Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark One)**                                          | ** ** | ** **                                                                                              |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                              |
| x                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                              | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2009** |
|                                                    |       |                                                                                                    |
| **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 000-50689**

 

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**BH/RE, L.L.C.**

(Exact Name of Registrant as Specified in itsCharter)

 
| **NEVADA**                                             | **84-1622334**          |
|--------------------------------------------------------|-------------------------|
| (State or Other  Jurisdiction                          | (I.R.S. Employer        |
| of Incorporation  or Organization)                     | Identification  Number) |
|                                                   |                    |
| **3667  Las Vegas Boulevard South  Las Vegas, Nevada** | **89109**               |
| (Address of  Principal Executive Offices)              | (Zip Code)              |

 

**(702) 785-5555**

(Registrant’s Telephone Number, IncludingArea Code)

 

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Indicate by check markwhether the Registrant (1) has filed all reports required by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.   Yes x   No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes o   No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. (See definition of “acceleratedfiler,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act).

 
| Large  accelerated filer o                                              | Accelerated  filer o         |
|-------------------------------------------------------------------------|-----------------------------------|
|                                                                    |                              |
| Non-accelerated  filer x  (Do not check if a smaller reporting company) | Smaller  reporting company o |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

 

 

 

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Table of Contents

 

BH/RE, L.L.C. AND SUBSIDIARIES

Index

 
| PART I— FINANCIAL  INFORMATION |
|------------------------------------------|
|                                     |   |
| ITEM 1.                                  | FINANCIAL  STATEMENTS: |
|                                     |   |
|                                     | Condensed Consolidated Balance Sheets (Unaudited) |
|                                     |   |
|                                     | Condensed Consolidated Statements Of Operations  (Unaudited) |
|                                     |   |
|                                     | Condensed Consolidated Statements Of Cash Flows  (Unaudited) |
|                                     |   |
|                                     | Notes To Condensed Consolidated Financial Statements  (Unaudited) |
|                                     |   |
| ITEM 2.                                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|                                     |   |
| ITEM 3.                                  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|                                     |   |
| ITEM 4T.                                 | CONTROLS AND  PROCEDURES |
|                                     |   |
| PART II  — OTHER INFORMATION:  |
|                                     |   |
| ITEM 6.                                  | EXHIBITS |
|                                     |   |
| SIGNATURES                               |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**BH/RE, L.L.C. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands)**

 
| ** **                                           | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| ASSETS                                               |       |                     |       |                        |       |
| Current assets:                                      |       |                     |       |                        |       |
| Cash and cash equivalents                            |       | $                        | 18,554     |                        | $          | 23,881 |   |
| Receivables, net                                     |       | 16,493                   |       | 18,717                      |       |
| Inventories                                          |       | 2,265                    |       | 2,498                       |       |
| Prepaid expenses                                     |       | 6,895                    |       | 7,935                       |       |
| Deposits and other current assets                    |       | 164                      |       | 164                         |       |
| Restricted cash and cash equivalents                 |       | 32,590                   |       | 29,366                      |       |
| Total current assets                                 |       | 76,961                   |       | 82,561                      |       |
|                                                 |       |                     |       |                        |       |
| Property and equipment, net                          |       | 568,583                  |       | 578,043                     |       |
| Restricted cash and cash equivalents                 |       | 11,981                   |       | 11,284                      |       |
| Land receivable                                      |       | 16,548                   |       | 16,918                      |       |
| Other assets, net                                    |       | 217                      |       | 244                         |       |
| Total assets                                         |       | $                        | 674,290    |                        | $          | 689,050 |   |
|                                                 |       |                     |       |                        |       |
| LIABILITIES AND MEMBERS’  EQUITY (DEFICIT)      |       |                     |       |                        |       |
|                                                 |       |                     |       |                        |       |
| Current liabilities:                                 |       |                     |       |                        |       |
| Current portion of long-term debt                    |       | $                        | 862,059    |                        | $          | 2,001 |   |
| Accounts payable                                     |       | 3,648                    |       | 3,549                       |       |
| Accrued payroll and related                          |       | 12,429                   |       | 10,786                      |       |
| Accrued interest payable                             |       | 6,643                    |       | 6,827                       |       |
| Accrued taxes                                        |       | 2,560                    |       | 2,422                       |       |
| Accrued expenses                                     |       | 7,912                    |       | 8,881                       |       |
| Deposits                                             |       | 3,343                    |       | 4,587                       |       |
| Other current liabilities                            |       | 4,610                    |       | 4,512                       |       |
| Due to affiliates                                    |       | 1,926                    |       | 1,773                       |       |
| Total current liabilities                            |       | 905,130                  |       | 45,338                      |       |
|                                                 |       |                     |       |                        |       |
| Long-term debt, less current portion                 |       | 25,029                   |       | 885,561                     |       |
| Other long-term liabilities                          |       | 1,537                    |       | 1,537                       |       |
| Total liabilities                                    |       | 931,696                  |       | 932,436                     |       |
|                                                 |       |                     |       |                        |       |
| Members’ equity (deficit):                      |       |                     |       |                        |       |
| Controlling members’ equity (deficit)           |       |                     |       |                        |       |
| Equity                                               |       | 34,200                   |       | 34,200                      |       |
| Accumulated deficit                                  |       | (265,917                 | )          | (253,493                    | )          |
| Controlling members’ deficit                    |       | (231,717                 | )          | (219,293                    | )          |
| Noncontrolling members’ deficit                 |       | (25,690                  | )          | (24,093                     | )          |
| Total members’ equity (deficit)                 |       | (257,407                 | )          | (243,386                    | )          |
| Total liabilities and members’ equity (deficit) |       | $                        | 674,290    |                        | $          | 689,050 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**BH/RE, L.L.C. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(amounts in thousands)**

 
| ** **                                       | ** ** | **Three Months  Ended  March 31, 2009** | ** ** | **Three Months  Ended  March 31, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                        | ** ** |
|                                             |       |                                                   |       |                                                   |       |
| Operating revenues:                              |       |                                                   |       |                                                   |       |
| Casino                                           |       | $                                                      | 25,351     |                                                   | $          | 32,347 |   |
| Hotel                                            |       | 22,759                                                 |       | 30,953                                                 |       |
| Food and beverage                                |       | 11,699                                                 |       | 14,257                                                 |       |
| Other                                            |       | 2,881                                                  |       | 3,782                                                  |       |
| Gross revenues                                   |       | 62,690                                                 |       | 81,339                                                 |       |
| Promotional allowances                           |       | (5,616                                                 | )          | (7,345                                                 | )          |
| Net revenues                                     |       | 57,074                                                 |       | 73,994                                                 |       |
|                                             |       |                                                   |       |                                                   |       |
| Operating costs and expenses:                    |       |                                                   |       |                                                   |       |
| Casino                                           |       | 17,415                                                 |       | 20,420                                                 |       |
| Hotel                                            |       | 9,402                                                  |       | 10,566                                                 |       |
| Food and beverage                                |       | 8,637                                                  |       | 9,068                                                  |       |
| Other                                            |       | 456                                                    |       | 284                                                    |       |
| Selling, general and administrative              |       | 15,702                                                 |       | 18,974                                                 |       |
| Depreciation and amortization                    |       | 10,184                                                 |       | 8,801                                                  |       |
|                                             |       | 61,796                                                 |       | 68,113                                                 |       |
|                                             |       |                                                   |       |                                                   |       |
| Operating income (loss)                          |       | (4,722                                                 | )          | 5,881                                                  |       |
|                                             |       |                                                   |       |                                                   |       |
| Interest expense, net                            |       | (9,298                                                 | )          | (17,891                                                | )          |
| Pre-tax loss                                     |       | (14,020                                                | )          | (12,010                                                | )          |
| Provision for income taxes                       |       | —                                                 |       | —                                                 |       |
| Net loss including noncontrolling interest       |       | (14,020                                                | )          | (12,010                                                | )          |
| Net loss attributable to noncontrolling interest |       | (1,597                                                 | )          | (1,802                                                 | )          |
| Net loss attributable to BH/RE, L.L.C.           |       | $                                                      | (12,423    | )                                                      | $          | (10,208 | ) |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**BH/RE, L.L.C. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 
| ** **                                                                                 | ** ** | **Three Months  Ended  March 31, 2009** | ** ** | **Three Months  Ended  March 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                        | ** ** |
|                                                                                       |       |                                                   |       |                                                   |       |
| Cash flows from operating activities:                                                      |       |                                                   |       |                                                   |       |
| Net loss including noncontrolling interest                                                 |       | $                                                      | (14,020    | )                                                      | $          | (10,208 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by  operating activities: |       |                                                   |       |                                                   |       |
| Depreciation and amortization                                                              |       | 10,184                                                 |       | 8,801                                                  |       |
| Amortization of debt discount and issuance costs                                           |       | —                                                 |       | 2,090                                                  |       |
| Decease in value of interest rate cap                                                      |       | 27                                                     |       | —                                                 |       |
| Changes in assets and liabilities:                                                         |       |                                                   |       |                                                   |       |
| Restricted cash and cash equivalents                                                       |       | (3,224                                                 | )          | 6,484                                                  |       |
| Receivables, net                                                                           |       | 2,224                                                  |       | 1,344                                                  |       |
| Inventories and prepaid expenses                                                           |       | 1,273                                                  |       | (1,319                                                 | )          |
| Deposits and other current assets                                                          |       | —                                                 |       | 52                                                     |       |
| Due to affiliates                                                                          |       | 153                                                    |       | 835                                                    |       |
| Accounts payable                                                                           |       | 99                                                     |       | (2,063                                                 | )          |
| Accrued payroll and related                                                                |       | 1,643                                                  |       | 276                                                    |       |
| Accrued expenses                                                                           |       | (831                                                   | )          | (633                                                   | )          |
| Deposits and other current liabilities                                                     |       | (1,146                                                 | )          | (213                                                   | )          |
| Accrued interest                                                                           |       | (184                                                   | )          | (1,273                                                 | )          |
| Long term deposits and other assets                                                        |       | 370                                                    |       | 647                                                    |       |
| Net cash (used in) provided by operating activities                                        |       | (3,432                                                 | )          | 3,018                                                  |       |
| Cash flows from investing activities:                                                      |       |                                                   |       |                                                   |       |
| Purchases of property and equipment                                                        |       | (724                                                   | )          | (17,752                                                | )          |
| Restricted cash and cash equivalents                                                       |       | (697                                                   | )          | 16,719                                                 |       |
| Net cash used in investing activities                                                      |       | (1,421                                                 | )          | (1,033                                                 | )          |
| Cash flows from financing activities:                                                      |       |                                                   |       |                                                   |       |
| Payments under CUP financing                                                               |       | (474                                                   | )          | (424                                                   | )          |
| Net cash used in financing activities                                                      |       | (474                                                   | )          | (424                                                   | )          |
| Cash and cash equivalents:                                                                 |       |                                                   |       |                                                   |       |
| (Decrease) increase in cash and cash equivalents                                           |       | (5,327                                                 | )          | 1,561                                                  |       |
| Balance, beginning of period                                                               |       | 23,881                                                 |       | 21,468                                                 |       |
| Balance, end of period                                                                     |       | $                                                      | 18,554     |                                                   | $          | 23,029 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| Supplemental cash flow disclosures:                                                        |       |                                                   |       |                                                   |       |
| Cash paid for interest, net of capitalized interest                                        |       | $                                                      | 9,538      |                                                   | $          | 17,341 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**BH/RE,L.L.C. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

** **

##### **1.****                                     ****ORGANIZATION AND BASIS OF PRESENTATION**

#####  

###### ***Organization***

######  

BH/RE is a holding company that owns 88.61% of EquityCo, L.L.C. (“EquityCo”).The remaining 11.39% of EquityCo is owned indirectly by Starwood Hotels &Resorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is awholly owned subsidiary of EquityCo and each of OpBiz, LLC (“OpBiz”) andPH Mezz II LLC (“PH Mezz II”) is a wholly owned subsidiary of MezzCo.PH Mezz I LLC (“PH Mezz I”) is a wholly owned subsidiary of PHMezz II. PH Fee Owner LLC (“PH Fee Owner”) is a wholly ownedsubsidiary of PH Mezz I. TSP Owner LLC (“TSP Owner”) is a whollyowned subsidiary of PH Fee Owner. PH Mezz II, PH Mezz I, PH Fee Ownerand TSP Owner are Delaware limited liability companies structured as bankruptcyremote special purpose entities which, together with OpBiz, own and operate thePlanet Hollywood Resort and Casino (the “PH Resort”). OpBiz is the licensedowner and operator of the gaming assets and leases the casino space and hotelspace together with all hotel assets from PH Fee Owner. TSP Owner was formed tohold the parcel of land (the “Timeshare Parcel”) that was sold to WestgateResorts, LLP, a Florida limited partnership (“Westgate”) subject to theTimeshare Purchase Agreement, dated December 10, 2004 and modified on September 10,2007, between OpBiz and Westgate, as more fully described below. As of March 31,2009, each of Robert Earl and Douglas P. Teitelbaum held 50% of BH/RE’svoting membership interests. BH/RE’s equity membership interests were held43.27% by BH Casino and Hospitality LLC I (“BHCH I”), 15.61% by BH Casinoand Hospitality LLC II (“BHCH II” and, together with BHCH I, “BHCH”)and 41.13% by OCS Consultants, Inc. (“OCS”).

 

BH/RE and its subsidiaries were formed to acquire, operate and renovatethe Aladdin Resort and Casino (the “Aladdin”) located in Las Vegas, Nevada.OpBiz completed the acquisition of the Aladdin on September 1, 2004 andcompleted a renovation project which transformed the Aladdin into the PH Resortat the end of 2007. In connection with the operation of the PH Resort, OpBizhas entered into an agreement with Planet Hollywood International, Inc. (“PlanetHollywood”) and certain of its subsidiaries to, among other things, licensePlanet Hollywood’s trademarks, memorabilia and other intellectual property.OpBiz has also entered into an agreement with Sheraton Operating Corporation (“Sheraton”),a subsidiary of Starwood, pursuant to which Sheraton will provide hotelmanagement, marketing and reservation services for the hotel that comprises aportion of the PH Resort.

 

BH/RE is a Nevada limitedliability company and was organized on March 31, 2003. BH/RE was formed byBHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum, a managing principalof Bay Harbour Management, L.C. (“Bay Harbour Management”). BHCH was formed by Mr. Teitelbaumfor the purpose of holding investments in BH/RE by funds managed by Bay HarbourManagement. Bay Harbour Management is an investment management firm. OCS iswholly owned and controlled by Robert Earl and holds Mr. Earl’s investmentin BH/RE. Mr. Earl is the founder, chairman and chief executive officer ofPlanet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood.Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’schildren and certain affiliates of Bay Harbour Management, own substantially allof the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownershipof any equity of Planet Hollywood owned by the trust.

 

###### ***Interim Financial Statements (unaudited)***

######  

The accompanyingcondensed consolidated financial statements included herein have been preparedby the management of BH/RE (the “Company”), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared in accordancewith U.S. generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. BH/RE believes that thedisclosures are adequate to make the information presented not misleading. Inthe opinion of management, all adjustments (which include normal recurringadjustments) necessary for a fair presentation of the results for the interimperiods have been made. The results for the three months ended March 31,2009, are not indicative of results to be expected for the full fiscal year.These unaudited financial statements should be read in conjunction with theaudited financial statements and notes thereto for the year ended December 31,2008, included in BH/RE’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 2009.

 

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##### **2.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

#####  

###### ***SignificantAccounting Policies and Estimates***

######  

The condensed consolidated financial statements areprepared in conformity with U.S. generally accepted accounting principles.Certain policies, including the determination of bad debt reserves, theestimated useful lives assigned to assets, asset impairment, insurance reservesand the calculation of liabilities, require that management apply significantjudgment in defining the appropriate assumptions for calculating financialestimates. By their nature, these judgments are subject to an inherent degreeof uncertainty. Management’s judgments are based on historical experience,terms of existing contracts, observance of trends in the gaming industry andinformation available from other outside sources. There can be no assurance thatactual results will not differ from management’s estimates.

 

To providean understanding of the methodology management applies, BH/RE’s significantaccounting policies and basis of presentation are discussed below.

 

###### *Cash and Cash Equivalents*

######  

Cash and cash equivalents include cash on hand, as well asshort-term investments with original maturities not in excess of 90 days.

 

###### *Restricted Cash and Cash Equivalents*

######  

The balance in current restricted cash and cash equivalentsat March 31, 2009 and December 31, 2008 was approximately $32.6million and $29.4 million, respectively, which consists of reserves requiredunder the Loan Agreement (as defined in Note 5 to the CondensedConsolidated Financial Statements) including a reserve for payment of property taxes and insuranceand a reserve for on-going furniture, fixture and equipment purchases orproperty improvements. Long-term restricted cash and cash equivalents consistof approximately $12.0 million and $11.3 million at March 31, 2009 and December 31,2008, respectively, which primarily includes a reserve for interest shortfallsrequired under the Loan Agreement.

 

###### *Accounts Receivable (and Allowance for Doubtful Accounts)*

######  

Accounts receivable, including casino and hotelreceivables, are typically non-interest bearing and are initially recorded atcost. An estimated allowance for doubtful accounts is maintained to reduce thereceivables to their carrying amount, which approximates fair value. Managementestimates the allowance for doubtful accounts by applying standard reservepercentages, which are based on historical collections, to aged accountbalances under a specific dollar amount and specifically analyzes thecollectability of each account with a balance over the specified dollar amount,based on the age of the account, the customer’s financial condition, collectionhistory and any other known information.

 

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###### *Inventories*

######  

Inventories consist of food and beverage, retailmerchandise and operating supplies, and are stated at the lower of cost ormarket. Cost is determined by the first-in, first-out and specificidentification methods.

 

###### *Property and Equipment*

######  

Property and equipmentare stated at cost. Recurring repairs and maintenance costs, including itemsthat are replaced routinely in the casino, hotel and food and beveragedepartments which do not meet the Company’s capitalization policy, are expensedas incurred. The Company has established its capital expense policy to bereflective of its individual ongoing repairs and maintenance programs. Gains orlosses on dispositions of property and equipment are included in thedetermination of income. Property and equipment are generally depreciated overthe following estimated useful lives on a straight-line basis:

 
| Buildings                         |   | 40  years       |   |
|-----------------------------------|--------|-----------------|--------|
| Building improvements             |   | 15  to 40 years |   |
| Furniture, fixtures and equipment |   | 3  to 7 years   |   |

 

Property and equipmentand other long-lived assets are evaluated for impairment in accordance with theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*.” For assets tobe disposed of, the asset to be sold is recognized at the lower of carryingvalue or fair value less costs of disposal. Fair value for assets to bedisposed of is estimated based on comparable asset sales, solicited offers or adiscounted cash flow model.

 

Property and equipmentare reviewed for impairment whenever indicators of impairment exist. If anindicator of impairment exists, the estimated future cash flows of the asset,on an undiscounted basis, are compared to the carrying value of the asset. Ifthe undiscounted cash flows exceed the carrying value, no impairment isindicated. If the undiscounted cash flows do not exceed the carrying value,then impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model.

 

*Derivative Instruments and Hedging Activities*

 

Pursuant to the refinancing of the Securities Purchase Agreement andthe terms of the Restructuring Agreement, the Restructuring Parties agreed toamend the warrants issued by MezzCo to purchase 17.5% of the fully dilutedequity in MezzCo. The warrants contain a net cash settlement, and therefore areaccounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*”. BothSFAS No. 133 “*Accounting for DerivativeInstruments and Hedging Activities*” and EITF 00-19 require thatthe warrants be recognized as liabilities, with changes in fair value affectingnet income. See “Note 5. Long-Term Debt.”

 

The terms of the Loan Agreement required the Company to enter into aninterest rate cap agreement, which expires on December 9, 2009, to manageinterest rate risk. The Company did not apply cash flow hedge accounting tothis instrument. Although this derivative was not afforded cash flow hedgeaccounting, the Company retained the instrument as protection against theinterest rate risk associated with its long-term borrowings. The Companyaccounts for its derivative activity in accordance with SFAS No. 133 andaccordingly, includes the rate cap agreement in other assets on theaccompanying balance sheet at fair value with any in change in fair value beingrecorded in interest income or expense in the accompanying consolidatedstatements of operations.

 

*Revenue Recognition andPromotional Allowances*

 

Casino revenues arerecognized as the net win from gaming activities, which is the differencebetween gaming wins and losses. Hotel revenue recognition criteria aregenerally met at the time of occupancy. Food and beverage revenue recognitioncriteria are generally met at the time of service. Deposits for future hoteloccupancy or food and beverage services are recorded as deferred income untilrevenue recognition criteria are met. Cancellation fees for hotel and food andbeverage services are recognized upon cancellation by the customer as definedby a written contract entered into with the customer. All other revenues arerecognized as the service is provided. Revenues include the retail value offood, beverage, rooms, entertainment and merchandise provided on acomplimentary basis to customers. Such complimentary amounts are then deductedfrom revenues as promotional allowances on BH/RE’s consolidated statements ofoperations. The estimated departmental costs of providing such promotionalallowances are included in casino costs and expenses and consist of thefollowing (amounts in thousands):

 

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| ** **                           | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| ** **                           | ** ** | **(unaudited)**                              | ** ** | **(unaudited)** | ** ** |
| Rooms                                |       | $                                            | 1,412      |   | $ | 1,567 |   |
| Food and beverage                    |       | 2,090                                        |       | 2,429 |   |
| Other                                |       | 8                                            |       | 8 |   |
| Total cost of promotional allowances |       | $                                            | 3,510      |   | $ | 4,004 |   |

 

###### *Players’ Club Program*

######  

 Players’ club members earn points based ongaming activity, which can be redeemed for cash. OpBiz accrues expense and aliability related to this program as the points are earned based on historicalredemption percentages. Revenues are recognized net of certain sales incentivesin accordance with the Emerging Issues Task Force (“EITF”) consensus on Issue01-9, “Accounting for Consideration Given by a Vendor to a Customer (Includinga Reseller of the Vendor’s Products).” EITF 01-9 requires that salesincentives be recorded as a reduction of revenue; consequently, casino revenuesare reduced by points earned through the players’ club loyalty program. TheCompany accrues a liability for players’ club points that can be redeemed forcash.  In March 2009, the Companychanged the structure of its players club to allow patrons who earn points toredeem those points for promotional slot play and other non-cashincentives.  The total accrued liabilityrelated to potential cash awards redeemable under the players’ club program was$1.3 million at March 31, 2009 and $2.2 million at December 31,2008.

 

*Self-Insurance Accruals*

 

BH/RE is self-insured, upto certain limits, for costs associated with employee medical coverage. TheCompany accrues for the estimated expense of known claims, as well as estimatesfor claims incurred but not yet reported which totaled approximately$3.3 million at March 31, 2009 and $2.4 million at December 31,2008.

 

*Advertising Costs*

 

Advertisingcosts are expensed as incurred and included in selling, general andadministrative costs and expenses. Advertising costs totaled approximately $0.9million and $2.4 million for the three months ended March 31, 2009 and2008, respectively.

 

*IncomeTaxes*

 

Thecondensed consolidated financial statements include the operations of BH/RE andits majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH MezzI, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liabilitycompanies and are taxed as partnerships for federal income tax purposes.However, MezzCo has elected to be taxed as a corporation for federal income taxpurposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, aretreated as divisions of MezzCo for federal income tax purposes, andaccordingly, are also subject to federal income taxes. Additionally, PH Mezz I,a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly ownedsubsidiary of PH Mezz I, and TSP Owner, a wholly owned subsidiary of PH FeeOwner, are also subject to federal income taxes.

 

MezzCo, OpBiz, PH MezzII, PH Mezz I, PH Fee Owner and TSP Owner account for income taxes inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*”. SFAS 109 requires the recognition of deferred income taxassets, net of applicable reserves, related to net operating loss carryforwardsand certain temporary differences. The standard requires recognition of afuture tax benefit to the extent that realization of such benefit is morelikely than not. Otherwise, a valuation allowance is applied.

 

The Company accounts forincome taxes in accordance with the provisions of  FASB Interpretation No. 48 (“FIN 48”) *“Accounting for Uncertainty in Income Taxes — an interpretation of FASBNo. 109”*, which clarifies certain aspects of accounting foruncertain tax positions, including issues related to the recognition andmeasurement of those tax positions.  FIN48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosures, and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. Further discussion regarding the adoption of FIN 48 can be found inNote 9 to the Condensed Consolidated Financial Statements.

 

*Timeshare Purchase Agreement*

 

Pursuant to an agreementdated December 10, 2004 and modified on September 10, 2007, OpBizentered into a Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”),a Florida limited partnership, whereby OpBiz agreed to sell approximately 4acres of land adjacent to the PH Resort to Westgate (the “Timeshare Parcel”),who plans to develop, market, manage and sell timeshare units on the land. On September 19,2007, the sale of the land and deed transfer to Westgate was completed. In 

 

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connection with the close of the transaction, OpBiz,PH Fee Owner, LLC and TSP Owner, LLC, entered into a modificationagreement (the “Modification Agreement”) with Westgate. The ModificationAgreement defines the development phases for the Timeshare Parcel and outlinesthe permitted number of timeshare, whole ownership and penthouse units. TheModification Agreement also outlines permitted amenities on the TimeshareParcel and documents Seller’s approval of Westgate’s financing for the project.

 

Pursuant to the terms ofthe Timeshare Purchase Agreement, the purchase price of the land was$29.5 million. The Company was carrying the land at a value of$29.5 million. Accordingly, no gain on the sale of this land has beenrecognized in the accompanying financial statements. Westgate pays the Companya monthly fee equal to 9% of total timeshare sales. 50% of the fees receivedwill be used to pay the purchase price for the land and the remaining 50% willbe recorded as income as received. As of March 31, 2009, the Company has areceivable balance for the sale of land of $19.2 million, $16.6 million ofwhich is classified as long-term and at December 31, 2008 the Company hasa receivable balance for the sale of land of $19.9 million,$16.9 million of which is classified as long-term in the accompanyingfinancial statements.

 

###### *Membership Interests*

######  

As of March 31, 2009, BH/RE’s membership interests hadnot been unitized and BH/RE’s members do not presently intend to unitize thesemembership interests. Accordingly, management of BH/RE has excluded earningsper share data required pursuant to SFAS No. 128, “*Earnings PerShare,*” because management believes that such disclosures would notbe meaningful to the financial statement presentation.

 

*Recently Issued Accounting Pronouncements*

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), *“Business Combinations.”* SFAS No. 141(revised) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and noncontrolling interest in the acquireeand the goodwill acquired. The revision is intended to simplify existing guidanceand converge rulemaking under U.S. generally accepted accounting principleswith international accounting rules. This statement applies prospectively tobusiness combinations where the acquisition date is on or after the beginningof the first annual reporting period beginning on or after December 15,2008. The adoption of SFAS No. 141 (revised) had no impact on the Company’sfinancial position, results of operations or cash flows.

 

In December 2007, the FASB issued SFAS No. 160, *“Noncontrolling Interest in Consolidated Financial Statements, anamendment of ARB No. 51.”* This statement establishes accountingand reporting standards for ownership interest in subsidiaries held by partiesother than the parent and for the deconsolidation of a subsidiary. It alsoclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in the consolidated entity that should be reported as equity in theconsolidated financial statements. SFAS No. 160 changes the way theconsolidated statement of operations is presented by requiring consolidated netincome to be reported at amounts that include the amount attributable to boththe parent and the noncontrolling interests. The statement also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interest of the parent and those of thenoncontrolling owners. This statement is effective for fiscal years beginningon or after December 15, 2008. The adoption of this provision on January 1,2009 did not have a material impact on the Company’s financial position,results of operations or cash flows.

 

In March 2008, theFASB issued SFAS No. 161, *“Disclosures AboutDerivative Instruments and Hedging Activities, an amendment of SFAS No. 133.”*SFAS No. 161 is intended to improve financial reporting about derivativeinstruments and hedging activities by requiring enhanced disclosures to enableinvestors to better understand their effects on an entity’s financial position,financial performance, and cash flows. This statement is effective for fiscalyears beginning after November 15, 2008. SFAS No. 161 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

**3.****                                     ****RECEIVABLES**

 

Receivables consist of the following (in thousands):

 
| ** **                                 | ** ** | **March 31  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Casino                                     |       | $                       | 14,764     |                        | $          | 13,584 |   |
| Hotel                                      |       | 5,249                   |       | 5,999                       |       |
| Land sale receivable                       |       | 19,188                  |       | 19,918                      |       |
| Other                                      |       | 3,446                   |       | 4,368                       |       |
|                                       |       | 42,647                  |       | 43,869                      |       |
| Long-term portion of land  sale receivable |       | (16,548                 | )          | (16,918                     | )          |
| Allowance for doubtful  accounts           |       | (9,606                  | )          | (8,234                      | )          |
| Receivables, net                           |       | $                       | 16,493     |                        | $          | 18,717 |   |

 

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**4.****                                     ****PROPERTY AND EQUIPMENT**

 

Property and equipmentand the related accumulated depreciation consist of the following (inthousands):

 
| ** **                        | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Land                              |       | $                        | 68,479     |                        | $          | 68,479 |   |
| Building and improvements         |       | 502,420                  |       | 502,305                     |       |
| Furniture, fixtures and equipment |       | 126,912                  |       | 126,582                     |       |
| Construction in progress          |       | 743                      |       | 464                         |       |
|                              |       | 698,554                  |       | 697,830                     |       |
| Accumulated depreciation          |       | (129,971                 | )          | (119,787                    | )          |
| Property and equipment, net       |       | $                        | 568,583    |                        | $          | 578,043 |   |

 

Depreciation expense wasapproximately $10.2 million and $8.8 million for the three months ended March 31,2009 and 2008, respectively.

 

**5.****                                     ****LONG-TERM DEBT**

 

Long-term debt consistsof the following (in thousands):

 
| ** **                                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| $860 million Loan Agreement                      | $          | 860,000                  |       | $                           | 860,000    |   |
| Northwind Aladdin obligation under capital lease |       | 27,088                   |       | 27,562                      |       |
|                                             |       | 887,088                  |       | 887,562                     |       |
| Current portion of long-term debt                |       | (862,059                 | )          | (2,001                      | )          |
| Total long-term debt, net                        |       | $                        | 25,029     |                        | $          | 885,561 |   |

 

***LoanAgreement***

* *

On November 30, 2006, OpBiz and PH Fee Owner (collectively the “Borrower”)entered into the Loan Agreement (the “Loan Agreement”) with Column Financial, Inc.(the “Lender”) for a mortgage loan in the principal amount of up to$820 million. The Loan Agreement provided for an initial disbursement inthe amount of $759.7 million and a future funding facility in the amountof up to $60.3 million. On July 17, 2007, the Borrower and the Lenderentered into an amendment (the “Amendment”) to the Loan Agreement. TheAmendment provided for the immediate funding to Borrower of the balance offuture funding that was available under the Loan Agreement and established anadditional future funding facility in the amount of up to $40 million (“FutureFunding Tranche B”). Future Funding Tranche B has the same terms asthe Loan Agreement for maturity and extension. The Loan Agreement, as amendedby the Amendment, is referred to as the Loan. The Loan is secured by a deed oftrust on the PH Resort and a pledge, subject to approval by the Nevada gaming authorities,by MezzCo of its membership interest in OpBiz (as described below).

 

The initial maturity date of the Loan was December 9, 2008 withthree one year extension options available, subject to payment of a fee(applicable to the second and third extensions only) and the Borrower’scompliance with the requirements for an extension outlined in the LoanAgreement. The Borrower exercised the first available extension option therebyextending the maturity date to December 9, 2009. Interest on the Loan is payablemonthly and accrues at the 30 day LIBOR rate (0.56% for the March 31,2009 interest payment) plus 3.25% with a .25% ticking fee on available butun-advanced future funding. Interest on Future Funding Tranche B ispayable monthly and accrues at the 30 day LIBOR rate plus 7.50% with a1.50% ticking fee on available but un-advanced funds. The Loan does not requireamortization during the initial term or, provided certain EBITDA thresholds aremet, during the extension periods. The Loan requires that the Borrowerestablish and maintain certain reserves including a reserve for completion ofthe renovation project, a reserve for projected interest shortfalls, a reservefor payment of property taxes and insurance and a reserve for on-goingfurniture, fixture and equipment purchases or property improvements. The Loanrestricts the Borrower’s ability to spend excess cash flow until certain debtservice coverage ratios are met.

 

On May 7, 2009, the Borrower, Planet Hollywood International, Inc.,Planet Hollywood (Region IV), Inc., Planet Hollywood Memorabilia, Inc.,Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd., Bay Harbour MasterLtd., Douglas Teitelbaum, Robert Earl, and Wells Fargo Bank, N.A., as Trusteefor The Credit Suisse First Boston Mortgage Securities Corp. CommercialMortgage Pass-Through Certificates, Series 2007-TFL2 entered into a thirdmodification (the “Modification”) of the existing Loan Agreement, dated November 30,2006, between Borrower and Column Financial, Inc. (the “Loan Agreement”).  The Modification provides for up to $9million of the Interest Reserve Fund (as defined in the Loan Agreement) to beavailable to Borrower for monthly debt service. 

 

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The Loan Agreement has two remaining one year extension optionsavailable (the second and third extension options).  As a condition to exercising each of thesecond and third extension options, the Borrower must replenish the InterestReserve Account (as defined in the Loan Agreement) to an amount sufficient toachieve a Debt Service Coverage Ratio (as defined in the Loan Agreement) of1.05:1.00  and 1.10:1:0, respectively,using the specified terms and parameters outlined in the Loan Agreement.  Failure to replenish the Interest ReserveAccount is an Event of Default (as defined in the Loan Agreement) and aSpecified Event (as defined in the Modification).  A Specified Event means the occurrence ofcertain events, including (a) failure of the Borrower to make certainpayments as required by the Modification or the Loan Agreement; (b) certainEvents of Default under the Loan Agreement; and (c) an Event of Defaultunder the Modification resulting from failure to pay amounts owed to Lender,failure to pay certain taxes, the incurrence of additional indebtedness inviolation of the terms of the Loan Agreement, and the imposition of any lienencumbering the collateral of the loan (for the purpose of a Specified Event,an Event of Default means a Default (as defined in the Loan Agreement) thatcontinues after the applicable notice and cure or grace periods under the termsof the Loan Agreement and related documents).

 

At December 31, 2008, the Loan was classified as a non currentliability in the accompanying financial statements based on the Company’sintent and ability to exercise the second extension option. Operating incomefor the three months ended March 31, 2009 is not sufficient to demonstratethat the Company will generate sufficient cash flow from operations to meet theconditions set forth in the Modification (described above) in order to exercisethe second extension option. Accordingly, the Loan has been reclassified to a current liability in theaccompanying financial statements as of March 31, 2009.

 

As further outlined in the Modification dated May 7, 2009 withinten days after Lender’s written demand after the occurrence of a SpecifiedEvent as determined by Lender in its sole but good faith discretion, Borrower,MezzCo and TSP Owner LLC shall deliver to Lender (i) one or more deedsconveying fee simple title to all portions of the Property (as defined in theLoan Agreement); (ii) one or more assignments conveying membershipinterests of MezzCo in OpBiz; and (iii) all other documents andinstruments to Lender that may be required to enable Lender to obtain titleinsurance coverage with respect to fee simple property. In order to permit theLender to foreclose on the Hotel and Casino separately and to allow OpBiz tocontinue to operate the casino after such a foreclosure (should the Lenderchoose to do so), title to the real property comprising the Hotel and Casino(the “Property”) was transferred from OpBiz to PH Fee Owner. OpBiz and PH FeeOwner then entered into a lease pursuant to which OpBiz agreed to continue tooperate the Hotel in the manner it had been and to pay monthly rent ofapproximately $916,000. OpBiz and PH Fee Owner also entered into a leasepursuant to which OpBiz agreed to continue to operate the Casino in the mannerit had been and to pay monthly rent of approximately $1,160,000.

 

In connection with the Loan, the Lender required that Trophy HunterInvestments, Ltd., Bay Harbour 90-1, Ltd. and Bay HarbourMaster Ltd., which are affiliates of Bay Harbour Management, execute anddeliver a certain Guaranty (as described below). In exchange for Trophy HunterInvestments, Ltd., Bay Harbour 90-1, Ltd. and Bay HarbourMaster Ltd. (the “Guarantors”) executing the Guaranty, OpBiz and PH FeeOwner agreed to pay to Trophy Hunter Investments, Ltd. and Bay HarbourMaster Ltd. a fee equal to $1,500,000 per year. The fee is accrued as of March 31,2009 and only payable once OpBiz hits certain debt service coverage ratiosdefined in the Loan Agreement.

 

In connection with the Loan, the Guarantors entered into a Guaranty,dated November 30, 2006 (the “Guaranty”), pursuant to which the Guarantorsagreed to indemnify the Lender against losses related to certain prohibitedactions of the Borrower and guarantied full repayment of the Loan in the caseof a voluntary or collusive bankruptcy of the Borrower, a transfer of theProperty or interests in the Borrower in violation of the Loan Agreement and ifthe Borrower fails to maintain its status as a bankruptcy remote entity and asa result sees its assets consolidated with those of an affiliate in abankruptcy. The liability of the Guarantors is capped at $15,000,000 per entityand $30,000,000 in the aggregate, however this cap does not apply to (i) liabilityarising from events, acts or circumstances actually committed or brought aboutby the willful acts of any of the Guarantors and (ii) the extent of anybenefit received by any of the Guarantors as a result of the acts giving riseto the liability under the Guaranty. Each of Douglas Teitelbaum and Robert Earlexecuted and delivered guaranties substantially the same as that delivered bythe Guarantors, however the liability of each of them was limited to (i) liabilityarising from events, acts or circumstances actually committed or brought aboutby willful acts by him and (ii) the extent of any benefit received by himas a result of the acts giving rise to the liability under the Guaranty.

 

In connection with the Loan, the Guarantors and Robert Earl executedand delivered a Completion Guaranty, dated November 30, 2006, pursuant towhich they jointly and severally guarantied the completion of the renovation ofthe Property and payment of all costs associated therewith. The liability underthe Completion Guaranty is capped at the greater of (a) $35,000,000 and (b) onlyin the case that cost overruns for the renovation exceed $15,000,000, 24% ofthe then unpaid costs of the completion of the renovation.

 

In addition, in connection with the Loan Agreement, MezzCo effected arefinancing of the Securities Purchase Agreement, dated August 9, 2004,among MezzCo and the Investors, pursuant to which MezzCo issued to theInvestors (i) 16% senior subordinated secured Notes in the originalaggregate principal amount of $87 million, and (ii) Warrants for thepurchase (subject to certain adjustments as provided for therein) of membershipinterests of MezzCo, representing 17.5% of its fully diluted equity. Loanproceeds were used to redeem in full the Notes.

 

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In connection with the refinancing of the Securities Purchase Agreementand redemption of the Notes, the Restructuring Parties entered into theRestructuring Agreement, dated November 30, 2006, pursuant to which theRestructuring Parties terminated in full the Securities Purchase Agreement, theSubordination Agreement, dated as of August 31, 2004, among MezzCo, OpBiz,the Senior Agent and the Investors, the Pledge Agreement, dated August 9,2006, among MezzCo and the Collateral Agent, and the Guaranty, dated August 9,2004, made by OpBiz to the Investors, and amended certain other existingagreements, as described below.

 

In accordance with the terms of the Restructuring Agreement, theInvestors and EquityCo, MezzCo and OpBiz entered into a Release, Consent andWaiver Agreement, pursuant to which the Investors (i) released OpBiz fromits guaranteed obligations, under that certain Guaranty Agreement, dated as of August 9,2004 and executed by OpBiz in favor of the Investors and the collateral agent; (ii) releasedMezzCo from its pledge of the collateral, under that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of thecollateral agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executedby the Company in favor of the collateral agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee (as defined therein) for the benefit of thecollateral agent; (iv) released and terminated the Investors’ securityinterest in the securities account, provided for that certain SecuritiesAccount Control Agreement, dated as of August 9, 2004 and executed by theCompany, the collateral agent and Wells Fargo Bank, N.A.

 

Additionally, MezzCo, EquityCo, and the Investors entered into anAmended and Restated Investor Rights Agreement, dated November 30, 2006(the “A&R Investor Rights Agreement”), to amend and restate the originalInvestor Rights Agreements among the parties thereto, dated August 9, 2004.

 

Pursuant to the Restructuring Agreement, the Restructuring Partiesagreed to amend the Warrants by issuing Amended and Restated Warrants toPurchase Membership Interests of MezzCo (the “A&R Warrants”) to theInvestors upon approval by the Nevada gaming authorities. The A&R Warrantswill be exercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereofthrough the expiration date of December 9, 2012. In addition to customaryanti-dilution protections, the number of units representing MezzCo membershipinterests issuable upon exercise of the A&R Warrants may be increased fromtime to time upon the occurrence of certain events as described in the A&RWarrants. Holders of the A&R Warrants and any securities issued uponexercise thereof may require MezzCo to redeem such securities commencing on December 9,2011 at a redemption price based upon a formula set forth in the A&RWarrants. These rights expire upon completion of a public offering by MezzCo orOpBiz.

 

In connection with the Restructuring Agreement, EquityCo entered into aGuaranty Agreement, dated November 30, 2006 (the “Guaranty Agreement”), infavor of the Investors and the Collateral Agent, pursuant to which EquityCo hasguaranteed the obligation of MezzCo to pay the redemption price under theA&R Warrants prior to expiration and any indebtedness arising under the PutNote (as defined in the A&R Warrants).

 

EquityCo and the Collateral Agent also entered into a Pledge Agreement,dated November 30, 2006 (the “Pledge Agreement”), pursuant to whichEquityCo has, subject to approval of the Nevada gaming authorities, pledged andgranted a first priority security interest to the Collateral Agent for theratable benefit of the Investors in the membership interests of EquityCo inMezzCo. The Pledge Agreement, once approved, will secure the full payment ofthe Put Right (as defined in the A&R Warrants), including any obligationsunder the Put Note.

 

On November 30, 2006, MezzCo entered into an IndemnificationAgreement with the Investors, pursuant to which we agreed to indemnify theInvestors for any losses caused by (i) lack of gaming approvals for theissuance of the A&R Warrants, (ii) lack of gaming approval for thegranting of a lien by EquityCo in the equity interests in MezzCo, as describedin the Pledge Agreement, and (iii) the inability of the Investors toexercise the Warrants until July 1, 2007.

 

***Energy ServicesAgreement***

*** ***

On January 30,2009, OpBiz entered into the Fifth Amendment to Energy Services Agreement (the “FifthAmendment”) with Northwind Aladdin (“Northwind”), the third party that owns andoperates a central utility plant on land leased from OpBiz. The plant supplieshot and cold water and emergency power to the property under a contract whichexpires in 2020.  The Fifth Amendmentassigns a portion of the capacity to heat and chill water provided to OpBiz toWestgate for operation of the timeshare tower. Operation of the timeshare toweris fully described in Note 2—Summary of Significant Accounting Policies,Timeshare Purchase Agreement. The Fifth Amendment provides for Westgate toassume a pro-rata portion of the debt and equity obligations payable by OpBizto Northwind. OpBiz’s obligations to Northwind, recorded as a capital lease inthe accompanying financial statements, will be reduced 

 

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by the pro-rata assignment to Westgate as payments aremade.  Payments under the Northwindagreement made by OpBiz total approximately $292,000 per month.

 

**6.****                                     ****MEMBERSHIP INTERESTS**

 

The non-voting interests in BH/RE are owned 43.27% by BHCH I, 15.61% byBHCH II and 41.13% by OCS and the voting interests are owned 50% by Douglas P.Teitelbaum and 50% by Robert Earl. BHCH is controlled by Mr. Teitelbaum,managing principal of Bay Harbour Management, an investment management firm.BHCH was formed by Mr. Teitelbaum for the purpose of holding investmentsin BH/RE by funds managed by Bay Harbour Management. OCS is wholly-owned andcontrolled by Mr. Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earlis the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaumis a director of Planet Hollywood. Collectively, Mr. Earl, a trust for thebenefit of Mr. Earl’s children and affiliates of Bay Harbour Management,own substantially all of the equity of Planet Hollywood.

 

BH/RE owns 88.61% of the membership interests in EquityCo and Starwoodowns 11.39%. OpBiz is a wholly owned subsidiary of EquityCo. BH/RE and Starwoodmade total equity contributions of $20 million each in EquityCo to fundthe costs of the planned renovations to the Aladdin. Starwood’s equity interestin EquityCo is reflected as minority interest in the accompanying consolidatedfinancial statements.

 

BH/REhas the option to purchase all of Starwood’s membership interests in EquityCoif OpBiz is entitled to terminate the hotel management contract between OpBizand Sheraton (see Note 7) as a result of a breach by Sheraton. Starwoodcan require EquityCo to purchase all of its membership interests in EquityCo ifthe hotel management contract is terminated for any reason other than inaccordance with its terms or as the result of a breach by Sheraton. Inaddition, BH/RE and Starwood entered into a registration rights agreement withrespect to their membership interests in EquityCo.

 

The Company has entered into various employment agreements,as amended, with several executives. The employment agreements have initialterms of two to three years. The employment agreements provide that theexecutives will receive a base salary with either mandatory increases or annualadjustments and annual bonus payments. In addition, depending on the terms ofthe employment agreements, these executives are entitled to options to purchasebetween 0.2% and 3% of the equity of MezzCo.

 

Effective January 1, 2006, the Company adoptedthe provisions of SFAS No. 123(R), “*Share-BasedPayments”* requiring that compensation cost relating to share-basedpayment transactions be recognized in the operating expenses. The cost ismeasured at the grant date, based on the calculated fair value of the award,and is recognized as an expense over the employee’s estimated requisite serviceperiod (generally the vesting period of the equity award) on a straight-linebasis. Estimates are revised if subsequent information indicates thatforfeitures will differ from previous estimates, and the cumulative effect oncompensation cost of a change in the estimated forfeitures is recognized in theperiod of the change. Prior to January 1, 2006, the Company accounted forshare-based compensation to employees in accordance with APB No. 25, andrelated interpretations. The Company also followed the disclosure requirementsof SFAS No. 123 as amended by SFAS No. 148, *“Accountingfor Stock-Based Compensation-Transition and Disclosure.”*

 

There is no compensation cost related tonon-qualified stock options recognized in operating results for the threemonths ended March 31, 2009 and there is $3,000 of compensation cost,which approximated fair value, related to non-qualified stock optionsrecognized in operating results (included in selling, general andadministrative expenses) for the three months ended March 31, 2008.

 

**7.****                                     ****RELATED PARTY TRANSACTIONS**

 

***Planet Hollywood LicensingAgreement***

*** ***

OpBiz, Planet Hollywoodand certain of Planet Hollywood’s subsidiaries have entered into a licensingagreement pursuant to which OpBiz received a non-exclusive, irrevocable licenseto use various “Planet Hollywood” trademarks and service marks. Under thelicensing agreement, OpBiz also has the right, but not the obligation, to opena Planet Hollywood restaurant and one or more Planet Hollywood retail shopsunder a separate restaurant agreement with Planet Hollywood. OpBiz pays Planet Hollywooda quarterly licensing fee of 1.75% of OpBiz’s non-casino revenues. The initialterm of the licensing agreement will expire in 2028. OpBiz can renew thelicensing agreement for three successive 10-year terms. The property officiallybegan operation as the PH Resort on April 17, 2007 and began paying feespursuant to the licensing agreement as of that date. Licensing fees paid toPlanet Hollywood totaled approximately $0.6 million and $0.8 million for thethree months ended March 31, 2009 and 2008, respectively.

 

In addition to being amanager of BH/RE, Mr. Earl is the chief executive officer and chairman ofthe board of directors of Planet Hollywood. Similarly, Mr. Teitelbaum is amanager of BH/RE and a director of Planet Hollywood. Together, Mr. Earl, atrust for the

 

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benefit of Mr. Earl’s children and affiliates ofBay Harbour Management, own substantially all of the equity of PlanetHollywood. Mr. Earl disclaims beneficial ownership of any equity of PlanetHollywood owned by the trust.

 

***Sheraton HotelManagement Contract***

*** ***

OpBiz and Sheraton haveentered into a management contract pursuant to which Sheraton provides hotelmanagement services to OpBiz, assists OpBiz in the management, operation andpromotion of the Hotel and permits OpBiz to use the Sheraton brand andtrademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of4% of gross hotel revenue and certain food and beverage outlet revenues and 2%of rental income from third-party leases in the hotel. The management contracthas a 20-year term commencing on the completion of the Aladdin acquisition andis subject to certain termination provisions by either OpBiz or Sheraton.Sheraton is a wholly owned subsidiary of Starwood, which has an 11.39% equityinterest in EquityCo and has the right to appoint two members to the EquityCoboard of managers. Management fees paid to Starwood totaled approximately $2.1million and $2.6 million for the three months ended March 31, 2009 and2008, respectively.

 

***Planet Hollywood(LV) LLC Lease Agreement***

*** ***

OpBiz and PlanetHollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreementpursuant to which Planet Hollywood LV, as tenant, operates a new concept it hasdeveloped for an upscale 24-hour diner named “Planet Dailies” withinapproximately 11,500 square feet of space located on the premises owned byOpBiz. Planet Hollywood LV pays OpBiz base rent in the amount of $500,000 peryear (subject to annual increase adjustments), in addition to percentage rentof up to 12% based on annual gross sales (to the extent such percentage rentexceeds base rent).  The initial term ofthe lease agreement will expire in 2017. Planet Hollywood LV can renew thelease agreement for two successive 5-year terms. Planet Dailies began operationon April 1, 2007 and began paying rent pursuant to the lease agreement asof that date. Rent received from Planet Dailies totaled approximately $0.1million and $0.1 million for the three months ended March 31, 2009 and2008, respectively.

 

Planet Hollywood LV iswholly owned by, and a subsidiary of, Planet Hollywood International, Inc.Together, Mr. Earl, a trust for the benefit of Mr. Earl’s childrenand affiliates of Bay Harbour Management, own substantially all of the equityof Planet Hollywood International, Inc. Mr. Earl disclaims beneficialownership of any equity of Planet Hollywood International Inc. owned by thetrust.

 

***Earl of Sandwich(Las Vegas), LLC Lease Agreement***

*** ***

OpBiz and Earl ofSandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a leaseagreement pursuant to which Earl of Sandwich, as tenant, operates a restaurantnamed “Earl of Sandwich” within approximately 3,030 square feet of spacelocated on the premises owned by OpBiz. Earl of Sandwich pays OpBiz base rentin the amount of $161,600 per year (subject to annual increase adjustments), inaddition to percentage rent of up to 12% based on annual gross sales (to theextent such percentage rent exceeds base rent). The initial term of the leaseagreement will expire in 2017. Earl of Sandwich can renew the lease agreementfor two successive 5-year terms. Earl of Sandwich began operation in September 2007and began paying rent pursuant to the lease agreement as of that date. Rentreceived from Earl of Sandwich totaled approximately $0.1 million and $0.1million for the three months ended March 31, 2009 and 2008, respectively.

 

Earl of Sandwich iswholly and indirectly owned by a trust for the benefit of Mr. Earl’s children.Mr. Earl disclaims beneficial ownership of any equity of Earl of Sandwichowned by the trust.

 

***Guaranty Agreement***

*** ***

In connection with the Loan, the Lender requiredthat Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd. and Bay HarbourMaster Ltd., which are affiliates of Bay Harbour Management, execute anddeliver a certain Guaranty (see Note 5.—Long-Term Debt). In exchange forexecuting the Guaranty, OpBiz and PH Fee Owner agreed to pay Trophy HunterInvestments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 peryear. The fee is accrued and only payable once OpBiz achieves certain debtservice coverage ratios defined in the Loan Agreement.

 

***Aircraft Charter Arrangements***

 

In the ordinary course from time to time the Companyutilizes the services of private aircrafts for charter.  The Company currently utilizes severaldifferent third party aircraft management/charter vendors for the provision ofcharter flights depending upon aircraft size, availability and location.  One or more affiliates of BH/RE have placedan owned aircraft in service with one such vendor.  From time to time, the Company may utilizethe services of this vendor which may involve the affiliates owned aircraftprovided that the rate charged for that aircraft shall be at arms length andfair market for similar aircraft.

 

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**8.****                                     ****FAIR VALUE MEASUREMENTS**

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements”. SFAS 157 does not establish requirements for any new fairvalue measurements, but it does apply to existing accounting pronouncements inwhich fair value measurements are already required. SFAS 157 defines fairvalue, establishes a framework for measuring fair value in accordance withaccounting principles generally accepted in the United States, and expandsdisclosures about fair value measurements. The Company has adopted theprovisions of SFAS 157 as of January 1, 2008, for financial assetsand liabilities and January 1, 2009, for non-financial assets andliabilities. Although the adoption of SFAS 157 has not materially impactedits financial condition, results of operations, or cash flow, the Company is nowrequired to provide additional disclosures as part of its financial statements.

 

SFAS 157 establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value. These tiers include:Level 1, defined as observable inputs such as quoted prices in activemarkets; Level 2, defined as inputs other than quoted prices in activemarkets that are either directly or indirectly observable; and Level 3,defined as unobservable inputs in which little or no market data exists, thereforerequiring an entity to develop its own assumptions.

 

As of March 31,2009, the Company held certain items that are required to be measured at fairvalue on a recurring basis. These included an interest rate cap contract andcertain put warrants to purchase 17.5% of fully diluted equity interest in theCompany. The fair value of interest rate cap contract is determined based oninputs that are readily available in public markets or can be derived frominformation available in publicly quoted markets. Therefore, the Company hascategorized the cap contract as Level 2. The Company determines the valueof the put warrants using a discounted cash flow model and weekly assetvolatilities of comparable companies over the past three years. Therefore, theCompany has categorized these put warrants as Level 2.

 

Inaccordance with the fair value hierarchy described in SFAS No. 157 “FairValue Measurements,” the following table shows the fair value of our financialassets and financial liabilities as of March 31, 2009:

 
| ** **        | ** ** | **December 31, 2008** | ** ** | **March 31, 2009** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------|------------|----------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|              |       |                       |       |                    |       |             |       |             |       |             |       |
| Assets:           |       |                       |       |                    |       |             |       |             |       |             |       |
| Interest rate cap |       | $                          | 26,000     |                    | $          | 239              |       | $                | —     |             | $          | 239 |   | $ | — |   |
|              |       |                       |       |                    |       |             |       |             |       |             |       |
| Liabilities:      |       |                       |       |                    |       |             |       |             |       |             |       |
| Put warrants      |       | $                          | 1,537,000  |                    | $          | 1,537,000        |       | $                | —     |             | $          | 1,537,000 |   | $ | — |   |

 

Thefollowing section describes the valuation methodologies used to measure fairvalue, key inputs, and significant assumptions:

 

*Interest rate cap* — The estimated fair valueof our interest rate cap is based upon quoted prices available in active marketsand represent the amounts we would expect to receive if we sold thesemarketable securities.

 

*Put warrants* — The estimated fair valueof our put warrants is based on a discounted cash flow model and assetvolatilities of comparable companies over the past three years.

 

**9.****                                     ****INCOME TAXES**

 

The condensedconsolidated financial statements include the operations of BH/RE and itsmajority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PHFee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies andare taxed as partnerships for federal income tax purposes. However, MezzCo haselected to be taxed as a corporation for federal income tax purposes. OpBiz andPH Mezz II, wholly-owned subsidiaries of MezzCo, will be treated as divisionsof MezzCo for federal income tax purposes, and accordingly, will also besubject to federal income taxes. Additionally, PH Mezz I, a wholly-ownedsubsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz Iand TSP Owner, a wholly owned subsidiary of PH Fee Owner will also be subjectto federal income taxes.

 

MezzCo, OpBiz, PH MezzII, PH Mezz I, PH Fee Owner and TSP Owner account for income taxes inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*”. SFAS 109 requires the recognition of deferred income taxassets, net of applicable reserves, related to net operating loss carryforwardsand certain temporary differences. The standard requires recognition of afuture tax benefit to the extent that realization of such benefit is morelikely than not. Otherwise, a valuation allowance is recorded.

 

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Management believes it ismore likely than not that its net deferred tax asset will not be realized andhas therefore recorded a valuation allowance against this net deferred taxasset.

 

As of December 31,2008, MezzCo has federal net operating losses of $297.6 million which begin toexpire after 2024. MezzCo has general business credit carryforwards at December 31,2008 of $2.0 million which begin to expire after 2024 and a minimum tax creditcarryforward of $7,000.

 

As discussed in Note 2 tothe condensed consolidated financial statements, the Company accounts forincome taxes in accordance with the provisions of FIN 48.  Upon the adoption of FIN 48, the Companyreclassified the uncertain tax benefits as required and reclassified a portionof the existing allowance. Accordingly, there has been no adjustment toretained earnings recorded as a result of the FIN 48 reclassifications.The Company had uncertain tax benefits of $2.1million as of March 31, 2009and December 31, 2008. The Company recognizes penalties and interest as acomponent of income tax expense. Management does not expect any penalty assessment associated with theadoption of FIN 48.  The Company is nolonger subject to U.S. federal tax examinations by tax authorities for taxyears before 2004.

 

**10.****                              ****COMMITMENTS AND CONTINGENCIES**

 

###### ***Litigation***

######  

In the normal course of business, the Company is subject tovarious litigation claims and assessments. The Company is not currently a partyto any material legal proceedings.

 

***Employment Agreements***

*** ***

The Company has entered intovarious employment agreements, as amended, with several executives. Theemployment agreements have initial terms of two to three years. The employmentagreements provide that the executives will receive a base salary with eithermandatory increases or annual adjustments and annual bonus payments. Inaddition, depending on the terms of the employment agreements, these executivesare entitled to options to purchase between 0.2% and 3% of the equity ofMezzCo.

 

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## ***ITEM2.***MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## *** ***

###### ***Overview of Management’s Discussion and Analysis of Financial Conditionand Results of Operations***

######  

Set forth below is adiscussion of the financial condition and results of operations of BH/RE andits subsidiaries for the periods covered in this report. The discussion ofoperations herein focuses on events and the revenues and expenses during thethree months ended March 31, 2009, as compared to the three months ended March 31,2008.

 

The following management’sdiscussion and analysis of financial condition and results of operations shouldbe read in conjunction with the consolidated financial statements and therelated notes to the consolidated financial statements of BH/RE included inBH/RE’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission on March 31, 2009, and the unaudited condensed consolidatedfinancial statements and notes hereto included in Part I, Item 1 of thisreport.

 

###### ***Critical Accounting Policies and Estimates***

######  

###### *Significant Accounting Policiesand Estimates*

######  

Our unaudited condensed consolidated financial statementsare prepared in conformity with U.S. generally accepted accounting principles.Certain policies, including the determination of bad debt reserves, theestimated useful lives assigned to assets, asset impairment, insurance reservesand the calculation of liabilities, require that we apply significant judgmentin defining the appropriate assumptions for calculating financial estimates. Bytheir nature, these judgments are subject to an inherent degree of uncertainty.Our judgments are based on historical experience, terms of existing contracts,observance of trends in the gaming industry and information available fromother outside sources. There can be no assurance that actual results will notdiffer from our estimates. To provide an understanding of the methodology weapply, our significant accounting policies and basis of presentation arediscussed below, as well as, where appropriate, in the notes to the condensedconsolidated financial statements.

 

###### *Property and Equipment*

######  

Property and equipmentare stated at cost. Recurring repairs and maintenance costs, including itemsthat are replaced routinely in the casino, hotel and food and beveragedepartments which do not meet the Company’s capitalization policy, are expensedas incurred. The Company has established its capital expense policy to bereflective of its individual ongoing repairs and maintenance programs. Gains orlosses on dispositions of property and equipment are included in thedetermination of income. Property and equipment are generally depreciated overthe following estimated useful lives on a straight-line basis:

 
| Buildings                         |   | 40  years       |   |
|-----------------------------------|--------|-----------------|--------|
| Building improvements             |   | 15  to 40 years |   |
| Furniture, fixtures and equipment |   | 3  to 7 years   |   |

 

Property and equipmentand other long-lived assets are evaluated for impairment in accordance with theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*.” For assets tobe disposed of, the asset to be sold is recognized at the lower of carryingvalue or fair value less costs of disposal. Fair value for assets to bedisposed of is estimated based on comparable asset sales, solicited offers or adiscounted cash flow model.

 

Property and equipmentare reviewed for impairment whenever indicators of impairment exist. If anindicator of impairment exists, the estimated future cash flows of the asset,on an undiscounted basis, are compared to the carrying value of the asset. Ifthe undiscounted cash flows exceed the carrying value, no impairment isindicated. If the undiscounted cash flows do not exceed the carrying value,then impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model.

 

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*Derivative Instruments and Hedging Activities*

 

Pursuant to the refinancing of the Securities Purchase Agreement andthe terms of the Restructuring Agreement, the Restructuring Parties agreed toamend the warrants issued by MezzCo to purchase 17.5% of the fully dilutedequity in MezzCo. The warrants contain a net cash settlement, and therefore areaccounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*”. BothSFAS No. 133 “*Accounting for DerivativeInstruments and Hedging Activities*” and EITF 00-19 require thatthe warrants be recognized as liabilities, with changes in fair value affectingnet income. See “Note 5. Long-Term Debt.”

 

The terms of the Loan Agreement required the Company to enter into aninterest rate cap agreement, which expires on December 9, 2009, to manageinterest rate risk. The Company did not apply cash flow hedge accounting tothis instrument. Although this derivative was not afforded cash flow hedgeaccounting, the Company retained the instrument as protection against theinterest rate risk associated with its long-term borrowings. The Companyaccounts for its derivative activity in accordance with SFAS No. 133 andaccordingly, recognizes all derivatives on the balance sheet at fair value withany in change in fair value being recorded in interest income or expense in theaccompanying consolidated statements of operations.

 

*Revenue Recognition andPromotional Allowances*

 

Casino revenues arerecognized as the net win from gaming activities, which is the differencebetween gaming wins and losses. Hotel revenue recognition criteria aregenerally met at the time of occupancy. Food and beverage revenue recognitioncriteria are generally met at the time of service. Deposits for future hoteloccupancy or food and beverage services are recorded as deferred income untilrevenue recognition criteria are met. Cancellation fees for hotel and food andbeverage services are recognized upon cancellation by the customer as definedby a written contract entered into with the customer. All other revenues arerecognized as the service is provided. Revenues include the retail value offood, beverage, rooms, entertainment and merchandise provided on acomplimentary basis to customers. Such complimentary amounts are then deductedfrom revenues as promotional allowances on BH/RE’s consolidated statements ofoperations.

 

###### *Players’ Club Program*

######  

 Players’ club members earn points based ongaming activity, which can be redeemed for cash. OpBiz accrues expense and aliability related to this program as the points are earned based on historicalredemption percentages. Revenues are recognized net of certain sales incentivesin accordance with the Emerging Issues Task Force (“EITF”) consensus on Issue01-9, “Accounting for Consideration Given by a Vendor to a Customer (Includinga Reseller of the Vendor’s Products).” EITF 01-9 requires that salesincentives be recorded as a reduction of revenue; consequently, casino revenuesare reduced by points earned through the players’ club loyalty program. TheCompany accrues a liability for players’ club points that can be redeemed forcash.  In March 2009, the Companychanged the structure of its players club to allow patrons who earn points toredeem those points for promotional slot play and other non-cashincentives.  The total accrued liabilityrelated to potential cash awards redeemable under the players’ club program was$1.3 million at March 31, 2009 and $2.2 million at December 31,2008.

 

*Self-Insurance Accruals*

 

BH/RE is self-insured, upto certain limits, for costs associated with employee medical coverage. TheCompany accrues for the estimated expense of known claims, as well as estimatesfor claims incurred but not yet reported which totaled approximately$3.3 million at March 31, 2009 and $2.4 million at December 31,2008.

 

*IncomeTaxes*

 

Thecondensed consolidated financial statements include the operations of BH/RE andits majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH MezzI, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liabilitycompanies and are taxed as partnerships for federal income tax purposes.However, MezzCo has elected to be taxed as a corporation for federal income taxpurposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, aretreated as divisions of MezzCo for federal income tax purposes, andaccordingly, are also subject to federal income taxes. Additionally, PH Mezz I,a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly ownedsubsidiary of PH Mezz I, and TSP Owner, a wholly owned subsidiary of PH FeeOwner, are also subject to federal income taxes.

 

MezzCo, OpBiz, PH MezzII, PH Mezz I, PH Fee Owner and TSP Owner account for income taxes inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*”. SFAS 109 requires the recognition of deferred income taxassets, net of applicable reserves, 

 

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related to net operating loss carryforwards andcertain temporary differences. The standard requires recognition of a futuretax benefit to the extent that realization of such benefit is more likely thannot. Otherwise, a valuation allowance is recorded.

 

The Company accounts forincome taxes in accordance with the provisions of  FASB Interpretation No. 48 (“FIN 48”) *“Accounting for Uncertainty in Income Taxes — an interpretation of FASBNo. 109”*, which clarifies certain aspects of accounting foruncertain tax positions, including issues related to the recognition andmeasurement of those tax positions.  FIN48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosures, and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. Further discussion regarding the adoption of FIN 48 can be found inNote 9 to the Condensed Consolidated Financial Statements.

 

*Timeshare Purchase Agreement*

 

Pursuant to an agreementdated December 10, 2004 and modified on September 10, 2007, OpBizentered into a Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”),a Florida limited partnership, whereby OpBiz agreed to sell approximately 4acres of land adjacent to the PH Resort to Westgate (the “Timeshare Parcel”),who plans to develop, market, manage and sell timeshare units on the land. On September 19,2007, the sale of the land and deed transfer to Westgate was completed. Inconnection with the close of the transaction, OpBiz, PH Fee Owner, LLC andTSP Owner, LLC, entered into a modification agreement (the “ModificationAgreement”) with Westgate. The Modification Agreement defines the developmentphases for the Timeshare Parcel and outlines the permitted number of timeshare,whole ownership and penthouse units. The Modification Agreement also outlinespermitted amenities on the Timeshare Parcel and documents Seller’s approval ofWestgate’s financing for the project.

 

Pursuant to the terms ofthe Timeshare Purchase Agreement, the purchase price of the land was$29.5 million. The Company was carrying the land at a value of$29.5 million. Accordingly, no gain on the sale of this land has beenrecognized in the accompanying financial statements. Westgate pays the Companya monthly fee equal to 9% of total timeshare sales. 50% of the fees receivedwill be used to pay the purchase price for the land and the remaining 50% willbe recorded as income as received. As of March 31, 2009, the Company has areceivable balance for the sale of land of $19.2 million, $16.6 million ofwhich is classified as long-term and at December 31, 2008 the Company hasa receivable balance for the sale of land of $19.9 million,$16.9 million of which is classified as long-term in the accompanyingfinancial statements.

 

###### *Membership Interests*

######  

###### As of March 31, 2009,BH/RE’s membership interests had not been unitized and BH/RE’s members do notpresently intend to unitize these membership interests. Accordingly, managementof BH/RE has excluded earnings per share data required pursuant to SFAS No. 128,“*Earnings Per Share,*” because managementbelieves that such disclosures would not be meaningful to the financialstatement presentation.

######  

*Recently Issued Accounting Pronouncements*

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), *“Business Combinations.”* SFAS No. 141(revised) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and noncontrolling interest in the acquireeand the goodwill acquired. The revision is intended to simplify existingguidance and converge rulemaking under U.S. generally accepted accountingprinciples with international accounting rules. This statement appliesprospectively to business combinations where the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. The adoption of SFAS No. 141 (revised) had no impact on the Company’sfinancial position, results of operations or cash flows.

 

In December 2007, the FASB issued SFAS No. 160, *“Noncontrolling Interest in Consolidated Financial Statements, anamendment of ARB No. 51.”* This statement establishes accountingand reporting standards for ownership interest in subsidiaries held by partiesother than the parent and for the deconsolidation of a subsidiary. It alsoclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in the consolidated entity that should be reported as equity in theconsolidated financial statements. SFAS No. 160 changes the way the consolidatedstatement of operations is presented by requiring consolidated net income to bereported at amounts that include the amount attributable to both the parent andthe noncontrolling interests. The statement also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interest of the parent and those of the noncontrollingowners. This statement is effective for fiscal years beginning on or after December 15,2008. The adoption of this provision on January 1, 2009 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

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In March 2008, the FASB issued SFAS No. 161, *“Disclosures About Derivative Instruments and Hedging Activities, anamendment of SFAS No. 133.”* SFAS No. 161 is intended toimprove financial reporting about derivative instruments and hedging activitiesby requiring enhanced disclosures to enable investors to better understandtheir effects on an entity’s financial position, financial performance, andcash flows. This statement is effective for fiscal years beginning after November 15,2008. SFAS No. 161 did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

###### ***Results of Operations***

######  

***Current Economic Conditions and Comparability of Results***

 

Theoutlook for the leisure and gaming industries remains highly uncertain due to anumber of factors affecting consumers, including a slowdown in globaleconomies, reduced consumer spending, and restricted credit markets. Reducedcasino volumes, a reduced demand for hotel rooms and a highly competitive marketdriving hotel rates down have all contributed to declines in the overall LasVegas market. This slow down was particularly significant in the fourth quarterof 2008 and has continued into the first quarter of 2009. 2008 was the PHResort’s first full year of operation as a rebranded property. We believe thatfirst quarter 2009 operating results were negatively impacted by the currentmarket conditions and that we will continue to experience lower than historicalhotel occupancy, room rates and casino volumes in 2009. As a result, we haveincreasingly focused on efficiency initiatives to control expenses and improveperformance. We are continually reviewing the costs and marketing opportunitiesto ensure maximum operating performance in the face of the current economicconditions.

 

The following tablehighlights the results of operations for the three months ended March 31,2009 and 2008, respectively (dollars in thousands, unaudited).

 
| ** **                          | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2009**                                         | ** ** | **2008**    | ** ** | **Change** | ** ** |
|                                |       |                                             |       |        |       |   |   |
| Net revenues                        |       | $                                                | 57,074     |        | $          | 73,994 |   | (22.9 | )% |
| Operating expenses:                 |       |                                             |       |        |       |   |   |
| Casino                              |       | 17,415                                           |       | 20,420      |       | (14.7 | )% |
| Hotel                               |       | 9,402                                            |       | 10,566      |       | (11.0 | )% |
| Food and beverage                   |       | 8,637                                            |       | 9,068       |       | (4.8 | )% |
| Other                               |       | 456                                              |       | 284         |       | 60.6 | % |
| Selling, general and administrative |       | 15,702                                           |       | 18,974      |       | (17.2 | )% |
| Depreciation and amortization       |       | 10,184                                           |       | 8,801       |       | 15.7 | % |
| Operating (loss) income             |       | $                                                | (4,722     | )           | $          | 5,881 |   | (180.3 | )% |

 

Net revenues for thethree months ended March 31, 2009 decreased when compared to the threemonths ended March 31, 2008. We believe that our revenues for the threemonths ended March 31, 2009 have been negatively impacted by the weakenedUnited States economy. Disruptions in the housing and stock markets, hightravel costs, along with declines in the Las Vegas market due to decreasedvisitor volume and lower customer spending per trip have and may continue toadversely impact our revenues. We have and will continue to aggressivelymonitor and reduce expenses to improve operating margins during 2009.

 

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The following table highlights the various sourcesof our revenues and expenses for the three months ended March 31, 2009 and2008, respectively (dollars in thousands, unaudited).

 
| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                                   | ** ** | **2009**                                         | ** ** | **2008**    | ** ** | **Change** | ** ** |
|                                         |       |                                             |       |        |       |   |   |
| Casino revenues                              |       | $                                                | 25,351     |        | $          | 32,347 |   | (21.6 | )% |
| Casino expenses                              |       | 17,415                                           |       | 20,420      |       | (14.7 | )% |
| *Margin*                                     | * *   | *31.3*                                           | *%*        | *36.9*      | *%*        | * * | * * |
|                                         |       |                                             |       |        |       |   |   |
| Hotel revenues                               |       | $                                                | 22,759     |        | $          | 30,953 |   | (26.5 | )% |
| Hotel expenses                               |       | 9,402                                            |       | 10,566      |       | (11.0 | )% |
| *Margin*                                     | * *   | *58.7*                                           | *%*        | *65.9*      | *%*        | * * | * * |
|                                         |       |                                             |       |        |       |   |   |
| Food and beverage revenues                   |       | $                                                | 11,699     |        | $          | 14,257 |   | (17.9 | )% |
| Food and beverage expenses                   |       | 8,637                                            |       | 9,068       |       | (4.8 | )% |
| *Margin*                                     | * *   | *26.2*                                           | *%*        | *36.4*      | *%*        | * * | * * |
|                                         |       |                                             |       |        |       |   |   |
| Other revenues                               |       | $                                                | 2,881      |        | $          | 3,782 |   | (23.8 | )% |
| Other expenses                               |       | 456                                              |       | 284         |       | 60.6 | % |
| *Margin*                                     | * *   | *84.2*                                           | *%*        | *92.5*      | *%*        | * * | * * |
|                                         |       |                                             |       |        |       |   |   |
| Selling, general and administrative expenses |       | $                                                | 15,702     |        | $          | 18,974 |   | (17.2 | )% |
| *Percent of net revenues*                    | * *   | *27.5*                                           | *%*        | *25.6*      | *%*        | * * | * * |

 

*Casino*

 

Casino revenue is derivedprimarily from patrons wagering on slot machines, table games and other gamingactivities. Table games generally include blackjack or twenty one, craps,baccarat and roulette. Other gaming activities include the race and sportsbooks, poker and keno. Casino revenue is defined as the win from gamingactivities, computed as the difference between gaming wins and losses.

 

Casino revenues vary fromtime-to-time due to general economic conditions, competition, popularity ofentertainment offerings, table game hold, slot machine hold and occupancypercentages in the Hotel. Casino revenues also vary depending upon the amountof gaming activity, as well as variations in the odds for different games ofchance. Casino revenue is recognized at the end of each gaming day.

 

Casino revenues decreased 21.6% to $25.4 million forthe three months ended March 31, 2009, as compared to $32.3 million forthe three months ended March 31, 2008. Table games revenue for the threemonths ended March 31, 2009, decreased by approximately $3.7 million or27.4% when compared to the three months ended March 31, 2008. The declinein table revenue was due to a combination of a decline in drop which was $6.7million or 8.4% less than the same three month period in 2008 and a lower thananticipated hold.  Overall table hold forthe first quarter of 2009 was 13.4% compared to 16.9% in the first quarter of2008.  Slot revenue for the three monthsended March 31, 2009 decreased approximately $3.4 million when compared tothe same three month period in prior year. Overall slot win percent was 8.5% inthe first quarter 2009 compared to 7.6% in the first quarter of 2008 but slothandle for the three months ended March 31, 2009 decreased $66.7 millionor 24.4% when compared to the same three month period in prior year.  Combined revenues from the race and sportsbook and poker for the three months ended March 31, 2009 increased by 2.5%when compared to the three month period ended March 31, 2008 mainly due toa better hold on sporting events.

 

Casino expenses decreased 14.7% to $17.4 million forthe three months ended March 31, 2009, as compared to $20.4 million forthe three months ended March 31, 2008. The casino operating margindecreased 5.6% when comparing the same three month periods.  The operating margin decline is commensuratewith an increase in marketing costs necessary to attract casino customers inthe current economic operating environment.

 

*Hotel*

 

Hotel revenue is derivedfrom rooms and suites rented to guests. “average daily rate” is an industryspecific term used to define the average amount of revenue per rented room perday. “Occupancy percentage” defines the total percentage of rooms occupied and 

 

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is computed by dividing the number of rooms occupiedby the total number of rooms available. Hotel revenue is recognized at the timethe room is provided to the guest.

 

Hotel revenues of $22.8 million for the three monthsended March 31, 2009 were 26.5% lower than the three months ended March 31,2008 driven by a decline in both occupancy and average daily room rate. Hoteloccupancy decreased 9.5 percentage points to 85.1% for the three months ended March 31,2009 compared to 94.5% for the three months ended March 31, 2008.Approximately 1,008 rooms were out of service for renovation in the firstquarter of 2008 resulting in more rooms available for sale for the three monthsended March 31, 2009 when compared to the three months ended March 31,2008.  Average daily room rates decreasedto $115 for the three months ended March 31, 2009 compared to $144 for thethree months ended March 31, 2008. Las Vegas visitor volume, room occupancy and average daily rate are alldown in the first quarter of 2009 when compared to the first quarter of 2008and as a result, many of the Strip properties are reducing room rate tomaintain occupancy.  The decline inaverage daily room rate at the PH Resort is indicative of the rate reductionsnecessary to remain competitive in the current economic operatingenvironment.   Additionally, we haveexperienced cancellations and attrition in the higher rated convention segmentas the economic slowdown continues to reduce the demand for business travel.

 

Hotel expenses decreased 11.0% to $9.4 million forthe three months ended March 31, 2009, as compared to $10.6 million forthe three months ended March 31, 2008. Operating margin decreased 7.2% forthe three month period ended March 31, 2009 when compared to the samethree month period in the previous year. We continue to focus on expense savings initiatives to maximizeprofitability in reaction to the reductions in average daily rate andoccupancy.

 

*Food and Beverage*

 

Food and beverage revenuesare derived from food and beverage sales in the restaurants, bars, roomservice, banquets and entertainment outlets. Food and beverage revenue isrecognized at the time the food and/or beverage is provided to the guest.

 

Food and beverage revenues decreased 17.9% to $11.7million for the three months ended March 31, 2009, as compared to $14.3million for the three months ended March 31, 2008. Food revenue decreased25.9% when compared to the same three month period in the previous year whilebeverage revenue declined 15.1%.  The PHResort operates Starbucks, the Spice Market Buffet, room service, the poolcafé, banquets and the casino bars.  Theremaining food outlets are leased to third party operators.  The food and beverage revenue declines aremainly attributable to a reduction in buffet covers and banquet revenue.  Banquet revenue declines are the directresult of the decline in convention business in the hotel and continuedreductions in consumer spending.

 

Food and beverage expenses decreased 4.8% to $8.6million for the three months ended March 31, 2009, as compared to $9.1million for the three months ended March 31, 2008. Operating margindecreased 10.2% when compared to the same three month period in previous year.

 

*Other*

 

Other revenue includestenant income, telephone and other miscellaneous income and is recognized atthe time the goods or services are provided to the guest. Tenant income alsoincludes a portion of the marketing fees received from Westgate based on salesof timeshare units.

 

Other revenues decreased 23.8% to $2.9 million forthe three months ended March 31, 2009, as compared to $3.8 million for thethree months ended March 31, 2008. The decrease in other revenue isprimarily due to the decrease in the amount received from Westgate based onsales of timeshare units. Westgate pays OpBiz 9% of total timeshare sales on amonthly basis with 50% of the proceeds recorded as tenant income and theremaining 50% recorded against the land receivable.

 

Other expenses increased 60.6% to $0.5 million forthe three months ended March 31, 2009, as compared to $0.3 million for thethree months ended March 31, 2008.

 

*Selling, General and Administrative (“SG&A”)*

 

SG&A expenses decreased 17.2% to $15.7 millionfor the three months ended March 31, 2009, as compared to $19.0 millionfor the three months ended March 31, 2008. As a percentage of net revenue, SG&A expenses increased to 27.5% forthe three months ended March 31, 2009 as compared to 25.6% for the threemonths ended March 31, 2008.  We continuedto focus on operating expense reductions in the SG&A divisions as well asthe operating departments in an effort to maximize profitability during thesechallenging economic times.

 

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*Depreciation and Amortization*

 

Depreciation and amortization expense of $10.2million for the three months ended March 31, 2009 increased when comparedto $8.8 million in expense for the three months ended March 31, 2008. Theincrease in depreciation expense is a direct result of the additional assetsplaced in service once the renovation was complete.

 

*Net Interest Expense*

 

Net interest expense decreased to $9.3 million forthe three months ended March 31, 2009, as compared to $17.9 million forthe three months ended March 31, 2008. The decrease in interest expense isdirectly related to the reduction in the interest rates.

 

###### ***Liquidity and Capital Resources***

######  

During the three monthsended March 31, 2009, we utilized cash flows from operating activities ofapproximately $3.4 million and had a balance of $18.6 million in cash and cashequivalents as of March 31, 2009. We also had current restricted cash andcash equivalents of approximately $32.6 million and long-term restrictedcash and cash equivalents of approximately $12.0 million at March 31,2009. The current restricted cash and cash equivalents are primarily reserveaccounts that have been established under the Loan Agreement to guaranteepayment of property taxes, insurance and furniture, fixtures and equipmentreplacement. Current restricted cash also includes the balance in the cashmanagement account. Under the terms of the Loan Agreement, all cash receiptsare deposited into a cash management account under Lender control which is usedto fund reserves and operating expenses. The long-term cash and cashequivalents include funds held in an interest reserve which will be releasedonce certain debt service coverage ratios are achieved. See “Description ofCertain Indebtedness” below.

 

Our primary remainingcash requirements for 2009 are expected to include (i) approximately $6.2million for maintenance capital expenditures or replacement furniture, fixturesand equipment (ii) up to approximately $30.9 million in interest paymentson our debt (iii) approximately $2.6 million in payments to Northwindunder the Energy Services Agreement and (iv) a $2.1 million fee requiredto exercise the second extension of the Loan.

 

We believe that cashgenerated from operations, cash held in reserve by the lenders under the LoanAgreement and cash made available under the Modification to the Loan Agreementwill be adequate to meet the anticipated working capital and capitalexpenditure obligations of OpBiz through at least December 2009.  To the extent that cash is drawn under theModification to the Loan Agreement that cannot be replenished from subsequentmonthly operations, that cash and a contribution sufficient to bring theInterest Reserve Account to a level sufficient to cover the interest reservetest (as fully defined in the Loan Agreement) will be required to exercise thenext extension.  The required debtservice coverage ratio for the next extension period is 1.05:1.00.   As detailed in the *Descriptionof Certain Indebtedness* below, operating income for the three monthsended March 31, 2009 is not sufficient to demonstrate that the Companywill generate sufficient cash flow from operations to meet the conditions setforth in the Modification in order to exercise the second extensionoption.  Failure to replenish theInterest Reserve Account is an Event of Default (as defined in the LoanAgreement) and a Specified Event (as defined in the Modification).

 

There can be no assurancethat we have accurately estimated our liquidity needs, or that we will notexperience unforeseen events that may materially increase our need forliquidity to fund our operations or capital expenditure programs or decreasethe amount of cash generated from our operations.

 

***Descriptionof Certain Indebtedness***

 

*Loan Agreement*

* *

On November 30, 2006, OpBiz and PH Fee Owner (collectively the “Borrower”)entered into the Loan Agreement (the “Loan Agreement”) with Column Financial, Inc.(the “Lender”) for a mortgage loan in the principal amount of up to$820 million. The Loan Agreement provided for an initial disbursement inthe amount of $759.7 million and a future funding facility in the amountof up to $60.3 million. On July 17, 2007, the Borrower and the Lenderentered into an amendment (the “Amendment”) to the Loan Agreement. TheAmendment provided for the immediate funding to Borrower of the balance offuture funding that was available under the Loan Agreement and established anadditional future funding facility in the amount of up to $40 million (“FutureFunding Tranche B”). Future Funding Tranche B has the same terms asthe Loan Agreement for maturity and extension. The Loan Agreement, as amendedby the Amendment, is referred to as the Loan. The Loan is secured by a deed oftrust on the PH Resort and a pledge, subject to approval by the Nevada gamingauthorities, by MezzCo of its membership interest in OpBiz (as describedbelow).

 

The initial maturity date of the Loan was December 9, 2008 withthree one year extension options available, subject to payment of a fee(applicable to the second and third extensions only) and the Borrower’scompliance with the requirements for an

 

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extensionoutlined in the Loan Agreement. The Borrower exercised the first availableextension option thereby extending the maturity date to December 9, 2009.Interest on the Loan is payable monthly and accrues at the 30 day LIBORrate (0.56% for the March 31, 2009 interest payment) plus 3.25% with a..25% ticking fee on available but un-advanced future funding. Interest onFuture Funding Tranche B is payable monthly and accrues at the 30 dayLIBOR rate plus 7.50% with a 1.50% ticking fee on available but un-advancedfunds. The Loan does not require amortization during the initial term or,provided certain EBITDA thresholds are met, during the extension periods. The Loanrequires that the Borrower establish and maintain certain reserves including areserve for completion of the renovation project, a reserve for projectedinterest shortfalls, a reserve for payment of property taxes and insurance anda reserve for on-going furniture, fixture and equipment purchases or propertyimprovements. The Loan restricts the Borrower’s ability to spend excess cashflow until certain debt service coverage ratios are met.

 

On May 7, 2009, the Borrower, Planet Hollywood International, Inc.,Planet Hollywood (Region IV), Inc., Planet Hollywood Memorabilia, Inc.,Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd., Bay Harbour MasterLtd., Douglas Teitelbaum, Robert Earl, and Wells Fargo Bank, N.A., as Trusteefor The Credit Suisse First Boston Mortgage Securities Corp. CommercialMortgage Pass-Through Certificates, Series 2007-TFL2 entered into a thirdmodification (the “Modification”) of the existing Loan Agreement, dated November 30,2006, between Borrower and Column Financial, Inc. (the “Loan Agreement”).  The Modification provides for up to $9million of the Interest Reserve Fund (as defined in the Loan Agreement) to beavailable to Borrower for monthly debt service. The Loan Agreement has two remaining one year extension options available(the second and third extension options). As a condition to exercising each of the second and third extensionoptions, the Borrower must replenish the Interest Reserve Account (as definedin the Loan Agreement) to an amount sufficient to achieve a Debt ServiceCoverage Ratio (as defined in the Loan Agreement) of 1.05:1.00  and 1.10:1:0, respectively, using thespecified terms and parameters outlined in the Loan Agreement.  Failure to replenish the Interest ReserveAccount is an Event of Default (as defined in the Loan Agreement) and aSpecified Event (as defined in the Modification).  A Specified Event means the occurrence ofcertain events, including (a) failure of the Borrower to make certainpayments as required by the Modification or the Loan Agreement; (b) certainEvents of Default under the Loan Agreement; and (c) an Event of Defaultunder the Modification resulting from failure to pay amounts owed to Lender,failure to pay certain taxes, the incurrence of additional indebtedness inviolation of the terms of the Loan Agreement, and the imposition of any lienencumbering the collateral of the loan (for the purpose of a Specified Event,an Event of Default means a Default (as defined in the Loan Agreement) thatcontinues after the applicable notice and cure or grace periods under the termsof the Loan Agreement and related documents).

 

At December 31, 2008, the Loan was classified as a non currentliability in the accompanying financial statements based on the Company’sintent and ability to exercise the second extension option. Operating incomefor the three months ended March 31, 2009 is not sufficient to demonstratethat the Company will generate sufficient cash flow from operations to meet theconditions set forth in the Modification (described above) in order to exercisethe second extension option. Accordingly, the Loan has been reclassified to a current liability inthe accompanying financial statements as of March 31, 2009.

 

As further outlined in the Modification dated May 7, 2009 within tendays after Lender’s written demand after the occurrence of a Specified Event asdetermined by Lender in its sole but good faith discretion, Borrower, MezzCoand TSP Owner LLC shall deliver to Lender (i) one or more deeds conveyingfee simple title to all portions of the Property (as defined in the LoanAgreement); (ii) one or more assignments conveying membership interests ofMezzCo in OpBiz; and (iii) all other documents and instruments to Lenderthat may be required to enable Lender to obtain title insurance coverage withrespect to fee simple property. In order to permit the Lender to foreclose onthe Hotel and Casino separately and to allow OpBiz to continue to operate thecasino after such a foreclosure (should the Lender choose to do so), title to thereal property comprising the Hotel and Casino (the “Property”) was transferredfrom OpBiz to PH Fee Owner. OpBiz and PH Fee Owner then entered into a leasepursuant to which OpBiz agreed to continue to operate the Hotel in the mannerit had been and to pay monthly rent of approximately $916,000. OpBiz and PH FeeOwner also entered into a lease pursuant to which OpBiz agreed to continue tooperate the Casino in the manner it had been and to pay monthly rent ofapproximately $1,160,000.

 

In connection with the Loan, the Lender required that Trophy HunterInvestments, Ltd., Bay Harbour 90-1, Ltd. and Bay HarbourMaster Ltd., which are affiliates of Bay Harbour Management, execute anddeliver a certain Guaranty (as described below). In exchange for Trophy HunterInvestments, Ltd., Bay Harbour 90-1, Ltd. and Bay HarbourMaster Ltd. (the “Guarantors”) executing the Guaranty, OpBiz and PH FeeOwner agreed to pay to Trophy Hunter Investments, Ltd. and Bay HarbourMaster Ltd. a fee equal to $1,500,000 per year. The fee is accrued as of March 31,2009 and only payable once OpBiz hits certain debt service coverage ratiosdefined in the Loan Agreement.

 

In connection with the Loan, the Guarantors entered into a Guaranty,dated November 30, 2006 (the “Guaranty”), pursuant to which the Guarantorsagreed to indemnify the Lender against losses related to certain prohibitedactions of the Borrower and guarantied full repayment of the Loan in the caseof a voluntary or collusive bankruptcy of the Borrower, a transfer of the Propertyor interests in the Borrower in violation of the Loan Agreement and if theBorrower fails to maintain its status as a bankruptcy remote entity and as aresult sees its assets consolidated with those of an affiliate in a bankruptcy.The liability of the Guarantors is capped at $15,000,000 per entity and$30,000,000 in the aggregate, however this cap does not apply to (i) liabilityarising from events, acts or circumstances actually committed or brought aboutby the willful acts of any of the Guarantors and (ii) the extent of anybenefit received by any of the Guarantors as a result of the acts giving riseto the liability under the Guaranty. Each of Douglas Teitelbaum 

 

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andRobert Earl executed and delivered guaranties substantially the same as thatdelivered by the Guarantors, however the liability of each of them was limitedto (i) liability arising from events, acts or circumstances actuallycommitted or brought about by willful acts by him and (ii) the extent ofany benefit received by him as a result of the acts giving rise to theliability under the Guaranty.

 

In connection with the Loan, the Guarantors and Robert Earl executedand delivered a Completion Guaranty, dated November 30, 2006, pursuant towhich they jointly and severally guarantied the completion of the renovation ofthe Property and payment of all costs associated therewith. The liability underthe Completion Guaranty is capped at the greater of (a) $35,000,000 and (b) onlyin the case that cost overruns for the renovation exceed $15,000,000, 24% ofthe then unpaid costs of the completion of the renovation.

 

In addition, in connection with the Loan Agreement, we effected arefinancing of the Securities Purchase Agreement, dated August 9, 2004,among MezzCo and the Investors, pursuant to which MezzCo issued to theInvestors (i) 16% senior subordinated secured Notes in the originalaggregate principal amount of $87 million, and (ii) Warrants for thepurchase (subject to certain adjustments as provided for therein) of membershipinterests of MezzCo, representing 17.5% of its fully diluted equity. Loanproceeds were used to redeem in full the Notes.

 

In connection with the refinancing of the Securities Purchase Agreementand redemption of the Notes, the Restructuring Parties entered into theRestructuring Agreement, pursuant to which the Restructuring Parties terminatedin full the Securities Purchase Agreement, the Subordination Agreement, datedas of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and theInvestors, the Pledge Agreement, dated August 9, 2006, among MezzCo andthe Collateral Agent, and the Guaranty, dated August 9, 2004, made byOpBiz to the Investors, and amended certain other existing agreements, asdescribed below.

 

In accordance with the terms of the Restructuring Agreement, theInvestors and EquityCo, MezzCo and OpBiz entered into a Release, Consent andWaiver Agreement, pursuant to which the Investors (i) released OpBiz fromits guaranteed obligations, under that certain Guaranty Agreement, dated as of August 9,2004 and executed by OpBiz in favor of the Investors and the collateral agent; (ii) releasedMezzCo from its pledge of the collateral, under that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of thecollateral Agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executedby the Company in favor of the collateral agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee (as defined therein) for the benefit of thecollateral agent; (iv) released and terminated the Investors’ securityinterest in the securities account, provided for that certain SecuritiesAccount Control Agreement, dated as of August 9, 2004 and executed by theCompany, the collateral agent and Wells Fargo Bank, N.A.

 

Additionally, MezzCo, EquityCo, and the Investors entered into anAmended and Restated Investor Rights Agreement, dated November 30, 2006(the “A&R Investor Rights Agreement”), to amend and restate the originalInvestor Rights Agreements among the parties thereto, dated August 9,2004.

 

Pursuant to the Restructuring Agreement, the Restructuring Partiesagreed to amend the Warrants by issuing Amended and Restated Warrants to PurchaseMembership Interests of MezzCo (the “A&R Warrants”) to the Investors uponapproval by the Nevada gaming authorities. The A&R Warrants will beexercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereofthrough the expiration date of December 9, 2012. In addition to customaryanti-dilution protections, the number of units representing MezzCo membershipinterests issuable upon exercise of the A&R Warrants may be increased fromtime to time upon the occurrence of certain events as described in the A&RWarrants. Holders of the A&R Warrants and any securities issued uponexercise thereof may require MezzCo to redeem such securities commencing on December 9,2011 at a redemption price based upon a formula set forth in the A&RWarrants. These rights expire upon completion of a public offering by MezzCo orOpBiz.

 

In connection with the Restructuring Agreement, EquityCo entered into aGuaranty Agreement, dated November 30, 2006 (the “Guaranty Agreement”), infavor of the Investors and the Collateral Agent, pursuant to which EquityCo hasguaranteed the obligation of MezzCo to pay the redemption price under theA&R Warrants prior to expiration and any indebtedness arising under the PutNote (as defined in the A&R Warrants).

 

EquityCo and the Collateral Agent also entered into a Pledge Agreement,dated November 30, 2006 (the “Pledge Agreement”), pursuant to whichEquityCo has, subject to approval of the Nevada gaming authorities, pledged andgranted a first priority security interest to the Collateral Agent for theratable benefit of the Investors in the membership interests of EquityCo inMezzCo. The Pledge Agreement, once approved, will secure the full payment ofthe Put Right (as defined in the A&R Warrants), including any obligationsunder the Put Note.

 

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On November 30, 2006, we entered into an Indemnification Agreementwith the Investors, pursuant to which we agreed to indemnify the Investors forany losses caused by (i) lack of gaming approvals for the issuance of theA&R Warrants, (ii) lack of gaming approval for the granting of a lienby EquityCo in the equity interests in MezzCo, as described in the PledgeAgreement, and (iii) the inability of the Investors to exercise theWarrants until July 1, 2007.

 

Theforegoing descriptions of the various agreements described above do not purportto be complete and are qualified in their entirety by reference to theagreements, which are filed herewith as exhibits, and incorporated herein byreference.

 

*Energy Services Agreement*

 

On January 30, 2009,OpBiz entered into the Fifth Amendment to Energy Services Agreement (the “FifthAmendment”) with Northwind Aladdin (“Northwind”), the third party that owns andoperates a central utility plant on land leased from OpBiz. The plant supplieshot and cold water and emergency power to the property under a contract whichexpires in 2020.  The Fifth Amendmentassigns a portion of the capacity to heat and chill water provided to OpBiz toWestgate for operation of the timeshare tower. Operation of the timeshare toweris fully described in Note 2—Summary of Significant Accounting Policies,Timeshare Purchase Agreement. The Fifth Amendment provides for Westgate toassume a pro-rata portion of the debt and equity obligations payable by OpBizto Northwind. OpBiz’s obligations to Northwind, recorded as a capital lease inthe accompanying financial statements, will be reduced by the pro-rataassignment to Westgate as payments are made. Payments under the Northwind agreement made by OpBiz total approximately$292,000 per month.

 

***Forward Looking Statements***

 

This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. When used in this report and elsewhere bymanagement from time to time, the words “believe”, “anticipate”, “expect”, “intend”,“estimate”, “plan”, “may”, “seek”, “will”, and similar expressions are intendedto identify forward-looking statements with respect to our financial condition,results of operations and our business including our planned and possibleexpansion plans, legal proceedings and employee matters. Certain importantfactors, including but not limited to, competition from other gamingoperations, factors affecting our ability to complete acquisitions anddispositions of gaming properties, leverage, construction risks, the inherentuncertainty and costs associated with litigation and governmental andregulatory investigations, and licensing and other regulatory risks, couldcause our actual results to differ materially from those expressed in orimplied by our forward-looking statements. Further information on potentialfactors which could affect our financial condition, results of operations andbusiness including, without limitation, the expansion, development andacquisition projects, legal proceedings and employee matters are included in “Item1A—Risk Factors” of BH/RE’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 2009. Readers arecautioned not to place undue reliance on any forward-looking statements, whichspeak only as of the date thereof. We undertake no obligation to publiclyrelease any revisions to such forward-looking statements to reflect events orcircumstances after the date hereof.

 

## ***ITEM3.***QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## *** ***

Market risk is the riskof loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and commodity prices. Ourprimary exposure to market risk is interest rate risk associated with ourlong-term debt. We pay interest on the amount outstanding under the LoanAgreement monthly, in cash, at the London Inter-Bank Offered Rate, or LIBOR,plus 3.25% with a .25% ticking fee on available but un-advanced Future Funding.An increase of one percentage point in the average interest rate applicable tothe variable rate debt outstanding at March 31, 2009 would increase theannual interest cost by approximately $8.6 million.

 

## ***ITEM4T.***CONTROLSAND PROCEDURES

## *** ***

Our management,with the participation of our principal executive and principal financialofficers, evaluated the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31,2009. Based on their evaluation, our principal executive and principalfinancial officers concluded that our disclosure controls and procedures wereeffective as of March 31, 2009.

 

There has been no change in our internal controlover financial reporting (as defined in Rules 13a-15(f) and 15-d-15(f) underthe Exchange Act) that occurred during our fiscal quarter ended March 31,2009, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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# **PART II — OTHER INFORMATION**

# ** **

## ***ITEM6.***EXHIBITS

 
|        |   |                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------|
| 31.1   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Thomas J. McCartney. |
|   |   |                                                                                         |
| 31.2   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.       |
|   |   |                                                                                         |
| 32.1   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Thomas J. McCartney. |
|   |   |                                                                                         |
| 32.2   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.       |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                   | BH/RE, L.L.C.                         |
|-------------------|---------------------------------------|
|              |                                  |
|              |                                  |
| May 15, 2009 | By:                                   | /S/ Donna Lehmann |
|              | Donna Lehmann                         |
|              | Treasurer and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| Exhibit No. | ** ** | **Description**                                                                              |
|------------------|------------|----------------------------------------------------------------------------------------------|
| 31.1             |       | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Thomas J. McCartney. |
|             |       |                                                                                         |
| 31.2             |       | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.       |
|             |       |                                                                                         |
| 32.1             |       | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Thomas J. McCartney. |
|             |       |                                                                                         |
| 32.2             |       | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.       |

 

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