Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                         |
|--------------------------------------------------------|
|                                                   |   |   |
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                             |
| **For the quarterly period ended June 30,  2009** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from             to             **

 

**Commission File Number 000-50689**

 

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

(Exact Name of Registrant as Specified in itsCharter)

 

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

 

**(702) 785-5555**

(Registrant’s Telephone Number, IncludingArea Code)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

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

 

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

 

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

 

 

 

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

 

Index

 
| PART I—  FINANCIAL INFORMATION | 3                                                                                           |
|------------------------------------------|---------------------------------------------------------------------------------------------|
|                                     |                                                                                        |   |
| ITEM 1.                                  | FINANCIAL STATEMENTS:                                                                       | 3 |
|                                     |                                                                                        |   |
|                                     | Condensed  Consolidated Balance Sheets (Unaudited)                                          | 3 |
|                                     |                                                                                        |   |
|                                     | Condensed  Consolidated Statements Of Operations (Unaudited)                                | 4 |
|                                     |                                                                                        |   |
|                                     | Condensed  Consolidated Statements Of Cash Flows (Unaudited)                                | 6 |
|                                     |                                                                                        |   |
|                                     | Notes To Condensed Consolidated Financial Statements  (Unaudited)                           | 7 |
|                                     |                                                                                        |   |
| ITEM 2.                                  | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 23 |
|                                     |                                                                                        |   |
| ITEM  3.                                 | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 33 |
|                                     |                                                                                        |   |
| ITEM 4T.                                 | CONTROLS AND  PROCEDURES                                                                    | 34 |
|                                     |                                                                                        |   |
| PART II  — OTHER INFORMATION:  | 35                                                                                          |
|                                     |                                                                                        |   |
| ITEM 1A.                                 | RISK FACTORS                                                                                | 35 |
|                                     |                                                                                        |   |
| ITEM 6.                                  | EXHIBITS                                                                                    | 35 |
|                                     |                                                                                        |   |
| SIGNATURES                               | 36                                                                                          |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands)**

 
| ** **                                           | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                               |       |                    |       |                        |       |
| Current assets:                                      |       |                    |       |                        |       |
| Cash and cash equivalents                            |       | $                       | 16,093     |                        | $          | 23,881 |   |
| Receivables, net                                     |       | 20,072                  |       | 18,717                      |       |
| Inventories                                          |       | 2,223                   |       | 2,498                       |       |
| Prepaid expenses                                     |       | 5,125                   |       | 7,935                       |       |
| Deposits and other current assets                    |       | 164                     |       | 164                         |       |
| Restricted cash and cash equivalents                 |       | 35,437                  |       | 29,366                      |       |
| Total current assets                                 |       | 79,114                  |       | 82,561                      |       |
|                                                 |       |                    |       |                        |       |
| Property and equipment, net                          |       | 559,105                 |       | 578,043                     |       |
| Restricted cash and cash equivalents                 |       | 6,351                   |       | 11,284                      |       |
| Land receivable                                      |       | 16,049                  |       | 16,918                      |       |
| Other assets, net                                    |       | 681                     |       | 244                         |       |
| Total assets                                         |       | $                       | 661,300    |                        | $          | 689,050 |   |
|                                                 |       |                    |       |                        |       |
| LIABILITIES AND MEMBERS’  EQUITY (DEFICIT)      |       |                    |       |                        |       |
|                                                 |       |                    |       |                        |       |
| Current liabilities:                                 |       |                    |       |                        |       |
| Current portion of long-term debt                    |       | $                       | 862,118    |                        | $          | 2,001 |   |
| Accounts payable                                     |       | 4,065                   |       | 3,549                       |       |
| Accrued payroll and related                          |       | 10,423                  |       | 10,786                      |       |
| Accrued interest payable                             |       | 6,747                   |       | 6,827                       |       |
| Accrued taxes                                        |       | 2,468                   |       | 2,422                       |       |
| Accrued expenses                                     |       | 8,546                   |       | 8,881                       |       |
| Deposits                                             |       | 4,395                   |       | 4,587                       |       |
| Other current liabilities                            |       | 4,022                   |       | 4,512                       |       |
| Due to affiliates                                    |       | 3,523                   |       | 1,773                       |       |
| Total current liabilities                            |       | 906,307                 |       | 45,338                      |       |
|                                                 |       |                    |       |                        |       |
| Long-term debt, less current portion                 |       | 24,481                  |       | 885,561                     |       |
| Other long-term liabilities                          |       | 1,537                   |       | 1,537                       |       |
| Total liabilities                                    |       | 932,325                 |       | 932,436                     |       |
|                                                 |       |                    |       |                        |       |
| Members’ equity (deficit):                      |       |                    |       |                        |       |
| Equity                                               |       | 34,200                  |       | 34,200                      |       |
| Accumulated deficit                                  |       | (277,984                | )          | (253,493                    | )          |
| BH/RE, L.L.C. deficit                                |       | (243,784                | )          | (219,293                    | )          |
| Noncontrolling members’ deficit                 |       | (27,241                 | )          | (24,093                     | )          |
| Total members’ equity (deficit)                 |       | (271,025                | )          | (243,386                    | )          |
| Total liabilities and members’ equity (deficit) |       | $                       | 661,300    |                        | $          | 689,050 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(amounts in thousands)**

 
| ** **                                       | ** ** | **Three Months  Ended  June 30, 2009** | ** ** | **Three Months  Ended  June 30, 2008** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**                                       | ** ** | **(unaudited)**                                       | ** ** |
|                                             |       |                                                  |       |                                                  |       |
| Operating revenues:                              |       |                                                  |       |                                                  |       |
| Casino                                           |       | $                                                     | 28,336     |                                                  | $          | 30,965 |   |
| Hotel                                            |       | 22,839                                                |       | 30,363                                                |       |
| Food and beverage                                |       | 12,700                                                |       | 13,781                                                |       |
| Other                                            |       | 3,318                                                 |       | 4,071                                                 |       |
| Gross revenues                                   |       | 67,193                                                |       | 79,180                                                |       |
| Promotional allowances                           |       | (6,606                                                | )          | (6,954                                                | )          |
| Net revenues                                     |       | 60,587                                                |       | 72,226                                                |       |
|                                             |       |                                                  |       |                                                  |       |
| Operating costs and expenses:                    |       |                                                  |       |                                                  |       |
| Casino                                           |       | 18,715                                                |       | 18,980                                                |       |
| Hotel                                            |       | 9,448                                                 |       | 10,764                                                |       |
| Food and beverage                                |       | 8,870                                                 |       | 9,614                                                 |       |
| Other                                            |       | 466                                                   |       | 765                                                   |       |
| Selling, general and administrative              |       | 17,313                                                |       | 21,038                                                |       |
| Depreciation and amortization                    |       | 10,212                                                |       | 9,215                                                 |       |
|                                             |       | 65,024                                                |       | 70,376                                                |       |
|                                             |       |                                                  |       |                                                  |       |
| Operating (loss) income                          |       | (4,437                                                | )          | 1,850                                                 |       |
|                                             |       |                                                  |       |                                                  |       |
| Interest expense, net                            |       | (9,182                                                | )          | (16,203                                               | )          |
| Pre-tax loss                                     |       | (13,619                                               | )          | (14,353                                               | )          |
| Provision for income taxes                       |       | —                                                |       | —                                                |       |
| Net loss including noncontrolling interest       |       | (13,619                                               | )          | (14,353                                               | )          |
| Net loss attributable to noncontrolling interest |       | (1,551                                                | )          | (2,153                                                | )          |
| Net loss attributable to BH/RE, L.L.C.           |       | $                                                     | (12,068    | )                                                     | $          | (12,200 | ) |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

 
| ** **                                       | ** ** | **Six Months  Ended  June 30, 2009** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)**                                     | ** ** |
|                                             |       |                                                |       |                                                |       |
| Operating revenues:                              |       |                                                |       |                                                |       |
| Casino                                           |       | $                                                   | 53,687     |                                                | $          | 63,312 |   |
| Hotel                                            |       | 45,598                                              |       | 61,316                                              |       |
| Food and beverage                                |       | 24,400                                              |       | 28,038                                              |       |
| Other                                            |       | 6,198                                               |       | 7,853                                               |       |
| Gross revenues                                   |       | 129,883                                             |       | 160,519                                             |       |
| Promotional allowances                           |       | (12,221                                             | )          | (14,300                                             | )          |
| Net revenues                                     |       | 117,662                                             |       | 146,219                                             |       |
|                                             |       |                                                |       |                                                |       |
| Operating costs and expenses:                    |       |                                                |       |                                                |       |
| Casino                                           |       | 36,130                                              |       | 39,400                                              |       |
| Hotel                                            |       | 18,849                                              |       | 21,330                                              |       |
| Food and beverage                                |       | 17,507                                              |       | 18,683                                              |       |
| Other                                            |       | 922                                                 |       | 1,048                                               |       |
| Selling, general and administrative              |       | 33,016                                              |       | 40,012                                              |       |
| Depreciation and amortization                    |       | 20,396                                              |       | 18,016                                              |       |
|                                             |       | 126,820                                             |       | 138,489                                             |       |
|                                             |       |                                                |       |                                                |       |
| Operating (loss) income                          |       | (9,158                                              | )          | 7,730                                               |       |
|                                             |       |                                                |       |                                                |       |
| Interest expense, net                            |       | (18,481                                             | )          | (34,094                                             | )          |
| Pre-tax loss                                     |       | (27,639                                             | )          | (26,364                                             | )          |
| Provision for income taxes                       |       | —                                              |       | —                                              |       |
| Net loss including noncontrolling interest       |       | (27,639                                             | )          | (26,364                                             | )          |
| Net loss attributable to noncontrolling interest |       | (3,148                                              | )          | (3,955                                              | )          |
| Net loss attributable to BH/RE, L.L.C.           |       | $                                                   | (24,491    | )                                                   | $          | (22,409 | ) |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 
| ** **                                                                                 | ** ** | **Six Months  Ended  June 30, 2009** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)**                                     | ** ** |
|                                                                                       |       |                                                |       |                                                |       |
| Cash flows from operating activities:                                                      |       |                                                |       |                                                |       |
| Net loss including noncontrolling interest                                                 |       | $                                                   | (27,639    | )                                                   | $          | (26,364 | ) |
| Adjustments to reconcile net loss to net cash  (used in) provided by operating activities: |       |                                                |       |                                                |       |
| Depreciation and amortization                                                              |       | 20,396                                              |       | 18,016                                              |       |
| Amortization of debt discount and issuance costs                                           |       | 155                                                 |       | 4,181                                               |       |
| Decease in value of interest rate cap                                                      |       | 26                                                  |       | —                                              |       |
| Changes in assets and liabilities:                                                         |       |                                                |       |                                                |       |
| Restricted cash and cash equivalents                                                       |       | (6,071                                              | )          | 4,423                                               |       |
| Receivables, net                                                                           |       | (1,355                                              | )          | 756                                                 |       |
| Inventories and prepaid expenses                                                           |       | 3,085                                               |       | 163                                                 |       |
| Deposits and other current assets                                                          |       | —                                              |       | 52                                                  |       |
| Due to affiliates                                                                          |       | 1,750                                               |       | 582                                                 |       |
| Accounts payable                                                                           |       | 516                                                 |       | (2,552                                              | )          |
| Accrued payroll and related                                                                |       | (363                                                | )          | (763                                                | )          |
| Accrued expenses                                                                           |       | (289                                                | )          | (1,196                                              | )          |
| Deposits and other current liabilities                                                     |       | (682                                                | )          | (618                                                | )          |
| Accrued interest                                                                           |       | (80                                                 | )          | (1,300                                              | )          |
| Long term deposits and other assets                                                        |       | 869                                                 |       | 2,244                                               |       |
| Net cash (used in) provided by operating activities                                        |       | (9,682                                              | )          | (2,376                                              | )          |
| Cash flows from investing activities:                                                      |       |                                                |       |                                                |       |
| Purchases of property and equipment                                                        |       | (1,458                                              | )          | (15,887                                             | )          |
| Restricted cash and cash equivalents                                                       |       | 4,933                                               |       | 17,281                                              |       |
| Net cash provided by investing activities                                                  |       | 3,475                                               |       | 1,394                                               |       |
| Cash flows from financing activities:                                                      |       |                                                |       |                                                |       |
| Payments under CUP financing                                                               |       | (963                                                | )          | (859                                                | )          |
| Financing fees                                                                             |       | (618                                                | )          | —                                              |       |
| Net cash used in financing activities                                                      |       | (1,581                                              | )          | (859                                                | )          |
| Cash and cash equivalents:                                                                 |       |                                                |       |                                                |       |
| (Decrease) in cash and cash equivalents                                                    |       | (7,788                                              | )          | (1,841                                              | )          |
| Balance, beginning of period                                                               |       | 23,881                                              |       | 21,468                                              |       |
| Balance, end of period                                                                     |       | $                                                   | 16,093     |                                                | $          | 19,627 |   |
|                                                                                       |       |                                                |       |                                                |       |
| Supplemental cash flow disclosures:                                                        |       |                                                |       |                                                |       |
| Cash paid for interest, net of capitalized  interest                                       |       | $                                                   | 18,633     |                                                | $          | 31,616 |   |

 

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

 

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

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

 

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

#####  

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

######  

BH/RE, 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 awholly owned subsidiary of MezzCo. PH Mezz I LLC (“PH Mezz I”)is a wholly owned subsidiary of PH Mezz II. PH Fee Owner LLC (“PH FeeOwner”) is a wholly owned subsidiary of PH Mezz I. TSP Owner LLC (“TSPOwner”) is a wholly owned subsidiary of PH Fee Owner. PH Mezz II, PHMezz I, PH Fee Owner and TSP Owner are Delaware limited liabilitycompanies structured as bankruptcy remote special purpose entities which,together with OpBiz, own and operate the Planet Hollywood Resort and Casino(the “PH Resort”). OpBiz is the licensed owner and operator of the gamingassets and leases the casino space and hotel space together with all hotelassets from PH Fee Owner. TSP Owner was formed to hold the parcel of land (the “TimeshareParcel”) that was sold to Westgate Resorts, LLP, a Florida limitedpartnership (“Westgate”) subject to the Timeshare Purchase Agreement, dated December 10,2004 and modified on September 10, 2007, between OpBiz and Westgate, asmore fully described in Note 3. As of June 30, 2009, each of Robert Earland Douglas P. Teitelbaum held 50% of BH/RE’s voting membership interests.BH/RE’s equity membership interests were held 43.27% by BH Casino andHospitality LLC I (“BHCH I”), 15.61% by BH Casino andHospitality LLC II (“BHCH II” and, together with BHCH I, “BHCH”)and 41.13% by OCS Consultants, Inc. (“OCS”).

 

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

 

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

 

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

######  

The accompanyingcondensed consolidated financial statements included herein have been preparedby the management of BH/RE (the “Company”), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with U.S. generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. BH/REbelieves that the disclosures are adequate to make the information presentednot misleading. In the opinion of management, all adjustments (which includenormal recurring adjustments) necessary for a fair presentation of the resultsfor the interim periods have been made. The results for the three and sixmonths ended June 30, 2009, are not indicative of results to be expectedfor the full fiscal year. These unaudited financial statements should be readin conjunction with the audited financial statements and notes thereto for theyear ended December 31, 2008, included in BH/RE’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 31, 2009.

 

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##### **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 in 2009. As ofJune 30, 2009, the Company had approximately $886.6 million of total debt. TheCompany is uncertain as to whether it will be able to generate cash flows fromoperations to fund its 2009 financial commitments and cannot provide anyassurances that it will be able to raise additional capital to fund itsanticipated expenditures in 2009. Substantially all of the Company’s debt is an $860 million commercialmortgage which has two remaining one year extension options available (thesecond and third extension options).  Asa condition to exercising each of the second and third extension options, theInterest Reserve Account (as defined in the Loan Agreement) must be replenishedto an amount sufficient to achieve a Debt Service Coverage Ratio (as defined inthe Loan Agreement) of 1.05:1.00  and1.10:1:0, respectively, using the specified terms and parameters outlined inthe Loan Agreement.  If the Company doesnot exercise the second extension option, the Loan will mature on December 9,2009.  At December 31, 2008, the Loan wasclassified as a non current liability in the accompanying financial statementsbased on the Company’s intent and ability to exercise the second extensionoption. Operating income for the six months ended June 30, 2009 is notsufficient to demonstrate that the Company will generate sufficient cash flowfrom operations to meet the conditions set forth to exercise the secondextension option.  Accordingly, the Loanhas been reclassified to a current liability in the accompanying financialstatements as of June 30, 2009.  

 

Absent a capitalcontribution from the members of EquityCo, an equity investment by thirdparties or a restructuring of the Loan Agreement, we do not believe that cashgenerated from operations, cash held in reserve by the lenders under the LoanAgreement and cash made available under the Modification to the Loan Agreementwill be adequate to meet the anticipated working capital and debt serviceobligations of OpBiz through December 31, 2009, including interest payments dueon the Loan for upcoming monthly payments. The Loan Agreement is a commercial mortgage. As such, the Loan Agreementas amended and the EquityCo subsidiary corporate structures and operatingagreements (including bankruptcy remote entities) restrict the ability of OpBizand PH Fee Owner to file a voluntary petition for relief under the bankruptcycode.  Additionally, as detailed in Note6 – Long-Term Debt, in connection with the execution of the Loan, theGuarantors executed guarantees against certain actions including a voluntary orcollusive bankruptcy filing.  Ascurrently structured, the Loan Agreement requires that a contributionsufficient to bring the Interest Reserve Account to a level sufficient to coverthe interest reserve test (as fully defined in the Loan Agreement) will berequired to exercise the next extension. If the Company is not able to exercise the second extension option, theLoan will mature on December 9, 2009. The Company is currently seeking a modification of the Loan Agreementand access to funds in the Interest Reserve Account, as well as additionalcapital investments to satisfy the requirements necessary to exercise thesecond extension option or otherwise defer maturity of the Loan and to providefunds to pay upcoming monthly interest payments.  Failure to maintain sufficient cash flow tofund operations within the parameters defined in the Loan, failure to replenishthe Interest Reserve Account or failure to pay any portion of the Debt (asdefined in the Loan Agreement) when due is each an Event of Default (as definedin the Loan Agreement) and a Specified Event (as defined in theModification).  As described in Note 6 –Long-Term Debt,  the Modificationrequires us, within ten days after Lender’s written demand after the occurrenceof a Specified Event to deliver to Lender (i) one or more deeds conveying feesimple title to all portions of the Property (as defined in the LoanAgreement); (ii) one or more assignments conveying membership interests ofMezzCo in OpBiz; and (iii) all other documents and instruments to Lender thatmay be required to enable Lender to obtain title insurance coverage withrespect to fee simple property.

 

There can be no assurancethe Lender will agree to modify the Loan Agreement, will make funds in theInterest Reserve Account available or that we will receive additional capitalfrom the members of EquityCo or third parties. Additionally, there can be no assurance that we have accuratelyestimated our liquidity needs, or that we will not experience unforeseen eventsthat may materially increase our need for liquidity to fund our operations orcapital expenditure programs or decrease the amount of cash generated from ouroperations.

 

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

#####  

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

######  

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

 

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

 

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

######  

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

 

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

######  

The balance in current restricted cash and cash equivalentsat June 30, 2009 and December 31, 2008 was approximately $35.4million and $29.4 million, respectively, which consists of reserves requiredunder the Loan Agreement (as defined in Note 6 to the CondensedConsolidated Financial Statements) including a reserve for payment of property taxes and insuranceand a reserve for on-going furniture, fixture and equipment purchases orproperty improvements. Long-term restricted cash and cash equivalents consistof approximately $6.4 million and $11.3 million at June 30, 2009 and December 31,2008, respectively, which primarily includes a reserve for interest shortfallsrequired under the Loan Agreement.

 

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

######  

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

 

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###### *Inventories*

######  

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

 

###### *Property and Equipment*

######  

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

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

 

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

 

Property and equipment arereviewed for impairment whenever indicators of impairment exist. If anindicator of impairment exists, the estimated future cash flows of the asset,on an undiscounted basis, are compared to the carrying value of the asset. Ifthe undiscounted cash flows exceed the carrying value, no impairment isindicated. If the undiscounted cash flows do not exceed the carrying value,then impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model.  As a result of the continuing economicdownturn and constrained capital markets which have negatively impacted the LasVegas economy and the Company’s operating results, the Company determined thatits property and equipment should be evaluated for impairment.  Using an estimate of undiscounted future cashflows, which exceeded the carrying value of property and equipment, the Companydetermined that no impairment should be recognized.  In assessing the recoverability of thecarrying value of property and equipment, we must make assumptions regardingestimated future cash flows and other factors. If these estimates or the related assumptions change, we may be requiredto record impairment charges.

 

*Derivative Instruments and Hedging Activities*

 

Pursuant to the refinancing of the Securities Purchase Agreement andthe terms of the Restructuring Agreement, the Restructuring Parties agreed toamend the warrants issued by MezzCo to purchase 17.5% of the fully dilutedequity in MezzCo. The warrants contain a net cash settlement, and therefore areaccounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*”. BothSFAS No. 133 “*Accounting for DerivativeInstruments and Hedging Activities*” and EITF 00-19 require thatthe warrants be recognized as liabilities, with changes in fair value affectingnet income. See “Note 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 Companyaccounts for its derivative activity in accordance with SFAS No. 133 andaccordingly, includes the rate cap agreement in other assets on theaccompanying balance sheet at fair value with any change in fair value beingrecorded in interest income or expense in the accompanying consolidatedstatements of operations.

 

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*Revenue Recognition andPromotional Allowances*

 

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

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Rooms                                 |       | $                                                   | 1,835      |                                              | $          | 1,713 |   | $ | 3,247 |   | $ | 3,280 |   |
| Food  and Beverage                    |       | 2,323                                               |       | 2,164                                             |       | 4,413 |   | 4,593 |   |
| Other                                 |       | 22                                                  |       | 14                                                |       | 30 |   | 22 |   |
| Total  cost of promotional allowances | ** ** | **$**                                               | **4,180**  | ** **                                        | **$**      | **3,891** | ** ** | **$** | **7,690** | ** ** | **$** | **7,895** | ** ** |

 

###### *Players’ Club Program*

######  

Players’ club membersearn points based on gaming activity. OpBiz accrues a liability for players’club points that can be redeemed for cash as the points are earned based onhistorical redemption percentages in accordance with the Emerging Issues TaskForce (“EITF”) consensus on Issue 01-9, “Accounting for Consideration Given bya Vendor to a Customer (Including a Reseller of the Vendor’s Products).”EITF 01-9 requires that sales incentives be recorded as a reduction ofrevenue; consequently, casino revenues are reduced by points earned through theplayers’ club loyalty program. In March 2009, the Company changed the structureof its players club to allow patrons who earn points to redeem those points forpromotional slot play and other non-cash incentives.  The total accrued liability related topotential cash awards redeemable under the players’ club program was $1.3 millionat June 30, 2009 and $2.2 million at December 31, 2008.

 

*Self-Insurance Accruals*

 

BH/RE is self-insured, upto certain limits, for costs associated with employee medical coverage. TheCompany accrues for the estimated expense of known claims, as well as estimatesfor claims incurred but not yet reported which totaled approximately$3.2 million at June 30, 2009 and $2.4 million at December 31,2008.

 

*Advertising Costs*

 

Advertisingcosts are expensed as incurred and included in selling, general and administrativecosts and expenses. Advertising costs totaled approximately $1.2 million and$2.1 million for the three and six months ended June 30, 2009,respectively, and $4.5 million and $6.9 million for the three and six monthsended June 30, 2008, respectively.

 

*IncomeTaxes*

 

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

 

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

 

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

 

The Company accounts forincome taxes in accordance with the provisions of  FASB Interpretation No. 48 *“Accounting for Uncertainty in Income Taxes — an interpretation of FASBNo. 109”*(“FIN 48”), which clarifies certain aspects ofaccounting for uncertain tax positions, including issues related to therecognition and measurement of those tax positions.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition. See Note 10 — Income Taxes.

 

*Timeshare Purchase Agreement*

 

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

 

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

 

Pursuant to the terms ofthe Timeshare Purchase Agreement, the purchase price of the land was$29.5 million. The Company was carrying the land at a value of$29.5 million. Accordingly, no gain on the sale of this land has beenrecognized in the accompanying financial statements. Westgate pays the Companya monthly fee equal to 9% of total timeshare sales. 50% of the fees receivedare used to pay the purchase price for the land and the remaining 50% isrecorded as income as received. As of June 30, 2009, the Company has areceivable balance for the sale of land of $18.7 million, $16.0 million ofwhich is classified as long-term and at December 31, 2008 the Company hasa receivable balance for the sale of land of $19.9 million,$16.9 million of which is classified as long-term in the accompanyingfinancial statements.

 

###### *Membership Interests*

######  

As of June 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 required pursuant to SFAS No. 128, “*Earnings PerShare,*” because management believes that such disclosures would notbe meaningful to the financial statement presentation.

 

*Recently Issued Accounting Pronouncements*

 

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

 

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

 

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

 

In May 2009, theFASB issued SFAS No. 165, *“Subsequent Events,”*which establishes general standards of accounting for and disclosure of eventsthat occur after the balance sheet date but before financial statements areissued or are available to be issued. SFAS No. 165 is effective for interimreporting periods ending after June 15, 2009. Management evaluated theactivity of BH/RE through August 14, 2009 (the issue date of the FinancialStatements) and concluded that no subsequent events have occurred that wouldrequire recognition in the Financial Statements or disclosure in the Notes tothe Financial Statements.

 

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

 

Receivables consist of the following (in thousands):

 
| ** **                                | ** ** | **June 30  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(unaudited)**        | ** ** | ** **                  | ** ** |
| Casino                                    |       | $                      | 16,870     |                        | $          | 13,584 |   |
| Hotel                                     |       | 6,329                  |       | 5,999                       |       |
| Land sale receivable                      |       | 18,689                 |       | 19,918                      |       |
| Other                                     |       | 4,595                  |       | 4,368                       |       |
|                                      |       | 46,483                 |       | 43,869                      |       |
| Long-term portion of land sale receivable |       | (16,049                | )          | (16,918                     | )          |
| Allowance for doubtful accounts           |       | (10,362                | )          | (8,234                      | )          |
| Receivables, net                          |       | $                      | 20,072     |                        | $          | 18,717 |   |

 

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

 

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

 
| ** **                         | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Land                               |       | $                       | 68,479     |                        | $          | 68,479 |   |
| Building and improvements          |       | 502,536                 |       | 502,305                     |       |
| Furniture, fixtures and  equipment |       | 127,427                 |       | 126,582                     |       |
| Construction in progress           |       | 847                     |       | 464                         |       |
|                               |       | 699,289                 |       | 697,830                     |       |
| Accumulated depreciation           |       | (140,184                | )          | (119,787                    | )          |
| Property and equipment,  net       |       | $                       | 559,105    |                        | $          | 578,043 |   |

 

Depreciation expense wasapproximately $10.2 million and $20.4 million for the three and six monthsended June 30, 2009, respectively, and $9.2 million and $18.0 million forthe three and six months ended June 30, 2008, respectively.

 

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

 

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

 
| ** **                                        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| $860 million Loan  Agreement                      |       | $                       | 860,000    |                        | $          | 860,000 |   |
| Northwind Aladdin  obligation under capital lease |       | 26,599                  |       | 27,562                      |       |
|                                              |       | 886,599                 |       | 887,562                     |       |
| Current portion of  long-term debt                |       | (862,118                | )          | (2,001                      | )          |
| Total long-term debt, net                         |       | $                       | 24,481     |                        | $          | 885,561 |   |

 

***LoanAgreement***

* *

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. TheLoan 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

 

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date to December 9, 2009. Interest on the Loanis payable monthly and accrues at the 30 day LIBOR rate (0.32% for the June 30,2009 interest payment) plus 3.25% with a .25% ticking fee on available butun-advanced future funding. Interest on Future Funding Tranche B ispayable monthly and accrues at the 30 day LIBOR rate plus 7.50% with a1.50% ticking fee on available but un-advanced funds. The Loan does not requireamortization during the initial term or, provided certain EBITDA thresholds aremet, during the extension periods. The Loan requires that the Borrowerestablish and maintain certain reserves including a reserve for completion ofthe renovation project, a reserve for projected interest shortfalls, a reservefor payment of property taxes and insurance and a reserve for on-goingfurniture, fixture and equipment purchases or property improvements. The Loanrestricts the Borrower’s ability to spend excess cash flow until certain debtservice coverage ratios are met.

 

On May 7, 2009, 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 existing Loan Agreement, dated November 30, 2006, between Borrowerand Column Financial, Inc. (the “Loan Agreement”).  The Modification provides for up to $9million of the Interest Reserve Fund (as defined in the Loan Agreement) to beavailable to Borrower for monthly debt service.

 

The Loan Agreement has 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 the InterestReserve Account is an Event of Default (as defined in the Loan Agreement) and aSpecified Event (as defined in the Modification).  A Specified Event means the occurrence ofcertain events, including (a) failure of the Borrower to make certainpayments as required by the Modification or the Loan Agreement; (b) certainEvents of Default under the Loan Agreement; and (c) an Event of Defaultunder the Modification resulting from failure to pay amounts owed to Lender,failure to pay certain taxes, the incurrence of additional indebtedness inviolation of the terms of the Loan Agreement, and the imposition of any lienencumbering the collateral of the loan (for the purpose of a Specified Event,an Event of Default means a Default (as defined in the Loan Agreement) thatcontinues after the applicable notice and cure or grace periods under the termsof the Loan Agreement and related documents).

 

At December 31, 2008,the Loan was classified as a non current liability in the accompanyingfinancial statements based on the Company’s intent and ability to exercise thesecond extension option. Operating income for the three and six months ended June 30,2009 is not sufficient to demonstrate that the Company will generate sufficientcash flow from operations to meet the conditions set forth in the Modification(described above) in order to exercise the second extension option.  Accordingly, the Loan has been reclassifiedto a current liability in the accompanying financial statements as of June 30,2009.

 

As further outlined in theModification dated May 7, 2009 within ten days after Lender’s writtendemand after the occurrence of a Specified Event as determined by Lender in itssole but good faith discretion, Borrower, MezzCo and TSP Owner LLC shalldeliver to Lender (i) one or more deeds conveying fee simple title to allportions of the Property (as defined in the Loan Agreement); (ii) one ormore assignments 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. Inorder to permit the Lender to foreclose on the Hotel and Casino separately andto allow OpBiz to continue to operate the casino after such a foreclosure(should the Lender choose to do so), title to the real property comprising theHotel and Casino (the “Property”) was transferred from OpBiz to PH Fee Owner.OpBiz and PH Fee Owner then entered into a lease pursuant to which OpBiz agreedto continue to operate the Hotel in the manner it had been and to pay monthlyrent of approximately $916,000. OpBiz and PH Fee Owner also entered into alease pursuant to which OpBiz agreed to continue to operate the Casino in themanner it had been and to pay monthly rent of approximately $1,160,000.

 

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 June 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 Property 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 is cappedat $15,000,000 per entity and $30,000,000 in the aggregate, however this capdoes not apply to (i) liability arising from events, acts or circumstancesactually committed or brought about by the willful acts of any of theGuarantors and (ii) the extent of any benefit

 

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received by any of the Guarantors as a result of theacts giving rise to the liability under the Guaranty. Each of DouglasTeitelbaum and Robert Earl executed and delivered guaranties substantially thesame as that delivered by the Guarantors, however the liability of each of themwas limited to (i) liability arising from events, acts or circumstancesactually committed or brought about by willful acts by him and (ii) theextent of any benefit received by him as a result of the acts giving rise tothe 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 Property 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, among MezzCo and the Investors,pursuant to which MezzCo issued to the Investors (i) 16% seniorsubordinated 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.

 

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In connection with therefinancing of the Securities Purchase Agreement and redemption of the Notes,the Restructuring Parties entered into the Restructuring Agreement, dated November 30,2006, 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, among MezzCo and the Collateral Agent,and the Guaranty, dated August 9, 2004, made by OpBiz to the Investors,and amended certain other existing agreements, as described 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 that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of thecollateral agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executedby the Company in favor of the collateral agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee (as defined therein) for the benefit of thecollateral agent; (iv) released and terminated the Investors’ securityinterest in the securities account, provided for that certain SecuritiesAccount Control Agreement, dated as of August 9, 2004 and executed by theCompany, the collateral agent and Wells Fargo Bank, N.A.

 

Additionally, MezzCo,EquityCo, and the Investors entered into 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).

 

EquityCo and the CollateralAgent also entered into a Pledge Agreement, dated November 30, 2006 (the “PledgeAgreement”), pursuant to which EquityCo has, subject to approval of the Nevadagaming authorities, pledged and granted a first priority security interest tothe Collateral Agent for the ratable benefit of the Investors in the membershipinterests of EquityCo in MezzCo. The Pledge Agreement, once approved, willsecure the full payment of the Put Right (as defined in the A&R Warrants),including any obligations under the Put Note.

 

On November 30, 2006,MezzCo entered into an Indemnification Agreement with the Investors, pursuantto which MezzCo agreed to indemnify the Investors for any losses caused by (i) lackof gaming approvals for the issuance of the A&R Warrants, (ii) lack ofgaming approval for the granting of a lien by EquityCo in the equity interestsin MezzCo, as described in the Pledge Agreement, and (iii) the inabilityof 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

 

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by the pro-rataassignment to Westgate as payments are made. Payments under the Northwind agreement made by OpBiz total approximately$292,000 per month.

 

**7.****                                     ****MEMBERSHIP INTERESTS**

 

The non-voting interests inBH/RE are owned 43.27% by BHCH I, 15.61% by BHCH II and 41.13% by OCS and thevoting interests are owned 50% by Douglas P. Teitelbaum and 50% by Robert Earl.BHCH is controlled by Mr. Teitelbaum, managing principal of Bay HarbourManagement, an investment management firm. BHCH was formed by Mr. Teitelbaumfor the purpose of holding investments in BH/RE by funds managed by Bay HarbourManagement. OCS is wholly-owned and controlled by Mr. Earl and holds Mr. Earl’sinvestment in BH/RE. Mr. Earl is the founder, chairman and chief executiveofficer of Planet Hollywood and Mr. Teitelbaum is a director of PlanetHollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’schildren and affiliates of Bay Harbour Management, own substantially all of theequity of Planet Hollywood.

 

BH/RE owns 88.61% of themembership interests in EquityCo and Starwood owns 11.39%. OpBiz is a whollyowned subsidiary of EquityCo. BH/RE and Starwood made total equitycontributions of $20 million each in EquityCo to fund the costs of theplanned renovations to the Aladdin. Starwood’s equity interest in EquityCo isreflected as non controlling interest in the accompanying consolidatedfinancial statements.

 

BH/REhas the option to purchase all of Starwood’s membership interests in EquityCoif OpBiz is entitled to terminate the hotel management contract between OpBizand Sheraton (see Note 8) as a result of a breach by Sheraton. Starwoodcan require EquityCo to purchase all of its membership interests in EquityCo ifthe hotel management contract is terminated for any reason other than inaccordance with its terms or as the result of a breach by Sheraton. Inaddition, BH/RE and Starwood entered into a registration rights agreement withrespect to their membership interests in EquityCo.

 

The Companyhas entered into various employment agreements, as amended, with severalexecutives. The employment agreements have initial terms of two to three years.The employment agreements provide that the executives will receive a basesalary with either mandatory increases or annual adjustments and annual bonuspayments. In addition, depending on the terms of the employment agreements,these executives are entitled to options to purchase between 0.2% and 3% of theequity of MezzCo.

 

In accordance with the provisions of  SFAS No. 123(R), “*Share-Based Payments”* the Company recognizes compensationcost relating to share-based payment transactions in the operating expenses.The cost is measured at the grant date, based on the calculated fair value ofthe award, and is recognized as an expense over the employee’s estimatedrequisite service period (generally the vesting period of the equity award) ona straight-line basis. Estimates are revised if subsequent informationindicates that forfeitures will differ from previous estimates, and thecumulative effect on compensation cost of a change in the estimated forfeituresis recognized in the period of the change. Prior to January 1, 2006, theCompany accounted for share-based compensation to employees in accordance withAPB No. 25, and related interpretations. The Company also followed thedisclosure requirements of SFAS No. 123 as amended by SFAS No. 148, *“Accounting for Stock-Based Compensation-Transition and Disclosure.”*

 

There is no compensation cost related tonon-qualified stock options recognized in operating results for the three orsix months ended June 30, 2009 and there is $3,000 of compensation cost,which approximated fair value, related to non-qualified stock optionsrecognized in operating results (included in selling, general andadministrative expenses) for the three and six months ended June 30, 2008.

 

**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 totaledapproximately $0.7 million and $1.3 million for the three and six months ended June 30,2009, respectively, and $0.8 million and $1.6 million for the three and sixmonths ended June 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 benefit of Mr. Earl’s children and affiliates of Bay HarbourManagement, own substantially all of the equity of Planet Hollywood. Mr. Earldisclaims beneficial ownership of any equity of Planet Hollywood owned by thetrust.

 

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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 $2.2 million and $2.6 million for the threemonths ended June 30, 2009 and 2008, respectively, and $4.3 million and$5.2 million for the six months ended June 30, 2009 and 2008,respectively.

 

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

 

OpBiz and PlanetHollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreementpursuant to which Planet Hollywood LV, as tenant, operates a new concept it hasdeveloped for an upscale 24-hour diner named “Planet Dailies” withinapproximately 11,500 square feet of space located on the premises owned byOpBiz. Planet Hollywood LV pays OpBiz base rent in the amount of $500,000 peryear (subject to annual increase adjustments), in addition to percentage rentof up to 12% based on annual gross sales (to the extent such percentage rentexceeds base rent).  The initial term ofthe lease agreement will expire in 2017. Planet Hollywood LV can renew thelease agreement for two successive 5-year terms. Planet Dailies began operationon April 1, 2007 and began paying rent pursuant to the lease agreement asof that date. Rent received from Planet Dailies totaled approximately $0.2million and $0.3 million for the three and six months ended June 30, 2009,and $0.1 million and $0.2 million for the three and six months ended June 30,2008.

 

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

 

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

 

OpBiz and Earl ofSandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a leaseagreement pursuant to which Earl of Sandwich, as tenant, operates a restaurantnamed “Earl of Sandwich” within approximately 3,030 square feet of spacelocated on the premises owned by OpBiz. Earl of Sandwich pays OpBiz base rentin the amount of $161,600 per year (subject to annual increase adjustments), inaddition to percentage rent of up to 12% based on annual gross sales (to theextent such percentage rent exceeds base rent). The initial term of the leaseagreement will expire in 2017. Earl of Sandwich can renew the lease agreementfor two successive 5-year terms. Earl of Sandwich began operation in September 2007and began paying rent pursuant to the lease agreement as of that date. Rentreceived from Earl of Sandwich totaled approximately $0.1 million and $0.2million for the three and six months ended June 30, 2009, and $0.1 millionand $0.2 million for the three and six months ended June 30, 2008.

 

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***

 

In connection with the Loan, the Lender requiredthat Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd. and Bay HarbourMaster Ltd., which are affiliates of Bay Harbour Management, execute and delivera certain Guaranty (see Note 6.—Long-Term Debt). In exchange for executing theGuaranty, OpBiz and PH Fee Owner agreed to pay Trophy Hunter Investments, Ltd.and Bay Harbour Master Ltd. a fee equal to $1,500,000 per year. The fee isaccrued and only payable once OpBiz achieves certain debt service coverageratios defined in the Loan Agreement.

 

***Aircraft CharterArrangements***

 

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

 

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

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements”.   SFAS 157 does not establishrequirements for any new fair value measurements, but it does apply to existingaccounting pronouncements in which fair value measurements are alreadyrequired. SFAS 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements. The Company has adopted the provisions of SFAS 157 as of January 1,2008, for financial assets and liabilities and January 1, 2009, fornon-financial assets and liabilities. Although the adoption of SFAS157 has not materially impacted its financial condition, results ofoperations, or cash flow, the Company is now required to provide additionaldisclosures as part of its financial statements.

 

SFAS 157 establishes athree-tier fair value hierarchy, which prioritizes the inputs used in measuringfair value. These tiers include: Level 1, defined as observable inputssuch as quoted prices in active markets; Level 2, defined as inputs otherthan quoted prices in active markets that are either directly or indirectlyobservable; and Level 3, defined as unobservable inputs in which little orno market data exists, therefore requiring an entity to develop its ownassumptions.

 

As of June 30, 2009,the Company held certain items that are required to be measured at fair valueon a recurring basis. These included an interest rate cap contract and certainput warrants to purchase 17.5% of fully diluted equity interest in the Company.The fair value of interest rate cap contract is determined based on inputs thatare readily available in public markets or can be derived from informationavailable in publicly quoted markets. Therefore, the Company has categorizedthe cap contract as Level 2. The Company determines the value of the putwarrants using a discounted cash flow model which is based primarily onprojected future cash flows and asset volatilities of comparable companies.Therefore, the Company has categorized these put warrants 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 June 30, 2009:

 
| ** **        | ** ** | **December 31, 2008** | ** ** | **June 30, 2009** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------|------------|----------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|              |       |                       |       |                   |       |             |       |             |       |             |       |
| Assets:           |       |                       |       |                   |       |             |       |             |       |             |       |
| Interest rate cap |       | $                          | 26,000     |                   | $          | 18               |       | $                | —     |             | $          | 18 |   | $ | — |   |
|              |       |                       |       |                   |       |             |       |             |       |             |       |
| Liabilities:      |       |                       |       |                   |       |             |       |             |       |             |       |
| Put warrants      |       | $                          | 1,537,000  |                   | $          | 1,537,000        |       | $                | —     |             | $          | — |   | $ | 1,537,000 |   |

 

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

 

*Interest rate cap* — The estimated fair valueof our interest rate cap is based upon quoted prices available in 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.

 

**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 ofthe Company’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 due to their short maturity.

 

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*LandReceivable*

 

The Company did not estimate the fair value of landreceivable as the Company determined, in accordance with SFAS 107, that it isnot practicable to estimate the fair value of its land receivable.  Under the Timeshare Purchase Agreement, theCompany receives fees each year based on sales of timeshare units until thetimeshare units are one hundred percent sold out. The fees are received monthlyand equal to 9% of total timeshare sales. The carrying value of the landreceivable at June 30, 2009 and December 31, 2008 were approximately$18.7 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.

 

The estimated fair values of the Company’s financialinstruments are as follows (in thousands):

 
| ** **                 | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Carrying   Amount**  | ** ** | **Fair  Value**            | ** ** | **Carrying   Amount** | ** ** | **Fair  Value** | ** ** |
| **Financial assets:**      |       |                   |       |                       |       |   |   |   |   |
| Cash and cash equivalents  |       | $                      | 16,093     |                       | $          | 16,093 |   | $ | 23,881 |   | $ | 23,881 |   |
| Accounts Receivable        |       | 20,072                 |       | 20,072                     |       | 18,717 |   | 18,717 |   |
| Land Receivable            |       | 18,689                 |       | 18,689                     |       | 19,918 |   | 19,918 |   |
|                       |       |                   |       |                       |       |   |   |   |   |
| **Financial liabilities:** |       |                   |       |                       |       |   |   |   |   |
| Long-Term debt             |       | 886,599                |       | 886,599                    |       | 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 account for income taxes inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*”. SFAS 109 requires the recognition of deferred income taxassets, net of applicable reserves, related to net operating loss carryforwardsand certain temporary differences. The standard requires recognition of afuture tax benefit to the extent that realization of such benefit is morelikely than not. Otherwise, a valuation allowance is recorded.

 

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

 

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

 

As discussed in Note 3 tothe condensed consolidated financial statements, the Company accounts for incometaxes in accordance with the provisions of FIN 48.  Upon the adoption of FIN 48, the Companyreclassified the uncertain tax benefits as required and reclassified a portionof the existing allowance. Accordingly, there has been no adjustment toretained earnings recorded as a result of the FIN 48 reclassifications.The Company had uncertain tax benefits of $2.1 million as of June 30, 2009and December 31, 2008. The Company recognizes penalties and interest as acomponent of income tax expense. Management does not expect any penalty assessment associated with theadoption of FIN 48.  The Company is nolonger subject to U.S. federal tax examinations by tax authorities for taxyears before 2004.

 

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

 

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

######  

In the normal course of business, the Company is subject tovarious litigation claims and assessments. The Company is not 

 

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currently aparty to any material legal proceedings.

 

***Employment Agreements***

 

The Companyhas entered into various employment agreements, as amended, with severalexecutives. The employment agreements have initial terms of two to three years.The employment agreements provide that the executives will receive a basesalary with either mandatory increases or annual adjustments and annual bonuspayments. In addition, depending on the terms of the employment agreements,these executives are entitled to options to purchase between 0.2% and 3% of theequity of MezzCo.

 

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## ***ITEM2.***MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

###### ***Overview of Management’s Discussion andAnalysis of Financial Condition and Results of Operations***

######  

Set forth below is adiscussion of the financial condition and results of operations of BH/RE andits subsidiaries for the periods covered in this report. The discussion ofoperations herein focuses on events and the revenues and expenses during thethree and six months ended June 30, 2009, as compared to the three and sixmonths ended June 30, 2008.

 

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

 

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

######  

###### *Significant Accounting Policies and Estimates*

######  

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

 

###### *Property and Equipment*

######  

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

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

 

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

 

Property and equipmentare reviewed for impairment whenever indicators of impairment exist. If anindicator of impairment exists, the estimated future cash flows of the asset,on an undiscounted basis, are compared to the carrying value of the asset. Ifthe undiscounted cash flows exceed the carrying value, no impairment isindicated. If the undiscounted cash flows do not exceed the carrying value,then impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model. As a result ofthe continuing 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.  Using an estimate ofundiscounted future cash flows, which exceeded the carrying value of propertyand equipment, the Company determined that no impairment should berecognized.  In assessing therecoverability of the carrying value of property and equipment, we must makeassumptions regarding estimated future cash flows and other factors.  If these estimates or the related assumptionschange, we may be required to record impairment charges.

 

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*Derivative Instruments and Hedging Activities*

 

Pursuant to the refinancingof the Securities Purchase Agreement and the terms of the RestructuringAgreement, the Restructuring Parties agreed to amend the warrants issued byMezzCo to purchase 17.5% of the fully diluted equity in MezzCo. The warrantscontain a net cash settlement, and therefore are accounted for in accordancewith Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFAS No. 133“*Accounting for Derivative Instruments andHedging Activities*” and EITF 00-19 require that the warrants berecognized as liabilities, with changes in fair value affecting net income. See“Note 6. Long-Term Debt.”

 

The terms of the LoanAgreement required the Company to enter into an interest rate cap agreement,which expires on December 9, 2009, to manage interest rate risk. The Companydid not apply cash flow hedge accounting to this instrument. Although thisderivative was not afforded cash flow hedge accounting, the Company retainedthe instrument as protection against the interest rate risk associated with itslong-term borrowings. The Company accounts for its derivative activity inaccordance with SFAS No. 133 and accordingly, recognizes all derivativeson the balance sheet at fair value with any in change in fair value beingrecorded in interest income or expense in the accompanying consolidatedstatements of operations.

 

*RevenueRecognition and Promotional Allowances*

 

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

 

###### *Players’ Club Program*

######  

Players’ club membersearn points based on gaming activity. OpBiz accrues a liability for players’club points that can be redeemed for cash as the points are earned based onhistorical redemption percentages in accordance with the Emerging Issues TaskForce (“EITF”) consensus on Issue 01-9, “Accounting for Consideration Given bya Vendor to a Customer (Including a Reseller of the Vendor’s Products).”EITF 01-9 requires that sales incentives be recorded as a reduction of revenue;consequently, casino revenues are reduced by points earned through the players’club loyalty program. In March 2009, the Company changed the structure ofits players club to allow patrons who earn points to redeem those points forpromotional slot play and other non-cash incentives.  The total accrued liability related topotential cash awards redeemable under the players’ club program was$1.3 million at June 30, 2009 and $2.2 million at December 31,2008.

 

*Self-Insurance Accruals*

 

BH/RE is self-insured, upto certain limits, for costs associated with employee medical coverage. TheCompany accrues for the estimated expense of known claims, as well as estimatesfor claims incurred but not yet reported which totaled approximately$3.2 million at June 30, 2009 and $2.4 million at December 31,2008.

 

*IncomeTaxes*

 

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

 

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

 

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related to net operatingloss carryforwards and certain temporary differences. The standard requiresrecognition of a future tax benefit to the extent that realization of suchbenefit is more likely than not. Otherwise, a valuation allowance is recorded.

 

The Company accounts forincome taxes in accordance with the provisions of FASB Interpretation No. 48*“Accounting for Uncertainty in Income Taxes — aninterpretation of FASB No. 109”*(“FIN 48”), which clarifiescertain aspects of accounting for uncertain tax positions, including issuesrelated to the recognition and measurement of those tax positions.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition.

 

*TimesharePurchase 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 4 acresof land adjacent to the PH Resort to Westgate (the “Timeshare Parcel”), whoplans 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 June 30, 2009, the Company has areceivable balance for the sale of land of $18.7 million, $16.0 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*

######  

###### Asof June 30, 2009, BH/RE’s membership interests had not been unitized andBH/RE’s members do not presently intend to unitize these membership interests.Accordingly, management of BH/RE has excluded earnings per share data requiredpursuant to SFAS No. 128, “*Earnings Per Share,*”because management believes that such disclosures would not be meaningful tothe financial statement presentation.

######  

*Recently Issued Accounting Pronouncements*

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), *“BusinessCombinations.”* SFAS No. 141 (revised) establishes principlesand requirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, andnoncontrolling interest in the acquiree and the goodwill acquired. The revisionis intended to simplify existing guidance and converge rulemaking under U.S.generally accepted accounting principles with international accounting rules.This statement applies prospectively to business combinations where theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. The adoption of SFAS No. 141(revised) had no impact on the Company’s financial position, results ofoperations or cash flows.

 

In December 2007, theFASB issued SFAS No. 160, *“Noncontrolling Interestin Consolidated Financial Statements, an amendment of ARB No. 51.”*This statement establishes accounting and reporting standards for ownershipinterest in subsidiaries held by parties other than the parent and for thedeconsolidation of a subsidiary. It also clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements. SFAS No. 160changes the way the consolidated statement of operations is presented byrequiring consolidated net income to be reported at amounts that include theamount attributable to both the parent and the noncontrolling interests. Thestatement also establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interest of theparent and those of the noncontrolling owners. This statement is effective forfiscal years beginning on or after December 15, 2008. The adoption of thisprovision on January 1, 2009 did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

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

 

In May 2009, the FASB issued SFAS No. 165,*“Subsequent Events,”* which establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued. SFAS No. 165 is effective for interimreporting periods ending after June 15, 2009. Management evaluated theactivity of BH/RE through August 14, 2009 (the issue date of the FinancialStatements) and concluded that no subsequent events have occurred that wouldrequire recognition in the Financial Statements or disclosure in the Notes tothe Financial Statements.

 

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

######  

***Current Economic Conditions andComparability of Results***

 

The outlook for the leisure and gaming industriesremains highly uncertain due to a number of factors affecting consumers,including a slowdown in global economies, reduced consumer spending, andrestricted credit markets. Reduced casino volumes, a reduced demand for hotelrooms and a highly competitive market driving hotel rates down have allcontributed to declines in the overall Las Vegas market. This slow down wasparticularly significant in the fourth quarter of 2008 and has continued intothe second quarter of 2009. 2008 was the PH Resort’s first full year ofoperation as a rebranded property. We believe that second quarter 2009operating results were negatively impacted by the current market conditions andthat we will continue to experience lower than historical hotel occupancy, roomrates and casino volumes in 2009. As a result, we have increasingly focused onefficiency initiatives to control expenses and improve performance. We arecontinually reviewing the costs and marketing opportunities to ensure maximumoperating performance in the face of the current economic conditions.

 

The following tablehighlights the results of operations for the three and six months ended June 30,2009 and 2008, respectively (dollars in thousands, unaudited).

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Percent** | ** ** | **Six Months Ended June 30,** | ** ** | **Percent** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **2009**                                            | ** ** | **2008**    | ** ** | **Change**                                        | ** ** | **2009**    | ** ** | **2008** | ** ** | **Change** | ** ** |
| Net Revenues                         |       | $                                                   | 60,587     |        | $          | 72,226                                            |       | (16.1       | )%         | $ | 117,662 |   | $ | 146,219 |   | (19.5 | )% |
| Operating Expenses:                  |       |                                                |       |        |       |                                              |       |        |       |   |   |   |   |
| Casino                               |       | 18,715                                              |       | 18,980      |       | (1.4                                              | )%         | 36,130      |       | 39,400 |   | (8.3 | )% |
| Hotel                                |       | 9,448                                               |       | 10,764      |       | (12.2                                             | )%         | 18,849      |       | 21,330 |   | (11.6 | )% |
| Food and Beverage                    |       | 8,870                                               |       | 9,614       |       | (7.7                                              | )%         | 17,507      |       | 18,683 |   | (6.3 | )% |
| Other                                |       | 466                                                 |       | 765         |       | (39.1                                             | )%         | 922         |       | 1,048 |   | (12.0 | )% |
| Selling, general and  administrative |       | 17,313                                              |       | 21,038      |       | (17.7                                             | )%         | 33,016      |       | 40,012 |   | (17.5 | )% |
| Depreciation and  amortization       |       | 10,212                                              |       | 9,215       |       | 10.8                                              | %          | 20,396      |       | 18,016 |   | 13.2 | % |
| Operating (Loss) Income              | ** ** | **$**                                               | **(4,437** | **)**       | **$**      | **1,850**                                         |       | (339.8      | )%         | **$** | **(9,158** | **)** | **$** | **7,730** |   | (218.5 | )% |

 

Net revenues for thethree and six months ended June 30, 2009 decreased when compared to thethree and six months ended June 30, 2008. We believe that our revenues forthe three and six months ended June 30, 2009 have been negatively impactedby the weakened United States economy. Disruptions in the housing and stockmarkets, high travel costs, along with declines in the Las Vegas market due todecreased visitor volume and lower customer spending per trip have and maycontinue to adversely impact our revenues. We have and will continue toaggressively monitor and reduce expenses to improve operating margins during2009.

 

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The following table highlights the various sourcesof our revenues and expenses for the three and six months ended June 30,2009 and 2008, respectively (dollars in thousands, unaudited).

 
| ** **                                    | ** ** | **Three months ended** | ** ** | ** **  | ** ** | **Six months ended** | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-------------|------------|--------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **Percent** | ** ** | **June 30,**              | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008**    | ** ** | **Change**                     | ** ** | **2009**    | ** ** | **2008** | ** ** | **Change** | ** ** |
| Casino revenues                               |       | $                                | 28,336     |        | $          | 30,965                         |       | (8.5        | )%         | $ | 53,687 |   | $ | 63,312 |   | (15.2 | )% |
| Casino expenses                               |       | 18,715                           |       | 18,980      |       | (1.4                           | )%         | 36,130      |       | 39,400 |   | (8.3 | )% |
| *Margin*                                      | * *   | *34.0*                           | *%*        | *38.7*      | *%*        | * *                       | * *   | *32.7*      | *%*        | *37.8* | *%* | * * | * * |
| Hotel revenues                                |       | $                                | 22,839     |        | $          | 30,363                         |       | (24.8       | )%         | $ | 45,598 |   | $ | 61,316 |   | (25.6 | )% |
| Hotel expenses                                |       | 9,448                            |       | 10,764      |       | (12.2                          | )%         | 18,849      |       | 21,330 |   | (11.6 | )% |
| *Margin*                                      | * *   | *58.6*                           | *%*        | *64.5*      | *%*        | * *                       | * *   | *58.7*      | *%*        | *65.2* | *%* | * * | * * |
| Food and beverage revenues                    |       | $                                | 12,700     |        | $          | 13,781                         |       | (7.8        | )%         | $ | 24,400 |   | $ | 28,038 |   | (13.0 | )% |
| Food and beverage expenses                    |       | 8,870                            |       | 9,614       |       | (7.7                           | )%         | 17,507      |       | 18,683 |   | (6.3 | )% |
| *Margin*                                      | * *   | *30.2*                           | *%*        | *30.2*      | *%*        | * *                       | * *   | *28.3*      | *%*        | *33.4* | *%* | * * | * * |
| Other revenues                                |       | $                                | 3,318      |        | $          | 4,071                          |       | (18.5       | )%         | $ | 6,198 |   | $ | 7,853 |   | (21.1 | )% |
| Other expenses                                |       | 466                              |       | 765         |       | (39.1                          | )%         | 922         |       | 1,048 |   | (12.0 | )% |
| *Margin*                                      | * *   | *86.0*                           | *%*        | *81.2*      | *%*        | * *                       | * *   | *85.1*      | *%*        | *86.7* | *%* | * * | * * |
| Selling, general and  administrative expenses |       | $                                | 17,313     |        | $          | 21,038                         |       | (17.7       | )%         | $ | 33,016 |   | $ | 40,012 |   | (17.5 | )% |
| *% of revenue*                                | * *   | *25.8*                           | *%*        | *26.6*      | *%*        | * *                       | * *   | *25.4*      | *%*        | *24.9* | *%* | * * | * * |

 

*Casino*

 

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

 

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

 

Casino revenues decreased 8.5% to $28.3 million forthe three months ended June 30, 2009, as compared to $31.0 million for thethree months ended June 30, 2008. Table games revenue for the three monthsended June 30, 2009, decreased by approximately $0.3 million or 2.6% whencompared to the three months ended June 30, 2008. Table drop for the threemonths ended June 30, 2009 decreased $1.5 million or 2.0% when compared tothe same three month period in the prior year. Overall table hold for the threemonths ended June 30, 2009 was 16.1% compared to 15.4% for the threemonths ended June 30, 2008. Relationship marketing efforts, focused promotional efforts and a slightlyhigher hold percentage allowed us to maintain fairly consistent table revenuedespite the continued operating challenges presented by market conditions.  Slot revenue for the three months ended June 30,2009 decreased approximately $2.3 million when compared to the same three monthperiod in prior year. Overall slot win percent was 8.4% for the three monthsended June 30, 2009 compared to 8.3% for the three months ended June 30,2008. Slot handle for the three months ended June 30, 2009 decreased $30.0million or 11.7% 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.  Second quarter initiatives in slots includeda reconfiguration 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 June 30, 2009increased by 2.4% when compared to the three month period ended June 30,2008 mainly due to a better hold on sporting events.

 

Casino expenses decreased 1.4% to $18.7 million forthe three months ended June 30, 2009, as compared to $19.0 million for thethree months ended June 30, 2008. The casino operating margin decreased4.7% when comparing the same three month periods.  Targeted marketing expenses focused onattracting and retaining casino customers through expansion of loyalty programsand promotional activities, along with successful administrative expensereduction plans, led to the overall expense reduction for the quarter.

 

Casino revenues decreased 15.2% to $53.7 million forthe six months ended June 30, 2009, as compared to $63.3 million for thesix months ended June 30, 2008. Table games revenue for the six monthsended June 30, 2009 decreased by approximately $3.5 million or 14.0% whencompared to the six months ended June 30, 2008. Table drop for the sixmonths ended June 30, 2009 

 

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decreased$8.2 million or 5.3% when compared to the same six month period in the prioryear. Overall table hold for the six months ended June 30, 2009 was 14.7%compared to 16.2% for the six months ended June 30, 2008.  Reduced visitor volumes and reduced wageringper visitor as well as a lower hold percent in the first quarter of 2009contributed to the decline in table revenues. Slot revenue for the six months ended June 30, 2009 decreasedapproximately $5.6 million when compared to the same six month period in theprior year. Overall slot win percent was 8.4% for the six months ended June 30,2009 compared to 7.9% for the six months ended June 30, 2008. Slot handlefor the six months ended June 30, 2009 decreased $96.2 million 18.3% whencompared to the same six month period in the prior year. Decreases in occupiedhotel rooms, visitor volume and spend per visitor contributed to the decline inslot handle and revenue. Combined revenues from the race and sports book andpoker increased by 2.4% for the six months ended June 30, 2009 whencompared to the six months ended June 30, 2008. The increase is mainly dueto a better hold on sporting events wagering.

 

Casino expenses decreased 8.3% to $36.1 million forthe six months ended June 30, 2009, as compared to $39.4 million for thesix months ended June 30, 2008. Operating margin decreased 5.1% whencomparing the same six month periods.  Wecontinue to focus on expense reduction plans and targeted customer reinvestmentexpense promotions in the casino division.

 

*Hotel*

 

Hotel revenue is derived from rooms and suitesrented to guests. “average daily rate” is an industry specific term used todefine the average amount of revenue per rented room per day. “Occupancypercentage” defines the total percentage of rooms occupied and is computed bydividing the number of rooms occupied by the total number of rooms available.Hotel revenue is recognized at the time the room is provided to the guest.

 

Hotel revenues of $22.8 million for the three monthsended June 30, 2009 were 24.8% lower than the three months ended June 30,2008 driven by a decline in both occupancy and average daily room rate. Hoteloccupancy decreased 5.4 percentage points to 91.6% for the three months ended June 30,2009 compared to 97.0% for the three months ended June 30, 2008. Therewere approximately 8,377 more room nights available in the three months ended June 30,2009 when compared to the three months ended June 30, 2008 due to thecompletion of the room renovation project that was underway in 2008.  Average daily room rates decreased to $96 forthe three months ended June 30, 2009 compared to $136 for the three monthsended June 30, 2008.  Las Vegasvisitor volume, room occupancy and average daily rate are all down in thesecond quarter of 2009 when compared to the second quarter of 2008 and as aresult, many of the Strip properties are reducing room rate to maintainoccupancy.  The decline in average dailyroom rate at the PH Resort is indicative of the rate reductions necessary toremain competitive in the current economic operating environment.  Additionally, we have experiencedcancellations and attrition in the higher rated convention segment as theeconomic slowdown continues to reduce the demand for business travel.

 

Hotel expenses decreased 12.2% to $9.4 million forthe three months ended June 30, 2009, as compared to $10.8 million for thethree months ended June 30, 2008. Operating margin decreased 5.9% for thethree month period ended June 30, 2009 when compared to the same threemonth period in the previous year.  Wecontinue to focus on expense savings initiatives and unique marketingopportunities to maximize profitability in reaction to the reductions inaverage daily rate and occupancy.

 

Hotel revenues of $45.6 million for the six monthsended June 30, 2009, were 25.6% lower that the six months ended June 30,2008. Hotel occupancy percentage was 88.4% for the six months ended June 30,209, as compared to 95.8% for the six months ended June 30, 2008. Averagedaily room rates decreased to $110 for the six months ended June 30, 2009,as compared to $142 for the six months ended June 30, 2008.

 

Hotel expenses decreased 11.6% to $18.9 million forthe six months ended June 30, 2009, as compared to $21.3 million for thesix months ended June 30, 2008. Operating margin decreased 6.5 percentagepoints over the same six month period.

 

*Food and Beverage*

 

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

 

Food and beverage revenues decreased 7.8% to $12.7million for the three months ended June 30, 2009, as compared to $13.8million for the three months ended June 30, 2008. Food revenue decreased17.8% when compared to the same three month period in the previous year whilebeverage revenue declined 1.6%.  The PHResort operates Starbucks, the Spice Market Buffet, room service, the poolcafé, banquets and the casino bars.  Theremaining food outlets are leased to third party operators.  The food and beverage revenue declines are mainlyattributable to a reduction in buffet covers and banquet revenue.  Banquet revenue declines are the directresult of the decline in convention business in the hotel and continuedreductions in consumer spending.

 

Food and beverage expenses decreased 7.7% to $8.9million for the three months ended June 30, 2009, as compared to $9.6million for the three months ended June 30, 2008. Operating marginremained consistent at 30.2% when compared to the same three 

 

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monthperiod in previous year.

 

Food and beverage revenues decreased 13.0% to $24.4million for the six months ended June 30, 2009, as compared to $28.0 millionfor the six months ended June 30, 2008.

 

Food and beverage expenses decreased 6.3% to $17.5million for the six months ended June 30, 2009, as compared to $18.7million for the six months ended June 30, 2008. Food and beverage marginsdecreased 5.1 percentage points in comparing the same six month periods.

 

*Other*

 

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

 

Other revenues decreased 18.5% to $3.3 million forthe three months ended June 30, 2009, as compared to $4.1 million for thethree months ended June 30, 2008, and decreased 21.1% to $6.2 million forthe six months ended June 30, 2009, as compared to $7.9 million for thesix months ended June 30, 2008. The decrease in other revenue is primarilydue to the decrease in the amount received from Westgate based on sales of timeshareunits. Westgate pays OpBiz 9% of total timeshare sales on a monthly basis with50% of the proceeds recorded as tenant income and the remaining 50% recordedagainst the land receivable.

 

Other expenses decreased 39.1% to $0.5 million forthe three months ended June 30, 2009, as compared to $0.8 million for thethree months ended June 30, 2008, and decreased 12.0% to $0.9 million forthe six months ended June 30, 2009, as compared to $1.0 million for thesix months ended June 30, 2008.

 

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

 

SG&A expenses decreased 17.7% to $17.3 millionfor the three months ended June 30, 2009, as compared to $21.0 million forthe three months ended June 30, 2008. As a percentage of net revenue, SG&A expenses decreased to 25.8% forthe three months ended June 30, 2009 as compared to 26.6% for the threemonths ended June 30, 2008. SG&A expenses decreased 17.5% to $33.0 million for the six monthsended June 30, 2009, as compared to $40.0 million for the six months endedJune 30, 2008. SG&A expenses as a percentage of revenues increased0.5% for the six months ended June 30, 2009 when compared to the sixmonths ended June 30, 2008. Significant operating expense reduction plansthat were implemented to maximize profitability at the first signs of theeconomic downturn continue to prove successful.

 

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*Depreciation and Amortization*

 

Depreciation and amortization expense of $10.2million for the three months ended June 30, 2009 increased when comparedto $9.2 million in expense for the three months ended June 30, 2008.Depreciation and amortization expense of $20.4 million for the six months endedJune 30, 2009 increased when compared to $18.0 million in expense for thesix months ended June 30, 2008. The increase in depreciation expense is adirect result of the additional assets placed in service once the renovationwas complete.

 

*Net Interest Expense*

 

Net interest expense decreased to $9.2 million forthe three months ended June 30, 2009, as compared to $16.2 million for thethree months ended June 30, 2008. Net interest expense decreased to $18.5million for the six months ended June 30, 2009, as compared to $34.1million for the six months ended June 30, 2008. The decrease in interestexpense is directly related to the reduction in the interest rates.

 

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

######  

During the six monthsended June 30, 2009, we utilized cash flows from operating activities ofapproximately $9.7 million and had a balance of $16.1 million in cash and cashequivalents as of June 30, 2009. We also had current restricted cash andcash equivalents of approximately $35.4 million and long-term restrictedcash and cash equivalents of approximately $6.4 million at June 30, 2009.The current restricted cash and cash equivalents are primarily reserve accountsthat have been established under the Loan Agreement to guarantee payment ofproperty taxes, insurance and furniture, fixtures and equipment replacement.Current restricted cash also includes the balance in the cash managementaccount. Under the terms of the Loan Agreement, all cash receipts are depositedinto a cash management account under Lender control which is used to fundreserves and operating expenses. The long-term cash and cash equivalentsinclude funds held in an interest reserve which will be released once certaindebt service coverage ratios are achieved. See “Description of Certain Indebtedness”below.

 

Our primary remainingcash requirements for 2009 are expected to include (i) approximately $4.0million for maintenance capital expenditures or replacement furniture, fixturesand equipment, (ii) up to approximately $16.8 million in interest paymentson our debt, (iii) approximately $1.7 million in payments to Northwindunder the Energy Services Agreement and (iv) a $2.1 million fee requiredto exercise the second extension of the Loan.

 

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.  If the Company does notexercise the second extension option, the Loan will mature on December 9,2009.  At December 31, 2008, theLoan was classified as a non current liability in the accompanying financialstatements based on the Company’s intent and ability to exercise the secondextension option. Operating income for the six months ended June 30, 2009is not sufficient to demonstrate that the Company will generate sufficient cashflow from operations to meet the conditions set forth to exercise the secondextension option.  Accordingly, the Loanhas been reclassified to a current liability in the accompanying financialstatements as of June 30, 2009.

 

Absent a capitalcontribution from the members of EquityCo, an equity investment by thirdparties or a restructuring of the Loan Agreement, we do not believe that cashgenerated from operations, cash held in reserve by the lenders under the LoanAgreement and cash made available under the Modification to the Loan Agreementwill be adequate to meet the anticipated working capital and debt serviceobligations of OpBiz through December 31, 2009, including interestpayments due on the Loan for upcoming monthly payments.  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. Additionally, as detailed in *Description of CertainIndebtedness* below, in connection with the execution of the Loan,the Guarantors executed guarantees against certain actions including avoluntary or collusive bankruptcy filing. As currently structured, the Loan Agreement requires that a contributionsufficient to bring the Interest Reserve Account to a level sufficient to coverthe interest reserve test (as fully defined in the Loan Agreement) will berequired to exercise the next extension. If the Company is not able to exercise the second extension option, theLoan will mature on December 9, 2009. The Company is currently seeking a modification of the Loan Agreementand access to funds in the Interest Reserve Account, as well as additionalcapital investments to satisfy the requirements necessary to exercise thesecond extension option or otherwise defer maturity of the Loan and to providefunds to pay upcoming monthly interest payments.  Failure to maintain sufficient cash flow tofund operations within the parameters defined in the Loan, failure to replenishthe Interest Reserve Account or failure to pay any portion of the Debt (asdefined in the Loan Agreement) when due is each an Event of Default (as definedin the Loan Agreement) and a Specified Event (as defined in the Modification).  As described in *Descriptionof Certain Indebtedness*,  theModification requires us, within ten days after Lender’s written demand afterthe occurrence of a Specified Event to deliver to Lender (i) one or moredeeds conveying fee simple title to all portions of the Property (as defined inthe Loan Agreement); (ii) one or more assignments conveying membershipinterests of MezzCo in OpBiz; and (iii) all other documents andinstruments to Lender that may be required to enable Lender to obtain titleinsurance coverage with respect to fee simple property.

 

There can be no assurancethe Lender will agree to modify the Loan Agreement, will make funds in theInterest Reserve Account available or that we will receive additional capitalfrom the members of EquityCo or third parties. Additionally, there can be no assurance that we have accuratelyestimated our liquidity needs, or that we will not experience unforeseen eventsthat may materially increase our need for liquidity to fund our operations orcapital expenditure programs or decrease the amount of cash generated from ouroperations.

 

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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. TheLoan 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 (0.32% for the June 30, 2009 interest payment) plus 3.25% witha .25% ticking fee on available but un-advanced future funding. Interest onFuture Funding Tranche B is payable monthly and accrues at the 30 dayLIBOR rate plus 7.50% with a 1.50% ticking fee on available but un-advanced funds.The Loan does not require amortization during the initial term or, providedcertain EBITDA thresholds are met, during the extension periods. The Loanrequires that the Borrower establish and maintain certain reserves including areserve for completion of the renovation project, a reserve for projectedinterest shortfalls, a reserve for payment of property taxes and insurance anda reserve for on-going furniture, fixture and equipment purchases or propertyimprovements. The Loan restricts the Borrower’s ability to spend excess cashflow until certain debt service coverage ratios are met.

 

On May 7, 2009, 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 existing Loan Agreement, dated November 30, 2006, between Borrowerand Column Financial, Inc. (the “Loan Agreement”).  The Modification provides for up to $9million of the Interest Reserve Fund (as defined in the Loan Agreement) to beavailable to Borrower for monthly debt service. The Loan Agreement has two remaining one year extension optionsavailable (the second and third extension options).  As a condition to exercising each of thesecond and third extension options, the Borrower must replenish the InterestReserve Account (as defined in the Loan Agreement) to an amount sufficient toachieve a Debt Service Coverage Ratio (as defined in the Loan Agreement) of1.05:1.00  and 1.10:1:0, respectively,using the specified terms and parameters outlined in the Loan Agreement.  Failure to replenish the Interest ReserveAccount is an Event of Default (as defined in the Loan Agreement) and aSpecified Event (as defined in the Modification).  A Specified Event means the occurrence ofcertain events, including (a) failure of the Borrower to make certainpayments as required by the Modification or the Loan Agreement; (b) certainEvents of Default under the Loan Agreement; and (c) an Event of Defaultunder the Modification resulting from failure to pay amounts owed to Lender,failure to pay certain taxes, the incurrence of additional indebtedness inviolation of the terms of the Loan Agreement, and the imposition of any lienencumbering the collateral of the loan (for the purpose of a Specified Event,an Event of Default means a Default (as defined in the Loan Agreement) thatcontinues after the applicable notice and cure or grace periods under the termsof the Loan Agreement and related documents).

 

At December 31, 2008,the Loan was classified as a non current liability in the accompanyingfinancial statements based on the Company’s intent and ability to exercise thesecond extension option. Operating income for the six months ended June 30,2009 is not sufficient to demonstrate that the Company will generate sufficientcash flow from operations to meet the conditions set forth in the Modification(described above) in order to exercise the second extension option.  Accordingly, the Loan has been reclassifiedto a current liability in the accompanying financial statements as of June 30,2009.

 

As further outlined in theModification dated May 7, 2009 within ten days after Lender’s writtendemand after the occurrence of a Specified Event as determined by Lender in itssole but good faith discretion, Borrower, MezzCo and TSP Owner LLC shalldeliver to Lender (i) one or more deeds conveying fee simple title to allportions of the Property (as defined in the Loan Agreement); (ii) one ormore assignments 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. Inorder to permit the Lender to foreclose on the Hotel and Casino separately andto allow OpBiz to continue to operate the casino after such a foreclosure(should the Lender choose to do so), title to the real property comprising theHotel and Casino (the “Property”) was transferred from OpBiz to PH Fee Owner.OpBiz and PH Fee Owner then entered into a lease pursuant to which OpBiz agreedto continue to operate the Hotel in the manner it had been and to pay monthlyrent of approximately $916,000. OpBiz and PH Fee Owner

 

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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.

 

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 June 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 Property 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 and Robert Earl executed and deliveredguaranties substantially the same as that delivered by the Guarantors, howeverthe liability 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 Property 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, we effected a refinancing of the Securities PurchaseAgreement, dated August 9, 2004, among MezzCo and the Investors, pursuantto which MezzCo issued to the Investors (i) 16% senior subordinatedsecured Notes in the original aggregate principal amount of $87 million,and (ii) Warrants for the purchase (subject to certain adjustments asprovided for therein) of membership interests of MezzCo, representing 17.5% ofits fully diluted equity. Loan proceeds were used to redeem in full the Notes.

 

In connection with therefinancing of the Securities Purchase Agreement and redemption of the Notes,the Restructuring Parties entered into the Restructuring Agreement, pursuant towhich the Restructuring Parties terminated in full the Securities PurchaseAgreement, the Subordination Agreement, dated as of August 31, 2004, amongMezzCo, OpBiz, the Senior Agent and the Investors, the Pledge Agreement, dated August 9,2006, among MezzCo and the Collateral Agent, and the Guaranty, dated August 9,2004, made by OpBiz to the Investors, and amended certain other existingagreements, as described below.

 

In accordance with the 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 that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of thecollateral Agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executedby the Company in favor of the collateral agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee (as defined therein) for the benefit of thecollateral agent; (iv) released and terminated the Investors’ securityinterest in the securities account, provided for that certain SecuritiesAccount Control Agreement, dated as of August 9, 2004 and executed by theCompany, the collateral agent and Wells Fargo Bank, N.A.

 

Additionally, MezzCo,EquityCo, and the Investors entered into 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

 

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exercise of the A&R Warrants may be increasedfrom time to time upon the occurrence of certain events as described in theA&R Warrants. Holders of the A&R Warrants and any securities issuedupon exercise thereof may require MezzCo to redeem such securities commencingon December 9, 2011 at a redemption price based upon a formula set forthin the A&R Warrants. These rights expire upon completion of a publicoffering by MezzCo or OpBiz.

 

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).

 

EquityCo and the CollateralAgent also entered into a Pledge Agreement, dated November 30, 2006 (the “PledgeAgreement”), pursuant to which EquityCo has, subject to approval of the Nevadagaming authorities, pledged and granted a first priority security interest tothe Collateral Agent for the ratable benefit of the Investors in the membershipinterests of EquityCo in MezzCo. The Pledge Agreement, once approved, willsecure the full payment of the Put Right (as defined in the A&R Warrants),including any obligations under the Put Note.

 

On November 30, 2006,we entered into an Indemnification Agreement with the Investors, pursuant towhich MezzCo agreed to indemnify the Investors for any losses caused by (i) lackof gaming approvals for the issuance of the A&R Warrants, (ii) lack ofgaming approval for the granting of a lien by EquityCo in the equity interestsin MezzCo, as described in the Pledge Agreement, and (iii) the inabilityof the Investors to exercise the Warrants until July 1, 2007.

 

The foregoing descriptions of the various agreementsdescribed above do not purport to be complete and are qualified in theirentirety by reference to the agreements, which are filed herewith as exhibits,and incorporated herein by reference.

 

*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 gaming operations,factors affecting our ability to complete acquisitions and dispositions ofgaming properties, leverage, construction risks, the inherent uncertainty andcosts 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 Securitiesand Exchange Commission on March 31, 2009. See *Liquidityand Capital Resources* above for additional risks related to oursubstantial indebtedness.  Readers arecautioned not to place undue reliance on any forward-looking statements, whichspeak only as of the date thereof. We undertake no obligation to publiclyrelease any revisions to such forward-looking statements to reflect events orcircumstances after the date hereof.

 

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

 

Market risk is the riskof loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and commodity prices. Ourprimary exposure to market risk is interest rate risk associated with ourlong-term debt. We pay interest on the amount outstanding under the LoanAgreement monthly, in cash, at the London Inter-Bank Offered Rate, or LIBOR,plus 3.25% with a .25% ticking fee on available but un-advanced Future Funding.An increase of one percentage point in the average interest rate applicable tothe variable rate debt outstanding at June 30, 2009 would increase theannual 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 June 30,2009. Based on their evaluation, our principal executive and principalfinancial officers concluded that our disclosure controls and procedures were effectiveas of June 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 June 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***

 

See *Management’s Discussionand Analysis of Financial Condition and Results of Operations -**Liquidity and Capital Resources* above for additional risksrelated to our substantial indebtedness.

 

## ***ITEM6.***EXHIBITS

 
| 10.1   |   | Third  Modification Agreement dated May 7, 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, and Robert Earl. (Incorporated by reference to the  Company’s Current Report on Form 8-K filed on May 13, 2009) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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.                         |
|-----------------------|----------------------------------------|
|                  |                                   |   |
|                  |                                   |   |
| August 14,  2009 | By:                                    | /S/  Donna Lehmann |
|                  | Donna  Lehmann                         |
|                  | Treasurer and Chief  Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Third  Modification Agreement dated May 7, 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, and Robert Earl. (Incorporated by reference to the  Company’s Current Report on Form 8-K filed on May 13, 2009) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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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