HRH Holdings by BDO for the years ended December 31, 2012 and 2011 for audit related accounting consultations (401(k) plan review and Sarbanes Oxley) totaled approximately $16,000 and $19,000, respectively.
Tax Fees
The Company and HRH Holdings were not billed fees or expenses for tax compliance, tax advice and tax planning services by Deloitte or BDO during the years ended December 31, 2012 and 2011.
All Other Fees
The Company and HRH Holdings were not billed by Deloitte or BDO any other fees or expenses during the years ended December 31, 2012 or 2011.
BREF HR Management has adopted a policy requiring pre-approval by our members of all audit services to be provided to the Company by its independent auditors. In accordance with that policy, our management has given its approval for the provision of audit services by Deloitte for fiscal year 2012. All other services must be specifically pre-approved by our management or by a designated named executive officer who has been delegated the authority to pre-approve the provision of services.



51


PART IV
Item 15
Exhibits and Financial Statement Schedules
(a)  Financial Statements.
An index of Financial Statements is included on page F-1 of this Annual Report on Form 10-K
(b) Exhibits
An index of Exhibits are included on page F-37 of this Annual Report on Form 10-K

52


Signatures
Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BREF HR, LLC, by its manager, BREF HR Management, LLC
 
 
 
Date: December 20, 2013
By: /s/ Andrea Balkan
 
 
Authorized Representative

                                                                    


53


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Audited Consolidated Annual Financial Statements
 
Report of Independent Registered Public Accounting Firm, Deloitte and Touche LLP
F2
Report of Independent Registered Public Accounting Firm, BDO USA, LLP
F3
Consolidated Balance Sheets
F4
Consolidated Statements of Operations and Comprehensive (Loss) Income
F5
Consolidated Statements of Members’ Equity (Deficit)
F6
Consolidated Statements of Cash Flows
F7
Notes to Audited Consolidated Financial Statements
F9
 


F-1



Report of Independent Registered Public Accounting Firm
BREF HR Management, LLC, on behalf of
BREF HR, LLC and Subsidiaries
New York, New York

We have audited the accompanying consolidated balance sheets of BREF HR, LLC and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, members’ equity (deficit), and cash flows for the year ended December 31, 2012 and for the period March 1, 2011 to December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the BREF HR, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the year ended December 31, 2012 and for the period March 1, 2011 to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 12 to the consolidated financial statements, the accompanying 2011 consolidated financial statements have been restated to correct an error.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, recurring losses from operations and the potential debt repayments at March 1, 2014 raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/Deloitte & Touche LLP

Las Vegas, Nevada
December 20, 2013


F-2



Report of Independent Registered Public Accounting Firm
Board of Directors and Members
Hard Rock Hotel Holdings, LLC
Las Vegas, Nevada
We have audited the accompanying consolidated statements of operations and comprehensive (loss) income, members’ equity (deficit), and cash flows of Hard Rock Hotel Holdings, LLC (“Company”) for the year ended December 31, 2010, and the two-month period ended February 28, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, on March 1, 2011, the Company’s debt holders foreclosed on substantially all of the Company’s assets.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Hard Rock Hotel Holdings, LLC for the year ended December 31, 2010, and the two-month period ended February 28, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and defaulted on its debt. On March 1, 2011, the Company’s debt holders foreclosed on substantially all of the Company’s assets. These factors among others raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO USA, LLP
Las Vegas, Nevada
July 29, 2011


F-3



BREF HR, LLC
Consolidated Balance Sheets
($ in thousands)
As of December 31,
Assets
2012
 
2011
Current assets:
 
 
 
Cash and Cash equivalents
$
13,658

 
$
16,818

Accounts receivable, net
8,309

 
8,054

Inventories
2,519

 
2,569

Prepaid expenses and other current assets
3,861

 
3,311

Investment in joint venture
1,474

 
—

Related party receivable
885

 
759

Restricted cash
3,995

 
4,632

Total current assets
34,701

 
36,143

 
 
 
 
Property and equipment, net
499,164

 
511,351

Intangible assets, net
76,195

 
104,000

Restricted cash
17,781

 
28,958

Total assets
$
627,841

 
$
680,452

 
 
 
 
Liabilities and Members' Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,053

 
$
3,430

Construction related payables
302

 
235

Related party payables
406

 
—

Accrued expenses
23,676

 
26,939

Total current liabilities
30,437

 
30,604

 
 
 
 
Long term accrued expenses
568

 
1,170

Long term interest payable
43,963

 
19,590

Long term debt
632,864

 
594,897

Long term debt - due to affiliate
15,021

 
13,802

Total long term liabilities
692,416

 
629,459

Total liabilities
722,853

 
660,063

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

 
86,673

Accumulated other comprehensive loss
—

 
(203
)
Accumulated deficit
(181,685
)
 
(66,081
)
Total members' equity (deficit)
(95,012
)
 
20,389

Total liabilities and members' equity (deficit)
$
627,841

 
$
680,452

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

F-4



BREF HR, LLC
Consolidated Statements of Operations and Comprehensive (Loss) Income
 
Company
 
 
HRH Holdings
 
 
 
 
 
 
 
 
 
 
For the year
ended
 
Period from
Mar 1, 2011 to
 
 
Period from
Jan 1, 2011
 
For the year
ended
($ in thousands)
December 31,
2012
 
December 31,
2011
 
 
to Feb 28,
2011
 
December 31,
2010
Revenue
 
 
 
 
 
 
 
 
Casino
$
43,572

 
$
34,641

 
 
$
5,973

 
$
59,703

Lodging
61,356

 
48,725

 
 
9,222

 
55,405

Food and beverage
79,348

 
69,908

 
 
12,390

 
96,669

Retail
2,789

 
2,588

 
 
426

 
4,452

Other
31,469

 
24,011

 
 
4,591

 
31,242

Gross revenues
218,534

 
179,873

 
 
32,602

 
247,471

Less: Promotional allowances
(19,993
)
 
(15,220
)
 
 
(3,345
)
 
(23,500
)
Net revenues
198,541

 
164,653

 
 
29,257

 
223,971

 
 
 
 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
 
 
 
Casino
35,444

 
29,717

 
 
5,666

 
48,067

Lodging
20,472

 
16,321

 
 
3,122

 
18,617

Food and beverage
44,747

 
37,005

 
 
5,748

 
51,612

Retail
1,682

 
1,696

 
 
273

 
2,872

Other
20,495

 
13,930

 
 
2,877

 
22,320

Marketing
8,650

 
5,867

 
 
843

 
8,656

Fee and expense reimbursements - related party
2,206

 
1,673

 
 
932

 
9,444

General and administrative
36,832

 
31,906

 
 
6,389

 
47,701

Depreciation and amortization
31,360

 
24,815

 
 
10,858

 
55,575

Loss on disposal of assets
501

 
50

 
 
—

 
3,138

Pre-opening
433

 
146

 
 
—

 
726

Impairment of land
—

 
—

 
 
—

 
16,180

Impairment of intangible assets
21,175

 
—

 
 
—

 
—

Total costs and expenses
223,997

 
163,126

 
 
36,708

 
284,908

(Loss) income from operations
(25,456
)
 
1,527

 
 
(7,451
)
 
(60,937
)
Interest income
36

 
66

 
 
8

 
38

Interest expense
(89,554
)
 
(67,674
)
 
 
(14,870
)
 
(68,251
)
Gain on forgiveness of debt
—

 
—

 
 
32,460

 
—

Loss on joint venture investment
(630
)
 
—

 
 
—

 
—

(Loss) income before income tax
 
 
 
 
 
 
 
 
expense
(115,604
)
 
(66,081
)
 
 
10,147

 
(129,150
)
Income tax expense
—

 
—

 
 
141

 
467

Net (loss) income
(115,604
)
 
(66,081
)
 
 
10,006

 
(129,617
)
Interest rate cap fair market value
 
 
 
 
 
 
 
 
adjustment, net of tax
203

 
(203
)
 
 
335

 
1,976

Comprehensive (loss) income
$
(115,401
)
 
$
(66,284
)
 
 
$
10,341

 
$
(127,641
)
The accompanying notes are an integral part of these consolidated financial statements.

F-5



BREF HR, LLC
Consolidated Statements of Members’ Equity (Deficit)
($ in thousands)
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Members'
Equity
(Deficit)
Balances at December 31, 2009 (HRH Holdings)
$
500,218

 
$
(562,780
)
 
$
(2,311
)
 
$
(64,873
)
Net income
—

 
(129,617
)
 
—

 
(129,617
)
Interest rate cap fair market value
 
 
 
 
 
 
 
adjustment, net of tax
 
 
 
 
1,976

 
1,976

Balances at December 31, 2010 (HRH Holdings)
$
500,218

 
$
(692,397
)
 
$
(335
)
 
$
(192,514
)
Net income
—

 
10,006

 
—

 
10,006

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

 
—

 
335

 
335

Balances at February 28, 2011 (HRH Holdings)
$
500,218

 
$
(682,391
)
 
—

 
$
(182,173
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at March 1, 2011 (Company)
$
—

 
$
—

 
$
—

 
$
—

Issuance of members' equity
68,046

 
—

 
—

 
68,046

Contributions at closing of the Assignment
17,000

 
—

 
—

 
17,000

Additional paid in capital
1,627

 
—

 
—

 
1,627

Net loss
—

 
(66,081
)
 
—

 
(66,081
)
Interest rate cap fair market value
 
 
 
 
 
 
 
adjustment
—

 
—

 
(203
)
 
(203
)
Balances at December 31, 2011 (Company)
86,673

 
(66,081
)
 
(203
)
 
20,389

Net loss
—

 
(115,604
)
 
—

 
(115,604
)
Interest rate cap fair market value
 
 
 
 
 
 
 
adjustment
—

 
—

 
203

 
203

Balances at December 31, 2012 (Company)
$
86,673

 
$
(181,685
)
 
$
—

 
$
(95,012
)
The accompanying notes are an integral part of these consolidated financial statements.

F-6



BREF HR, LLC
Consolidated Statements of Cash Flows
 
Company
 
 
HRH Holdings
 
 
 
AS RESTATED - See Note 12
 
 
 
 
 
 
For the year
ended
 
Period from Mar
1, 2011 to
 
 
Period from
Jan 1, 2011
 
For the year
ended
($ in thousands)
December 31,
2012
 
December 31,
2011
 
 
to Feb 28,
2011
 
December 31,
2010
Cash flows from operating activities
 
 
 
 
 
 
 
 
Net (loss) income
$
(115,604
)
 
$
(66,081
)
 
 
$
10,006

 
$
(129,617
)
Adjustment to reconcile net income (loss) to net cash
 
 
 
 
 
 
 
 
provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation
24,730

 
17,042

 
 
10,307

 
51,915

Gain on forgiveness of debt
—

 
—

 
 
(32,460
)
 
 
Provision for (recovery of) doubtful accounts
(325
)
 
1,627

 
 
5

 
(5,169
)
Amortization of loan fees and costs
—

 
—

 
 
2,200

 
2,451

Impairment of land
—

 
—

 
 
—

 
16,180

Impairment of licenses and trademarks
21,175

 
—

 
 
—

 
—

Amortization of intangible assets
6,630

 
7,773

 
 
551

 
3,660

Amortization of debt discount
28,914

 
17,856

 
 
—

 
—

Accrued non-cash interest applied to principal
11,273

 
9,154

 
 
—

 
—

Change in value of interest rate caps net of premium amortization
345

 
169

 
 
335

 
1,976

Loss on joint venture investment
630

 
—

 
 
—

 
—

Loss on sale of assets
501

 
50

 
 
—

 
3,138

Deferred income taxes
—

 
—

 
 
141

 
467

(Increase) decrease in assets:
 
 
 
 
 
 
 
 
Accounts receivable
70

 
(619
)
 
 
(1,065
)
 
7,651

Inventories
50

 
(360
)
 
 
508

 
345

Prepaid expenses
(550
)
 
(506
)
 
 
33

 
937

Related party receivable
(126
)
 
(759
)
 
 
4

 
(7
)
Increase (decrease) in liabilities:
 
 
 
 
 
 
 
 
Accounts payable
2,623

 
(4,857
)
 
 
66

 
(1,612
)
Related party payable
406

 
—

 
 
945

 
6,432

Other accrued liabilities
(2,135
)
 
3,955

 
 
6,916

 
4,013

Accrued interest payable
24,373

 
16,378

 
 
5,529

 
9,213

Net cash provided by (used in) operating activities
2,980

 
822

 
 
4,021

 
(28,027
)
Cash flow from investing activities
 
 
 
 
 
 
 
 
Purchases of property and equipment
(13,018
)
 
(4,839
)
 
 
(137
)
 
(55,845
)
Payments on construction related payable
—

 
(347
)
 
 
(44
)
 
(49,411
)
Reduction (increase) in restricted cash
—

 
—

 
 
16,527

 
42,264

Restricted cash contributions
(9,988
)
 
(41,387
)
 
 
—

 
—

Restricted cash withdrawals
21,802

 
15,355

 
 
—

 
—

Purchase of joint venture investment
(2,104
)
 
—

 
 
—

 
—

Proceeds from sale of operating assets
41

 
15

 
 
—

 
—

Net cash (used in) provided by investing activities
(3,267
)
 
(31,203
)
 
 
16,346

 
(62,992
)

F-7



BREF HR, LLC
Consolidated Statements of Cash Flows
 
Company
 
 
HRH Holdings
 
 
 
AS RESTATED - See Note 12
 
 
 
 
 
 
For the year
ended
 
Period from Mar
1, 2011 to
 
 
Period from
Jan 1, 2011
 
For the year
ended
($ in thousands)
December 31,
2012
 
December 31,
2011
 
 
to Feb 28,
2011
 
December 31,
2010
Cash flow from financing activities
 
 
 
 
 
 
 
 
Proceeds from borrowings
—

 
13,000

 
 
—

 
95,036

Proceeds from members' equity contribution
—

 
18,627

 
 
—

 
—

Repayments on borrowings
(1,001
)
 
(1,093
)
 
 
(15,199
)
 
—

Purchase of interest rate caps
(142
)
 
(372
)
 
 
—

 
—

Financing costs of debt
—

 
—

 
 
—

 
(1,271
)
Principal payments on capital leases
(1,730
)
 
(3,154
)
 
 
—

 
—

Net cash (used in) provided by financing activities
(2,873
)
 
27,008

 
 
(15,199
)
 
93,765

Net (decrease) increase in cash and cash equivalents
(3,160
)
 
(3,373
)
 
 
5,168

 
2,746

Cash and cash equivalents, beginning of period
16,818

 
20,191

 
 
15,023

 
12,277

Cash and cash equivalents, end of period
$
13,658

 
$
16,818

 
 
$
20,191

 
$
15,023

 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net
 
 
 
 
 
 
 
 
of amounts capitalized
$
25,434

 
$
21,399

 
 
$
8,245

 
$
41,313

 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Non-cash Investing and Financing Activities
 
 
 
 
 
Capitalized interest
$
—

 
$
—

 
 
$
—

 
$
20,393

Construction related payables
302

 
235

 
 
2,450

 
51,905

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
)
 
—

Issuance of members' equity
—

 
68,046

 
 
—

 
—

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

F-8



BREF HR, LLC
Notes to Audited Consolidated Financial Statements
1.    Company Structure and Significant Accounting Policies
Basis of Presentation and Nature of Business
BREF HR, LLC (the “Company”) 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.
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 own 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”). The transactions contemplated by such agreement are referred to as the “Assignment”, as described more fully herein.
Hard Rock Hotel Holdings, LLC (“HRH Holdings”), a Delaware limited liability company was formed on January 16, 2007 by DLJ Merchant Banking Partners (“DLJMB”) and Morgans Hotel Group Co. (“Morgans”) to acquire Hard Rock Hotel, Inc. (“HRH”), a Nevada corporation incorporated on August 30, 1993, and certain related assets.
Since March 1, 2011, the Hard Rock Hotel & Casino Las Vegas and related assets have been owned by the Company pursuant to the Assignment described below from HRH Holdings. The financial information of HRH Holdings as of December 31, 2010 and for the year ended December 31, 2010, and the two-month period ended February 28, 2011, have been included in the financial statements in this Form 10-K. Because of the change in basis of accounting as a result of the Assignment, the results of operations are not comparable for successor and predecessor periods.
The preparation of the consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America requires 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 consolidated 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.
The Company's Going Concern
The Company incurred a loss of $115.6 million for the year ended December 31, 2012, and has a net members' deficit of $95.0 million as of December 31, 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 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

F-9



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 uncertainties, including the possibility that the Company loses some or substantially all of its assets to foreclosure as a result of these uncertainties.
HRH Holdings’ Going Concern Uncertainty
HRH Holdings’ consolidated financial statements as of and for the year ended December 31, 2010, were prepared assuming that HRH Holdings would continue as a going concern, which contemplated the realization of assets and the liquidation of liabilities in the normal course of business. HRH Holdings incurred significant losses and did not generate sufficient cash to fully cover the interest payments on the Facility and used funds from the reserves to meet its liquidity needs. The Facility matured on February 9, 2011 and HRH Holdings did not qualify for the extension option, resulting in a default. As of February 28, 2011, HRH Holdings had a total deficit of approximately $182.2 million. HRH Holdings’ history of recurring losses, negative working capital and limited access to capital, raised substantial doubt regarding HRH Holdings’ ability to continue as a going concern. Management of HRH Holdings reviewed its options and discussed with the lenders possibly restructuring the debt. However, on March 1, 2011, HRH Holdings, the lenders, as well as other interested parties, entered into the Assignment, which among other things, transferred 100% of the indirect equity interest in the Hard Rock Hotel & Casino, as described above. The consolidated financial statements of HRH Holdings do not include any adjustments that might result from the outcome of this uncertainty.
The Assignment
On March 1, 2011, HRH Holdings, Vegas HR Private Limited (the “Mortgage Lender”), Brookfield Financial, NRFC WA Holdings, LLC, Morgans and certain affiliates of 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 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 we have engaged Morgans Management as (i) the exclusive operator and manager of the Hard Rock (excluding the operation of the gaming facilities which are operated by our subsidiary, HRHH Gaming, LLC) and (ii) the asset manager of the approximately 23-acre parcel adjacent to the Hard Rock and the land on which the Hard Rock Cafe restaurant is situated (which is subject to a lease between our subsidiary, HRHH Cafe, LLC, as landlord, and Hard Rock Cafe International (USA), Inc., as tenant).
In addition, Brookfield Financial, as a condition of the Assignment, entered into the Second Mortgage on March 1, 2011 with the Company 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.

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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 are paid specified values in full.  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 Assignment was accounted for as a business combination in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. All assets and liabilities were recorded at their respective fair values as of the date of foreclosure.
The following table summarizes the net contributions and the fair value of the assets and liabilities acquired at the date of the Assignment (in thousands):
Assets
 
Other assets
$
71,825

Land, buildings and equipment
523,931

Intangible assets
111,773

Total assets
$
707,529

 
 
Liabilities & Members' Equity
 
Current liabilities
$
39,701

Long term debt
582,782

Total liabilities
622,483

 
 
Member' equity
85,046

 
 
Total liabilities & members' equity
$
707,529

Unaudited Pro Forma Financial Data
The following unaudited pro forma statement of operations for the years ended December 31, 2010 and 2011, give effect to the Assignment as if it occurred on January 1, 2010. The unaudited pro forma statement of operations for the year ended December 31, 2011 includes the actual results of operations for the Company for the period from March 1, 2011 through December 31, 2011 and the pro forma results of operations for HRH Holdings for the period from January 1, 2011 to February 28, 2011 adjusted as described below. The unaudited pro forma consolidated financial statements are not necessarily indicative of the results that would have been reported had such transactions actually occurred on the date specified, nor are they indicative of the Company’s future results of operations or financial condition.
Unaudited Pro Forma Statement of Operations For the Years Ended December 31, 2010 and 2011
($ in thousands)
For the year ended December 31, 2010
 
For the year ended December 31, 2011
Total revenues
$
223,971

 
$
193,910

Income before income taxes
(92,694
)
 
(80,566
)
Net income
(92,694
)
 
(80,566
)
Principles of Consolidation
The accompanying consolidated financial statements of the Company and HRH Holdings include the accounts of the Company and HRH Holdings and their subsidiaries, including interests consolidated as variable interest entities.

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Consolidation of Variable Interest Entity
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.
The following represent the summarized balance sheet of LVHR included in our consolidated balance sheet as of 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

Investment in Joint Venture
During 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, out of 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 December 31, 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 year ended December 31, 2012, the Company recorded a loss of $0.6 million, related to its equity in CDO. The Company’s share of the joint venture’s loss is included in equity in income of joint venture in the accompanying consolidated statements of operations. At December 31, 2012, the Company’s net investment in CDO is $1.5 million, which is included in other current assets in the accompanying consolidated balance sheets at December 31, 2012. There were no distributions to the members for the year ended December 31, 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and interest-bearing deposits with maturities at the date of purchase of three months or less. Cash equivalents are carried at cost which approximates fair value.

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Deferred Income
Deferred income consists of sponsorship payments received from various vendors and suppliers. These sponsorship payments are amortized using the straight line method over the life of the agreements. As of December 31, 2012 and 2011, the Company had $4.1 million and $3.2 million in deferred income, respectively.
Restricted Cash
We are obligated to maintain certain cash reserve funds for a variety of purposes as determined pursuant to the Amended Facility, including a requirement to deposit funds into a replacements and refurbishments reserve fund at amounts equal to three percent of the Hard Rock Hotel & Casino Las Vegas' gross revenues. Restricted cash consists of the following:
($ in thousands)
December 31, 2012
 
December 31, 2011
Current
 
 
 
Tax reserves
$
2,072

 
$
1,921

Insurance reserves
1,327

 
1,222

Other reserves
363

 
1,260

Workers' compensation reserves
233

 
229

Total current restricted cash
3,995

 
4,632

Long-term
 
 
 
Working capital reserves
16,148

 
26,554

Available restricted cash reserves for future capital expenditures
1,633

 
2,404

Total long-term restricted cash
17,781

 
28,958

Total restricted cash
$
21,776

 
$
33,590

Concentrations of Credit Risk
Financial instruments that potentially subject the Company and HRH Holdings to concentrations of credit risk consist principally of casino accounts receivable. The Company and HRH Holdings issues credit in the form of “markers” to approved casino customers following investigations of creditworthiness. Business or economic conditions or other significant events could affect the collectability of such receivables.
Substantially all accounts receivable are unsecured and are due primarily from casino and hotel patrons and convention functions. Non-performance by these parties would result in losses up to the recorded amount of the related receivables. Management does not anticipate significant non-performance and believes that they have adequately provided for uncollectible receivables.
Accounts receivable, including casino and hotel receivables, are typically non-interest bearing and are initially recorded at cost. Accounts are written off when management deems them to be uncollectible. Recoveries of accounts previously written off are recorded when received. An estimated allowance for doubtful accounts is maintained to reduce the receivables to their carrying amount, which approximates fair value. Such allowances are estimated based on specific review of customer accounts as well as management's experience with collection trends in the casino industry and current economic and business conditions.
Inventories
Inventories are stated at the lower of cost (determined using the first-in, first-out method), or market.

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Property and Equipment, Net
Land improvements, buildings and improvements, equipment, furniture and fixtures, and memorabilia were recorded at fair value as of March 1, 2011. Subsequent additions are recorded at cost. The Company and HRH Holdings capitalize interest on funds disbursed during construction. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. Estimated useful lives are as follows:
Buildings and Building improvements
15-40 years
Equipment, furniture and fixtures
3-10 years
Gains or losses arising from dispositions are included in costs and expenses in the accompanying statements of operations. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. Substantially all property and equipment is pledged as collateral for long-term debt at December 31, 2012 and 2011. For assets to be disposed of the Company recognizes the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. We treat memorabilia as an indefinite lived asset and therefore it is non-amortizing.
For the year ended December 31, 2010 and the two-month period ended February 28, 2011, land improvements, buildings and improvements, equipment, furniture and fixtures, and memorabilia relating to HRH Holdings were recorded at historical cost. Depreciation and amortization were computed using the straight-line method over the estimated useful lives. Estimated useful lives were as follows:
Land improvements
12-15 years
Building improvements
15 years
Buildings
39-45 years
Equipment, furniture and fixtures
3-10 years
Memorabilia
40 years
Indefinite-lived Intangibles
The Company performs an annual impairment test for indefinite-lived intangible assets at December 31 of each year, or more frequently if impairment indicators exist. The impairment test consists of comparing the fair value of the asset with its carrying amount, and, if the carrying amount exceeds its fair value, an impairment loss would be recognized for the carrying amount in excess of its implied fair value.
The Hard Rock trade name and future trademark licensing are tested for impairment using the discounted net revenue stream based on the estimated future results of the Company.
During 2012, the Company recognized a non-cash impairment charge of $15.0 million relating to the Hard Rock trademark. See further discussion at Note 5, Intangible Assets. No impairments were recorded for the ten-month period ended December 31, 2011 and for the two-month period ended February 28, 2011, related to these assets.
Finite-lived Intangible Assets
Intangible assets that have a definite life, such as trade names, in-place contracts and certain non-compete agreements, are amortized on a straight-line basis over their estimated useful lives or related contract. The Company and HRH Holdings each review the carrying value of its intangible assets that have a definite life for possible impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. HRH Holdings and the Company then compare the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is recorded based on the fair value of the asset, typically measured using a discounted cash flow model. All recognized impairment losses, whether for assets held for sale or assets to be held and used, are recorded as operating expenses.

F-14



Inherent in reviewing the carrying amounts of the above assets is the use of various estimates. First, the Company and HRH Holdings must determine the usage of the asset. Impairment of an asset is more likely to be recognized where and to the extent management of the Company or HRH Holdings decides that such asset may be disposed of or sold. Assets must be tested at the lowest level for which identifiable cash flows exist. This testing means that some assets must be grouped and management of the Company and HRH Holdings exercises some judgement in grouping those assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from estimates. If ongoing estimates of future cash flows are not met, the Company or HRH Holdings may have to record additional impairment charges in future accounting periods. Estimates of cash flows for the Company and HRH Holdings are based on the current regulatory, social and economic climates where operations are or were conducted as well as recent operating information and budgets for the Company’ and HRH Holdings’ business. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting various forms of travel and access to the Hard Rock Hotel & Casino Las Vegas.
During 2012, the Company recognized a non-cash impairment charge of $6.2 million relating to the Isleta license agreement. See further discussion at Note 5, Intangible Assets. No impairments were recorded for the ten-month period ended December 31, 2011 and for the two-month period ended February 28, 2011, related to these assets.
Impairment of Long-Lived Assets
The carrying value of property and equipment to be held and used are evaluated for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable based on the estimated future undiscounted cash flows of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows are less than the assets carrying value, the impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model. Assets to be disposed of are recorded at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model.
No impairments were recorded for the year ended December 31, 2012, the ten-month period ended December 31, 2011 and for the two-month period ended February 28, 2011. HRH Holdings recognized a non-cash impairment charge for the year ended December 31, 2010 of approximately $16.2 million related to land.
Advertising Expenses
The costs of all advertising campaigns and promotions are expensed as incurred. Total advertising expense (exclusive of amounts related to pre-opening) for year ended December 31, 2012 and the ten-month period ended December 31, 2011 was $6.5 million and $3.3 million, respectively, for the Company. Total advertising expenses (exclusive of pre-opening) for the two-month period ended February 28, 2011 and for the year ended December 31, 2010 were $0.3 million and $3.1 million, respectively, for the HRH Holdings.
Income Taxes
The Company is treated as a limited liability company and its default classification for tax purposes is that of a disregarded entity not subject to federal income taxes.  Accordingly, the Company makes no provision for federal income taxes in its financial statements. The Company’s federal taxable income or loss, which is different than financial statement income or loss, is reportable by the member.  The Company’s members are responsible for reporting their allocable share of the Company’s income, gains, deductions, losses and credits on their individual income tax returns. The Company may however, be subject to certain state and local taxes.
HRH Holdings is a limited liability company and, as such, does not pay taxes on an entity level but passes its earnings and losses through to its members. HRH Holdings does, however, own all of the stock of a Sub-Chapter C corporation, which is a tax paying entity. Income taxes of HRH Holdings’ subsidiaries are computed using the subsidiaries effective tax rate. HRH Holdings’ members are responsible for reporting their allocable share of HRH Holdings’ income, gains, deductions, losses and credits on their individual income tax returns. HRH Holdings recorded $0.5 million and $0.1 million of income tax expense for the year ended December 31, 2010 and the two-month period ended February 28, 2011, respectively.

F-15



Revenues
Casino revenues are derived from patrons wagering on table games, slot machines, poker, sporting events and races. Table games generally include Blackjack or Twenty One, Craps, Baccarat and Roulette. Casino revenue is defined as the win from gaming activities, computed as the difference between gaming wins and losses, not the total amounts wagered. Casino revenue is recognized at the end of each gaming day.
Lodging revenues are derived from rooms and suites rented to guests and include related revenues for incidental services. Room revenue is recognized at the time the room or service is provided to the guest.
Food and beverage revenues are derived from food and beverage sales in the food outlets, including restaurants, room service, banquets and nightclub. Food and beverage revenue is recognized at the time the food and/or beverage is provided to the guest.
Retail and other revenues include retail sales, entertainment revenue, spa fees, commissions, estimated income for gaming chips and tokens not expected to be redeemed, fees for licensing the “Hard Rock” brand and other miscellaneous income. Retail and other revenues are recognized at the point in time the retail sale occurs, when entertainment and spa services are provided to the guest, when we determine that gaming chips or tokens are not expected to be redeemed or when licensing fees become due and payable.
Complimentaries
Revenues include the retail value of rooms, food and beverage, and other complimentaries provided to casino customers without charge, which are then subtracted to arrive at net revenues. The allocated costs of providing such complimentaries have been classified as casino operating expenses as follows:
 
Company
 
HRH Holdings
 
 Year Ended
 
 March 1, 2011 to
 
 Jan 1, 2011 to
 
 Year Ended
($ in thousands)
December 31, 2012
 
December 31, 2011
 
February 28, 2011
 
December 31, 2010
Food and beverage
$
7,289

 
$
5,440

 
$
1,220

 
$
8,996

Lodging
2,907

 
1,860

 
398

 
3,196

Other
1,293

 
890

 
147

 
1,520

Total costs allocated to
 
 
 
 
 
 
 
casino operating costs
$
11,489

 
$
8,190

 
$
1,765

 
$
13,712

Revenues are recognized net of certain sales incentives, including points redeemed for cash through customer loyalty programs, such as the player's club loyalty program, amounts of reimbursed airfare and marker discounts, and cash incentives earned in the Company's “Backstage Pass” slot club.
Reimbursed customer airfare and marker discounts were $2.0 million and $1.3 million for the year ended December 31, 2012 and for the ten-month period ended December 31, 2011, respectively. Reimbursed customer airfare and marker discounts were $3.8 million and $285,000 for the year ended December 31, 2010 and the two-month period ended February 28, 2011, respectively.
Derivative Instruments and Hedging Activities
All derivative instruments are recorded at fair value. The accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative instruments 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

F-16



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 our 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 debt agreements without exchange of the underlying principal amount.
The Company
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 $141,980. These interest rate cap agreements matured on April 1, 2013. The Company did not designate these interest rate cap agreements for hedge accounting.
Effective March 1, 2011, the Company purchased two interest rate cap agreements with an aggregate notional amount of $868.5 million and a LIBOR cap of 1.26575% approximately $0.4 million. These interest rate cap agreements matured on March 1, 2012. The Company did designate these interest rate cap agreements for hedge accounting as a cash flow hedge. Accordingly, the effective portion of the change in fair value of these derivative instruments is recognized in other comprehensive income (loss).
For the year ended December 31, 2012, the Company expensed $142,000 to interest expense attributable to derivatives not designated as hedges. For the period March 1, 2011 to December 31, 2011, the Company expensed $0.2 million to interest expense attributable to derivatives not designated as hedges.
HRH Holdings
On February 9, 2010, HRH Holdings purchased five interest rate cap agreements with an aggregate notional amount of $1.285 billion and a LIBOR cap of 1.23313% approximately $1.6 million. These interest rate cap agreements expired on February 9, 2011. HRH Holdings designated four out of the five interest rate caps for hedge accounting as cash flow hedges. Accordingly, the effective portion of the change in fair value of these derivative instruments was recognized in other comprehensive income (loss). The changes in fair value of the remaining one interest rate cap that did not qualify for hedge accounting was recognized directly in earnings.
These derivative instruments expired as of February 28, 2011. The gain or (loss) in fair value included in HRH Holdings' comprehensive income for the two months ended February 28, 2011 was $0.3 million, net of premium amortization. Amounts reported in accumulated other comprehensive loss related to derivatives were reclassified to interest expense as interest payments were made on HRH Holdings' variable-rate debt. HRH Holdings reflected the change in fair value of all hedging instruments in cash flows from operating activities. The net gain or loss recognized in earnings during the reporting period representing the amount of the hedges' ineffectiveness was insignificant. For the two-month period ended February 28, 2011 and for the year ended December 31, 2010, HRH Holdings recognized $0.3 million and $3.6 million in interest expense attributable to the derivatives not designated as hedges according to FASB ASC 815-10, respectively.
Fair Value of Financial Instruments
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, fair value measurement is determined based on assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy is used to distinguish between market participant assumptions based on market data obtained from sources independent of the reporting entity as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

F-17



The Company
Interest rate caps. The Company uses interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The Company has determined that its derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. As of December 31, 2012 and 2011, the Company’s interest rate caps had a fair value of zero included in prepaid expenses and other current assets.
Debt. To determine the fair value of our debt the Company utilizes a discounted cash flow model. The discount rate is determined utilizing historical market-based equity returns which are adjusted, as necessary, for entity specific factors. The Company has determined that our debt valuations are classified in Level 3 of the fair value hierarchy. As of December 31, 2012 and 2011, the fair value of the Company’s debt was estimated to be $603.1 million and $622.9 million, respectively. The carrying amount of debt was $647.9 million and $608.7 million, respectively.
HRH Holdings
Interest rate caps. HRH Holdings used interest rate caps to manage its interest rate risk. The valuation of these instruments was determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities. HRH Holdings incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. HRH Holdings was exposed to credit loss in the event of a non-performance by the counterparties to its interest rate cap agreements; however, HRH Holdings believed that this risk was minimized because it monitored the credit ratings of the counterparties to such agreements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, HRH Holdings had considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although HRH Holdings had determined that the majority of the inputs used to value its derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, HRH Holdings had assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and had determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, HRH Holdings determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy. As of February 28, 2011, the interest rate caps had all expired.
Valuation of Consideration Transferred in the Assignment
To estimate the fair value of consideration transferred to the Company in connection with the Assignment, we first estimated the Company’s total business enterprise value (the “BEV”). BEV, which was determined using Level 3 inputs, reflects the fair value of the core operations and was determined based on a combination of the market approach (25% weight) and income approach (75% weight) while the excess land was valued solely under the market approach and the new initiatives were valued using the income approach.
In constructing an income approach model for the core operations of the Company, we developed a “most likely” case projection of future revenues, expenses, depreciation, and capital expenditures for the years 2011 through 2016. The terminal (or residual) year value calculation using the Gordon Dividend Growth Model was made to capture business value beyond the forecast horizon. Other key inputs include a discount rate range of 13.50% to 14.50% and long term growth ranging from 2.50% to 3.00% for the core business. A discount rate of 35% was used for the new initiatives and intellectual property. Discount rates were chosen to reflect the estimated weighted average cost of capital derived for the Company based in part on certain financial metrics observed for a group of publicly traded guideline companies.
The market approach utilized the observed BEV-to-EBTIDA multiples of a group of publicly traded guideline companies operating in the gaming sector. Multiples were computed and applied to both trailing historical and forward looking EBTIDA parameters. Upward adjustments were made to the observed multiples to reflect the Company’s pass-through tax status and a premise of control.

F-18



Higher weight was accorded the income approach due to the expectation that several years may transpire before the financial performance of the Company grows to a stabilized level.
Recently Issued and Adopted Accounting Pronouncements
In May 2011, FASB issued an accounting standards update that is intended to align the principles for fair value measurements and the related disclosure requirements under GAAP and IFRS. From a GAAP perspective, the updates are largely clarifications and certain additional disclosures. The changes were originally to be effective for us January 1, 2012. In December 2011, FASB issued updated guidance deferring the effective date indefinitely pending further deliberations by FASB at a future date. This update did not have a material impact on our financial statements.
In June 2011, FASB issued new guidance for the presentation of other comprehensive income ("OCI"). 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 will make the presentation of items within OCI more prominent. 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. The new disclosure requirements have been included in this Form 10-K, and, there was no impact on our consolidated financial position, results of operations, or cash flows upon adoption.

2.    Accounts Receivable, Net
Components of accounts receivable, net consists of the following:
 
 As of December 31,
($ in thousands)
2012
 
2011
Casino
$
3,677

 
$
3,862

Hotel
2,883

 
3,277

Other
2,708

 
2,235

 
9,268

 
9,374

Less: allowance for doubtful accounts
(959
)
 
(1,320
)
Total accounts receivable, net
$
8,309

 
$
8,054

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

Additions - bad debt expense
2,476

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

 
 
 
 
Fair value adjustments (Company)
$
(595
)
Balance at March 1, 2011 (Company)
—

Additions - bad debt expense
1,627

Deductions - write off net of collections
(307
)
Balance at December 31, 2011 (Company)
1,320

Additions - bad debt expense
(325
)
Deductions - write off net of collections
(36
)
Balance at December 31, 2012 (Company)
$
959



F-19



3.
Inventories
Inventories consist of the following:
 
 As of December 31,
($ in thousands)
2012
 
2011
Restaurants and bars
$
1,739

 
$
1,892

Retail merchandise
699

 
593

Other inventory and operating supplies
81

 
84

Total inventories
$
2,519

 
$
2,569


4.
Property and Equipment, Net
Property and equipment consists of the following:
 
 As of December 31,
($ in thousands)
2012
 
2011
Land
$
115,600

 
$
115,600

Buildings and building improvements
341,940

 
337,314

Furniture, fixtures and equipment
77,005

 
69,182

Memorabilia
6,012

 
5,953

 
540,557

 
528,049

Less: accumulated depreciation and amortization
(41,603
)
 
(17,038
)
Construction in progress
210

 
340

Total property and equipment, net
$
499,164

 
$
511,351

Depreciation relating to property and equipment for the Company was $24.7 million and $17.0 million for the year ended December 31, 2012 and the ten-month period ended December 31, 2011, respectively.
Depreciation relating to property and equipment for HRH Holdings was $51.9 million and $10.3 million for the years ended December 31, 2010 and the two month period ended February 28, 2011, respectively.


F-20



5.
Intangible Assets, Net
Intangible assets, net balances consist of the following:
 
Company
 
December 31, 2011
 
December 31, 2012
($ in thousands)
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Accumulated Amortization
 
Net Carrying Amount
 
 Remaining life (years)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-amortizing
   intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hard Rock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
licensing
$
55,000

 
$
—

 
$
55,000

 
$
55,000

 
$
(15,000
)
 
$
—

 
$
40,000

 
 Indefinite

Future Trademark
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
licensing
7,000

 
—

 
7,000

 
7,000

 
—

 
—

 
7,000

 
 Indefinite

 
62,000

 
—

 
62,000

 
62,000

 
(15,000
)
 
—

 
47,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizing
   intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In-place contracts
29,000

 
(2,417
)
 
26,583

 
29,000

 
(6,175
)
 
(5,316
)
 
17,509

 
0-8

Monster TM
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 licensing
2,537

 
(551
)
 
1,986

 
2,537

 
—

 
(1,213
)
 
1,324

 
2

Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relationships
3,000

 
(2,500
)
 
500

 
3,000

 
—

 
(3,000
)
 
—

 
—

Sponsorship
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
1,300

 
(541
)
 
759

 
1,300

 
—

 
(1,191
)
 
109

 
—

Market leases
1,736

 
(270
)
 
1,466

 
1,736

 
—

 
(594
)
 
1,142

 
 1-8

Player
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relationships
10,000

 
(1,310
)
 
8,690

 
10,000

 
—

 
(2,685
)
 
7,315

 
8

Other
2,200

 
(184
)
 
2,016

 
2,200

 
—

 
(404
)
 
1,796

 
8

 
49,773

 
(7,773
)
 
42,000

 
49,773

 
(6,175
)
 
(14,403
)
 
29,195

 
 
Total net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
intangibles
$
111,773

 
$
(7,773
)
 
$
104,000

 
$
111,773

 
$
(21,175
)
 
$
(14,403
)
 
$
76,195

 
 
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 year ended December 31, 2012 and the ten month period ended December 31, 2011, the Company recorded amortization expense of $6.6 million and $7.8 million, respectively.
The estimated amortization expense for the above amortizing intangible assets for each of the five succeeding fiscal years beginning December 31, 2013 is $5.7 million, $4.0 million, $3.2 million, $3.2 million and $3.2 million, respectively.
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 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. The fair value of the Isleta agreement at December 31, 2012 was determined using the remaining discounted cash flow. This impairment charges is included within Impairment of intangible assets reflected in the Consolidated Statement of Operations.

F-21



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. 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 during 2012 was determined using the discounted cash flow of forecasted net revenues. These impairment charges 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 Consolidated Statement of Operations.
Intangible assets, net consists of the following for the HRH Holdings:
 
HRH Holdings
 
December 31, 2010
 
February 28, 2011
 
 
 
 
 
 
 
 
 
 
Remaining
($ in thousands)
 Beginning
 
Amortization
 
 Ending
 
Amortization
 
 Ending
life (years)
 
 
 
 
 
 
 
 
 
 
 
Non-amortizing intangible assets
 
 
 
 
 
 
 
 
 
 
Hard Rock Licensing
$
34,833

 
$
—

 
$
34,833

 
$
—

 
$
34,833

Indefinite
 
$
34,833

 
$
—

 
$
34,833

 
$
—

 
$
34,833

 
Amortizing intangible assets
 
 
 
 
 
 
 
 
 
 
Rehab trade name
1,700

 
(240
)
 
1,460

 
(40
)
 
1,420

6
Body English trade name
20

 
(20
)
 
—

 
—

 
—

0
Pink Taco trade name
292

 
(140
)
 
152

 
(23
)
 
129

1
Love Jones trade name
42

 
(20
)
 
22

 
(3
)
 
19

1
Mr. Lucky's trade name
250

 
(120
)
 
130

 
(20
)
 
110

1
Player relationships
11,870

 
(3,120
)
 
8,750

 
(465
)
 
8,285

5
 
14,174

 
(3,660
)
 
10,514

 
(551
)
 
9,963

 
 
 
 
 
 
 
 
 
 
 
 
 
$
49,007

 
$
(3,660
)
 
$
45,347

 
$
(551
)
 
$
44,796

 
The Hard Rock licensing rights are not subject to amortization as they have an indefinite useful life. The trade names are being ratably amortized on a straight-line basis over the useful lives. Player relationships are amortized on an accelerated basis consistent with the expected timing of HRH Holdings’ realization of the economic benefits of such relationships.



F-22



6.
Accrued Expenses
Accrued expenses consist of the following :
 
 As of December 31,
($ in thousands)
2012
 
2011
Current
 
 
 
Deferred income
$
4,082

 
$
3,202

Capital leases, current
599

 
1,727

Advance room, convention and customer deposits
4,575

 
7,709

Accrued salaries, payroll taxes and other employee benefits
3,001

 
2,929

Accrued miscellaneous taxes
1,187

 
1,683

Reserve for general liability and accrued legal claims
3,727

 
1,927

Other accrued liabilities
6,505

 
7,762

Total current accrued expenses
23,676

 
26,939

Long term
 
 
 
Capital leases, long term
568

 
1,170

Total long term accrued expenses
568

 
1,170

Total accrued expenses
$
24,244

 
$
28,109

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

7.    Agreements with Related Parties
The Company
(i) Engagement of WG-Harmon
During the year ended December 31, 2012, and the ten month period ended December 31, 2011, the Company incurred $1.8 million and $1.9 million, respectively in management fees payable to WG-Harmon under the management agreements noted below which is included in general and administrative on the consolidated statement of operations. As of December 31, 2012, the Company had $0.4 million payable to WG-Harmon. There were no amounts payable to WG-Harmon as of December 31, 2011.
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.

F-23



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. For the period ended December 31, 2012, the Company did not incur any incentive fees.
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. For the year ended December 31, 2012, the Company incurred incentive fees of $0.2 million.
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.
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. WG-Harmon will manage the liquor operations as one of its duties under the Amended Resort Management Agreement. The Liquor Management Agreement terminated on June 15, 2012, and such responsibilities were absorbed with the Amended Resort Management Agreement.
(ii) Second Mortgage Loan Agreement
The Second Mortgage loan agreement is with a related party, Brookfield Financial. See Note 8, Debt for further discussion.

F-24



HRH Holdings
(i) Management Agreement
Engagement of Morgans Management. HRH Holdings’ subsidiaries, HRHH Hotel/Casino, LLC (“HRHH Hotel/Casino”), HRHH Development, LLC (“HRHH Development”) and HRHH Cafe, LLC (“HRHH Cafe”) entered into an Amended and Restated Property Management Agreement, dated as of May 30, 2008, (the “Management Agreement”) with Morgans Hotel Group Management LLC (“Morgans Management”), pursuant to which HRH Holdings engaged Morgans Management as (i) the exclusive operator and manager of the Hard Rock (excluding the operation of the gaming facilities which are operated by its subsidiary, HRHH Gaming, LLC) and (ii) the asset manager of the approximately 23-acre parcel adjacent to the Hard Rock and the land on which the Hard Rock Cafe restaurant is situated (which is subject to a lease between HRH Holdings’ subsidiary, HRHH Cafe, LLC, as landlord, and Hard Rock Cafe International (USA), Inc., as tenant).
Term; Termination Fee. The Management Agreement originally commenced on February 2, 2007 and had an initial term of 20 years. Morgans Management had the option to elect to extend this initial term for two additional 10-year periods. The Management Agreement provided certain termination rights for HRH Holdings and Morgans Management. Morgans Management was entitled to a termination fee if such a termination occurred in connection with a sale of HRH Holdings or the hotel at the Hard Rock. However, the Management Agreement was terminated with no termination fee in connection with the Assignment.
Base Fee, Chain Service Expense Reimbursement and Annual Incentive Fee. As compensation for its services, Morgans Management received a management fee equal to 4% of defined net non-gaming revenues including casino rents and all other rental income, a gaming facilities support fee equal to $828,000 per year and a chain service expense reimbursement, which reimbursement was subject to a cap of 1.5% of defined non-gaming revenues and all other income. Morgans Management was also entitled to receive an annual incentive fee of 10.0% of the Hotel EBITDA (as defined in the Management Agreement) in excess of certain threshold amounts, which increased each calendar year. However, as a result of the completion of the expansion project at the Hard Rock, the amount of such annual incentive fee was equal to 10% of annual Hotel EBITDA in excess of 90% of annual projected post-expansion EBITDA of the Hard Rock, the property on which the Hard Rock Cafe restaurant is situated and the property adjacent to the Hard Rock (excluding any portion of the adjacent property not being used for the expansion). For purposes of the Management Agreement, “EBITDA” generally is defined as earnings before interest, taxes, depreciation and amortization in accordance with generally accepted accounting principles applicable to the operation of hotels and the uniform system of accounts used in the lodging industry, but excluding income, gain, expenses or loss that is extraordinary, unusual, non-recurring or non-operating. “Hotel EBITDA” generally is defined as EBITDA of the Hard Rock, the property on which the Hard Rock Cafe restaurant is situated and the property adjacent to the Hard Rock (excluding any portion of the adjacent property not used for the expansion), excluding an annual consulting fee payable to DLJMB HRH VoteCo, LLC (“DLJMB VoteCo”) under the JV Agreement (as defined below). Hotel EBITDA generally does not include any EBITDA attributable to any facilities operated by third parties at the Hard Rock, unless HRH Holdings owns or holds an interest in the earnings or profits of, or any equity interests in, such third party facility.
For the year ended December 31, 2010 and for the two-month period ended February 28, 2011, HRH Holdings accrued or paid a base management fee of $6.2 million and $0.7 million, a gaming facilities support fee of $0.8 million and $0.1 million, and accrued or reimbursed chain service expenses of $2.4 million and $0.2 million to Morgans Management, respectively.
(ii) Joint Venture Agreement Consulting Fee
Under HRH Holdings’ Second Amended and Restated Limited Liability Company Agreement (the “JV Agreement”), subject to certain conditions, HRH Holdings was required to pay DLJMB HRH VoteCo, LLC (“DLJMB VoteCo”) (or its designee) a consulting fee of $250,000 each quarter in advance. In the event HRH Holdings was not permitted to pay the consulting fee when required (pursuant to the terms of any financing or other agreement approved by its board of directors), then the payment of such fee was deferred until such time as it may be permitted under such agreement. DLJMB VoteCo is a member of HRH Holdings. As of December 31, 2010, HRH Holdings had accrued $3.8 million in deferred consulting fees.
(iii) Technical Services Agreement
On February 2, 2007, HRH Holdings’ subsidiary, HRHH Hotel/Casino, LLC, and Morgans Management entered into a Technical Services Agreement pursuant to which HRH Holdings had engaged Morgans Management to provide technical services for its

F-25



expansion project prior to its opening. Under the Technical Services Agreement, HRH Holdings was required to reimburse Morgans Management for certain expenses it incurred in accordance with the terms and conditions of the agreement. For the year ended December 31, 2010, HRH Holdings reimbursed Morgans Management $2.0 million under the Technical Services Agreement.
(iv) Intercompany Land Acquisition Financing
Northstar was a lender to HRH Holdings under the land acquisition financing HRH Holdings had entered into with respect to an approximately 11-acre parcel of land located adjacent to the Hard Rock Hotel & Casino.

8.
Debt
The following table presents debt outstanding as of December 31, 2012 and December 31, 2011:
 
 
 
As of December 31,
($ in thousands)
 
 Final
 
 Face value
 
 Book value
 
Face value
 
 Book value
Project name/lender
 
 maturity
 
2012
 
2012
 
2011
 
2011
Amended facility -
 
 
 
 
 
 
 
 
 
 
Note A/Vegas HR
 
 
 
 
 
 
 
 
 
 
Private Limited
 
March 1, 2018
 
$
553,826

 
$
472,740

 
$
543,554

 
$
456,658

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

 
160,124

 
327,290

 
138,239

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

 
15,021

 
30,000

 
13,802

Total debt
 
 
 
911,116

 
647,885

 
900,844

 
608,699

 
 
 
 
 
 
 
 
 
 
 
Current portion of
 
 
 
 
 
 
 
 
 
 
long-term debt
 
 
 
—

 
—

 
—

 
—

Total long-term debt
 
 
 
$
911,116

 
$
647,885

 
$
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.
As of December 31, 2012, the Company has outstanding $38.0 million in supplemental interest under the Amended Facility. In addition, the Company has outstanding $5.9 million in accrued interest and contractually owes $8.8 million under the Second Mortgage, the difference representing application of the effective interest method and its affects on accrued interest and amortization of the discount as of December 31, 2012.
Amended Facility. On March 1, 2011, as part of the Assignment, the Company assumed the obligations under the Facility and entered into 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 December 31, 2012). In addition, 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 that 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.

F-26



The Amended Facility requires that the Company repay in full all “paid in kind” interest (PIK Interest) outstanding on March 1, 2014 and February 28, 2016, in the event the Company has not made sufficient payments to the lender to provide a specified debt yield, on the terms specified in the Amended Facility. We currently believe the Company will not meet the specified debt yield threshold. 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 obligation, selling off a portion of existing collateral, or attempting to obtain additional borrowings from other sources. If we are unable to restructure our indebtedness, find alternative financing sources on acceptable terms, or obtain approval from the lender to use our cash reserves to satisfy a portion of this potential obligation, we risk losing some or all of our property to foreclosure. The outstanding PIK interest as of September 30, 2013, December 31, 2012 and 2011 was $31.7 million, $18.5 million and $8.2 million, respectively. See further discussion in Note 1, Company Structure and Significant Accounting Policies.
The total amount of the Company’s debt, under certain exceptions described in the Amended Facility, is due on March 1, 2018, and no principal payments are due until then.
Second Mortgage. On March 1, 2011, as part of the Assignment, the Company entered into the Second Mortgage loan agreement with Brookfield Financial in the amount of $30.0 million pursuant to which certain land, building and improvements, equipment, fixtures and personal properties were pledged as security and collateral. The Second Mortgage is subordinate in right of payment to the Amended Facility. The maturity date of the Second Mortgage is March 1, 2018 and provides for an effective interest rate of 15% payable at maturity.
The Amended Facility and Second Mortgage include affirmative and negative covenants, including, among others, restrictive covenants regarding incurrence of liens, sales or assets, distributions to affiliates, changes in business, cancellation of indebtedness, dissolutions, mergers and consolidations, as well as limitations on security issuances, transfers of any of the Company's real property and removal of any material article of furniture, fixture or equipment from the Company's real property. As of December 31, 2012, the Company was in compliance with all covenants.
The estimated annual amortization of the debt discounts under the effective interest method assuming estimated future cash flow payments of the Amended Facility and the Second Mortgage for each of the five succeeding years and thereafter, is as follows:
($ in thousands)
Amortization - Amended Facility
 
Amortization - Second Mortgage
2013
$
30,829

 
$
1,576

2014
41,311

 
2,042

2015
43,976

 
2,645

2016
54,897

 
3,439

2017
62,534

 
4,445

Thereafter
14,705

 
832

Total
$
248,252

 
$
14,979



F-27



9.
Commitments and Contingencies
 Future minimum lease payments
Future minimum lease payments required under capital leases, included in our consolidated balance sheet as current and long term accrued expenses, as of December 31, 2012 are as follows:
 
Payments due by
 
 
($ in thousands)
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
 
Total
Capital leases
 
 
 
 
 
 
 
 
 
Gross capital leases
535

 
517

 
—

 
—

 
1,052

Imputed interest
64

 
51

 
—

 
—

 
115

Net capital leases
599

 
568

 
—

 
—

 
1,167

Total
$
599

 
$
568

 
$
—

 
$
—

 
$
1,167

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,

F-28



the intellectual property rights holder dated as of December 31, 2009 (the "Supplement," and together with the LOI and Supplement 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 December 31, 2012, the Company accrued approximately $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.

10.    Employee Benefit Plans
The Company’s current policy is, and HRH Holdings’ policy was, to pay discretionary cash incentive bonuses to eligible employees based upon individual and company-wide goals that are established by the Company and HRH Holdings, respectively, on an annual basis.
The Company’s current policy is, and HRH Holdings’ policy was, to maintain a 401(k) profit sharing plan whereby substantially all employees over the age of 21 who have completed six months of continuous employment and 1000 hours of service are eligible for the plan. Such employees joining the plan may contribute, through salary deductions, no less than 1% nor greater than 50% of their annual compensation. The Company currently does not match contributions to the plan and recorded no charges for 401(k) contributions year ended December 31, 2012.

11.    Membership Interests
Membership Interests
The Company
Classes of Membership Interests
We have two classes of membership interests: Class A Units and Class B Units, each of which is 100% owned by its members. Holders of Class A Units are entitled to vote on any matter to be voted upon by our members. Except as provided by law, the holders of Class B Units do not have any right to vote.
Additional Capital Contributions
The members are not required to make any additional capital contributions to the Company. However, the members may make additional capital contributions to the Company at any time. During the year ended December 31, 2012, no capital contributions were made to the Company. During the ten-month period ended December 31, 2011, the Company entered into a second mortgage loan agreement as part of the Assignment with Brookfield Financial in the amount of $30 million. The fair value of the debt as of the Assignment date was $13.0 million with the remaining $17.0 million accounted for as an equity contribution. In addition, Brookfield Financial made a $1.6 million cash contribution during the ten-month period ended December 31, 2011.
Distribution of Cash Available for Distribution
We have not in the past paid cash distributions on our membership interests. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash distributions in the foreseeable future. The terms of our current financing agreements preclude us, and any future financing agreements may preclude us, from paying any distributions. To the extent not prohibited by the terms of any financing agreement or applicable law, however, we may at some future date distribute available cash to our members.

F-29



Restrictions on Transfer
Our members generally are prohibited from transferring or encumbering our membership interests without the prior written consent of BREF HR Management or the holder of Class A Units. No transfer may be made unless certain general conditions are met, including that the transfer complies with applicable gaming regulations.
Distributions Upon Liquidation
We may be dissolved upon certain events, including at the election of the members. In the event of a dissolution, the cash proceeds from the liquidation, after payment of our liabilities, will be distributed to our members in accordance with their respective positive capital account balances as calculated under the LLC Agreement, subject to any necessary approvals from the Nevada Gaming Commission and/or the Nevada State Gaming Control Board.
 No Sinking Fund Provisions or Rights to Redemption or Conversion
Holders of Class A Units or Class B Units have no redemption rights or conversion rights and do not benefit from any sinking fund.
HRH Holdings     
Classes of Membership Interests
HRH Holdings had three classes of membership interests: Class A Membership Interests, Class B Membership Interests and Class C Membership Interests. Holders of Class A Membership Interests were entitled to vote on any matter to be voted upon by HRH Holdings’ members. Except as provided by law, the holders of Class B Membership Interests and Class C Membership Interests did not have any right to vote.
Initial Capital Contributions
On the Closing Date, pursuant to the Contribution Agreement, Morgans and Morgans Group LLC, an affiliate of Morgans (“Morgans LLC”) were deemed to have contributed to HRH Holdings one-third of the equity, or approximately $57.5 million, to fund a portion of the purchase price for the Acquisition by virtue of the application of the escrow deposits under the Acquisition Agreements to the purchase price for the Acquisition and by virtue of the credit given for the expenses Morgans LLC incurred in connection with the Acquisition. Affiliates of DLJMB contributed to HRH Holdings two-thirds of the equity, or approximately $115 million, to fund the remaining amount of the equity contribution for the Acquisition. In consideration for these contributions, HRH Holdings issued Class A Membership Interests and Class B Membership Interests to the affiliates of DLJMB, Morgans and Morgans LLC.
Additional Capital Contributions
For the year ended December 31, 2010 the DLJMB Parties and the Morgans Parties did not make any contribution to HRH Holdings. Pursuant to an agreement between DLJMB IV HRH and Morgans, a portion of the amounts contributed to HRH Holdings by the parties were being treated as interest-free loans, which would convert into new equity in HRH Holdings on terms to be agreed upon by the parties or by a written appraisal or fairness opinion.

F-30



Distribution of Cash Available for Distribution
To the extent not prohibited by the terms of any financing agreement or applicable law, HRH Holdings’ board of directors could cause HRH Holdings to distribute cash available for distribution to its members. Under the JV Agreement, the DLJMB Parties would receive a preferred return of capital in an amount based on a percentage of the fees paid by HRH Holdings to Morgans Management under the Management Agreement. Cash available for distribution would then be distributed among the members pro rata in proportion to their percentage interests (as adjusted to disregard the effect of any prior adjustments to the percentage interests made as a result of the posting of letters of credit). If at such time the DLJMB Parties had received a return of all of their capital contributions, then the cash available for distribution would be distributed to the Morgans Parties until they had received a return of all of their diluted capital contributions (as calculated under the JV Agreement). Then, cash available for distribution would be distributed among the members pro rata in proportion to the adjusted percentage interests until the Morgans Parties had received a return of all of their capital contributions. Thereafter, all remaining amounts would be distributed between the Morgans Parties, the DLJMB Parties and Class C Members pro rata in proportion to their profits percentage interests as of the date of such distribution.
Restrictions on Transfer
HRH Holdings’ members generally were prohibited from transferring or encumbering HRH Holdings’ membership interests without the prior written consent of HRH Holdings’ Class A members. Transfers of interests by a Morgans Party or a DLJ Fund (described below) in any intermediate subsidiary that indirectly held interests in HRH Holdings would be considered a transfer of such person’s indirect interest in HRH Holdings. The “DMJ Funds” included DLJMB Partners, DLJMB HRH Co-Investments, L.P., DLJ Offshore Partners IV, L.P., DLJ Merchant Banking Partners IV (Pacific), L.P. and MBP IV Plan Investors, LP. were all parties which indirectly held interest in HRH Holdings. Exceptions to the transfer prohibition applied to (a) transfers to subsidiaries of a DLJ Fund or Morgans, (b) transfers of the equity interests of a Morgans Party or a DLJ Fund (including pursuant to a change in control of those entities), and (c) after the earlier of February 2, 2011 and the termination date of the Management Agreement, in accordance with the right of first offer in favor of the other members under the JV Agreement. If the DLJMB Parties proposed to transfer more than 51% of HRH Holdings’ aggregate membership interests to a third party, then under certain circumstances the DLJMB Parties would be able to require the Morgans Parties and Class C Members to sell the same ratable share of HRH Holdings’ membership interests held by each of them to the third party on the same terms and conditions. If this drag-along right was not exercised, then under certain circumstances the Morgans Parties and the Class C Members could exercise a tag-along right to sell certain of HRH Holdings’ membership interests held by each of them to the third-party transferee on the same terms and conditions as under the sale by the DLJMB Parties. Notwithstanding these exceptions, no transfer could be made unless certain general conditions were met, including that the transfer complied with applicable gaming regulations.
Events of Default
The following constituted events of default under the JV Agreement (subject in certain cases to applicable cure periods): (a) any transfer in violation of the JV Agreement, (b) a material breach of the JV Agreement or a related fee agreement entered into by the members, (c) a determination by the gaming authorities that one of HRH Holdings’ members is an unsuitable person, (d) the failure to make a required capital contribution, (e) a material breach under the contribution agreement Morgans and DLJMB IV HRH entered into with respect to their initial capital contributions, (f) the incapacity of a member, (g) the attachment, execution or other judicial seizure of substantial assets of member or its interest in HRH Holdings or (h) the perpetration of fraud or willful misconduct. Upon the occurrence of any event of default (and after the expiration of any applicable cure period) by a member, a non-affiliated member may (i) elect to dissolve HRH Holdings, (ii) purchase the entire interest of the defaulting member for 85.0% of the defaulting member’s “existing equity” in HRH Holdings (as defined in the JV Agreement), (iii) adjust the defaulting member’s capital account to equal such purchase price or (iv) revoke the defaulting member’s voting rights, right to participate in profits or distributions or right to receive information (subject to certain exceptions).
 Distributions upon Liquidation
HRH Holdings could be dissolved upon certain events, including at the election of its members. In the event of dissolution, the cash proceeds from the liquidation, after payment of HRH Holdings’ liabilities, would be distributed to its members in accordance with their respective positive capital account balances as calculated under the JV Agreement.

F-31



No Sinking Fund Provisions or Rights to Redemption or Conversion
Holders of Class A Membership Interests or Class B Membership Interests had no redemption rights or conversion rights and did not benefit from any sinking fund.

12.    Restatement to the 2011 Cash Flows of the Company
Subsequent to the issuance of the Company’s March 1, 2011 to December 31, 2011 consolidated financial statements in its Form 10-K, the Company discovered errors due to the oversight of underlying information in the preparation of the consolidated statement of cash flows for the period March 1, 2011 to December 31, 2011. Specifically, the Company discovered the following amounts incorrectly included in cash flows from operating activities:
•
Restricted cash withdrawals in the amount of $15.4 million had been incorrectly included in cash flows from operating activities.  Such amount should have been included in cash flows used in investing activities. 
•
Principal payments on capital leases in the amount of $3.2 million 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.
The accompanying Consolidated Statement of Cash Flows has been restated to correct the items above.  Accordingly, previously reported net cash flows provided by operating activities of $13.0 million was reduced to net cash flows provided by operating activities of $0.8 million, previously reported net cash used in investing activities of $(46.6) million was reduced to net cash used in investing activities of $(31.2) million and previously reported net cash provided by financing activities of $30.2 million was reduced to net cash flows provided by financing activities of $27.0 million. The table below reflects the restated and previously reported Consolidated Statement of Cash Flows for the period from March 1, 2011 to December 31, 2011:
($ in thousands)
As Previously Reported
 
Adjustment
 
As Restated
Cash flows from operating activities
 
 
 
 
 
Restricted cash used in operations
$
15,355

 
$
(15,355
)
 
$
—

Other accrued liabilities
801

 
3,154

 
3,955

Net cash flows provided by operating activities
13,023

 
(12,201
)
 
822

 
 
 
 
 
 
Cash flows from investing activities
 
 


 
 
Reduction (increase) in restricted cash
(41,387
)
 
41,387

 
—

Restricted cash contributions
—

 
(41,387
)
 
(41,387
)
Restricted cash withdrawals
—

 
15,355

 
15,355

Net cash flows used in investing activities
(46,558
)
 
15,355

 
(31,203
)
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
Principal payments on capital leases
—

 
(3,154
)
 
(3,154
)
Net cash flows provided by financing activities
$
30,162

 
$
(3,154
)
 
$
27,008


The provision for doubtful accounts and the change in accounts receivable within operating cash flows in the 2011 consolidated statement of cash flows also reflects a $1.3 million increase in the provision for doubtful accounts and an increase in accounts receivable to correct amounts previously reported.

F-32



13.    Quarterly Financial Information (unaudited)
Quarterly financial information for the years ended December 31, 2012 and 2011 is summarized below:
 
2012
($ in thousands)
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net Revenues
$
51,248

 
$
54,302

 
$
49,724

 
$
43,267

Operating Income (loss)
390

 
(797
)
 
(833
)
 
(24,216
)
Income (loss) before Income taxes
(21,677
)
 
(22,681
)
 
(23,659
)
 
(47,587
)
Net Income (loss)
(21,677
)
 
(22,681
)
 
(23,659
)
 
(47,587
)
 
2011
 
Predecessor
 
Successor
($ in thousands)
Period from
Jan 1, 2011 to Feb 28, 2011
 
Period from
Mar 1, 2011 to Mar 31, 2011
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net Revenues
$
29,257

 
$
16,451

 
$
57,247

 
$
50,702

 
$
40,253

Operating Income (loss)
(7,451
)
 
624

 
5,672

 
747

 
(5,516
)
Income (loss) before Income taxes
10,147

 
(5,811
)
 
(14,089
)
 
(19,752
)
 
(26,429
)
Net Income (loss)
10,006

 
(5,811
)
 
(14,089
)
 
(19,752
)
 
(26,429
)


F-33



EXHIBIT INDEX
EXHIBIT
NUMBER 
 
DESCRIPTION 
 
 
 
2.1
 
Agreement to Transfer in Lieu of Foreclosure and Settlement Agreement dated as of March 1, 2011 by and among HRHH Hotel/Casino, LLC, HRHH Development, LLC, HRHH Gaming, LLC, HRHH IP, LLC, HRHH Cafe, LLC, HRHH Gaming Senior Mezz, LLC, HRHH JV Senior Mezz, LLC, HRHH Gaming Junior Mezz, LLC, HRHH Junior Mezz Two, LLC, HRHH Gaming Junior Mezz Two, LLC, Hard Rock Hotel, Inc., Hard Rock Hotel Holdings, LLC, Morgans Group LLC, DLJ MB IV HRH, LLC, Morgans Hotel Group Management LLC, BREF HR, LLC, NRFC HRH Holdings, LLC, Vegas HR Private Limited and Brookfield Financial, LLC—Series B; previously filed as Exhibit 2.1 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
3.1
 
Certificate of Formation, dated as of February 11, 2011, for BREF HR, LLC; previously filed as Exhibit 3.1 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
3.2
 
Limited Liability Company Agreement, dated as of March 1, 2011, for BREF HR, LLC by BREF HR Management, LLC, Brookfield Financial, LLC – Series B, Michele A. Dreyer and Mary S. Stawikey; previously filed as Exhibit 3.2 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
10.1
 
Fourth Amended and Restated Loan Agreement, dated as of March 1, 2011 by and among HRHH Hotel/Casino, LLC, HRHH Cafe, LLC, HRHH Development, LLC, HRHH IP, LLC, HRHH Gaming, LLC and Vegas HR Private Limited; previously filed as Exhibit 10.1 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
10.2
 
Second Mortgage Loan Agreement, dated as of March 1, 2011, among HRHH Hotel/Casino, LLC, HRHH Cafe, LLC, HRHH Development, LLC, HRHH IP, LLC, HRHH Gaming, LLC and Brookfield Financial, LLC – Series B; previously filed as Exhibit 10.2 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
10.3
 
Management Agreement (Gaming Operations) dated as of March 1, 2011 by and between LVHR Casino, Inc. WG-Harmon, LLC (Terminated June 15, 2012); previously filed as Exhibit 10.3 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
10.4
 
Amended and Restated Resort Management Agreement dated as of June 15 ,2012 by and between HRHH Hotel/Casino, LLC, HRHH Development, LLC, HRHH IP, LLC, HRHH Cafe, LLC and WG-Harmon, LLC; previously filed as Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
 
10.5
 
Amended and Restated Casino Lease dated as of June 15, 2012 by and between HRHH Hotel/Casino, LLC and LVHR Casino Inc.; previously filed as Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
 
10.6
 
Trademark License and Cooperation Agreement dated as of June 7, 1996 by and between Rank Licensing, Inc. and Peter A. Morton; previously filed as Exhibit 10.7 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
10.7
 
Omnibus Amendment and Joinder to Fourth Amended and Restated Loan Agreement and Loan Documents, dated as of June 15, 2012 by and among HRHH Hotel/Casino, LLC, HRHH Cafe, LLC, HRHH Development, LLC, HRHH IP, LLC, HRHH Gaming, LLC and Vegas HR Private Limited; previously filed as Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
 
14
 
Code of ethics; previously filed as Exhibit 14 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
 
21.1
 
Subsidiaries of the Registrant; previously filed as Exhibit 21.1 to the Company’s registration statement on Form 10 (File No. 000-54532) filed on October 24, 2011
 
 
 
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T

F-34