Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM10-Q**

 

**(MarkOne)**

 

**x**      **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2009**

 

**OR**

 

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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 its Charter)

 

| **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, Including Area Code)

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x Noo

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “accelerated filer,” “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 

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

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

 

 

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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  1A.                           | RISK FACTORS                                                                                |   |
|                                |                                                                                        |   |
| ITEM 3.                             | DEFAULTS UPON  SENIOR SECURITIES                                                            |   |
|                                |                                                                                        |   |
| ITEM 5.                             | OTHER INFORMATION                                                                           |   |
|                                |                                                                                        |   |
| ITEM  6.                            | EXHIBITS                                                                                    |   |
|                                |                                                                                        |   |
| SIGNATURES                          |                                                                                        |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIALSTATEMENTS**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands)**

 
| ** **                                  | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                      |       |                         |       |                        |       |
| Current assets:                             |       |                         |       |                        |       |
| Cash and cash equivalents                   |       | $                            | 18,915     |                        | $          | 23,881 |   |
| Receivables, net                            |       | 16,413                       |       | 18,717                      |       |
| Inventories                                 |       | 2,084                        |       | 2,498                       |       |
| Prepaid expenses                            |       | 7,830                        |       | 7,935                       |       |
| Deposits and other current assets           |       | 184                          |       | 164                         |       |
| Restricted cash and cash equivalents        |       | 13,493                       |       | 29,366                      |       |
| Total current assets                        |       | 58,919                       |       | 82,561                      |       |
|                                        |       |                         |       |                        |       |
| Property and equipment, net                 |       | 557,628                      |       | 578,043                     |       |
| Restricted cash and cash equivalents        |       | 1,202                        |       | 11,284                      |       |
| Land receivable                             |       | 14,909                       |       | 16,918                      |       |
| Other assets, net                           |       | 449                          |       | 244                         |       |
| Total assets                                |       | $                            | 633,107    |                        | $          | 689,050 |   |
|                                        |       |                         |       |                        |       |
| LIABILITIES  AND MEMBERS’ DEFICIT      |       |                         |       |                        |       |
|                                        |       |                         |       |                        |       |
| Current liabilities:                        |       |                         |       |                        |       |
| Current portion of long-term debt           |       | $                            | 844,955    |                        | $          | 2,001 |   |
| Accounts payable                            |       | 4,113                        |       | 3,549                       |       |
| Accrued payroll and related                 |       | 9,440                        |       | 10,786                      |       |
| Accrued interest payable                    |       | 10,958                       |       | 6,827                       |       |
| Accrued taxes                               |       | 2,822                        |       | 2,422                       |       |
| Accrued expenses                            |       | 14,477                       |       | 8,881                       |       |
| Deposits                                    |       | 4,281                        |       | 4,587                       |       |
| Other current liabilities                   |       | 4,430                        |       | 4,512                       |       |
| Due to affiliates                           |       | 4,532                        |       | 1,773                       |       |
| Total current liabilities                   |       | 900,008                      |       | 45,338                      |       |
|                                        |       |                         |       |                        |       |
| Long-term debt, less current portion        |       | 23,917                       |       | 885,561                     |       |
| Other long-term liabilities                 |       | —                       |       | 1,537                       |       |
| Total liabilities                           |       | 923,925                      |       | 932,436                     |       |
|                                        |       |                         |       |                        |       |
| Members’ deficit:                      |       |                         |       |                        |       |
| Equity                                      |       | 34,200                       |       | 34,200                      |       |
| Accumulated deficit                         |       | (295,522                     | )          | (253,493                    | )          |
| BH/RE, L.L.C. deficit                       |       | (261,322                     | )          | (219,293                    | )          |
| Noncontrolling members’ deficit        |       | (29,496                      | )          | (24,093                     | )          |
| Total members’ deficit                 |       | (290,818                     | )          | (243,386                    | )          |
| Total liabilities and members’ deficit |       | $                            | 633,107    |                        | $          | 689,050 |   |

 

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

 

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

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(amounts in thousands)**

 
| ** **                                        | ** ** | **Three Months  Ended  September 30, 2009** | ** ** | **Three Months  Ended  September 30, 2008** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**                                            | ** ** | **(unaudited)**                                            | ** ** |
|                                              |       |                                                       |       |                                                       |       |
| Operating revenues:                               |       |                                                       |       |                                                       |       |
| Casino                                            |       | $                                                          | 23,914     |                                                       | $          | 31,054 |   |
| Hotel                                             |       | 21,692                                                     |       | 25,632                                                     |       |
| Food and beverage                                 |       | 12,247                                                     |       | 13,187                                                     |       |
| Other                                             |       | 3,220                                                      |       | 5,806                                                      |       |
| Gross revenues                                    |       | 61,073                                                     |       | 75,679                                                     |       |
| Promotional allowances                            |       | (6,015                                                     | )          | (6,367                                                     | )          |
| Net revenues                                      |       | 55,058                                                     |       | 69,312                                                     |       |
|                                              |       |                                                       |       |                                                       |       |
| Operating costs and expenses:                     |       |                                                       |       |                                                       |       |
| Casino                                            |       | 17,170                                                     |       | 19,463                                                     |       |
| Hotel                                             |       | 9,695                                                      |       | 10,221                                                     |       |
| Food and beverage                                 |       | 8,890                                                      |       | 9,530                                                      |       |
| Other                                             |       | 363                                                        |       | 77                                                         |       |
| Selling, general and administrative               |       | 18,328                                                     |       | 17,413                                                     |       |
| Depreciation and amortization                     |       | 11,009                                                     |       | 8,971                                                      |       |
|                                              |       | 65,455                                                     |       | 65,675                                                     |       |
|                                              |       |                                                       |       |                                                       |       |
| Operating (loss) income                           |       | (10,397                                                    | )          | 3,637                                                      |       |
|                                              |       |                                                       |       |                                                       |       |
| Interest expense, net                             |       | (10,965                                                    | )          | (16,198                                                    | )          |
| Decrease in fair value of warrants                |       | 1,537                                                      |       | —                                                     |       |
| Other                                             |       | 32                                                         |       | —                                                     |       |
| Pre-tax loss                                      |       | (19,793                                                    | )          | (12,561                                                    | )          |
| Provision for income taxes                        |       | —                                                     |       | —                                                     |       |
| Net loss including noncontrolling interest        |       | (19,793                                                    | )          | (12,561                                                    | )          |
| Net loss attributable to noncontrolling  interest |       | (2,254                                                     | )          | (1,884                                                     | )          |
| Net loss attributable to BH/RE, L.L.C.            |       | $                                                          | (17,539    | )                                                          | $          | (10,677 | ) |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(amounts in thousands)**

 
| ** **                                        | ** ** | **Nine Months  Ended  September 30, 2009** | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**                                           | ** ** | **(unaudited)**                                           | ** ** |
|                                              |       |                                                      |       |                                                      |       |
| Operating revenues:                               |       |                                                      |       |                                                      |       |
| Casino                                            |       | $                                                         | 77,601     |                                                      | $          | 94,367 |   |
| Hotel                                             |       | 67,290                                                    |       | 86,948                                                    |       |
| Food and beverage                                 |       | 36,646                                                    |       | 41,225                                                    |       |
| Other                                             |       | 9,419                                                     |       | 13,659                                                    |       |
| Gross revenues                                    |       | 190,956                                                   |       | 236,199                                                   |       |
| Promotional allowances                            |       | (18,237                                                   | )          | (20,668                                                   | )          |
| Net revenues                                      |       | 172,719                                                   |       | 215,531                                                   |       |
|                                              |       |                                                      |       |                                                      |       |
| Operating costs and expenses:                     |       |                                                      |       |                                                      |       |
| Casino                                            |       | 53,300                                                    |       | 58,863                                                    |       |
| Hotel                                             |       | 28,545                                                    |       | 31,551                                                    |       |
| Food and beverage                                 |       | 26,397                                                    |       | 28,212                                                    |       |
| Other                                             |       | 1,285                                                     |       | 1,125                                                     |       |
| Selling, general and administrative               |       | 51,343                                                    |       | 57,425                                                    |       |
| Depreciation and amortization                     |       | 31,405                                                    |       | 26,987                                                    |       |
|                                              |       | 192,275                                                   |       | 204,163                                                   |       |
|                                              |       |                                                      |       |                                                      |       |
| Operating (loss) income                           |       | (19,556                                                   | )          | 11,368                                                    |       |
|                                              |       |                                                      |       |                                                      |       |
| Interest expense, net                             |       | (29,445                                                   | )          | (50,292                                                   | )          |
| Decrease in fair value of warrants                |       | 1,537                                                     |       | —                                                    |       |
| Other                                             |       | 32                                                        |       | —                                                    |       |
| Pre-tax loss                                      |       | (47,432                                                   | )          | (38,924                                                   | )          |
| Provision for income taxes                        |       | —                                                    |       | —                                                    |       |
| Net loss including noncontrolling interest        |       | (47,432                                                   | )          | (38,924                                                   | )          |
| Net loss attributable to noncontrolling  interest |       | (5,403                                                    | )          | (5,839                                                    | )          |
| Net loss attributable to BH/RE, L.L.C.            |       | $                                                         | (42,029    | )                                                         | $          | (33,085 | ) |

 

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

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 
| ** **                                                                                 | ** ** | **Nine Months  Ended  September 30, 2009** | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **(unaudited)**                                           | ** ** | **(unaudited)**                                           | ** ** |
|                                                                                       |       |                                                      |       |                                                      |       |
| Cash flows from operating activities:                                                      |       |                                                      |       |                                                      |       |
| Net loss including noncontrolling interest                                                 |       | $                                                         | (47,432    | )                                                         | $          | (38,924 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                                                      |       |                                                      |       |
| Depreciation and amortization                                                              |       | 31,405                                                    |       | 26,987                                                    |       |
| Amortization of debt discount and issuance  costs                                          |       | 387                                                       |       | 6,343                                                     |       |
| Decease in value of interest rate cap                                                      |       | 26                                                        |       | —                                                    |       |
| Change in value of warrants                                                                |       | (1,537                                                    | )          | —                                                    |       |
| Gain on disposal of assets                                                                 |       | (32                                                       | )          | —                                                    |       |
| Changes in assets and liabilities:                                                         |       |                                                      |       |                                                      |       |
| Restricted cash and cash equivalents                                                       |       | (1,352                                                    | )          | 2,114                                                     |       |
| Receivables, net                                                                           |       | 2,304                                                     |       | 2,714                                                     |       |
| Inventories and prepaid expenses                                                           |       | 519                                                       |       | (2,559                                                    | )          |
| Deposits and other current assets                                                          |       | (20                                                       | )          | 52                                                        |       |
| Due to affiliates                                                                          |       | 2,759                                                     |       | 300                                                       |       |
| Accounts payable                                                                           |       | 564                                                       |       | (4,287                                                    | )          |
| Accrued payroll and related                                                                |       | (1,346                                                    | )          | 1,119                                                     |       |
| Accrued expenses                                                                           |       | 5,996                                                     |       | 995                                                       |       |
| Deposits and other current liabilities                                                     |       | (388                                                      | )          | (1,517                                                    | )          |
| Accrued interest                                                                           |       | 4,131                                                     |       | (921                                                      | )          |
| Long term deposits and other assets                                                        |       | 2,009                                                     |       | 4,244                                                     |       |
| Net cash used in operating activities                                                      |       | (2,007                                                    | )          | (3,340                                                    | )          |
| Cash flows from investing activities:                                                      |       |                                                      |       |                                                      |       |
| Purchases of property and equipment                                                        |       | (10,990                                                   | )          | (26,673                                                   | )          |
| Proceeds from sale of assets                                                               |       | 32                                                        |       | —                                                    |       |
| Restricted cash and cash equivalents used  to purchase property and equipment              |       | 10,082                                                    |       | 31,551                                                    |       |
| Net cash (used in) provided by investing  activities                                       |       | (876                                                      | )          | 4,878                                                     |       |
| Cash flows from financing activities:                                                      |       |                                                      |       |                                                      |       |
| Repayment of term loan with restricted cash                                                |       | (17,225                                                   | )          | —                                                    |       |
| Restricted cash used to repay term loan                                                    |       | 17,225                                                    |       | —                                                    |       |
| Payments under CUP financing                                                               |       | (1,465                                                    | )          | (1,307                                                    | )          |
| Financing fees                                                                             |       | (618                                                      | )          | (143                                                      | )          |
| Net cash used in financing activities                                                      |       | (2,083                                                    | )          | (1,450                                                    | )          |
| Cash and cash equivalents:                                                                 |       |                                                      |       |                                                      |       |
| (Decrease) increase in cash and cash  equivalents                                          |       | (4,966                                                    | )          | 88                                                        |       |
| Balance, beginning of period                                                               |       | 23,881                                                    |       | 21,468                                                    |       |
| Balance, end of period                                                                     |       | $                                                         | 18,915     |                                                      | $          | 21,556 |   |
|                                                                                       |       |                                                      |       |                                                      |       |
| Supplemental cash flow disclosures:                                                        |       |                                                      |       |                                                      |       |
| Cash paid for interest, net of capitalized  interest                                       |       | $                                                         | 25,324     |                                                      | $          | 45,394 |   |

 

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

 

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

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

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

#####  

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

######  

BH/RE, L.L.C. (“BH/RE”) is a holding company that owns 88.61% ofEquityCo, L.L.C. (“EquityCo”). The remaining 11.39% of EquityCo is ownedindirectly by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”).MezzCo, L.L.C. (“MezzCo”) is a wholly owned subsidiary of EquityCo and each ofOpBiz, LLC (“OpBiz”) and PH Mezz II LLC (“PH Mezz II”) is a wholly ownedsubsidiary of MezzCo. PH Mezz I LLC (“PH Mezz I”) is a wholly owned subsidiaryof PH Mezz II. PH Fee Owner LLC (“PH Fee Owner”) is a wholly owned subsidiaryof PH Mezz I. TSP Owner LLC (“TSP Owner”) is a wholly owned subsidiary of PHFee Owner. PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner are Delawarelimited liability companies structured as bankruptcy remote special purposeentities which, together with OpBiz, own and operate the Planet HollywoodResort and Casino (the “PH Resort”). OpBiz is the licensed owner and operatorof the gaming assets and leases the casino space and hotel space together withall hotel assets from PH Fee Owner. TSP Owner was formed to hold the parcel ofland (the “Timeshare Parcel”) that was sold to Westgate Resorts, LLP, a Floridalimited partnership (“Westgate”) subject to the Timeshare Purchase Agreement,dated December 10, 2004 and modified on September 10, 2007, between OpBiz andWestgate, as more fully described in Note 3. As of September 30, 2009, each ofRobert Earl and Douglas P. Teitelbaum held 50% of BH/RE’s voting membershipinterests. BH/RE’s equity membership interests were held 43.27% by BH Casinoand Hospitality LLC I (“BHCH I”), 15.61% by BH Casino and Hospitality LLC II (“BHCHII” 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 limited liability company and wasorganized on March 31, 2003. BH/RE was formed by BHCH and OCS. BHCH iscontrolled by Douglas P. Teitelbaum, a managing principal of Bay HarbourManagement, 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 investment inBH/RE. Mr. Earl is the founder, chairman and chief executive officer of PlanetHollywood and Mr. Teitelbaum is a director of Planet Hollywood. Collectively, Mr.Earl, a trust for the benefit of Mr. Earl’s children and certain 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.

 

###### ***Basis of Presentation***

######  

The accompanying condensed consolidated financialstatements included herein have been prepared by the management of BH/RE (the “Company”),without audit, pursuant to the rules and regulations of the U.S. Securities andExchange Commission (the “SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with U.S.generally accepted accounting principles have been condensed or omittedpursuant to such rules and regulations. BH/RE believes that the disclosures areadequate to make the information presented not misleading. In the opinion ofmanagement, all adjustments (which include normal recurring adjustments)necessary for a fair presentation of the results for the interim periods havebeen made. The results for the three and nine months ended September 30, 2009,are not indicative of results to be expected for the full fiscal year. Theseunaudited financial statements should be read in conjunction with the auditedfinancial statements and notes thereto for the year ended December 31, 2008,included in BH/RE’s Annual Report on Form 10-K filed with the Securities andExchange Commission on March 31, 2009.

 

During the three months ended September 30, 2009, TheFinancial Accounting Standards Board (the “FASB”) Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles – AReplacement of FASB Statement No. 162 , (the “Codification”) (previously “SFAS168”) became effective.  Accordingly, theCodification became the source of authoritative accounting principlesrecognized by the FASB to be applied by nongovernmental entities in thepreparation of financial statements in conformity with GAAP. The implementationof the Codification did not have an impact on our consolidated financialstatements, as it 

 

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did not modify any existing authoritative GAAP.

 

##### **2.****                                     ****LIQUIDITY AND FINANCIAL POSITION**

#####  

The accompanyingconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability of assets or the amounts ofliabilities that may result should the Company be unable to continue as a goingconcern. A summary of the Company’s current financial position and liquidityand management’s plans in regard to these matters is described below.

 

The Company hassignificant indebtedness and significant financial commitments. As of September30, 2009, the Company had approximately $869.9 million of total debt.  Substantially all of the Company’s debt ispursuant to an $860 million commercial mortgage loan agreement entered into on November30, 2006 (the “Loan Agreement”) between OpBiz and PH Fee Owner (collectively,the “Borrower”) and Column Financial, Inc. (the “Lender”). After the close ofthe initial Loan Agreement, the Loan was syndicated and is currently held by aconsortium of Lenders.  KeyBank RealEstate Capital acts as master servicer of the Loan for the Lender group.  The Loan Agreement has two remaining one yearextension options available (the second and third extension options).  As a condition to exercising each of thesecond and third extension options, the Interest Reserve Account (as defined inthe Loan Agreement) must be replenished to an amount sufficient to achieve aDebt Service Coverage Ratio (as defined in the Loan Agreement) of 1.05:1.00 and1.10:1:0, respectively, using the specified terms and parameters outlined inthe Loan Agreement. The Loan Agreement provides that if the Company does notexercise the second extension option, the Loan under the Loan Agreement (the “Loan”)matures on December 9, 2009. At December 31, 2008, the Loan was classified as anon current liability in the accompanying financial statements based on theCompany’s intent and ability to exercise the second extension option. Operatingincome for the first six months of 2009 was not sufficient to demonstrate thatthe Company could generate sufficient cash flow from operations to meet theconditions set forth to exercise the second extension option. Accordingly, theLoan was reclassified to a current liability as of June 30, 2009 and in theaccompanying financial statements.

 

On September 9, 2009, theCompany did not have sufficient available cash to make the interest and reservepayments due under the Loan on that date. In connection with the Company’s failure to make the payments requiredunder the Loan, the Borrower and Lender entered into a Protective AdvanceAgreement dated September 11, 2009 (the “Protective Advance Agreement”).  The Protective Advance Agreement acknowledgesthat there has been an Event of Default (as defined in the Loan Agreement) anda Specified Event (as defined in the Modification (as defined in Note 6 –Long-Term Debt), that the Loan is due and payable and outlines the conditionsby which cash advances may be made to the Company in the sole discretion of theLender so that it may continue operating. The Company is continuing discussions with the Lender in this regard.Cash advances under the Protective Advance Agreement are made first fromavailable operating cash generated by the Borrower from operations and held inreserve by the Lenders.  To the extentoperating cash is not sufficient to cover necessary operating expenses,additional advances made under the Protective Advance Agreement will be addedto the total debt outstanding under the Loan (the “Protective Advances”).  To date, the Lender has made no ProtectiveAdvances to the Company.  The LoanAgreement is a commercial mortgage. As such, the Loan Agreement as amended andthe EquityCo subsidiary corporate structures and operating agreements(including bankruptcy remote entities) restrict the ability of OpBiz and PH FeeOwner to file a voluntary petition for relief under the bankruptcy code.  As further outlined in the Modification datedMay 7, 2009 within ten days after Lender’s written demand after the occurrenceof a Specified Event as determined by Lender in its sole but good faithdiscretion, Borrower, MezzCo and TSP Owner LLC shall deliver to Lender (i) oneor more deeds conveying fee simple title to all portions of the real propertycomprising the PH Resort ; (ii) one or more assignments conveying membershipinterests of MezzCo in OpBiz; and (iii) all other documents and instruments toLender that may be required to enable Lender to obtain title insurance coveragewith respect to fee simple property.  Inorder to permit the Lender to foreclose on the hotel and casino comprising thePH Resort separately and to allow OpBiz to continue to operate the casino aftersuch a foreclosure (should the Lender choose to do so), title to the PH Resortwas transferred from OpBiz to PH Fee Owner. OpBiz and PH Fee Owner then entered into a lease pursuant to which OpBizagreed to continue to operate the hotel in the manner it had been and to paymonthly rent of approximately $916,000. OpBiz and PH Fee Owner also entered into a lease pursuant to which OpBizagreed to continue to operate the casino in the manner it had been and to paymonthly rent of approximately $1,160,000. Additionally, as detailed in Note 6 – Long-Term Debt, in connection withthe execution of the Loan, the Guarantors executed guarantees against certainactions including a voluntary or collusive bankruptcy filing which wereratified in the Protective Advance Agreement.

 

After the occurrence ofthe Event of Default, interest on the Loan accrues at the Default Rate (asdefined in the Loan Agreement).  TheLender, in its sole discretion, has applied certain reserve funds in the amountof $17,225,000 to the outstanding principal balance of the Loan and hascollected interest.  The balance of theLoan after application of the reserve funds is $842,775,000 as presented in theaccompanying condensed consolidated financial statements.  Pending the on-going negotiations, theCompany is recording interest expense on the $860 million Loan balance at thedefault rate of interest (4% over the Applicable Interest Rate as defined inthe Loan Agreement) as called for in the Loan Agreement once an Event ofDefault has occurred.  The Lender hascollected interest for the month of September in the amount of $680,000.

 

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Although an Event ofDefault has been acknowledged, the Lender has not at this time demanded paymentof the Loan nor pursued its rights and remedies. The Company will continue todiscuss solutions with the Lender and operate under the Protective AdvanceAgreement until a resolution can be reached. An Event of Default allows the Lender to foreclose on and take ownershipof the PH Resort which would result in the Lender taking title to all assets ofthe property, a change of control of the PH Resort, and transfer of substantiallyall of the assets of BH/RE.  However theLender has not exercised it’s rights in this regard and the Company is involvedin discussions with the Lender that could result in a foreclosure on theproperty and a transfer of the deed (as described above), a transfer of aportion of some or all of the current equity of the Company or a modificationto the Loan.

 

There can be no assurancethat an agreement will be reached with the Lender, that the Lender will notexercise its rights to obtain ownership of the PH Resort, will agree to modifythe Loan Agreement or will make adequate funds available under the ProtectiveAdvance Agreement.  Additionally, therecan be no assurance that we have accurately estimated our liquidity needs, orthat we will not experience unforeseen events that may materially increase ourneed for liquidity to fund our operations or capital expenditure programs ordecrease the amount of cash generated from our operations.

 

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

#####  

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

######  

Thecondensed consolidated financial statements are prepared in conformity withU.S. generally accepted accounting principles. Certain policies, including thedetermination of bad debt reserves, the estimated useful lives assigned toassets, asset impairment, insurance reserves and the calculation ofliabilities, require that management apply significant judgment in defining theappropriate assumptions for calculating financial estimates. By their nature,these judgments are subject to an inherent degree of uncertainty. Management’sjudgments 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 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 andcash equivalents include cash on hand, as well as short-term investments withoriginal maturities not in excess of 90 days.

 

###### *Restricted Cash and CashEquivalents*

######  

The balance in current restricted cash and cash equivalentsat September 30, 2009 and December 31, 2008 was approximately $13.5 million and$29.4 million, respectively, which consists of reserves required under the LoanAgreement (as defined in Note 6 to the Condensed Consolidated FinancialStatements) includinga reserve for payment of property taxes and insurance and a reserve foron-going furniture, fixture and equipment purchases or property improvements.Long-term restricted cash and cash equivalents consist ofapproximately $1.2 million and $11.3 million at September 30, 2009 and December31, 2008, respectively, which primarily includes a reserve for interestshortfalls required under the Loan Agreement.

 

After the occurrence of the Event of Default on September 9,2009, the Lender applied the cash funds held in the Timeshare Reserve andFF&E Reserve against the outstanding principal of the Loan reducing theoutstanding balance from $860 million to approximately $842.8 million.

 

###### *Accounts Receivable (andAllowance for Doubtful Accounts)*

######  

Accountsreceivable, including casino and hotel receivables, are typically non-interestbearing and are initially recorded at cost. An estimated allowance for doubtfulaccounts is maintained to reduce the receivables to their carrying amount,which approximates fair value. Management estimates the allowance for doubtfulaccounts by applying standard reserve percentages, which are based onhistorical collections, to aged account balances under a specific dollar amountand specifically analyzes the collectability of each account with a balanceover the specified dollar amount, based on the age of the account, the customer’sfinancial condition, collection history and any other known information.

 

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###### *Inventories*

######  

Inventoriesconsist of food and beverage, retail merchandise and operating supplies, andare stated at the lower of cost or market. Cost is determined by the first-in,first-out and specific identification methods.

 

###### *Property and Equipment*

######  

Property and equipment are stated at cost. Recurringrepairs and maintenance costs, including items that are replaced routinely inthe casino, hotel and food and beverage departments which do not meet theCompany’s capitalization policy, are expensed as incurred. The Company hasestablished its capital expense policy to be reflective of its individualongoing repairs and maintenance programs. Gains or losses on dispositions ofproperty and equipment are included in the determination of income. Propertyand equipment are generally depreciated over the following estimated usefullives on a straight-line basis:

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

 

Forassets held and used, the Company reviews the asset (or asset group) forimpairment whenever indicators of impairment exist.  If an indicator of impairment exists, theestimated future cash flows of the asset, on an undiscounted basis, arecompared to the carrying value of the asset. If the undiscounted cash flowsexceed the carrying value, no impairment is indicated. If the undiscounted cashflows do not exceed the carrying value, then impairment is measured based onfair value compared to carrying value, with fair value typically based on adiscounted cash flow model. For assets to be disposed of, the asset isrecognized at the lower of carrying value or fair value less costs of disposal.Fair value for assets to be disposed of is estimated based on comparable assetsales, solicited offers or a discounted cash flow model.

 

Asa result of the continuing economic downturn and constrained capital marketswhich have negatively impacted the Las Vegas economy and the Company’soperating results, the Company determined that its property and equipmentshould be evaluated for impairment during the three months ended September 30,2009 and determined that no impairment needs to be recognized during thecurrent quarter based on an estimate of undiscounted future cash flows, whichexceeded the carrying value of property and equipment.  However, inherent in assessing therecoverability of the carrying value of property and equipment are variousassumptions regarding estimated future cash flows and other factors.  If these estimates or the related assumptionschange, we may be required to record impairment charges.

 

*Derivative Instruments and Hedging Activities*

 

Pursuant to the refinancing of the Securities Purchase Agreement (asdefined in Note 6) and the terms of the Restructuring Agreement (as defined inNote 6), the Restructuring Parties (as defined in Note 6) agreed to amend thewarrants issued by MezzCo to purchase 17.5% of the fully diluted equity inMezzCo. The warrants contain a net cash settlement, and therefore arerecognized as liabilities, with changes in fair value affecting net income. See“Note 6. 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 rate capagreement is included in other assets on the accompanying balance sheet at fairvalue with any change in fair value being recorded in interest income orexpense in the accompanying consolidated statements of operations.

 

*Revenue Recognition andPromotional Allowances*

 

Casino revenues are recognized as the net win fromgaming activities, which is the difference between gaming wins and losses.Hotel revenue recognition criteria are generally met at the time of occupancy.Food and beverage revenue recognition criteria are generally met at the time ofservice. Deposits for future hotel occupancy or food and beverage services arerecorded as deferred income until revenue recognition criteria are met.Cancellation fees for hotel and food and beverage services are recognized uponcancellation by the customer as defined by a written contract entered into withthe customer. All other revenues are recognized as the service is provided.Revenues include the retail value of food, beverage, rooms, entertainment andmerchandise provided on a complimentary basis to customers. Such complimentaryamounts are then deducted from revenues as promotional allowances on 

 

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BH/RE’s consolidated statements of operations. Theestimated departmental costs of providing such promotional allowances areincluded in casino costs and expenses and consist of the following (amounts inthousands):

 
| ** **                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2009**                             | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Rooms                                 |       | $                                    | 1,714      |                                | $          | 1,670 |   | $ | 4,961 |   | $ | 4,950 |   |
| Food  and Beverage                    |       | 2,126                                |       | 2,138                               |       | 6,539 |   | 6,731 |   |
| Other                                 |       | 20                                   |       | 22                                  |       | 50 |   | 45 |   |
| Total  cost of promotional allowances | ** ** | **$**                                | **3,860**  | ** **                          | **$**      | **3,830** | ** ** | **$** | **11,550** | ** ** | **$** | **11,726** | ** ** |

 

###### *Players’ Club Program*

######  

The Company’s gaming patrons who join the PH ResortPlayers’ club earn points based on gaming activity. OpBiz had accrued aliability for players’ club points that can be redeemed for cash as the pointsare earned based on historical redemption percentages which was recorded as areduction of revenue. In March 2009, the Company changed the structure of itsplayers club to allow patrons to redeem those points for promotional slot playand other non-cash incentives but not for cash, and therefore no longeraccounts for the points earned as reduction to revenue. The total accruedliability related to potential cash awards redeemable under the players’ clubprogram was $1.2 million at September 30, 2009 and $2.2 million at December 31,2008.

 

*Self-Insurance Accruals*

 

BH/RE is self-insured, up to certain limits, for costsassociated with employee medical coverage. The Company accrues for theestimated expense of known claims, as well as estimates for claims incurred butnot yet reported which totaled approximately $2.1 million at September 30, 2009and $2.4 million at December 31, 2008.

 

*AdvertisingCosts*

 

Advertising costs areexpensed as incurred and included in selling, general and administrative costsand expenses. Advertising costs totaled approximately $1.7 million and $3.8million for the three and nine months ended September 30, 2009, respectively,and $1.4 million and $8.3 million for the three and nine months ended September30, 2008, respectively.

 

*Income Taxes*

 

The condensed consolidatedfinancial statements include the operations of BH/RE and its majority-ownedsubsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner andTSP Owner. BH/RE and EquityCo are limited liability companies and are taxed aspartnerships for federal income tax purposes. However, MezzCo has elected to betaxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II,wholly-owned subsidiaries of MezzCo, are treated as divisions of MezzCo forfederal income tax purposes, and accordingly, are also subject to federalincome taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II,PH Fee Owner, a wholly owned subsidiary of PH Mezz I, and TSP Owner, a whollyowned subsidiary of PH Fee Owner, are also subject to federal income taxes.

 

MezzCo, OpBiz, PH MezzII, PH Mezz I, PH Fee Owner and TSP Owner recognize deferred income tax assets,net of applicable reserves, related to net operating loss carry-forwards and certain temporarydifferences and also recognize a future tax benefit to the extent thatrealization of such benefit is more likely than not. Otherwise, a valuationallowance is applied.

 

*Timeshare Purchase Agreement*

 

Pursuant to an agreementdated December 10, 2004 and modified on September 10, 2007, OpBiz entered intoa Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”), aFlorida limited partnership, whereby OpBiz agreed to sell approximately 4 acresof land adjacent to the PH Resort (the “Timeshare Parcel”) to Westgate, whoplans to develop, market, manage and sell timeshare units on the land. On September19, 2007, the sale of the land and deed transfer to Westgate was completed. In connectionwith the closing of the transaction, OpBiz, PH Fee Owner, LLC and TSP Owner, LLC,entered into a modification agreement (the “Modification Agreement”) withWestgate. The Modification Agreement defines the development phases for the 

 

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Timeshare Parcel and outlines the permitted number oftimeshare, whole ownership and penthouse units. The Modification Agreement alsooutlines permitted amenities on the Timeshare Parcel and documents Seller’sapproval 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, nogain on the sale of this land has been recognized in the accompanying financialstatements. Westgate pays the Company a monthly fee equal to 9% of totaltimeshare sales. 50% of the fees received are used to pay the purchase pricefor the land and the remaining 50% is recorded as income as received. As of September30, 2009, the Company has a receivable balance for the sale of land of $17.5million, $14.9 million of which is classified as long-term and at December 31,2008 the Company has a receivable balance for the sale of land of $19.9 million,$16.9 million of which is classified as long-term in the accompanying financialstatements.

 

###### *Membership Interests*

######  

As of September 30, 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 because management believes that such disclosures would not bemeaningful to the financial statement presentation.

 

*Recently Issued Accounting Pronouncements*

 

Subsequent to theadoption of the Codification, any change to the source of authoritative GAAPwill be communicated through an Accounting Standards Update (“ASU”). ASUs willbe published by the FASB for all authoritative GAAP promulgated by the FASB,regardless of the form in which such guidance may have been issued prior torelease of the Codification. Prior to inclusion in an ASU, the standard-settingorganizations and regulatory agencies continue to issue proposed changes to theaccounting standards in previous form (e.g., FASB Statements of FinancialAccounting Standards, EITF Abstracts, FASB Staff Positions, SEC StaffAccounting Bulletins, etc.).

 

Variable InterestEntities. In September 2009, the FASB issued SFAS No. 167, Amendments to FASBInterpretation No. 46(R) (“SFAS 167”) . SFAS 167 is a revision to FASB Interpretation No. 46, Consolidation ofVariable Interest Entities (which is currently promulgated in a subsection ofCodification Topic 810). The amendments include: (1) the elimination of theexemption for qualifying special purpose entities, (2) a new approach fordetermining who should consolidate a variable-interest entity, and (3) changesto when it is necessary to reassess who should consolidate a variable-interestentity. SFAS 167 is effective for the first annual reporting period beginningafter November 15, 2009 and for interim periods within that first annualreporting period. We are currently evaluating the requirements of SFAS 167 andhave not determined the impact, if any, that the adoption will have on ourconsolidated financial statements.

 

Transfer of FinancialAssets. In September 2009, the FASB issued SFAS No. 166, Accounting forTransfers of Financial Assets – An Amendment to FASB Statement No. 140 (“SFAS166”). SFAS 166 is a revision of SFAS No. 140, Accounting for Transfers andServicing Financial Assets and Extinguishments of Liabilities , which ispresently included in Codification Topic 860, Transfers and Servicing. SFAS 166eliminates the concept of a “qualifying special-purpose entity,” changes therequirements for derecognizing financial assets, and requires additionaldisclosures in order to enhance information reported to users of financialstatements by providing greater transparency about transfers of financialassets, including securitization transactions, and an entity’s continuinginvolvement in and exposure to the risks related to transferred financialassets. SFAS 166 is effective for fiscal years beginning after November 15,2009. We do not believe that the adoption of SFAS 166 will have a materialimpact on our consolidated financial statements .

 

SubsequentEvents.  In May 2009, the FASB issued SFAS 165,Subsequent Events (“SFAS 165”).  SFAS 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued, and is is presently included in CodificationTopic 855, Subsequent Events. In addition, under the guidance, anentity is required to disclose the date through which subsequent events havebeen evaluated, as well as whether that date is the date the financialstatements were issued or the date the financial statements were available tobe issued. The guidance does not apply to subsequent events or transactionsthat are within the scope of other applicable GAAP that provide differentguidance on the accounting treatment for subsequent events or transactions. Theguidance is effective for interim or annual financial periods ending after June15, 2009, and shall be applied prospectively. The Company adopted the guidanceas of June 30, 2009, as required. The adoption of the guidance did not have amaterial impact on the Company’s consolidated financial statements.

 

A variety of additionalproposed or otherwise potential accounting standards are currently under studyby standard-setting organizations and certain regulatory agencies. Because ofthe tentative and preliminary nature of such proposed standards, we have not 

 

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yet determined theeffect, if any, that the implementation of such proposed standards would haveon our consolidated financial statements.

 

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**4.****                                     ****RECEIVABLES**

 

Receivablesconsist of the following (in thousands):

 
| ** **                                 | ** ** | **September 30  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **(unaudited)**        | ** ** | ** **             | ** ** |
| Casino                                     |       | $                      | 16,084     |                   | $          | 13,584 |   |
| Hotel                                      |       | 6,486                  |       | 5,999                  |       |
| Land  sale receivable                      |       | 17,549                 |       | 19,918                 |       |
| Other                                      |       | 2,387                  |       | 4,368                  |       |
|                                       |       | 42,506                 |       | 43,869                 |       |
| Long-term  portion of land sale receivable |       | (14,909                | )          | (16,918                | )          |
| Allowance  for doubtful accounts           |       | (11,184                | )          | (8,234                 | )          |
| Receivables,  net                          |       | $                      | 16,413     |                   | $          | 18,717 |   |

 

**5.****                                     ****PROPERTY AND EQUIPMENT**

 

Property and equipment and the related accumulateddepreciation consist of the following (in thousands):

 
| ** **                        | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| Land                              |       | $                       | 68,479     |                   | $          | 68,479 |   |
| Building and improvements         |       | 502,668                 |       | 502,305                |       |
| Furniture, fixtures and equipment |       | 136,134                 |       | 126,582                |       |
| Construction in progress          |       | 1,414                   |       | 464                    |       |
|                              |       | 708,695                 |       | 697,830                |       |
| Accumulated depreciation          |       | (151,067                | )          | (119,787               | )          |
| Property and equipment, net       |       | $                       | 557,628    |                   | $          | 578,043 |   |

 

Depreciation expense was approximately $11.0 millionand $31.4 million for the three and nine months ended September 30, 2009,respectively, and $9.0 million and $27.0 million for the three and nine monthsended September 30, 2008, respectively.

 

**6.****                                     ****LONG-TERM DEBT**

 

Long-term debt consists of the following (inthousands):

 
| ** **                                       | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| $860 million Loan Agreement                      |       | $                       | 842,775    |                   | $          | 860,000 |   |
| Northwind Aladdin obligation under capital lease |       | 26,097                  |       | 27,562                 |       |
|                                             |       | 868,872                 |       | 887,562                |       |
| Current portion of long-term debt                |       | (844,955                | )          | (2,001                 | )          |
| Total long-term debt, net                        |       | $                       | 23,917     |                   | $          | 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.  After the close of the initial LoanAgreement, the Loan was syndicated and is currently held by a consortium oflenders.  KeyBank Real Estate Capitalacts as master servicer for the Lender group. The Loan Agreement provided for an initial disbursement in the amount of$759.7 million and a future funding facility in the amount of up to $60.3 million.On July 17, 2007, the Borrower and the Lender entered into an amendment (the “Amendment”)to the Loan Agreement. The Amendment provided for the immediate funding toBorrower of the balance of future funding that was available under the LoanAgreement and established an additional future funding facility in the amountof up to $40 million (“Future Funding Tranche B”). Future Funding Tranche B hasthe same terms as the Loan Agreement for maturity and extension. The LoanAgreement, as amended by the Amendment, is referred to as the Loan. The Loan issecured by a deed of trust on the PH Resort and a pledge, subject to approvalby 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 with threeone year extension options available, subject to payment of a fee (applicableto the second and third extensions only) and the Borrower’s compliance with therequirements for an extension outlined in the Loan Agreement. The Borrowerexercised the first available extension option thereby extending the maturity

 

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dateto December 9, 2009. Interest on the Loan is payable monthly and accrues at the30 day LIBOR rate plus 3.25% with a .25% ticking fee on available butun-advanced future funding. Interest on Future Funding Tranche B is payablemonthly and accrues at the 30 day LIBOR rate plus 7.50% with a 1.50% tickingfee on available but un-advanced funds. The Loan does not require amortizationduring the initial term or, provided certain EBITDA thresholds are met, duringthe extension periods. The Loan requires that the Borrower establish andmaintain certain reserves including a reserve for completion of the renovationproject, a reserve for projected interest shortfalls, a reserve for payment ofproperty taxes and insurance and a reserve for on-going furniture, fixture andequipment purchases or property improvements. The Loan restricts the Borrower’sability to spend excess cash flow until certain debt service coverage ratiosare met.

 

On May 7, 2009, the Borrower, Planet Hollywood International, Inc.,Planet Hollywood (Region IV), Inc., Planet Hollywood Memorabilia, Inc., TrophyHunter Investments, Ltd., Bay Harbour 90-1, Ltd., Bay Harbour Master Ltd.,Douglas Teitelbaum, Robert Earl, and Wells Fargo Bank, N.A., as Trustee for TheCredit Suisse First Boston Mortgage Securities Corp. Commercial MortgagePass-Through Certificates, Series 2007-TFL2 entered into a third modification(the “Modification”) of the Loan Agreement. The Modification provides for up to $9 million of the Interest ReserveFund (as defined in the Loan Agreement) to be available to Borrower for monthlydebt service.

 

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 parametersoutlined in the Loan Agreement.  Failureto replenish the Interest Reserve Account is an Event of Default (as defined inthe Loan Agreement) and a Specified Event (as defined in theModification).  A Specified Event meansthe occurrence of certain events, including (a) failure of the Borrower to makecertain payments as required by the Modification or the Loan Agreement; (b) certainEvents of Default under the Loan Agreement; and (c) an Event of Default underthe Modification resulting from failure to pay amounts owed to Lender, failureto pay certain taxes, the incurrence of additional indebtedness in violation ofthe terms of the Loan Agreement, and the imposition of any lien encumbering thecollateral of the loan (for the purpose of a Specified Event, an Event ofDefault means a Default (as defined in the Loan Agreement) that continues afterthe applicable notice and cure or grace periods under the terms of the LoanAgreement 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 income inthe first six months of 2009 was not sufficient to demonstrate that the Companywould generate sufficient cash flow from operations to meet the conditions setforth in the Modification (described above) in order to exercise the secondextension option.  Accordingly, the Loan wasreclassified to a current liability as of June 30, 2009 and in the accompanyingfinancial statements.

 

On September 9, 2009, the Company did not havesufficient available cash to make the interest and reserve payments due underthe Loan on that date.  In connectionwith the Company’s failure to make the payments required under the Loan, theBorrower and Lender entered into a Protective Advance Agreement dated September11, 2009 (the “Protective Advance Agreement”). The Protective Advance Agreement acknowledges that there has been anEvent of Default (as defined in the Loan Agreement) and a Specified Event (asdefined in the Modification (as defined in Note 6 – Long-Term Debt)), that theLoan is due and payable and outlines the conditions by which cash advances maybe made to the Company in the sole discretion of the Lender so that it maycontinue operating.  The Company iscontinuing discussions with the Lender in this regard. Cash advances under theProtective Advance Agreement are made first from available operating cashgenerated by the Borrower from current operations and held in reserve by theLenders.  To the extent operating cash isnot sufficient to cover necessary operating expenses, additional advances madeunder the Protective Advance Agreement will be added to the total debt outstandingunder the Loan (the “Protective Advances”). To date, the Lender has made no Protective Advances to the Company.  The Loan Agreement is a commercial mortgage.As such, the Loan Agreement as amended and the EquityCo subsidiary corporatestructures and operating agreements (including bankruptcy remote entities)restrict the ability of OpBiz and PH Fee Owner to file a voluntary petition forrelief under the bankruptcy code.  Asfurther outlined in the Modification dated May 7, 2009 within ten days after Lender’swritten demand after the occurrence of a Specified Event as determined byLender in its sole but good faith discretion, Borrower, MezzCo and TSP OwnerLLC shall deliver to Lender (i) one or more deeds conveying fee simple title toall portions of the real property comprising the PH Resort; (ii) one or moreassignments conveying membership interests of MezzCo in OpBiz; and (iii) allother documents and instruments to Lender that may be required to enable Lenderto obtain title insurance coverage with respect to fee simple property.  In order to permit the Lender to foreclose onthe hotel and casino comprising the PH Resort separately and to allow OpBiz tocontinue to operate the casino after such a foreclosure (should the Lenderchoose to do so), title to the PH Resort was transferred from OpBiz to PH FeeOwner.  OpBiz and PH Fee Owner thenentered into a lease pursuant to which OpBiz agreed to continue to operate thehotel in the manner it had been and to pay monthly rent of approximately$916,000.  OpBiz and PH Fee Owner alsoentered into a lease pursuant to which OpBiz agreed to continue to operate thecasino in the manner it had been and to pay monthly rent of approximately$1,160,000.  Additionally, as 

 

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detailed in Note 6 – Long-Term Debt, in connectionwith the execution of the Loan, the Guarantors executed guarantees againstcertain actions including a voluntary or collusive bankruptcy filing which wereratified in the Protective Advance Agreement.

 

After the occurrence of the Event of Default, intereston the Loan accrues at the Default Rate (as defined in the LoanAgreement).  The Lender, in its sole discretion,has applied certain reserve funds in the amount of $17,225,000 to theoutstanding principal balance of the Loan and has collected interest.  The balance of the Loan after application ofthe reserve funds is $842,775,000 as presented in the accompanying condensedconsolidated financial statements. Pending the on-going negotiations, the Company is recording interestexpense on the $860 million Loan balance at the default rate of interest (4%over the Applicable Interest Rate as defined in the Loan Agreement) as calledfor in the Loan Agreement once an Event of Default has occurred.  The Lender has collected interest for themonth of September in the amount of $680,000.

 

Although an Event of Default has been acknowledged,the Lender has not at this time demanded payment of the Loan nor pursued its’rights and remedies. The Company will continue to discuss solutions with theLender and operate under the Protective Advance Agreement until a resolutioncan be reached.  An Event of Defaultallows the Lender to foreclose on and take ownership of the PH Resort whichwould result in the Lender taking title to all assets of the property, a changeof control of the PH Resort, and transfer of substantially all of the assets ofBH/RE.  However the Lender has not exercisedit’s rights in this regard and the Company is involved in discussions with theLender that could result in a foreclosure on the property and a transfer of thedeed (as described above), a transfer of a portion of some or all of thecurrent equity of the Company or a modification to the Loan.

 

There can be no assurance that an agreement will bereached with the Lender, that the Lender will not exercise its rights to obtainownership of the PH Resort, will agree to modify the Loan Agreement or will makeadequate funds available under the Protective Advance Agreement.  Additionally, there can be no assurance thatwe 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.

 

In connection with the Loan, the Lender required that Trophy HunterInvestments, Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., whichare affiliates of Bay Harbour Management, execute and deliver a certainGuaranty (as described below). In exchange for Trophy Hunter Investments, Ltd.,Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”) executingthe Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy HunterInvestments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 peryear. The fee is accrued as of September 30, 2009 and only payable once OpBizhits certain debt service coverage ratios defined 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 prohibited actionsof the Borrower and guarantied full repayment of the Loan in the case of avoluntary or collusive bankruptcy of the Borrower, a transfer of the PH Resortor 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 any benefit

 

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receivedby any of the Guarantors as a result of the acts giving rise to the liabilityunder the Guaranty. Each of Douglas Teitelbaum and Robert Earl executed anddelivered guaranties substantially the same as that delivered by theGuarantors, 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 PH Resort and payment of all costs associated therewith. The liabilityunder the Completion Guaranty is capped at the greater of (a) $35,000,000and (b) only in the case that cost overruns for the renovation exceed$15,000,000, 24% of the 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(the “Securities Purchase Agreement”), among MezzCo and the Investors (as namedin the Securities Purchase Agreement), 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 (as named in theRestructuring Agreement) entered into the Restructuring Agreement, dated November 30,2006 (the “Restructuring Agreement”), pursuant to which the RestructuringParties terminated in full the Securities Purchase Agreement, the SubordinationAgreement, dated as of August 31, 2004, among MezzCo, OpBiz, the SeniorAgent and the Investors, the Pledge Agreement, dated August 9, 2006 (the “PledgeAgreement”), 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 the Pledge Agreement, theInvestors released their security interest, as defined in that certain SecurityAgreement, as amended by that certain Amendment to Security Agreement, in eachcase dated as of August 9, 2004 and executed by the Company in favor ofthe collateral agent; (iii) released and terminated the Deed of Trust,dated as of August 9, 2004 and executed by MezzCo in favor of the Trustee(as defined therein) for the benefit of the collateral agent; (iv) releasedand terminated the Investors’ security interest in the securities account,provided for that certain Securities Account Control Agreement, dated as of August 9,2004 and executed by the Company, 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).

 

Pursuant to the Pledge Agreement, EquityCo has, subject to approval ofthe Nevada gaming authorities, pledged and granted a first priority securityinterest to the Collateral Agent for the ratable benefit of the Investors inthe membership interests of EquityCo in MezzCo. The Pledge Agreement, onceapproved, will secure the full payment of the Put Right (as defined in theA&R Warrants), including any obligations under the Put Note.

 

On November 30, 2006, MezzCo entered into an IndemnificationAgreement with the Investors, pursuant to which MezzCo 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 Services Agreement***

*** ***

On January 30, 2009, OpBiz entered into the FifthAmendment to Energy Services Agreement (the “Fifth Amendment”) with NorthwindAladdin (“Northwind”), the third party that owns and operates a central utilityplant on land leased from OpBiz. The plant supplies hot and cold water andemergency power to the property under a contract which expires in 2020.  The Fifth Amendment assigns a portion of thecapacity to heat and chill water provided to OpBiz to Westgate for operation ofthe timeshare tower. Operation of the timeshare tower is fully described inNote 3—Summary of Significant Accounting Policies, Timeshare PurchaseAgreement. The Fifth Amendment provides for Westgate to assume a pro-rataportion of the debt and equity obligations payable by OpBiz to Northwind. OpBiz’sobligations to Northwind, recorded as a capital lease in the accompanyingfinancial 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 $289,000 per month.

 

**7.****                                     ****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 fund thecosts of the planned renovations to the Aladdin. Starwood’s equity interest inEquityCo is reflected as non controlling interest in the accompanyingconsolidated financial statements.

 

BH/RE has the option topurchase all of Starwood’s membership interests in EquityCo if OpBiz isentitled to terminate the hotel management contract between OpBiz and Sheraton(see Note 8) as a result of a breach by Sheraton. Starwood can requireEquityCo to purchase all of its membership interests in EquityCo if the hotel managementcontract is terminated for any reason other than in accordance with its termsor as the result of a breach by Sheraton. In addition, BH/RE and Starwoodentered into a registration rights agreement with respect to their membershipinterests in EquityCo.

 

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.

 

TheCompany recognizes compensation cost relating to share-based paymenttransactions in the operating expenses. The cost is measured at the grant date,based on the calculated fair value of the award, and is recognized as anexpense over the employee’s estimated requisite service period (generally thevesting period of the equity award) on a straight-line basis. Estimates arerevised if subsequent information indicates that forfeitures will differ fromprevious estimates, and the cumulative effect on compensation cost of a changein the estimated forfeitures is recognized in the period of the change.

 

Thereis no compensation cost related to non-qualified stock options recognized inoperating results for the three or nine months ended September 30, 2009and there is $3,000 and $9,000 of compensation cost, which approximated fairvalue, related to non-qualified stock options recognized in operating results(included in selling, general and administrative expenses) for the three andnine months ended September 30, 2008, respectively.

 

**8.****                                     ****RELATED PARTY TRANSACTIONS**

 

***Planet Hollywood Licensing Agreement***

*** ***

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 PlanetHollywood a quarterly licensing fee of 1.75% of OpBiz’s non-casino revenues.The initial term of the licensing agreement will expire in 2028. OpBiz canrenew the licensing agreement for three successive 10-year terms. The propertyofficially began operation as the PH Resort on April 17, 2007 and beganpaying fees pursuant to the licensing agreement as of that date. Licensing feeexpenses related to the Planet Hollywood Licensing Agreement totaled approximately$0.6 million and $1.9 million for the three and nine months ended September 30,2009, respectively, and $0.7 million and $2.3 million for the three and ninemonths ended September 30, 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.

 

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***Sheraton Hotel Management 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 fee expenses related to the Starwood managementcontract totaled approximately $2.0 million and $2.2 million for the threemonths ended September 30, 2009 and 2008, respectively, and $6.3 millionand $7.4 million for the nine months ended September 30, 2009 and 2008,respectively.  Unpaid management fees dueto Starwood, net of amounts due to OpBiz from Starwood for Starwood preferredguests who redeemed Starwood points for hotel stays, total $3.7 million as of September 30,2009.  OpBiz is currently in default ofthe management contract with Sheraton due to such non-payment of fees.

 

***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 by OpBiz.Planet Hollywood LV pays OpBiz base rent in the amount of $500,000 per year(subject to annual increase adjustments), in addition to percentage rent of upto 12% based on annual gross sales (to the extent such percentage rent exceedsbase rent).  The initial term of thelease agreement will expire in 2017. Planet Hollywood LV can renew the leaseagreement for two successive 5-year terms. Planet Dailies began operation on April 1,2007 and began paying rent pursuant to the lease agreement as of that date.Rental income from Planet Dailies totaled approximately $0.2 million and $0.4million for the three and nine months ended September 30, 2009,respectively, and $0.1 million and $0.3 million for the three and nine monthsended September 30, 2008, 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. Rentalincome from Earl of Sandwich totaled approximately $0.2 million and $0.4million for the three and nine months ended September 30, 2009,respectively, and $0.1 million and $0.3 million for the three and nine monthsended September 30, 2008, respectively.

 

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

 

***Guaranty Agreement***

*** ***

Inconnection with the Loan, the Lender required that Trophy Hunter Investments,Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliatesof Bay Harbour Management, execute and deliver a certain Guaranty (see Note6.—Long-Term Debt). In exchange for executing the Guaranty, OpBiz and PH FeeOwner agreed to pay Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd.a fee equal to $1,500,000 per year. The fee is accrued and only payable onceOpBiz achieves certain debt service coverage ratios defined in the LoanAgreement.

 

***Aircraft Charter Arrangements***

 

Inthe ordinary course from time to time the Company utilizes the services ofprivate aircrafts for charter.  TheCompany currently utilizes several different third party aircraftmanagement/charter vendors for the provision of charter flights depending uponaircraft size, availability and location. One or more affiliates of BH/RE have placed an owned aircraft in servicewith one such vendor.  From time to time,the Company may utilize the services of this vendor which may involve theaffiliates’ owned aircraft provided that the 

 

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ratecharged for that aircraft shall be at arm’s length and fair market for similaraircraft.

 

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**9.****                                     ****FAIR VALUE MEASUREMENTS**

 

In September 2006, the FASB issued new accounting standardsregarding fair value measurements.  Thesestandards do not require any new fair value measurements, but rather definefair value, establish a framework for measuring fair value, and expanddisclosures about fair value measurements under other accounting pronouncementsthat require or permit fair value measurements. The Company adopted certainprovisions of the standards as they relate to financial assets and liabilitieson January 1, 2008, and adopted the remaining provisions on January 1,2009. Although the adoption of the standards did not have a material impact onthe Company’s financial position, operations, or cash flows, the Company isrequired to provide additional disclosures as part of its financial statements.

 

The new standards on fair value measurements define the “fair value” asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date and is measured according to a three-tier fair value hierarchy, which prioritizes theinputs used in measuring fair value. These tiers include: Level 1, definedas observable inputs such as quoted prices in active markets; Level 2,defined as inputs other than quoted prices in active markets that are eitherdirectly or indirectly observable; and Level 3, defined as unobservableinputs in which little or no market data exists, therefore requiring an entityto develop its own assumptions.

 

As of September 30,2009, 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 (see Note 6). The fair value of interest rate cap contract isdetermined based on inputs that are readily available in public markets or canbe derived from information available in publicly quoted markets. Therefore,the Company has categorized the cap contract as Level 2. The Companydetermines the value of the put warrants using a discounted cash flow modelwhich is based primarily on projected future cash flows and asset volatilitiesof comparable companies. Therefore, the Company has categorized these putwarrants as Level 3.

 

Inaccordance with the fair value hierarchy described in SFAS No. 157, thefollowing table shows the fair value of our financial assets and financialliabilities as of September 30, 2009:

 
| ** **        | ** ** | **December 31, 2008** | ** ** | **September 30,  2009** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------|------------|----------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|              |       |                       |       |                         |       |             |       |             |       |             |       |
| Assets:           |       |                       |       |                         |       |             |       |             |       |             |       |
| Interest rate cap |       | $                          | 26,000     |                         | $          | 18               |       | $                | —     |             | $          | 18 |   | $ | — |   |
|              |       |                       |       |                         |       |             |       |             |       |             |       |
| Liabilities:      |       |                       |       |                         |       |             |       |             |       |             |       |
| Put warrants      |       | $                          | 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 activemarkets and 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.  The value of the warrants was adjusted basedon the Company’s current cash flow.  Theput warrants are level 3 financial liabilities.

 

**FairValue of Financial Instruments**

 

The following methods andassumptions are used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate:

 

*CashEquivalents*

 

The fair value of theCompany’s cash equivalents approximates their carrying value due to the shortmaturity of the cash equivalents.

 

*AccountsReceivable*

 

The fair value of the Company’s casino and hotelreceivable approximates their carrying value as they are non-interest bearingand 

 

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due to their short maturity.

 

*LandReceivable*

 

The Company did not estimate the fair value of landreceivable as the Company determined that it is not practicable to estimate thefair value of its land receivable.  Underthe Timeshare Purchase Agreement, the Company receives fees each year based onsales of timeshare units until the timeshare units are one hundred percent soldout. The fees are received monthly and equal to 9% of total timeshare sales.The carrying value of the land receivable at September 30, 2009 and December 31,2008 were approximately $17.5 million and $19.9 million, respectively.

 

*Long-termDebt*

 

The fair value of the Company’s long-term debtsapproximates its carrying value, as it is variable-rate debt. The fair value ofthe Company’s capital lease approximates its carrying value.

 

Theestimated fair values of the Company’s financial instruments are as follows (inthousands):

 
| ** **                 | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **Carrying  Amount**         | ** ** | **Fair  Value**             | ** ** | **Carrying    Amount** | ** ** | **Fair  Value** | ** ** |
| **Financial assets:**      |       |                         |       |                        |       |   |   |   |   |
| Cash  and cash equivalents |       | $                            | 18,915     |                        | $          | 18,915 |   | $ | 23,881 |   | $ | 23,881 |   |
| Accounts  Receivable       |       | 16,413                       |       | 16,413                      |       | 18,717 |   | 18,717 |   |
| Land  Receivable           |       | 17,549                       |       | 17,549                      |       | 19,918 |   | 19,918 |   |
|                       |       |                         |       |                        |       |   |   |   |   |
| **Financial liabilities:** |       |                         |       |                        |       |   |   |   |   |
| Long-Term  debt            |       | 868,872                      |       | 868,872                     |       | 887,562 |   | 887,562 |   |
|                            |            |                              |            |                             |            |  |  |  |  |  |  |  |  |

 

**10.****                              ****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 recognize deferred income tax assets,net of applicable reserves, related to net operating loss carry-forwards andcertain temporary differences and also recognize a future tax benefit to theextent that realization of such benefit is more likely than not. Otherwise, avaluation allowance is applied.

 

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.

 

The Company had uncertaintax benefits of $2.0 million and $2.1 million as of September 30, 2009 andDecember 31, 2008, respectively. The Company recognizes penalties andinterest as a component of income tax expense. Management does not expect any penalty assessment associated with theadoption of the guidance.  The Company isno longer subject to U.S. federal tax examinations by tax authorities for taxyears before 2004.

 

**11.****                              ****COMMITMENTS AND CONTINGENCIES**

 

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

######  

In thenormal course of business, the Company is subject to various litigation claimsand assessments. The Company is not

 

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currently aparty to 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.

 

**12.****                              ****SUBSEQUENT EVENTS**

 

TheCompany evaluated all subsequent events through November 16, 2009, whichis the date and time that the consolidated financial statements were issued. Nomaterial subsequent events have occurred since September 30, 2009 thatrequired recognition or disclosure in the consolidated financial statements.

 

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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 a discussion of the financialcondition and results of operations of BH/RE and its subsidiaries for theperiods covered in this report. The discussion of operations herein focuses onevents and the revenues and expenses during the three and nine months ended September 30,2009, as compared to the three and nine months ended September 30, 2008.

 

The following management’s discussion and analysis offinancial condition and results of operations should be read in conjunctionwith the consolidated financial statements and the related notes to theconsolidated financial statements of BH/RE included in BH/RE’s Annual Report onForm 10-K filed with the SEC on March 31, 2009, and the unauditedcondensed consolidated financial statements and notes hereto included in Part I,Item 1 of this report.

 

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

######  

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

######  

Ourunaudited condensed consolidated financial statements are prepared inconformity with U.S. generally accepted accounting principles. Certainpolicies, including the determination of bad debt reserves, the estimateduseful lives assigned to assets, asset impairment, insurance reserves and thecalculation of liabilities, require that we apply significant judgment indefining 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 equipment are stated at cost. Recurringrepairs and maintenance costs, including items that are replaced routinely inthe casino, hotel and food and beverage departments which do not meet theCompany’s capitalization policy, are expensed as incurred. The Company hasestablished its capital expense policy to be reflective of its individual ongoingrepairs and maintenance programs. Gains or losses on dispositions of propertyand equipment are included in the determination of income. Property andequipment are generally depreciated over the following estimated useful liveson a straight-line basis:

 

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

 

For assets held and used,the Company reviews the asset (or asset group) for impairment wheneverindicators of impairment exist.  If an indicatorof impairment exists, the estimated future cash flows of the asset, on anundiscounted basis, are compared to the carrying value of the asset. If theundiscounted cash flows exceed the carrying value, no impairment is indicated.If the undiscounted cash flows do not exceed the carrying value, thenimpairment is measured based on fair value compared to carrying value, withfair value typically based on a discounted cash flow model. For assets to bedisposed of, the asset is recognized at the lower of carrying value or fairvalue less costs of disposal. Fair value for assets to be disposed of isestimated based on comparable asset sales, solicited offers or a discountedcash flow model.

 

As a result of thecontinuing economic downturn and constrained capital markets which havenegatively impacted the Las Vegas economy and the Company’s operating results,the Company determined that its property and equipment should be evaluated forimpairment during the three months ended September 30, 2009 and determinedthat no impairment needs to be recognized during the current quarter based onan estimate of undiscounted future cash flows, which exceeded the carryingvalue of property and equipment. However, inherent in assessing the recoverability of the carrying valueof property and equipment are various assumptions regarding estimated futurecash flows and other factors.  If theseestimates or the related assumptions change, we may be required to recordimpairment charges.

 

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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 arerecognized as liabilities, with changes in fair value affecting net income. See“Note 6. - 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 rate capagreement is included in other assets on the accompanying balance sheet at fairvalue with any change in fair value being recorded in interest income orexpense in the accompanying consolidated statements of operations.

 

*Revenue Recognition and Promotional Allowances*

 

Casino revenues are recognized as the net win fromgaming activities, which is the difference between gaming wins and losses.Hotel revenue recognition criteria are generally met at the time of occupancy.Food and beverage revenue recognition criteria are generally met at the time ofservice. Deposits for future hotel occupancy or food and beverage services arerecorded as deferred income until revenue recognition criteria are met.Cancellation fees for hotel and food and beverage services are recognized uponcancellation by the customer as defined by a written contract entered into withthe customer. All other revenues are recognized as the service is provided.Revenues include the retail value of food, beverage, rooms, entertainment andmerchandise provided on a complimentary basis to customers. Such complimentaryamounts are then deducted from revenues as promotional allowances on BH/RE’sconsolidated statements of operations.

 

###### *Players’ Club Program*

######  

The Company’s gaming patrons who join the PH ResortPlayers’ club earn points based on gaming activity. OpBiz had accrued aliability for players’ club points that can be redeemed for cash as the pointsare earned based on historical redemption percentages which was recorded as areduction of revenue. In March 2009, the Company changed the structure ofits players club to allow patrons to redeem those points for promotional slotplay and other non-cash incentives but not for cash, and therefore no longeraccounts for the points earned as reduction to revenue. The total accrued liabilityrelated to potential cash awards redeemable under the players’ club program was$1.2 million at September 30, 2009 and $2.2 million at December 31,2008.

 

*Self-Insurance Accruals*

 

BH/RE is self-insured, up to certain limits, for costsassociated with employee medical coverage. The Company accrues for theestimated expense of known claims, as well as estimates for claims incurred butnot yet reported which totaled approximately $2.1 million at September 30,2009 and $2.4 million at December 31, 2008.

 

*Income Taxes*

 

The condensed consolidatedfinancial statements include the operations of BH/RE and its majority-ownedsubsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner andTSP Owner. BH/RE and EquityCo are limited liability companies and are taxed aspartnerships for federal income tax purposes. However, MezzCo has elected to betaxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II,wholly-owned subsidiaries of MezzCo, are treated as divisions of MezzCo forfederal income tax purposes, and accordingly, are also subject to federalincome taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II,PH Fee Owner, a wholly owned subsidiary of PH Mezz I, and TSP Owner, a whollyowned subsidiary of PH Fee Owner, are also subject to federal income taxes.

 

MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner andTSP Owner, recognize deferred income tax assets, net of applicable reserves,related to net operating loss carry-forwards and certain temporary differencesand also recognize a future tax benefit to the extent that realization of suchbenefit is more likely than not. Otherwise, a valuation allowance is applied.

 

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*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 (the “Timeshare Parcel”) to Westgate,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 closing of the transaction, OpBiz, PH Fee Owner, LLCand TSP 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 receivedare used to pay the purchase price for the land and the remaining 50% isrecorded as income as received. As of September 30, 2009, the Company hasa receivable balance for the sale of land of $17.5 million, $14.9 million ofwhich is classified as long-term and at December 31, 2008 the Company hada receivable balance for the sale of land of $19.9 million,$16.9 million of which was classified as long-term in the accompanyingfinancial statements.

 

###### *Membership Interests*

######  

###### As of September 30,2009, BH/RE’s membership interests had not been unitized and BH/RE’s members donot presently intend to unitize these membership interests. Accordingly,management of BH/RE has excluded earnings per share data because managementbelieves that such disclosures would not be meaningful to the financialstatement presentation.

######  

*Recently Issued Accounting Pronouncements*

 

Subsequent to the adoption of the Codification (asdefined in Note 1), any change to the source of authoritative GAAP will becommunicated through an Accounting Standards Update (“ASU”). ASUs will bepublished by the FASB for all authoritative GAAP promulgated by the FASB,regardless of the form in which such guidance may have been issued prior torelease of the Codification. Prior to inclusion in an ASU, the standard-settingorganizations and regulatory agencies continue to issue proposed changes to theaccounting standards in previous form (e.g., FASB Statements of FinancialAccounting Standards, EITF Abstracts, FASB Staff Positions, SEC StaffAccounting Bulletins, etc.).

 

Variable Interest Entities. In September 2009, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167,Amendments to FASB Interpretation No. 46(R)  (“SFAS 167”) .  SFAS 167 is a revision to FASB InterpretationNo. 46,  Consolidation of VariableInterest Entities  (which is currentlypromulgated in a subsection of Codification Topic 810). The amendments include:(1) the elimination of the exemption for qualifying special purposeentities, (2) a new approach for determining who should consolidate avariable-interest entity, and (3) changes to when it is necessary toreassess who should consolidate a variable-interest entity. SFAS 167 iseffective for the first annual reporting period beginning after November 15,2009 and for interim periods within that first annual reporting period. We arecurrently evaluating the requirements of SFAS 167 and have not determined theimpact, if any, that the adoption will have on our consolidated financialstatements.

 

Transfer of Financial Assets. In September 2009,the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets— An Amendment to FASB Statement No. 140 (“SFAS 166”). SFAS 166 is a revision of SFAS No. 140,  Accounting for Transfers and ServicingFinancial Assets and Extinguishments of Liabilities, which is presentlyincluded in Codification Topic 860, Transfers and Servicing.  SFAS 166eliminates the concept of a “qualifying special-purpose entity,” changes therequirements for derecognizing financial assets, and requires additionaldisclosures in order to enhance information reported to users of financialstatements by providing greater transparency about transfers of financialassets, including securitization transactions, and an entity’s continuinginvolvement in and exposure to the risks related to transferred financial assets.SFAS 166 is effective for fiscal years beginning after November 15,2009. We do not believe that the adoption of SFAS 166 will have a materialimpact on our consolidated financial statements.

 

SubsequentEvents.  In May 2009, the FASBissued SFAS 165, Subsequent Events (“SFAS 165”).  SFAS 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued, and is is presently included in CodificationTopic 855, Subsequent Events. In addition, under the guidance, 

 

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an entity is required todisclose the date through which subsequent events have been evaluated, as wellas whether that date is the date the financial statements were issued or thedate the financial statements were available to be issued. The guidance doesnot apply to subsequent events or transactions that are within the scope ofother applicable GAAP that provide different guidance on the accountingtreatment for subsequent events or transactions. The guidance is effective forinterim or annual financial periods ending after June 15, 2009, and shallbe applied prospectively. The Company adopted the guidance as of June 30,2009, as required. The adoption of the guidance did not have a material impacton the Company’s consolidated financial statements.

 

Avariety of additional proposed or otherwise potential accounting standards arecurrently under study by standard-setting organizations and certain regulatoryagencies. Because of the tentative and preliminary nature of such proposedstandards, we have not yet determined the effect, if any, that theimplementation of such proposed standards would have on our consolidatedfinancial statements.

 

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###### ***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 competitivemarket driving hotel rates down have all contributed to declines in the overallLas Vegas market. This slow down was particularly significant in the fourthquarter of 2008 and has continued into the third quarter of 2009. 2008 was thePH Resort’s first full year of operation as a rebranded property. We believethat third quarter 2009 operating results were negatively impacted by thecurrent market conditions and that we will continue to experience lower thanhistorical hotel occupancy, room rates and casino volumes throughout  2009. As a result, we have increasinglyfocused on efficiency initiatives to control expenses and improve performance.We are continually reviewing the costs and marketing opportunities to ensuremaximum operating performance in the face of the current economic conditions.

 

The following table highlights the results ofoperations for the three and nine months ended September 30, 2009 and2008, respectively (dollars in thousands, unaudited).

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** **  | **Percent** | ** ** | **Nine Months Ended September 30,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|-------------|-------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2009**                                                 | ** **  | **2008**    | ** ** | **Change**                                              | ** ** | **2009**    | ** ** | **2008** | ** ** | **Change** | ** ** |
| Net Revenues                        |       | $                                                        | 55,058      |        | $          | 69,312                                                  |       | (20.6       | )%         | $ | 172,719 |   | $ | 215,531 |   | (19.9 | )% |
| Operating Expenses:                 |       |                                                     |        |        |       |                                                    |       |        |       |   |   |   |   |
| Casino                              |       | 17,170                                                   |        | 19,463      |       | (11.8                                                   | )%         | 53,300      |       | 58,863 |   | (9.5 | )% |
| Hotel                               |       | 9,695                                                    |        | 10,221      |       | (5.1                                                    | )%         | 28,545      |       | 31,551 |   | (9.5 | )% |
| Food and Beverage                   |       | 8,890                                                    |        | 9,530       |       | (6.7                                                    | )%         | 26,397      |       | 28,212 |   | (6.4 | )% |
| Other                               |       | 363                                                      |        | 77          |       | 371.4                                                   | %          | 1,285       |       | 1,125 |   | 14.2 | % |
| Selling, general and administrative |       | 18,328                                                   |        | 17,413      |       | 5.3                                                     | %          | 51,343      |       | 57,425 |   | 10.5 | % |
| Depreciation and amortization       |       | 11,009                                                   |        | 8,971       |       | 22.7                                                    | %          | 31,405      |       | 26,987 |   | 16.4 | % |
| Operating (Loss) Income             | ** ** | **$**                                                    | **(10,397** | **)**       | **$**      | **3,637**                                               |       | (385.9      | )%         | **$** | **(19,556** | **)** | **$** | **11,368** |   | (272 | )% |

 

Net revenues for the three and nine months ended September 30,2009 decreased when compared to the three and nine months ended September 30,2008. We believe that our revenues for the three and nine months ended September 30,2009 have been negatively impacted by the weakened United States economy.Disruptions in the housing and stock markets, high travel costs, along withdeclines in the Las Vegas market due to decreased visitor volume and lowercustomer spending per trip have and may continue to adversely impact ourrevenues. We have and will continue to aggressively monitor and reduce expensesto improve operating margins during 2009.

 

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Thefollowing table highlights the various sources of our revenues and expenses forthe three and nine months ended September 30, 2009 and 2008, respectively(dollars in thousands, unaudited).

 
| ** **                                    | ** ** | **Three months ended** | ** ** | ** **  | ** ** | **Nine months ended** | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008**    | ** ** | **Change**                      | ** ** | **2009**    | ** ** | **2008** | ** ** | **Change** | ** ** |
| Casino  revenues                              |       | $                                | 23,914     |        | $          | 31,054                          |       | (23.0       | )%         | $ | 77,601 |   | $ | 94,367 |   | (17.8 | )% |
| Casino  expenses                              |       | 17,170                           |       | 19,463      |       | (11.8                           | )%         | 53,300      |       | 58,863 |   | (9.5 | )% |
| *Margin*                                      | * *   | *28.2*                           | *%*        | *37,.3*     | *%*        | * *                        | * *   | *31.3*      | *%*        | *37.6* | *%* | * * | * * |
| Hotel  revenues                               |       | $                                | 21,692     |        | $          | 25,632                          |       | (15.4       | )%         | $ | 67,290 |   | $ | 86,948 |   | (22.6 | )% |
| Hotel  expenses                               |       | 9,695                            |       | 10,221      |       | (5.1                            | )%         | 28,545      |       | 31,551 |   | (9.5 | )% |
| *Margin*                                      | * *   | *55.3*                           | *%*        | *60.1*      | *%*        | * *                        | * *   | *57.6*      | *%*        | *63.7* | *%* | * * | * * |
| Food  and beverage revenues                   |       | $                                | 12,247     |        | $          | 13,187                          |       | (7.1        | )%         | $ | 36,646 |   | $ | 41,225 |   | (11.1 | )% |
| Food  and beverage expenses                   |       | 8,890                            |       | 9,530       |       | (6.7                            | )%         | 26,397      |       | 28,212 |   | (6.4 | )% |
| *Margin*                                      | * *   | *27.4*                           | *%*        | *27.7*      | *%*        | * *                        | * *   | *28.0*      | *%*        | *31.6* | *%* | * * | * * |
| Other  revenues                               |       | $                                | 3,220      |        | $          | 5,806                           |       | (44.5       | )%         | $ | 9,419 |   | $ | 13,659 |   | (31.0 | )% |
| Other  expenses                               |       | 363                              |       | 77          |       | 371.4                           | %          | 1,285       |       | 1,125 |   | 14.2 | % |
| *Margin*                                      | * *   | *88.7*                           | *%*        | *98.7*      | *%*        | * *                        | * *   | *86.4*      | *%*        | *91.8* | *%* | * * | * * |
| Selling,  general and administrative expenses |       | $                                | 18,328     |        | $          | 17,413                          |       | 5.3         | %          | $ | 51,343 |   | $ | 57,426 |   | (10.6 | )% |
| *% of revenue*                                | * *   | *30.0*                           | *%*        | *23.0*      | *%*        | * *                        | * *   | *26.9*      | *%*        | *24.3* | *%* | * * | * * |

 

*Casino*

 

Casino revenue is derived primarily from patronswagering on slot machines, table games and other gaming activities. Table gamesgenerally include blackjack or twenty one, craps, baccarat and roulette. Othergaming activities include the race and sports books, poker and keno. Casinorevenue is defined as the win from gaming activities, computed as thedifference between gaming wins and losses.

 

Casino revenues vary from time-to-time due to generaleconomic conditions, competition, popularity of entertainment offerings, tablegame hold, slot machine hold and occupancy percentages in the Hotel. Casinorevenues also vary depending upon the amount of gaming activity, as well asvariations in the odds for different games of chance. Casino revenue isrecognized at the end of each gaming day.

 

Casinorevenues decreased 23.0% to $23.9 million for the three months ended September 30,2009, as compared to $31.1 million for the three months ended September 30,2008. Table games revenue for the three months ended September 30, 2009,decreased by approximately $3.8 million or 33.5% when compared to the threemonths ended September 30, 2008. Table drop for the three months ended September 30,2009 decreased $4.1 million or 6.0% when compared to the same three monthperiod in the prior year. Overall table hold for the three months ended September 30,2009 was 11.6% compared to 16.5% for the three months ended September 30,2008.  We have focused on relationshipmarketing and promotional events to maintain table revenue despite thecontinued operating challenges in the Las Vegas market.  Slot revenue for the three months ended September 30,2009 decreased approximately $3.3 million when compared to the same three monthperiod in prior year. Overall slot win percent was 7.7% for the three monthsended September 30, 2009 compared to 8.7% for the three months ended September 30,2008. Slot handle for the three months ended September 30, 2009 decreased$9.5 million or 3.8% when compared to the same three month period in the prioryear. Decreases in occupied hotel rooms, visitor volume and spend per visitorcontributed to the decline in slot handle and revenue.  Third quarter initiatives in slots included areconfiguration of the gaming floor designed to enhance trial visitation fromstrip pedestrian traffic and increase the length of stay for rated slotplayers.  Combined revenues from the raceand sports book and poker for the three months ended September 30, 2009increased by 17.9% when compared to the three month period ended September 30,2008 mainly due to a better hold on sporting events.

 

Casinoexpenses decreased 11.8% to $17.2 million for the three months ended September 30,2009, as compared to $19.5 million for the three months ended September 30,2008. The casino operating margin decreased 9.1% when comparing the same threemonth periods.  Targeted marketingexpenses focused on attracting and retaining casino customers through expansionof loyalty programs and promotional activities, along with successfuladministrative expense reduction plans, led to the overall expense reductionfor the quarter.

 

Casinorevenues decreased 17.8% to $77.6 million for the nine months ended September 30,2009, as compared to $94.4 million for the nine months ended September 30,2008. Table games revenue for the nine months ended September 30, 2009decreased by approximately $7.3 million or 20.2% when compared to the ninemonths ended September 30, 2008. Table drop for the nine months ended September 30,2009

 

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decreased$12.3 million or 5.5% when compared to the same nine month period in the prioryear. Overall table hold for the nine months ended September 30, 2009 was13.8% compared to 16.3% for the nine months ended September 30, 2008.  Reduced visitor volumes and reduced wageringper visitor as well as a lower hold percent in the third quarter of 2009contributed to the decline in table revenues. Slot revenue for the nine months ended September 30, 2009 decreasedapproximately $8.9 million when compared to the same nine month period in theprior year. Overall slot win percent was 8.2% for the nine months ended September 30,2009 compared to 8.2% for the nine months ended September 30, 2008. Slothandle for the nine months ended September 30, 2009 decreased $105.8million or 13.6% when compared to the same nine month period in the prior year.Decreases in occupied hotel rooms, visitor volume and spend per visitorcontributed to the decline in slot handle and revenue. Combined revenues fromthe race and sports book and poker increased by 6.8% for the nine months ended September 30,2009 when compared to the nine months ended September 30, 2008. The increaseis mainly due to a better hold on sporting events wagering.

 

Casinoexpenses decreased 9.5% to $53.3 million for the nine months ended September 30,2009, as compared to $58.9 million for the nine months ended September 30,2008. Operating margin decreased 6.3% when comparing the same nine monthperiods.  We continue to focus on expensereduction plans and targeted customer reinvestment expense promotions in thecasino division.

 

*Hotel*

 

Hotelrevenue is derived from rooms and suites rented to guests. “Average daily rate”is an industry specific term used to define the average amount of revenue perrented room per day. “Occupancy percentage” defines the total percentage ofrooms occupied and is computed by dividing the number of rooms occupied by thetotal number of rooms available. Hotel revenue is recognized at the time theroom is provided to the guest.

 

Hotelrevenues of $21.7 million for the three months ended September 30, 2009were 15.4% lower than the three months ended September 30, 2008 driven by adecline in both occupancy and average daily room rate. Hotel occupancydecreased 3.9 percentage points to 91.1% for the three months ended September 30,2009 compared to 95.0% for the three months ended September 30, 2008.There were approximately 14,748 more room nights available in the three monthsended September 30, 2009 when compared to the three months ended September 30,2008 due to the completion of the room renovation project that was underway in2008.  Average daily room rates decreasedto $99 for the three months ended September 30, 2009 compared to $123 forthe three months ended September 30, 2008. Las Vegas visitor volume, room occupancy and average daily rate are alldown in the third quarter of 2009 when compared to the third 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 operating environment.  Additionally, we have experiencedcancellations and attrition in the higher rated convention segment as theeconomic slowdowncontinues to reduce the demand for business travel.

 

Hotelexpenses decreased 5.1% to $9.7 million for the three months ended September 30,2009, as compared to $10.2 million for the three months ended September 30,2008. Operating margin decreased 4.8% for the three month period ended September 30,2009 when compared to the same three month period in the previous year.  We continue to focus on expense savingsinitiatives and unique marketing opportunities to maximize profitability inreaction to the reductions in average daily rate and occupancy.

 

Hotelrevenues of $67.3 million for the nine months ended September 30, 2009,were 22.6% lower that the nine months ended September 30, 2008. Hoteloccupancy percentage was 89.3% for the nine months ended September 30,2009, as compared to 95.5% for the nine months ended September 30, 2008.Average daily room rates decreased to $106 for the nine months ended September 30,2009, as compared to $136 for the nine months ended September 30, 2008.

 

Hotelexpenses decreased 9.5% to $28.5 million for the nine months ended September 30,2009, as compared to $31.5 million for the nine months ended September 30,2008. Operating margin decreased 6.1 percentage points over the same nine monthperiod.

 

*Food and Beverage*

 

Food and beverage revenues are derived from food andbeverage sales in the restaurants, bars, room service, banquets and entertainmentoutlets. Food and beverage revenue is recognized at the time the food and/orbeverage is provided to the guest.

 

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Foodand beverage revenues decreased 7.1% to $12.2 million for the three monthsended September 30, 2009, as compared to $13.2 million for the threemonths ended September 30, 2008. Food revenue decreased 18.0% whencompared to the same three month period in the previous year while beveragerevenue increased 1.6%.  The PH Resortoperates Starbucks, the Spice Market Buffet, room service, the pool café,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.

 

Foodand beverage expenses decreased 6.7% to $8.9 million for the three months endedSeptember 30, 2009, as compared to $9.5 million for the three months endedSeptember 30, 2008. Operating margin decreased 0.3 percentage points overthe same three month period.

 

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Foodand beverage revenues decreased 11.1% to $36.6 million for the nine monthsended September 30, 2009, as compared to $41.2 million for the nine monthsended September 30, 2008.

 

Foodand beverage expenses decreased 6.4% to $26.4 million for the nine months endedSeptember 30, 2009, as compared to $28.2 million for the nine months endedSeptember 30, 2008. Food and beverage margins decreased 3.6 percentagepoints in comparing the same nine month periods.

 

*Other*

 

Other revenue includes tenant income, telephone andother miscellaneous income and is recognized at the time the goods or servicesare provided to the guest. Tenant income also includes a portion of themarketing fees received from Westgate based on sales of timeshare units.

 

Otherrevenues decreased 44.5% to $3.2 million for the three months ended September 30,2009, as compared to $5.8 million for the three months ended September 30,2008, and decreased 31.0% to $9.4 million for the nine months ended September 30,2009, as compared to $13.7 million for the nine months ended September 30,2008. The decrease in other revenue is primarily due to the decrease in theamount received from Westgate based on sales of timeshare units. Westgate paysOpBiz 9% of total timeshare sales on a monthly basis with 50% of the proceedsrecorded as tenant income and the remaining 50% recorded against the land receivable.

 

Otherexpenses increased 371.4% to $0.4 million for the three months ended September 30,2009, as compared to $0.1 million for the three months ended September 30,2008, and increased 14.2% to $1.3 million for the nine months ended September 30,2009, as compared to $1.1 million for the nine months ended September 30,2008.  The increase in other expenses inthe third quarter was due to the timing of certain expenses that are overall,consistent with prior year.

 

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

 

SG&Aexpenses increased 5.3% to $18.3 million for the three months ended September 30,2009, as compared to $17.4 million for the three months ended September 30,2008.  As a percentage of net revenue,SG&A expenses increased to 30.0% for the three months ended September 30,2009 as compared to 23.0% for the three months ended September 30,2008.  SG&A expenses decreased 10.6%to $51.3 million for the nine months ended September 30, 2009, as comparedto $57.4 million for the nine months ended September 30, 2008. SG&Aexpenses as a percentage of revenues increased 2.3% for the nine months ended September 30,2009 when compared to the nine months ended September 30, 2008.Significant operating expense reduction plans that were implemented to maximizeprofitability at the first signs of the economic downturn continue to provesuccessful although as a percentage of the reduced revenue base, overallmargins have declined.

 

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*Depreciation and Amortization*

 

Depreciation and amortization expense of $11.0million for the three months ended September 30, 2009 increased whencompared to $9.0 million in expense for the three months ended September 30,2008. Depreciation and amortization expense of $31.4 million for the ninemonths ended September 30, 2009 increased when compared to $27.0 millionin expense for the nine months ended September 30, 2008. The increase indepreciation expense is a direct result of the additional assets placed inservice once the renovation was complete.

 

*Net Interest Expense*

 

Net interest expense decreased to $11.0 million forthe three months ended September 30, 2009, as compared to $16.2 millionfor the three months ended September 30, 2008. Net interest expensedecreased to $29.4 million for the nine months ended September 30, 2009,as compared to $50.3 million for the nine months ended September 30, 2008.Pending the on-going negotiations, the Company is recording interest expense onthe $860 million Loan balance at the default rate of interest (4% over theApplicable Interest Rate as defined in the Loan Agreement) as called for in theLoan Agreement once an Event of Default has occurred.  The Lender has collected interest for themonth of September in the amount of $680,000. The decrease in net interestexpense is directly related to the reduction in LIBOR throughout 2009 whencompared to 2008.

 

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

######  

During the nine monthsended September 30, 2009, we utilized cash flows from operating activitiesof approximately $2.0 million and had a balance of $18.9 million in cash andcash equivalents as of September 30, 2009. We also had current restrictedcash and cash equivalents of approximately $13.5 million and long-termrestricted cash and cash equivalents of approximately $1.2 million at September 30,2009. 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. As of September 30, 2009, the Company hadapproximately $868.9 million of total debt. Substantially all of the Company’s debt is pursuant to the LoanAgreement (as defined below).  On September 9,2009, the Company did not have sufficient available cash to make the interestand reserve payments due under the Loan on that date.  In connection with the Company’s failure tomake the payments required under the Loan, the Borrower and Lender entered intoa Protective Advance Agreement dated September 11, 2009 (the “ProtectiveAdvance Agreement”).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. In accordance with the terms of theProtective Advance Agreement, operating funds are disbursed to the Company atthe Lenders sole discretion.  See Note 2 —Liquidity and Financial Position above and “Description of Certain Indebtedness”below which are hereby incorporated by reference.

 

As the Company iscurrently operating under the terms of the Protective Advance Agreement, ourprimary remaining cash requirements for 2009 are expected to include (i) operatingexpenses as incurred in the normal course of continuing operations (includingunpaid capital expenditures, and (ii) approximately $1.7 million inpayments to Northwind under the Energy Services Agreement.

 

Substantially all of theCompany’s debt is an $860 million commercial mortgage which has two remainingone year extension options available (the second and third extensionoptions).  As a condition to exercisingeach of the second and third extension options, the Borrower must replenish theInterest Reserve Account (as defined in the Loan Agreement) to an amountsufficient to achieve a Debt Service Coverage Ratio (as defined in the LoanAgreement) of 1.05:1.00  and 1.10:1:0,respectively, using the specified terms and parameters outlined in the LoanAgreement.  The Loan Agreement providesthat if the Company does not exercise the second extension option, the Loanmatures on December 9, 2009.  At December 31,2008, the Loan was classified as a non current liability in the accompanyingfinancial statements based on the Company’s intent and ability to exercise thesecond extension option. Operating income for the first six months of 2009 wasnot sufficient to demonstrate that the Company would generate sufficient cashflow from operations to meet the conditions set forth to exercise the secondextension option.  Accordingly, the Loanwas reclassified to a current liability as of June 30, 2009 and in theaccompanying financial statements.

 

There can be no assurancethat an agreement will be reached with the Lender, that the Lender will notexercise its rights to obtain ownership of the PH Resort, will agree to modifythe Loan Agreement or will make adequate funds available under the ProtectiveAdvance Agreement.  Additionally, therecan be no assurance that we have accurately estimated our liquidity needs, orthat we will not experience unforeseen events that may materially increase ourneed for liquidity to fund our operations or capital expenditure programs ordecrease the amount of cash generated from our operations.

 

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***Descriptionof Certain Indebtedness***

 

*Loan Agreement*

* *

On November 30, 2006,OpBiz and PH Fee Owner (collectively the “Borrower”) entered into the LoanAgreement (the “Loan Agreement”) with Column Financial, Inc. (the “Lender”)for a mortgage loan in the principal amount of up to $820 million.  After the close of the initial LoanAgreement, the Loan was syndicated and is currently held by a consortium oflenders.  KeyBank Real Estate Capitalacts as master servicer for the Lender group. The Loan Agreement provided for an initial disbursement in the amount of$759.7 million and a future funding facility in the amount of up to$60.3 million. On July 17, 2007, the Borrower and the Lender enteredinto an amendment (the “Amendment”) to the Loan Agreement. The Amendmentprovided for the immediate funding to Borrower of the balance of future fundingthat was available under the Loan Agreement and established an additionalfuture 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 ofthe Loan was December 9, 2008 with three one year extension optionsavailable, subject to payment of a fee (applicable to the second and thirdextensions only) and the Borrower’s compliance with the requirements for anextension outlined in the Loan Agreement. The Borrower exercised the firstavailable extension option thereby extending the maturity date to December 9,2009. Interest on the Loan is payable monthly and accrues at the 30 dayLIBOR rate plus 3.25% with a .25% ticking fee on available but un-advancedfuture funding. Interest on Future Funding Tranche B is payable monthlyand accrues at the 30 day LIBOR rate plus 7.50% with a 1.50% ticking feeon available but un-advanced funds. The Loan does not require amortizationduring the initial term or, provided certain EBITDA thresholds are met, duringthe extension periods. The Loan requires that the Borrower establish andmaintain certain reserves including a reserve for completion of the renovationproject, a reserve for projected interest shortfalls, a reserve for payment ofproperty taxes and insurance and a reserve for on-going furniture, fixture andequipment purchases or property improvements. The Loan restricts the Borrower’sability to spend excess cash flow until certain debt service coverage ratiosare met.

 

On May 7, 2009, theBorrower, Planet Hollywood International, Inc., Planet Hollywood (RegionIV), Inc., Planet Hollywood Memorabilia, Inc., Trophy HunterInvestments, Ltd., Bay Harbour 90-1, Ltd., Bay Harbour Master Ltd., DouglasTeitelbaum, Robert Earl, and Wells Fargo Bank, N.A., as Trustee for The CreditSuisse First Boston Mortgage Securities Corp. Commercial Mortgage Pass-ThroughCertificates, Series 2007-TFL2 entered into a third modification (the “Modification”)of the Loan Agreement.  The Modificationprovides for up to $9 million of the Interest Reserve Fund (as defined in theLoan Agreement) to be available to Borrower for monthly debt service.

 

The Loan Agreement has tworemaining one year extension options available (the second and third extensionoptions).  As a condition to exercisingeach of the second and third extension options, the Borrower must replenish theInterest Reserve Account (as defined in the Loan Agreement) to an amountsufficient to achieve a Debt Service Coverage Ratio (as defined in the LoanAgreement) of 1.05:1.00  and 1.10:1:0,respectively, using the specified terms and parameters outlined in the LoanAgreement.  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).  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 current liability in the accompanyingfinancial statements based on the Company’s intent and ability to exercise thesecond extension option. Operating income in the first six months of 2009 wasnot sufficient to demonstrate that the Company would generate sufficient cashflow from operations to meet the conditions set forth in the Modification(described above) in order to exercise the second extension option.  Accordingly, the Loan was reclassified to acurrent liability as of June 30, 2009 and in the accompanying financialstatements.

 

On September 9, 2009, the Company did not havesufficient available cash to make the interest and reserve payments due underthe Loan on that date.  In connectionwith the Company’s failure to make the payments required under the Loan, theBorrower and Lender entered into a Protective Advance Agreement dated September 11,2009 (the “Protective Advance Agreement”). The Protective Advance Agreement acknowledges that there has been an Eventof Default (as defined in the Loan Agreement) and a 

 

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Specified Event (as defined in the Modification (as definedin Note 6 — Long-Term Debt), that the Loan is due and payable and outlines theconditions by which cash advances may be made to the Company in the solediscretion of the Lender so that it may continue operating.  The Company is continuing discussions withthe Lender in this regard. Cash advances under the Protective Advance Agreementare made first from available operating cash generated by the Borrower fromcurrent operations and held in reserve by the Lenders.  To the extent operating cash is not sufficientto cover necessary operating expenses, additional advances made under theProtective Advance Agreement will be added to the total debt outstanding underthe Loan (the “Protective Advances”).  Todate, the Lender has made no Protective Advances to the Company.  The Loan Agreement is a commercial mortgage.As such, the Loan Agreement as amended and the EquityCo subsidiary corporatestructures and operating agreements (including bankruptcy remote entities)restrict the ability of OpBiz and PH Fee Owner to file a voluntary petition forrelief under the bankruptcy code.  Asfurther outlined in the Modification dated May 7, 2009 within ten daysafter 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 real property comprising the PH Resort;(ii) one or more assignments conveying membership interests of MezzCo inOpBiz; and (iii) all other documents and instruments to Lender that may berequired to enable Lender to obtain title insurance coverage with respect tofee simple property.  In order to permitthe Lender to foreclose on the hotel and casino comprising the PH Resortseparately and to allow OpBiz to continue to operate the casino after such aforeclosure (should the Lender choose to do so), title to the PH Resort wastransferred from OpBiz to PH Fee Owner. OpBiz and PH Fee Owner then entered into a lease pursuant to which OpBizagreed to continue to operate the hotel in the manner it had been and to paymonthly rent of approximately $916,000. OpBiz and PH Fee Owner also entered into a lease pursuant to which OpBizagreed to continue to operate the casino in the manner it had been and to pay monthly rent of approximately$1,160,000.  Additionally, as detailed inNote 6 — Long-Term Debt, in connection with the execution of the Loan, theGuarantors executed guarantees against certain actions including a voluntary orcollusive bankruptcy filing which were ratified in the Protective AdvanceAgreement.

 

After the occurrence of the Event of Default, intereston the Loan accrues at the Default Rate (as defined in the LoanAgreement).  The Lender, in its solediscretion, has applied certain reserve funds in the amount of $17,225,000 tothe outstanding principal balance of the Loan and has collected interest.  The balance of the Loan after application ofthe reserve funds is $842,775,000 as presented in the accompanying condensedconsolidated financial statements. Pending the on-going negotiations, the Company is recording interestexpense on the $860 million Loan balance at the default rate of interest (4%over the Applicable Interest Rate as defined in the Loan Agreement) as calledfor in the Loan Agreement once an Event of Default has occurred.  The Lender has collected interest for themonth of September in the amount of $680,000.

 

Although an Event of Default has been acknowledged,the Lender has not at this time demanded payment of the Loan nor pursued its’rights and remedies. The Company will continue to discuss solutions with theLender and operate under the Protective Advance Agreement until a resolutioncan be reached.  An Event of Defaultallows the Lender to foreclose on and take ownership of the PH Resort whichwould result in the Lender taking title to all assets of the property, a changeof control of the PH Resort and transfer of substantially all of the assets ofBH/RE.  However the Lender has notexercised it’s rights in this regard and the Company is involved in discussionswith the Lender that could result in a foreclosure on the property and atransfer of the deed (as described above), a transfer of a portion of some orall of the current equity of the Company or a modification to the Loan.

 

There can be no assurance that an agreement will bereached with the Lender, that the Lender will not exercise its rights to obtainownership of the PH Resort, will agree to modify the Loan Agreement or willmake adequate funds available under the Protective Advance Agreement.  Additionally, there can be no assurance thatwe 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.

 

In connection with the Loan,the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of BayHarbour Management, execute and deliver a certain Guaranty (as describedbelow). In exchange for Trophy Hunter Investments, Ltd., Bay Harbour90-1, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”) executingthe Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy HunterInvestments, Ltd. and Bay Harbour Master Ltd. a fee equal to$1,500,000 per year. The fee is accrued as of September 30, 2009 and onlypayable once OpBiz hits certain debt service coverage ratios defined in theLoan Agreement.

 

In connection with the Loan,the Guarantors entered into a Guaranty, dated November 30, 2006 (the “Guaranty”),pursuant to which the Guarantors agreed to indemnify the Lender against lossesrelated to certain prohibited actions of the Borrower and guarantied fullrepayment of the Loan in the case of a voluntary or collusive bankruptcy of theBorrower, a transfer of the PH Resort or interests in the Borrower in violationof the Loan Agreement and if the Borrower fails to maintain its status as abankruptcy remote entity and as a result sees its assets consolidated withthose of an affiliate in a bankruptcy. The liability of the Guarantors iscapped at $15,000,000 per entity and $30,000,000 in the aggregate, however thiscap does not apply to (i) liability arising from events, acts orcircumstances actually committed or brought about by the willful acts of any ofthe Guarantors and (ii) the extent of any benefit received by any of theGuarantors as a result of the acts giving rise to the liability under theGuaranty. Each of Douglas Teitelbaum 

 

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and Robert Earl executed and delivered guarantiessubstantially the same as that delivered by the Guarantors, however theliability of each of them was limited to (i) liability arising fromevents, acts or circumstances actually committed or brought about by willfulacts by him and (ii) the extent of any benefit received by him as a resultof the acts giving rise to the liability under the Guaranty.

 

In connection with the Loan,the Guarantors and Robert Earl executed and delivered a Completion Guaranty,dated November 30, 2006, pursuant to which they jointly and severallyguarantied the completion of the renovation of the PH Resort and payment of allcosts associated therewith. The liability under the Completion Guaranty iscapped at the greater of (a) $35,000,000 and (b) only in the casethat cost overruns for the renovation exceed $15,000,000, 24% of the thenunpaid costs of the completion of the renovation.

 

In addition, in connectionwith the Loan Agreement, MezzCo effected a refinancing of the SecuritiesPurchase Agreement, dated August 9, 2004 (the “Securities PurchaseAgreement”), among MezzCo and the Investors (as named in the SecuritiesPurchase Agreement), pursuant to which MezzCo issued to the Investors (i) 16%senior subordinated secured Notes in the original aggregate principal amount of$87 million, and (ii) Warrants for the purchase (subject to certainadjustments as provided for therein) of membership interests of MezzCo,representing 17.5% of its fully diluted equity. Loan proceeds were used toredeem in full the Notes.

 

In connection with therefinancing of the Securities Purchase Agreement and redemption of the Notes,the Restructuring Parties (as named in the Restructuring Agreement) enteredinto the Restructuring Agreement, dated November 30, 2006 (the “RestructuringAgreement”), pursuant to which the Restructuring Parties terminated in full theSecurities Purchase Agreement, the Subordination Agreement, dated as of August 31,2004, among MezzCo, OpBiz, the Senior Agent and the Investors, the PledgeAgreement, dated August 9, 2006 (the “Pledge Agreement”), 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 termsof the Restructuring Agreement, the Investors and EquityCo, MezzCo and OpBizentered into a Release, Consent and Waiver Agreement, pursuant to which theInvestors (i) released OpBiz from its guaranteed obligations, under thatcertain Guaranty Agreement, dated as of August 9, 2004 and executed byOpBiz in favor of the Investors and the collateral agent; (ii) releasedMezzCo from its pledge of the collateral, under the Pledge Agreement, theInvestors released their security interest, as defined in that certain SecurityAgreement, as amended by that certain Amendment to Security Agreement, in eachcase dated as of August 9, 2004 and executed by the Company in favor ofthe collateral agent; (iii) released and terminated the Deed of Trust,dated as of August 9, 2004 and executed by MezzCo in favor of the Trustee(as defined therein) for the benefit of the collateral agent; (iv) releasedand terminated the Investors’ security interest in the securities account,provided for that certain Securities Account Control Agreement, dated as of August 9,2004 and executed by the Company, the collateral agent and Wells Fargo Bank,N.A.

 

Additionally, MezzCo,EquityCo, and the Investors entered into an Amended and Restated InvestorRights Agreement, dated November 30, 2006 (the “A&R Investor RightsAgreement”), to amend and restate the original Investor Rights Agreements amongthe parties thereto, dated August 9, 2004.

 

Pursuant to theRestructuring Agreement, the Restructuring Parties agreed to amend the Warrantsby issuing Amended and Restated Warrants to Purchase Membership Interests ofMezzCo (the “A&R Warrants”) to the Investors upon approval by the Nevadagaming authorities. The A&R Warrants will be exercisable at any time,subject to the approval of the Nevada gaming authorities, at a purchase priceof $0.01 per unit. Subject to the approval of the Nevada gaming authorities,the warrants may be exercised to purchase either voting or non-votingmembership interests of MezzCo or a combination thereof through the expirationdate of December 9, 2012. In addition to customary anti-dilutionprotections, the number of units representing MezzCo membership interestsissuable upon exercise of the A&R Warrants may be increased from time totime 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 theRestructuring Agreement, EquityCo entered into a Guaranty Agreement, dated November 30,2006 (the “Guaranty Agreement”), in favor of the Investors and the CollateralAgent, pursuant to which EquityCo has guaranteed the obligation of MezzCo topay the redemption price under the A&R Warrants prior to expiration and anyindebtedness arising under the Put Note (as defined in the A&R Warrants).

 

Pursuant to the PledgeAgreement, EquityCo has, subject to approval of the Nevada gaming authorities,pledged and granted a first priority security interest to the Collateral Agentfor the ratable benefit of the Investors in the membership interests ofEquityCo in MezzCo. The Pledge Agreement, once approved, will secure the fullpayment of the Put Right (as defined in the A&R Warrants), including anyobligations under the Put Note.

 

On November 30, 2006, MezzCo entered into anIndemnification Agreement with the Investors, pursuant to which MezzCo agreedto indemnify the Investors for any losses caused by (i) lack of gamingapprovals for the issuance of the A&R Warrants, (ii) lack of gamingapproval for the granting of a lien by EquityCo in the equity interests inMezzCo, as described in the Pledge 

 

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Agreement,and (iii) the inability of the Investors to exercise the Warrants until July 1,2007.

 

*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 3—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 ofthe Securities 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 and regulatoryinvestigations, and licensing and other regulatory risks, could cause ouractual results to differ materially from those expressed in or implied by ourforward-looking statements. Further information on potential factors whichcould affect our financial condition, results of operations and businessincluding, without limitation, the expansion, development and acquisitionprojects, legal proceedings and employee matters are included in “Item 1A—RiskFactors” of BH/RE’s Annual Report on Form 10-K filed with the SEC on March 31,2009. See *Liquidity and Capital Resources* abovefor additional risks related to our substantial indebtedness.  Readers are cautioned not to place unduereliance on any forward-looking statements, which speak only as of the date thereof.We undertake no obligation to publicly release any revisions to suchforward-looking statements to reflect events or circumstances after the datehereof.

 

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

## *** ***

Market risk is the risk of loss arising from adverse changes in marketrates and prices, such as interest rates, foreign currency exchange rates andcommodity prices. Our primary exposure to market risk is interest rate riskassociated with our long-term debt. We pay interest on the amount outstandingunder the Loan Agreement monthly, in cash, at the London Inter-Bank OfferedRate, or LIBOR, plus 3.25% with a .25% ticking fee on available but un-advancedFuture Funding. An increase of one percentage point in the average interest rateapplicable to the variable rate debt outstanding at September 30, 2009would increase the annual interest cost by approximately $8.6 million.

 

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## ***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 September 30,2009. Based on their evaluation, our principal executive and principalfinancial officers concluded that our disclosure controls and procedures wereeffective as of September 30, 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 September 30,2009, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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# **PART II — OTHER INFORMATION**

# ** **

## ***ITEM1A. RISK FACTORS***

## *** ***

SeeManagement’s Discussion and Analysis of Financial Condition and Results ofOperations - Liquidity and Capital Resources above for additional risks relatedto our substantial indebtedness.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

See Note 2 to thecondensed consolidated financial statements — Liquidity and Financial Positionand Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources; Description of CertainIndebtedness — Loan Agreement, which are incorporated by reference to this Item3.

 

**ITEM5.  OTHER INFORMATION**

 

See description of theProtective Advance Agreement in Note 2 to the condensed consolidated financialstatements, which is incorporated by reference to this Item 5.

 

## ***ITEM6.***EXHIBITS

 
| 10.1   |   | Protective Advance Agreement dated September 11, 2009 by and  among Wells Fargo Bank, N.A., as trustee for the Credit Suisse First Boston  Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates,  Series 2007-TFL2, PH Fee Owner LLC,OpBiz, L.L.C., Planet Hollywood  International, Inc., Planet Hollywood (Region IV), Inc., Planet  Hollywood Memorabilia, Inc., Trophy Hunter Investments, Ltd., Bay  Harbour 90-1, Ltd., Bay Harbour Master Ltd., Douglas Teitelbaum, Robert Earl,  MezzCo, L.L.C. and TSP Owner LLC. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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.                         |
|------------------------|---------------------------------------|
|                   |                                  |
|                   |                                  |
| November 16, 2009 | By:                                   | /S/ Donna Lehmann |
|                   | Donna Lehmann                         |
|                   | Treasurer and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Protective Advance Agreement dated September 11, 2009 by and  among Wells Fargo Bank, N.A., as trustee for the Credit Suisse First Boston  Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates,  Series 2007-TFL2, PH Fee Owner LLC,OpBiz, L.L.C., Planet Hollywood  International, Inc., Planet Hollywood (Region IV), Inc., Planet  Hollywood Memorabilia, Inc., Trophy Hunter Investments, Ltd., Bay  Harbour 90-1, Ltd., Bay Harbour Master Ltd., Douglas Teitelbaum, Robert Earl,  MezzCo, L.L.C. and TSP Owner LLC. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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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